UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from _____ to _______
Commission File Number: 001-12974
SANTA FE GOLD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
84-1094315 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
1219 Banner Mine Road, Lordsburg, NM 88045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (505)
255-4852
N/A
Former name, former address, and
former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Check
one:
Larger accelerated filer [ ] |
Accelerated
filer
[ ] |
Non-accelerated filer [ ] |
Smaller reporting company [X] |
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date:
131,229,228 shares outstanding as of November 17, 2014.
SANTA FE GOLD CORPORATION |
INDEX TO FORM 10-Q |
2
PART I
|
FINANCIAL INFORMATION
|
ITEM 1. FINANCIAL STATEMENTS
SANTA FE GOLD CORPORATION |
|
CONSOLIDATED BALANCE SHEETS
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2014 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
Cash and
cash equivalents |
$ |
410 |
|
$ |
83,825 |
|
Accounts receivable |
|
72,807 |
|
|
14,267 |
|
Inventory
|
|
- |
|
|
40,000 |
|
Prepaid expenses and other current assets |
|
249,870 |
|
|
247,069 |
|
Total
Current Assets |
|
323,087 |
|
|
385,161 |
|
MINERAL PROPERTIES |
|
599,897 |
|
|
599,897 |
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND
EQUIPMENT, net of depreciation of $13,865,655 and $11,162,024,
respectively |
|
18,786,935 |
|
|
19,255,682 |
|
OTHER ASSETS: |
|
|
|
|
|
|
Restricted cash |
|
231,716 |
|
|
231,716 |
|
Mogollon
option costs |
|
876,509 |
|
|
876,509 |
|
Deferred financing costs, net |
|
89,379 |
|
|
99,310 |
|
Total
Other Assets |
|
1,197,604 |
|
|
1,207,535 |
|
Total Assets |
$ |
20,907,523 |
|
$ |
21,448,275 |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) |
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
Accounts payable |
$ |
3,789,866
|
|
$ |
3,659,848
|
|
Accrued
liabilities |
|
7,626,245 |
|
|
8,024,162 |
|
Derivative instrument liabilities |
|
804,839 |
|
|
292,124 |
|
Senior
subordinated convertible notes payable, current portion, net of discounts
of $5,696 and $17,937, respectively |
|
444,304 |
|
|
432,063 |
|
Notes payable, current portion |
|
9,416,664 |
|
|
9,200,666 |
|
Completion
guarantee payable |
|
3,359,873 |
|
|
3,359,873 |
|
Total Current Liabilities |
|
25,441,791 |
|
|
24,968,736 |
|
LONG TERM LIABILITIES: |
|
|
|
|
|
|
Senior subordinated convertible notes payable, net of current
portion and |
|
3,402,750 |
|
|
3,673,527 |
|
Asset
retirement obligation |
|
242,521 |
|
|
241,079 |
|
Total Liabilities |
|
29,087,062 |
|
|
28,883,342 |
|
STOCKHOLDERS' (DEFICIT) : |
|
|
|
|
|
|
Common
stock, $.002 par value, 300,000,000 shares authorized; 131,229,228
and 127,229,228
shares issued and outstanding, respectively |
|
262,459 |
|
|
254,459 |
|
Additional
paid in capital |
|
78,484,962 |
|
|
78,292,962 |
|
Accumulated (deficit) |
|
(86,926,960 |
)
|
|
(85,982,488 |
)
|
Total
Stockholders' (Deficit) |
|
(8,179,539 |
) |
|
(7,435,067 |
) |
Total Liabilities and Stockholders' (Deficit) |
$ |
20,907,523 |
|
$ |
21,448,275 |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
3
SANTA FE GOLD CORPORATION |
CONSOLIDATED STATEMENTS OF OPERATIONS |
AND COMPREHENSIVE (LOSS) |
(Unaudited) |
|
|
Three
Months Ended |
|
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
SALES, net |
$ |
71,518 |
|
$ |
1,193,683 |
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
Costs applicable
to sales |
|
40,000 |
|
|
2,176,917 |
|
Exploration and other mine related costs |
|
194,726 |
|
|
90,613 |
|
General and
administrative |
|
369,643 |
|
|
843,238 |
|
Depreciation and amortization |
|
482,248 |
|
|
774,460 |
|
Accretion of asset
retirement obligation |
|
1,442 |
|
|
513 |
|
Total Operating Costs and Expenses |
|
1,088,059 |
|
|
3,885,741 |
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
(1,016,541 |
)
|
|
(2,692,058 |
)
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
Interest income
|
|
|
|
|
- |
|
Foreign currency translation |
|
301,152 |
|
|
12,289 |
|
(Loss) on
derivative instrument liabilities |
|
(512,715 |
) |
|
(291,996 |
) |
Accretion of discounts on notes payable |
|
(12,241 |
)
|
|
(9,896 |
)
|
Financing costs -
commodity supply agreements |
|
756,372 |
|
|
(690,887 |
) |
Finance charges |
|
(25,125 |
)
|
|
- |
|
Interest expense
|
|
(435,374 |
) |
|
(327,027 |
) |
Total Other (Expense) |
|
72,069 |
|
|
(1,307,517 |
)
|
|
|
|
|
|
|
|
(LOSS) BEFORE PROVISION FOR
INCOME TAXES |
|
(944,472 |
)
|
|
(3,999,575 |
)
|
PROVISION FOR INCOME TAXES |
|
- |
|
|
- |
|
|
|
|
|
|
|
|
NET (LOSS) |
|
(944,472 |
) |
|
(3,999,575 |
) |
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
Unrealized gain on
marketable securities |
|
- |
|
|
- |
|
|
|
|
|
|
|
|
NET COMPREHENSIVE (LOSS) |
$ |
(944,472 |
) |
$ |
(3,999,575 |
) |
|
|
|
|
|
|
|
Basic and Diluted Per Share data |
|
|
|
|
|
|
Net (Loss) - basic and diluted |
$ |
(0.01 |
)
|
$ |
(0.03 |
)
|
|
|
|
|
|
|
|
Weighted Average Common
Shares Outstanding: |
|
|
|
|
|
|
Basic and diluted
|
|
130,620,532 |
|
|
117,599,598 |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
4
SANTA FE GOLD CORPORATION |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
|
|
Three
Months Ended |
|
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
Net loss |
$ |
(944,472 |
) |
$ |
(3,999,575 |
) |
Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
482,248 |
|
|
774,460 |
|
Stock-based compensation |
|
- |
|
|
108,610 |
|
Accretion of discount on notes payable |
|
12,241 |
|
|
9,896 |
|
Financing costs - commodity supply agreements |
|
(756,371 |
) |
|
690,887 |
|
Accretion of asset retirement obligation |
|
1,442 |
|
|
513 |
|
Loss on derivative instrument liabilities |
|
512,715 |
|
|
291,996 |
|
(Gain) on disposal of assets |
|
- |
|
|
(118,477 |
) |
Amortization of deferred financing costs |
|
9,931 |
|
|
81,745 |
|
Foreign currency translation |
|
(301,152 |
) |
|
(12,289 |
) |
Net change in operating assets
and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(58,540 |
) |
|
(552,468 |
) |
Inventory |
|
40,000 |
|
|
(138,421 |
) |
Prepaid expenses and other current assets |
|
(2,801 |
) |
|
24,041 |
|
Mogollon option costs |
|
- |
|
|
(50,000 |
) |
Accounts payable and accrued liabilities |
|
718,846 |
|
|
1,612,835 |
|
Net Cash Used in
Operating Activities |
|
(285,913 |
) |
|
(1,276,247 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Proceeds from
disposal of assets |
|
- |
|
|
249,000 |
|
Purchase of property, plant and
equipment |
|
(13,500 |
) |
|
(139,359 |
) |
Net
Cash Provided by (Used) in Investing Activities |
|
(13,500 |
) |
|
109,641 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Proceeds from
convertible notes payable |
|
- |
|
|
1,250,000 |
|
Proceeds from issuance of stock |
|
- |
|
|
- |
|
Proceeds from
notes payable |
|
220,000 |
|
|
29,144 |
|
Payments on notes payable |
|
(4,002 |
) |
|
(54,219 |
) |
Net
Cash Provided by Financing Activities |
|
215,998 |
|
|
1,224,925 |
|
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |
|
(83,415 |
) |
|
58,319 |
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD |
|
83,825 |
|
|
115,094 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ |
410 |
|
$ |
173,413 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
Cash paid for
interest |
$ |
216 |
|
$ |
7,015 |
|
Cash paid for income taxes |
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND |
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
Stock issued for accounts
payable and accrued wages |
$ |
200,000 |
|
$ |
- |
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
5
SANTA FE GOLD CORPORATION |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER 30, 2014 |
(UNAUDITED) |
NOTE 1 NATURE OF OPERATIONS
Santa Fe Gold Corporation (the Company) is a U.S. mining
company incorporated in Delaware in August 1991. Its general business strategy
is to acquire, explore, develop and mine mineral properties. The Companys
principal assets are the 100% owned Summit silver-gold property located in New
Mexico, the leased Ortiz gold project in New Mexico and the 100% owned Black
Canyon mica project in Arizona.
In May 2006, for a cash price of $1.3 million, the Company
acquired 100% of the shares of The Lordsburg Mining Company (Lordsburg
Mining), a New Mexico corporation. With the acquisition of Lordsburg Mining,
the Company acquired the Summit project, consisting of approximately 117.6 acres
of patented and approximately 520 acres of unpatented mining claims in Grant
County, New Mexico; approximately 257 acres of patented mining claims in Hidalgo
County, New Mexico; and milling equipment including a ball mill and floatation
plant in Sierra County, New Mexico.
On June 30, 2008, Lordsburg Mining purchased from St. Cloud
Mining Company, a New Mexico corporation, for a price of $841,500, mineral
processing equipment and real property situated adjacent to the Banner mill site
located south of Lordsburg, New Mexico. The equipment included in the purchase
constitutes important components for the Banner mill processing facility,
notably a portable crushing and screening plant and a feeding and conveying
system. The real property included in the purchase consists of 70 patented and 5
unpatented mining claims, and assignments of mineral leases covering 17 patented
and 6 unpatented mining claims. These mining claims and mineral leases, together
with the patented mining claims Lordsburg Mining already owned in the area of
the Banner mill site, cover approximately 1,500 acres (2.3 square miles) and
comprise the core of the Virginia Mining District. Historical production of
copper, gold and silver from the district has been substantial. Lordsburg Mining
assumed certain potential environmental obligations in connection with the real
property, including those related to reclamation of old workings, should such
obligations arise in the future.
The Company commenced processing operations at the Banner Mill
in March 2010. Commissioning of the mill proceeded and in July 2010, mill
operations were expanded to two shifts per day, five days a week. In April 2012,
the Company commenced commercial production at the Summit silvergold mine. In
November 2013 mining operations were suspended.
In September 2009, the Company formed a wholly owned Barbados
subsidiary, Santa Fe Gold Barbados Corporation, in connection with the
definitive gold sales agreement entered into on September 11, 2009. Under
separate agreements, Santa Fe Gold Barbados Corporation sells refined gold to
Sandstorm Gold, Ltd., and refined gold and silver to Waterton Global Value L.P.
See NOTE 10 CONTINGENCIES AND COMMITMENTS.
Investing in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties described in our
annual report on Form 10-K for our year fiscal ended June 30, 2014 in addition
to the other information included in this quarterly report.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Going Concern
The financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. Should the Company
be unable to continue as a going concern, it may be unable to realize the
carrying value of its assets and to meet its liabilities as they become due.
For the three months ended September 30, 2014, the Company
incurred a loss of $944,472, had a total accumulated deficit of $86,926,960, and
a working capital deficit of $25,118,704. The Company began revenue generating
operations during the fiscal year ended June 30, 2011, through the sales of
precious metals and flux material. Sales have decreased the in the most recent fiscal year during the
reporting period due to the suspension of all mining operations in November
2013.
6
On November 8, 2013, the Company suspended all mining
operations and placed the mine and mill on a care and maintenance program. The
Company is currently working to restructure its debts and obtain adequate
capital to restart operations in the Companys fiscal 2015 year.
To continue as a going concern, the Company is dependent on
continued capital financing for project development, repayment of various debt
facilities and payment of operating and financing expenses until production at
the Summit mine site attains cash flow to cover the Companys operating costs.
The Company has no commitment from any party to provide additional working
capital and there is no assurance that any funding will be available as needed,
or if available, that its terms will be favorable or acceptable to the
Company.
On July 15, 2014, the Company entered into a Share Exchange
Agreement (the "Share Exchange Agreement") with Canarc Resource Corp., a British
Columbia, Canada corporation whose common shares are listed on the TSX Exchange
under the symbol CCM ("Canarc"). Under the terms of the Share Exchange
Agreement, the Company will issue 66,000,000 shares of its common stock to
Canarc; and, in exchange, Canarc will issue 33,000,000 of its common shares to
the Company (the "Share Exchange"). Upon consummation of the Share Exchange, the
Company will own approximately 17 percent of Canarc's outstanding shares and
Canarc will own approximately 34 percent of Santa Fe's outstanding common
shares.
In connection with the Share Exchange Agreement, the Company
entered into a best efforts placement agency agreement with Euro Pacific
Capital, Inc. ("Euro Pacific") pursuant to which Euro Pacific agreed to act as
placement agent for the Company and use its "best-efforts" to complete the
proposed private placement of 8% Subordinated Secured Redeemable GLD Share
Delivery Notes and a Detachable Common Stock Purchase Warrant in the aggregate
principal amount between $20 million to $25 million. Euro Pacific did not place
any securities or raise any capital for the Company. The Euro Pacific best
efforts placement agency agreement expired by its terms on September 30, 2014.
The Share Exchange Agreement provided that it would terminate,
unless a closing of the transactions contemplated occurred on or before October
15, 2014. Since the transactions did not close, the Share Exchange Agreement
terminated pursuant to its terms on October 15, 2014.
At September 30, 2014, the Company was in default on payments
totaling approximately $8.9 million under its Senior Secured Gold Stream Credit
Agreement (the Credit Agreement) with Waterton and approximately $6.8 million
under a gold stream agreement (the Gold Stream Agreement) with Sandstorm Gold
Ltd. (Sandstorm). The Companys consolidated financial statements do not
include any adjustment relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Azco Mica, Inc., a Delaware
corporation, The Lordsburg Mining Company, a New Mexico corporation, Minera
Sandia, S.A. de C.V., a Mexican corporation and Santa Fe Gold Barbados
Corporation, a Barbados corporation. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain items in these consolidated financial statements have
been reclassified to conform to the current years presentation.
Estimates
The preparation of consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates under different assumptions or
conditions.
7
Significant estimates are used when accounting for the
Companys carrying value of mineral properties, fixed assets, depreciation and
amortization, accruals, derivative instrument liabilities, taxes and
contingencies, asset retirement obligations, revenue recognition, and
stock-based compensation which are discussed in the respective notes to the
consolidated financial statements.
Fair Value Measurements
The carrying values of cash and cash equivalents, restricted
cash, accounts receivable, accounts payable and accrued liabilities approximated
their related fair values as of September 30, 2014 and June 30, 2014, due to the
relatively short-term nature of these instruments. The carrying value of the
Companys convertible notes payable approximates the fair value based on the
terms at which the Company could obtain similar financing and the short term
nature of these instruments.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash balances. Restricted cash is excluded from cash and cash equivalents and
is included in other assets.
Accounts Receivable
Accounts receivable consist of trade receivables from precious
metals sales of concentrate and flux. In evaluating the collectability of
accounts receivable, the Company analyzes past results and identifies trends for
each major payer source of revenue for the purpose of estimating an allowance
for doubtful accounts. Data in each major payer source are regularly reviewed to
evaluate the adequacy of the allowance, and actual write-offs are charged
against the allowance. There was no allowance for doubtful accounts as of
September 30, 2014, and June 30, 2014.
On June 30, 2013, the Company signed a Waiver of Default Letter
(the Letter) with Waterton Global Value, L.P. (Waterton) wherein the Company
agreed to sell, convey, assign and transfer certain accounts receivable as
consideration for Watertons waiver for non-payment under the Senior Secured
Gold Stream Agreement. The transfer of the accounts receivable to Waterton are
to be treated as payment towards outstanding interest amounts with any remaining
transfer of receivables to be treated as a payment towards other indebtedness
under the Credit Agreement, including principal on the note. The valuation of
receivables sold under the Letter was finalized at $1,018,056. Additionally,
$813,919 of collected accounts receivable sold to Waterton still remains to be
remitted to them and is recorded in Accrued Liabilities at September 30,
2014.
Inventory
Major types of inventories include ore stockpile inventories,
in-process inventories, siliceous flux material inventories and concentrate
inventories, as described below. Inventories are carried at the lower of average
cost or net realizable value. The net realizable value of ore stockpile
inventories and in-process inventories represents the estimated future sales
price of the product based on current and future metals prices, less the
estimated costs to complete production and bring the product to sale.
Concentrate inventories and siliceous flux material inventories are carried at
the lower of full cost of production or net realizable value based on current
and future metals prices. Write-downs of inventory are reported as a component
of costs applicable to sales.
Ore Stockpile Inventories: Ore stockpile inventories
represent mineralized materials that have been mined and are available for
further processing. Costs are allocated to ore stockpile inventories based on
relative values of material stockpiled and processed using current mining costs
incurred up to the point of stockpiling the ore, including applicable overhead,
depreciation, and amortization. Material is removed from the stockpile at an
average cost per ton. The current portion of ore stockpiles is determined based
on the expected amounts to be processed within the next 12 months. Ore stockpile
inventories not expected to be processed within the next 12 months, if any, are
classified as long-term.
In-process Inventories: In-process inventories represent
materials that are currently in the process of being converted to a saleable
product. In-process inventories are valued at the lower of average cost or net
realizable value attributable to the source material plus the in-process
conversion costs, including applicable depreciation relating to the process
facilities incurred to that point in the process.
8
Siliceous Flux Material Inventories: The siliceous flux
material inventories represent ore stockpiles that have been crushed and
screened to the customers specifications, and represent a saleable product.
Concentrate Inventories: Concentrates inventories
include metal concentrates located either at the Companys facilities or in
transit to the customers port. Inventories consist of gold and silver metal
concentrates and represent a saleable product.
Property, Equipment and Mine Development
Property and Equipment
Property and equipment are carried at cost. Maintenance and
repairs that do not improve or extend the life of the respective assets are
expensed as incurred. Expenditures for new property or equipment and
expenditures that extend the useful lives of existing property and equipment are
capitalized and recorded at cost. Upon retirement, sale or other disposition,
the cost and accumulated amortization are eliminated and the gain or loss is
included in operations. Depreciation is taken over the estimated useful lives of
the assets using the straight-line method. The estimated useful lives of
property and equipment are shown below. Land is not depreciated.
|
Estimated Useful Life |
Leasehold improvements |
3 Years |
Office furniture and equipment |
3 Years |
Mine processing equipment and
buildings |
7 20 Years
|
Plant |
3 9 Years |
Tailings |
3 Years |
Environmental and permits |
7 Years |
Asset retirement obligation
|
5 Years |
Automotive |
3 5 Years |
Software |
5 Years
|
Mine Development
Mine development costs include engineering and metallurgical
studies, drilling and other related costs to delineate an ore body, and the
building of access ways, shafts, lateral access, drifts, ramps and other
infrastructure in an underground mine. Costs incurred before mineralization is
classified as proven and probable reserves are expensed and classified as
exploration expense. Capitalization of mine development project costs, that meet
the definition of an asset, begins once mineralization is classified as proven
and probable reserves.
Drilling and related costs are capitalized for an ore body
where proven and probable reserves exist and the activities are directed at
obtaining additional information on the ore body or converting non-reserve
mineralization to proven and probable reserves. All other drilling and related
costs are expensed as incurred. Drilling costs incurred during the production
phase for operational ore control are allocated to inventory costs and then
included as a component of costs applicable to sales.
Mine development is amortized using the units-of-production
method based upon estimated recoverable tonnage in proven and probable reserves.
To the extent that these costs benefit an entire ore body, they are amortized
over the estimated life of the ore body. Costs incurred to access specific ore
blocks or areas that only provide benefit over the life of that area are
amortized over the estimated life of that specific ore body.
Mineral Properties
Mineral properties are capitalized at their fair value at the
acquisition date, either as an individual asset purchase or as part of a
business combination. When it is determined that a mineral property can be
economically developed as a result of establishing reserves, subsequent mine
development are capitalized and are amortized using the units of production
method over the estimated life of the ore body based on estimated recoverable
tonnage in proven and probable reserves.
The Companys mineral rights generally are enforceable
regardless of whether proven and probable reserves have been established. The
Company has the ability and intent to renew mineral interests where the existing
term is not sufficient to recover all identified and valued proven and
probable reserves and/or undeveloped mineralized material.
9
Impairment of Long-Lived Assets
The Company reviews and evaluates long-lived assets for
impairment when events or changes in circumstances indicate the related carrying
amounts may not be recoverable. The assets are subject to impairment
consideration if events or circumstances indicate that their carrying amount
might not be recoverable. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. When impairment is
identified, the carrying amount of the asset is reduced to its estimated fair
value which is generally derived from estimated discounted cash flows.
The Company is in continuing discussions with various strategic
financing sources, including the Companys two major creditors at this time. It
is unknown if such discussions will be successful in attaining a financing
facility and necessary debt restructure that would allow the Company to continue
operations under a revised business plan.
If discussions with these financing sources are unsuccessful
the Company will not be able to continue as a going concern, and will likely be
forced to seek relief under the U.S. Bankruptcy Code. At that time the Company
would have to evaluate the circumstances and the potential impairment on its
long- lived assets.
As of September 30, 2014, and in light of continuing financing
dialog with various potential financing sources, no events or circumstances have
happened to indicate the related carrying values of long-lived assets may not be
recoverable.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.
The Company reviews the terms of convertible debt, equity
instruments and other financing arrangements to determine whether there are
embedded derivative instruments, including embedded conversion options that are
required to be bifurcated and accounted for separately as a derivative financial
instrument. Also, in connection with the issuance of financing instruments, the
Company may issue freestanding options or warrants that may, depending on their
terms, be accounted for as derivative instrument liabilities, rather than as
equity. The Company may also issue options or warrants to non-employees in
connection with consulting or other services.
Derivative financial instruments are initially measured at
their fair value. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to income. For warrant-based derivative financial
instruments, the Company uses the Black-Scholes option pricing model to value
the derivative instruments. To the extent that the initial fair values of the
freestanding and/or bifurcated derivative instrument liabilities exceed the
total proceeds received, an immediate charge to income is recognized, in order
to initially record the derivative instrument liabilities at their fair value.
The discount from the face value of the convertible debt or
equity instruments resulting from allocating some or all of the proceeds to the
derivative instruments, together with the stated interest on the instrument, is
amortized over the life of the instrument through periodic charges to income,
usually using the effective interest method.
The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is reassessed
at the end of each reporting period. If reclassification is required, the fair
value of the derivative instrument, as of the determination date, is
reclassified. Any previous charges or credits to income for changes in the fair
value of the derivative instrument are not reversed. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within twelve months of the balance sheet date.
Reclamation Costs
Reclamation obligations are recognized when incurred and
recorded as liabilities at fair value. The liability is accreted over time
through periodic charges to earnings. In addition, the asset retirement cost is
capitalized as part of the assets carrying value and amortized over the life of
the related asset. Reclamation costs are periodically adjusted to reflect
changes in the estimated present value resulting from the passage of time and
revisions to the estimates of either the timing or amount of the reclamation
costs. The reclamation obligation is based upon when spending for an existing disturbance will occur. The Company reviews, on an
annual basis, unless otherwise deemed necessary, the reclamation obligation at
each mine site in accordance with ASC guidance for reclamation obligations. As
of September 30, 2014 and June 30, 2014, the Company had a reclamation
obligation totaling $242,521 and $241,079, respectively.
10
Revenue Recognition
Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred physically, the price is fixed or
determinable, no related obligations remain and collectability is probable.
Sales of all metals products sold directly to the Companys
metals buyers, including by-product metals, are recorded as revenues upon a
buyer either taking physical delivery of the metals product in the case of
siliceous flux material or upon the buyer receiving all required documentation
necessary to take physical delivery of the metals product in the case of
concentrate (generally at the time the product is loaded onto a shipping vessel
at the originating port and the bill of lading is generated).
Revenues for metals products are recorded at current market
prices at the time of delivery and are subsequently adjusted to the current
market prices existing at the end of each reporting period. Due to the period of
time existing between delivery and final settlement with the buyer, the Company
estimates the prices at which sales will be settled. Changes in metals prices
between delivery and final settlement will result in adjustments to revenues
previously recorded.
Sales of metals products are recorded net of charges from the
buyer for treatment, refining, smelting losses, and other negotiated charges.
Charges are estimated upon shipment of product based on contractual terms, and
actual charges do not vary materially from estimates. Costs charged by smelters
include a metals payable fee, fixed treatment and refining costs per ton of
product.
Net Loss Per Share
Basic earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing net income
(loss) by the weighted average number of common shares and dilutive common stock
equivalents outstanding. During the periods when they are anti-dilutive, common
stock equivalents, if any, are not considered in the computation. For the three
month periods ended September 30, 2014 and 2013, the impact of outstanding stock
equivalents has not been included as they would be anti-dilutive.
Stock-Based Compensation
In connection with terms of employment with the Companys
executives and employees, the Company occasionally issues options to acquire its
common stock. Awards are made at the discretion of the Board of Directors. Such
options may be exercisable at varying exercise prices and generally vest over a
period of six months to a year.
The Company accounts for share-based compensation based upon on
the grant date fair value of the award. The Company estimates the fair value of
the award using the Black-Scholes option pricing model for valuation of the
share-based payments. The Company believes this model provides the best estimate
of fair value due to its ability to incorporate inputs that change over time,
such as volatility and interest rates, and to allow for actual exercise behavior
of option holders. The simplified method is used to determine compensation
expense since historical option exercise experience is limited. The compensation
cost is recognized over the expected vesting period.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15, Disclosure of
Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU
2014-15), which requires management to evaluate, in connection with financial
statement preparation for each annual and interim reporting period, whether
there are conditions or events that raise substantial doubt about the entitys
ability to continue as a going concern within one year after the date the
financial statements are issued, and to provide related disclosures. ASU 2014-15
applies to all entities and is effective for annual periods ending after
December 15, 2016, and interim periods thereafter, with early adoption
permitted. The Company has not studied this guidance and is not certain if the
adoption of this guidance will have a material effect on its consolidated
financial statements.
11
In May 2014, the FASB issued ASC updated No. 2014-09, "Revenue
from Contracts with Customers (Topic 606) (ASU 2014-09). Under the amendments
in this update, recognition of revenue occurs when a customer obtains control of
promised goods or services in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. In
addition, the new standard requires that reporting companies disclose the
nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The amendments in this update are effective for fiscal
years and interim periods within those years beginning after December 15, 2016.
Early adoption is not permitted. The new standard is required to be applied
either retrospectively to each prior reporting period presented, or
retrospectively with the cumulative effect of applying the update recognized at
the date of initial application. The Company has not yet selected a transition
method, and has not determined the impact, if any, that the new standard will
have on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, CompensationStock
Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of
an Award Provide That a Performance Target Could Be Achieved after the Requisite
Service Period, which is effective for financial statements issued for interim
and annual periods beginning on or after December 15, 2015. The guidance
requires that a performance target that affects vesting and that could be
achieved after the requisite service period be treated as a performance
condition and should not be reflected in the estimate of the grant-date fair
value of the award. This standard is not expected to have an effect on the
Companys reported financial position or results of operations.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the SEC did not, or
are not believed by management to, have a material impact on the Companys
present or future consolidated financial statements.
NOTE 3 INVENTORY
The following table provides the components of inventory as of:
|
|
September 30, |
|
|
June 30, |
|
|
|
2014 |
|
|
2014 |
|
Stockpiled ore |
$ |
- |
|
$ |
- |
|
In-process material |
|
- |
|
|
- |
|
Siliceous flux material |
|
- |
|
|
- |
|
Precious metals concentrate |
|
- |
|
|
40,000 |
|
|
$ |
- |
|
$ |
40,000 |
|
NOTE 4 - ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
|
|
September 30, |
|
|
June 30, |
|
|
|
2014 |
|
|
2014 |
|
Interest |
$ |
1,926,986
|
|
$ |
1,572,298
|
|
Vacation |
|
50,830 |
|
|
57.602 |
|
Deferred and accrued payroll
burden |
|
130,896 |
|
|
133,890 |
|
Franchise taxes |
|
12,753 |
|
|
8,503 |
|
Royalties |
|
690,358 |
|
|
690,358 |
|
Merger costs, net |
|
269,986 |
|
|
269,986 |
|
Other accrued expenses |
|
230,022 |
|
|
133,958 |
|
Audit and accounting |
|
71,885 |
|
|
111,825 |
|
Debt settlement |
|
106,977 |
|
|
106,977 |
|
Property taxes |
|
88,159 |
|
|
135,000 |
|
Receivables due Waterton |
|
813,919 |
|
|
813,919 |
|
Commodity supply agreements |
|
3,233,474 |
|
|
3,989,846 |
|
|
$ |
7,626,245 |
|
$ |
8,024,162 |
|
(See NOTE 10 CONTINGENCIES AND COMMITMENTS, regarding further
details of Commodity supply agreements.)
12
NOTE 5 - DERIVATIVE INSTRUMENT LIABILITIES
The fair market value of the derivative instruments liabilities
at September 30, 2014, was determined to be $804,839 with the following
assumptions: (1) risk free interest rate of 0.02% to 1.05%, (2) remaining
contractual life of 0.06 to 2.96 years, (3) expected stock price volatility of
141.4% to 216.62%, and (4) expected dividend yield of zero. Based upon the
change in fair value, the Company has recorded a loss on derivative instruments
for the three months ended September 30, 2014, of $512,715 and a corresponding
increase in the derivative instruments liability.
|
|
|
Derivative |
|
|
Derivative |
|
|
Loss for |
|
|
|
|
Liability as of |
|
|
Liability as of |
|
|
Three months ended |
|
|
|
|
June 30, 2014 |
|
|
September 30, 2014 |
|
|
September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
$ |
292,124 |
|
$ |
804,839 |
|
$ |
512,715 |
|
The entire amount of derivative instrument liabilities are
classified as current due to the fact that settlement of the derivative
instruments could be required within twelve months of the balance sheet date.
NOTE 6 CONVERTIBLE NOTES PAYABLE
Senior Subordinated Convertible Notes
On October 30, 2007, the Company completed the placement of 10%
Senior Subordinated Convertible Notes of $450,000. The notes were placed with
three accredited investors for $150,000 each and bear interest at 10% per annum.
The notes had term of 60 months at which time all remaining principal and
interest was due. Interest accrued for 18 months from the date of closing.
Interest on the outstanding principal balance was payable in quarterly
installments commencing on the first day of the 19th month following closing. In
connection with the transaction, the Company issued a five year warrant for each
$2.50 invested, for a total of 180,000 warrants, each warrant giving the note
holder the right to purchase one share of common stock at a price of $1.25 per
share. At the option of the holders of the convertible notes, the outstanding
principal and interest was convertible at any time into shares of the Companys
common stock at conversion price of $1.25 per share. The notes were to be
automatically converted into common stock if the weighted average closing sales
price of the stock exceeded $2.50 per share for ten consecutive trading days.
The shares underlying the notes and warrants are to be registered on request of
the note holders, provided the weighted average closing price of the stock
exceeds $1.50 per share for ten consecutive trading days.
On October 31, 2012, the notes with the three accredited
investors became due and payable. On January 15, 2013, the maturity dates for
the convertible senior subordinated notes aggregating $450,000 were extended for
a period of two years from the original maturity dates. Additionally, the
convertible price of the notes was reduced to $0.40 and the automatic conversion
price of $2.50 was reduced to $0.80. In connection with the extension of the
notes, 562,500 warrants were issued with a strike price of $0.40 and term of two
years from the original maturity dates; 375,000 warrants expiring on October 23,
2014 and the remaining 187,500 warrants with an expiration date of November 20,
2014.
At September 30, 2014 and June 30, 2014 the outstanding
principal balance on the senior subordinated convertible notes, was $450,000.
Convertible Secured Notes
In October and November 2012, the Company received advances
totaling A$3,900,000, representing cash proceeds of $3,985,000, from
International Goldfields Limited (ASX: IGS) in fulfillment of an important
condition of the Binding Heads of Agreement dated October 8, 2012 between the
Company and IGS. The funds were advanced by way of two secured convertible
notes. The convertible notes bear interest at a rate of 6% per annum, have a
three-year term, and are secured by the Companys contractual rights to the
Mogollon property. The Company has the right to prepay the notes at any time
without any premium or penalty. Should the Company fail to repay the notes on
the maturity date or should an event of default occur, then IGS may choose to
have the outstanding amounts repaid in the Companys shares at a conversion rate
equal to the daily volume weighted average sales price for the twenty trading
days immediately preceding the date of conversion.
In June 2013, the Company negotiated an additional A$2.0
million capital injection from IGS by way of a secured convertible note. In
conjunction with this financing, the Company agreed to explore a listing on the
Singapore Catalist Stock Exchange (SGX-ST). The convertible note will bear
interest at a rate of 10% per annum, has a maturity date of October 31, 2015, and is secured by the
Companys contractual rights in the Mogollon property. The note is repayable in
cash or Santa Fe Gold stock, at IGSs election, upon a refinancing of the
Companys loan from Waterton. Additionally, a facilitation fee of $300,000
common stock of the Company is due to IGS upon the first to occur of the
maturity date, refinancing date of the note, or date that all principal and
interest on the note is paid-in-full. As of March 31, 2014, the Company had
received advances totaling $1,250,000 in connection with the secured convertible
note. When the proposed Merger Agreement with Tyhee was signed, IGS and the
Company agreed to have all outstanding amounts under the note satisfied by the
issue of Companys stock aggregating 9,259,259 shares. The Company recorded a
gain of $615,781 on the extinguishment of the debt. The stock was issued
pursuant to an exemption from registration under Regulation S of the Securities
Act of 1933, as amended, and IGS is restricted from selling any of such stock
into the US or to any US person.
13
The components of the all convertible notes payable at
September 30, 2014 and June 30, 2014 are as follows:
September 30, 2014: |
|
Principal |
|
|
Unamortized |
|
|
|
|
|
|
Amount |
|
|
Discount |
|
|
Net |
|
Current portion |
$ |
450,000
|
|
$ |
(5,696 |
)
|
$ |
444,304
|
|
Long-term portion, net of current |
|
3,402,750 |
|
|
- |
|
|
3,402,750 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,852,750 |
|
$ |
(5,696 |
) |
$ |
3,847,054 |
|
June 30, 2014: |
|
Principal |
|
|
Unamortized |
|
|
|
|
|
|
Amount |
|
|
Discount |
|
|
Net |
|
Current portion |
$ |
450,000
|
|
$ |
(17,937 |
)
|
$ |
432,063
|
|
Long-term portion, net of current |
|
3,673,527 |
|
|
- |
|
|
3,673,527 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,123,527 |
|
$ |
(17,937 |
) |
$ |
4,105,590 |
|
NOTE 7 SENIOR SECURED GOLD STREAM CREDIT AGREEMENT
On December 23, 2011, the Company and its subsidiaries entered
into a Senior Secured Gold Stream Credit Agreement (the Credit Agreement)
Waterton. The Credit Agreement provided for two $10 million tranches and a $5
million revolving working capital facility. On December 23, 2011, the Company
closed the first $10 million tranche of the Credit Agreement. The second $10
million tranche was earmarked to fund the strategic acquisition of Columbus
Silver and was not drawn down due to the expiration of the Columbus Silver
acquisition agreement.
Proceeds from the initial $10 million tranche of the Credit
Agreement were used to retire the Companys $5 million, 15% Senior Secured
Bridge loan with Victory Park Capital Advisors, LLC, in addition to the payment
of transaction fees and expenses. The Company utilized the remaining net
proceeds for operations and working capital for the Summit silver-gold project.
The Credit Agreement provides for a 9% coupon and the initial
$10 million tranche amortized over a 12-month term with the first payment due
July 31, 2012. In connection with the transaction, the Company entered into a
gold and silver sale agreement (the Gold and Silver Supply Agreement) to sell
the gold and silver originating from the Summit property to Waterton. See NOTE
10 - CONTINGENCIES AND COMMITMENTS.
Pursuant to a series of guarantees, security agreements, deeds
of trust, a mortgage and a stock pledge agreement, the senior obligations are
secured by a first priority lien on the stock of the Companys subsidiaries and
on liens covering substantially all of the Companys assets, with the exception
of the Ortiz gold project, including the Summit silver-gold project, the Black
Canyon mica project, and the Planet micaceous iron oxide project. Existing
creditor, Sandstorm Gold (Barbados) Ltd., executed an intercreditor agreement
that provides for subordination of its security interests in favor of Waterton.
The outstanding principal amounts owed under the Credit Agreement are aggregated
with Notes Payable for financial statement presentation. See NOTE 8 - NOTES
PAYABLE.
On October 9, 2012, the Company entered into the First
Amendment to the Credit Agreement which modified the due dates of certain
principal payments on the note. The amendment provided for principal payments of
$1,082,955 in October 2012, $500,000 on November 30, 2012, $-0- in December 2012
and January 2013, and $3,852,275 on February 28, 2013. All other principal
payments remained unchanged and interest payments continued to be due monthly.
The Company has not made the principal payments for February 2013 or subsequent
months. In addition, interest payments for the three months ended September 30, 2014
have not been made and are included in accrued liabilities.
14
On June 30, 2013, the Company signed a Waiver of Default Letter
(the Letter) with Waterton Global Value, L.P. (Waterton) wherein the Company
agreed to sell, convey, assign and transfer certain accounts receivable as
consideration for a waiver for non-payment to Waterton under the Credit
Agreement. The transfer of the accounts receivable to Waterton were applied as
payment towards outstanding interest payable amounts first with any remaining
transfer of receivables treated as payment towards other indebtedness under the
Credit Agreement, including principal on the note. The measurement of
receivables transferred was subject to revaluation in accordance with
mark-to-market adjustments and final settlement of the invoices. The initial
valuation of receivables under the Letter was $1,053,599 at June 30, 2013. Under
terms of the Letter, interest payable was reduced by $116,693 and the principal
portion of the note was reduced by $768,263, while the remaining $168,643 was
recorded as financing costs in interest expense at June 30, 2013.
As of September 30, 2013, the valuation of receivables sold
under the Letter was finalized at $1,018,056. Accordingly, final valuation
adjustments were made to increase the principal portion of the note outstanding
by $29,145 and to decrease financing costs by $6,398. After recording final
valuation adjustments, the principal portion of the note was ultimately reduced
by $739,118, while the amount recorded over two quarters as financing costs in
interest expense was $162,245. There was no final valuation adjustment to
interest payable. The outstanding principal balance on the note at September 30,
2014 and June 30, 2014 was $7,042,427 y. Additionally, $813,919 of collected
accounts receivable sold to Waterton remains to be remitted to them and is
recorded in accrued liabilities at September 30, 2014.
Waterton may revoke the waiver at any time and note the Company
in default under the Credit Agreement. In the event that Debt Restructurings are
not consummated, or should any of Watertons indebtedness be accelerated, the
Company will not have adequate liquidity to fund its operations, meet its
obligations (including its debt payment obligations) and continue as a going
concern, and will likely be forced to seek relief under Chapter 11 or 15 of the
U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or
similar creditor action may be filed against it).
NOTE 8 NOTES PAYABLE
Pursuant to Share Exchange Agreement (the "Share Exchange
Agreement") with Canarc Resource Corp., a British Columbia, Canada corporation
whose common shares are listed on the TSX Exchange under the symbol CCM
("Canarc") on July 15, 2014, the Company and Carnac entered into an interim
financing facility pursuant to which Canarc advanced $220,000 to the Company.
The loan bears interest at a rate of 1% a month and is due and payable upon the
closing of a gold bond financing by the Company or January 15, 2015, if the
financing does not close.
On May 8, 2012, the Company entered into an installment sales
contract for $46,379 to purchase certain equipment. The term of the agreement is
for 36 months at an interest rate of 5.75%, with the equipment securing the
loan. The principal balance owed on the note was $12,352 and $16,354 at
September 30, 2014 and June 30, 2014, respectively.
On June 1, 2012, the Company entered into an installment sales
contract for $593,657 to purchase certain equipment. The term of the agreement
is for 48 months at an interest rate of 5.75%, with the equipment securing the
loan. The principal balance owed on the note was $398,793 and $398,793 at
September 30, 2014 and June 30, 2014, respectively. The Company has been unable
to make its monthly payments since November 2013, is currently in default and
the equipment has been returned to the vendor for sale..
In conjunction with the Merger Agreement, Tyhee and the Company
entered into a Bridge Loan Agreement, pursuant to which Tyhee was obligated to
advance up to $3 million to the Company in accordance with the terms thereof.
Tyhee advanced the Company $1,745,092 under the Bridge Loan as of June 30, 2014.
The Bridge Loan bears an annual interest rate of 24%. At this time the Company
and Tyhee are in disagreement as to the due date of the Bridge Loan. Tyhee has
provided the Company with purported notice of default under the Bridge Loan
Agreement. Given the terms of the Bridge Loan and Merger Agreement, the Company
believes Tyhees default notice is wrongful. At September 30, 2014 and June 30,
2014, the Company recorded merger expenses that are due to Tyhee of $269,986 and
is included in accrued liabilities. This amount is net of a break fee of
$300,000 due the Company from Tyhee.
15
The following summarizes notes payable, including the Senior
Secured Gold Stream Credit Agreement, at:
|
|
June 30, |
|
|
June 30, |
|
|
|
2014 |
|
|
2014 |
|
|
|
|
|
|
|
|
Working capital advances, |
|
|
|
|
|
|
interest at 1% per month, due January 15, 2015 |
$ |
220,000 |
|
$ |
- |
|
|
|
|
|
|
|
|
Installment sales contract on equipment, |
|
|
|
|
|
|
interest at 5.75%, payable in 36 monthly installments
of $1,406, including |
|
|
|
|
|
|
interest through June 2015. |
|
12,352 |
|
|
16,354 |
|
|
|
|
|
|
|
|
Installment sales contract on equipment, |
|
|
|
|
|
|
interest at 5.75%, payable in 48 monthly installments
of $13,874, |
|
|
|
|
|
|
including interest through July 2016. |
|
398,793 |
|
|
398,793 |
|
|
|
|
|
|
|
|
Unsecured bridge loan note payable, |
|
|
|
|
|
|
Interest at 2% monthly, payable August 17, 2014, six
months after the first |
|
|
|
|
|
|
advance on the bridge loan. |
|
1,745,092 |
|
|
1,745,092 |
|
|
|
|
|
|
|
|
Senior Secured Gold Stream Credit Agreement,
interest at |
|
|
|
|
|
|
9.00% per annum, payable monthly in arrears, principal
payments deferred |
|
|
|
|
|
|
to July 2012; principal installments are $425,000 for
July and August |
|
|
|
|
|
|
2012, $870,455 monthly for September 2012 through June
2013 and |
|
|
|
|
|
|
$445,450 in July 2013; Note amended October 9, 2012,
principal |
|
|
|
|
|
|
installments of $1,082,955 due October 2012, $500,000
November 2012, |
|
|
|
|
|
|
$0 due December 2012 and January 2013, $3,852,275
February 2013, |
|
|
|
|
|
|
$870,455 March through June 2013, and $445,450 in July 2013.
|
|
7,040,427 |
|
|
7,040,427 |
|
|
|
|
|
|
|
|
Total Outstanding Notes Payable |
|
9,416,664 |
|
|
9,200,666 |
|
Less: Current portion |
|
(9,416,664 |
) |
|
(9,200,666 |
) |
Notes payable, net of current portion and
discount |
$ |
-- |
|
$ |
-- |
|
The aggregate maturities of notes payable as of September 30, 2014, are as follows:
Year ending June 30, 2015 |
$ |
9,416,664 |
|
|
|
|
|
Total Outstanding Notes Payable |
$ |
9,416,664 |
|
NOTE 9 FAIR VALUE MEASUREMENTS
Fair value accounting establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described below:
Level 1 |
Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets
or liabilities; |
|
|
Level 2 |
Quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly for
substantially the full term of the asset or liability; |
|
|
Level 3 |
Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and
unobservable (supported by little or no market activity).
|
Asset and liabilities measured at fair value are classified in
their entirety based on the lowest level of input that is significant to their
fair value measurement.
16
The Companys financial instruments consist of derivative
instruments which are measured at fair value on a recurring basis. The
derivatives are measured on their respective origination dates, at the end of
each reporting period and at other points in time when necessary, such as
modifications, using Level 3 inputs in accordance with GAAP. The Company does not report any financial assets or
liabilities that it measures using Level 1 or 2 inputs. The fair value
measurement of financial instruments and other assets as of September 30, 2014
and June 30, 2014 are as follows:
|
|
|
|
Balance at September
30, |
|
Level 1 |
Level 2 |
Level 3 |
2014 |
|
|
|
|
|
Assets: |
--- |
--- |
--- |
--- |
None |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Derivative
instruments |
--- |
--- |
$ 804,839 |
$ 804,839
|
|
|
|
|
Balance at June 30, |
|
Level 1 |
Level 2 |
Level 3 |
2014 |
Assets: |
--- |
--- |
--- |
--- |
None |
|
|
|
|
|
|
|
|
|
Derivative instruments |
--- |
--- |
$ 292,124 |
$ 292,124
|
The following represents a reconciliation of the changes in
fair value of financial instruments measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the three months ended
September 30, 2014:
Derivative instruments
liabilities at June 30, 2014 |
$ |
292,124
|
|
Loss on derivative instrument liabilities |
|
512,715 |
|
Derivative instruments
liabilities at September 30, 2014 |
$ |
804,839 |
|
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Ortiz Gold Project
On August 1, 2004, the Company entered into an option and lease
agreement with Ortiz Mines, Inc.(Ortiz Mines), a New Mexico corporation,
whereby the Company acquired exclusive rights for exploration, development and
mining of gold and other minerals on 57,267 acres (approximately 90 square
miles) of the Ortiz Mine Grant in Santa Fe County, New Mexico. On November 1,
2007, the Company relinquished 14,970 acres and retained under lease 42,297
acres (66 square miles). On May 1, 2010, we agreed with Ortiz Mines, to amend
the terms of the lease. Under the amended terms, the lease provides for an
extension of the initial term from seven to ten years (17 years in certain
circumstances), continuing year-to-year thereafter for so long as we are
producing gold or other leased minerals in commercial quantities and otherwise
are performing our obligations under the lease. Among other terms, the amended
lease provides for annual lease payments of $130,000; a sliding-scale production
royalty varying from 3% to 5% depending on the price of gold; the requirement
that the Company comply with governmental permitting and other regulations; and
other terms common in mining leases of this type. The Ortiz gold project is
subject to a property identification agreement between the Company and our
former President and Chief Executive Officer. The Company is conducting a
strategic evaluation as whether or not to continue with the Ortiz Gold Project.
The minimum and maximum future payments due on this lease are
as follows for the next five years and thereafter:
Payment Due Date |
Minimum Due |
Maximum Due |
|
($) |
($) |
|
|
|
February 1, 2015 |
130,000 |
260,000 |
February 1, 2016 |
130,000 |
260,000 |
February 1, 2017 |
130,000 |
260,000 |
February 1, 2018 |
130,000 |
260,000 |
February 1, 2019 and
thereafter |
130,000 |
260,000
|
17
Summit Silver-Gold Project
The Summit project is subject to two underlying royalties and a
net proceeds interest as follows: (1) a 7.5% royalty on net smelter returns
toward an end price of $1,250,000; (2) a 5% royalty on net smelter returns
toward an end price of $4,000,000 less any amount paid under the royalty
described in (1); and (3) a net proceeds interest of 5% of net proceeds from
sales of unbeneficiated mineralized rock until such time as the royalties
described in (1) and (2) have been satisfied, and 10% of such net proceeds
thereafter toward an end price of $2,400,000. The Summit silver-gold project is
subject to a property identification agreement between the Company and the
former President and Chief Executive Officer. The property identification
agreement specifies that a 1% royalty be paid on the value of future production
from the project.
No royalty expense was incurred during the three months ended
September 30, 2014. At September 30, 2014, the Company had an accrued royalty
liability of $690,358, which includes $208,179 payable to the Companys former
President and Chief Executive Officer.
Mogollon Option Agreement
On October 22, 2012, the Company entered into the Mogollon
Option Agreement (the Mogollon Option Agreement) with Columbus following
approval of the agreement by the TSX Venture Exchange. Under the agreement, the
Company may acquire the Mogollon Project, Catron County, New Mexico, for
payments aggregating $4,500,000 scheduled to be paid through the end of 2014.
The Company paid an initial $100,000 upon the signing of the agreement and
$150,000 upon approval of the agreement by the TSX Venture Exchange. The payment
schedule called for $500,000 to be paid on or before December 30, 2012, and four
payments of $937,500 each on June 30, 2013, December 30, 2013, June 30, 2014,
and December 30, 2014. Additionally, the Company must maintain the property in
good standing by paying underlying claim and lease payments.
On June 28, 2013 the Company entered into Amendment No. 1 to
the Mogollon Option Agreement with Columbus. The amendment deferred the due
dates of the option payments. In accordance with the amendment, the Company paid
$50,000 in July 2013 and has an amended payment of $887,500 due on or before
December 30, 2013, with three additional payments of $937,500 each due on June
30, 2014, December 30, 2014, and June 30, 2015. In consideration for the
amendment, the Company transferred to Columbus its common shares held in the
capital of Columbus Exploration Corporation valued at $11,914 at the time of
transfer. The Company did not make the payment of $887,500 due on December 30,
2013.
On March 6, 2014, the Company entered into an Amended and
Restated Mogollon Option Agreement with Columbus. Upon execution of the new
agreement the Company paid $50,000. To exercise the option the Company had the
right to pay an additional $950,000 upon the closing of the merger with Tyhee
Gold. In return, the Company will earn a 100% interest in the Mogollon Project
with no further payments due. Upon notice of termination of the Merger on March
21, 2014, the Company had the right for three months, until June 21, 2014, to
exercise the option and make the remaining payment of $950,000 and earn 100%
interest in the Mogollon Project.
On June 18, 2014, the Company entered into Amendment No. 1 to
the Amended and Restated Mogollon Option Agreement with Columbus. The amendment
extended the option exercise date from June 21, 2014 to November 21, 2014. Since
the Company did not exercise the Mogollon option agreement, as restated and
amended, it expired in accordance with its terms on November 21, 2014. As of
September 30, 2014, the Company has made total payments of $876,509 under the
various Option Agreements.
Commodity Supply Agreements
In September 2009, the Company entered into a definitive gold
stream agreement (the Gold Stream Agreement) with Sandstorm to deliver a
portion of the life-of-mine gold production (excluding all silver production)
from the Companys Summit silver-gold mine. Under the agreement the Company
received advances of $4,000,000 as an upfront deposit, plus continue to receive
future ongoing payments equal to the lesser of: $400 per ounce or the prevailing
market price, (the Fixed Price) for each ounce of gold delivered pursuant to
the agreement for the life of the mine. The Company purchases and delivers
refined gold in order to satisfy the requirements of the Gold Stream Agreement
and receives the Fixed Price per ounce in cash from Sandstorm. The difference
between the prevailing market price and the Fixed Price per ounce for gold
delivered is credited against the upfront deposit of $4,000,000 until the
obligation is reduced to zero. Future ongoing payments for gold deliveries will
continue at the Fixed Price per ounce with no additional credits or advances to
be received from Sandstorm. In certain circumstances, including failure to meet
minimum production rates, interruption in production due to permitting issues
and customary events of default, the agreement may be terminated. In such event,
the Company may be required to return to Sandstorm any remaining uncredited
balance of the original $4,000,000 upfront deposit. Gold production subject to
the agreement includes 50% of the first 10,000 ounces of gold produced, and 22%
of the gold thereafter. The net cost of delivering refined gold along with other
related transactional costs corresponding to the Gold Stream Agreement are
recorded in Other Expenses as financing costs - commodity supply agreements.
18
On March 29, 2011, the Company entered into Amendment 1 for the
Gold Stream Agreement. The amendment extended the original completion guarantee
date from April 2011 to June 30, 2012. The completion guarantee test performs a
calculation based upon that percentage of underproduction of gold produced
relative to the amount of gold planned to have been produced as set out in the
agreement. In exchange for the amended completion guarantee date, the Company
agreed to deliver an additional 700 ounces of gold at equivalent sales terms
over and above the original agreement. Under the terms of the amendment the
delivery of the additional gold was to be made prior to June 30, 2011.
On June 28, 2011, the Company entered into Amendment 2 for the
Gold Stream Agreement. The amendment extended the delivery date for the
additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011
until October 15, 2011. In exchange for the new deferred delivery date the
Company agreed to pay a per diem of 3 ounces of gold for each day the additional
gold under Amendment 1 remained outstanding past June 30, 2011 until the actual
date of delivery, no later than October 15, 2011. On August 9, 2011 the Company
satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The
net cost of delivering the gold after receiving payment from Sandstorm of $400
per ounce delivered was $1,075,785.
At June 30, 2012, the Company calculated the completion
guarantee payable provided by Amendment 1. Based upon the provisions of the Gold
Stream Agreement and the related completion guarantee test, incremental
financing charges totaling $504,049 were recognized and accrued at June 30,
2012. These accrued charges, combined with the remaining uncredited liability
for the upfront deposit totaled $3,359,873 at September 30, 2014 and June 30,
2014, respectively, and are reported as the completion guarantee payable.
Under the Gold Stream Agreement the Company has a recorded an
obligation at September 30, 2014, of 3,692 ounces of undelivered gold valued at
approximately $3.0 million, net of the Fixed Price of $400 per ounce to be
received upon delivery.
On December 23, 2011, the Company and its subsidiaries entered
into a Senior Secured Gold Stream Credit Agreement (the Credit Agreement) with
Waterton. The Credit Agreement provided for two $10 million tranches and a $5
million revolving working capital facility. On December 23, 2011, the Company
closed the first $10 million tranche of the Credit Agreement. The second $10
million tranche, which was subject to several funding conditions, was earmarked
to fund the strategic acquisition of Columbus. The acquisition did not occur and
consequently the second tranche was not drawn down. As part of the transaction,
the Company agreed pursuant to a gold and silver sale agreement (the Gold and
Silver Supply Agreement) to sell refined gold and silver to Waterton for the
life the Summit mine. Gold and silver subject to the agreement includes all gold
and silver originating from the Summit property that is not otherwise committed
to delivery to and purchased by Sandstorm, pursuant to the September 9, 2011
Gold Stream Agreement. The sales price for refined gold and silver is based upon
a formulation which considers the London Bullion Market Association (LBMA) PM
fix settlement price for each respective metal, less a discount of three percent
for each metal, and a transaction cost of $1.75 per ounce for gold and $0.07 per
ounce for silver. The discount on gold and silver is only applicable until and
ceases after the latter of either, three years after all outstanding amounts due
under the Senior Secured Gold Stream Credit Agreement have been repaid, or the
date on which the Company has sold 125,000 gold equivalent ounces under the Gold
and Silver Supply Agreement. The Company recorded an obligation of $218,811 and
$611,503 at September 30, 2014 and June 30, 2014, respectively, related to the
Gold and Silver Supply Agreement and is recorded in accrued liabilities.
The Company refers to the Gold Stream Agreement and Gold and
Silver Supply Agreement collectively as the commodity supply agreements and
records the costs related to these agreements in financing costs commodity
supply agreements.
NOTE 11 - STOCKHOLDERS EQUITY Issuance of Stock
On July 15, 2014, the Company entered into shares for debt
settlements with five individuals wherein an aggregate of $200,000 of debt was
settled by the aggregate issuance of 4,000,000 shares of common stock.
19
Issuance of Warrants
During the three months ended September 30, 2014, no warrants
were issued and 112,263 warrants expired.
Stock Options and the 2007 Equity Incentive Plan
During the three months ended September 30, 2014, 7,500,000
options were granted and 6,525,000 options cancelled.
Pursuant to Share Exchange Agreement with Canarc Resource
Corp., the Company granted five year stock options for 7,500,000 shares of
common stock at an exercise price of $0.055, the closing price on the date of
grant. The stock options vest 100% upon the closing of a qualified financing.
The expiry date would be July 15, 2019 if a qualified financing was consummated,
or October 15, 2014 if a qualified financing was not consummated by October 31,
2014. A qualified financing is debt or equity financing of at least $20.0
million. The Share Exchange Agreement provided that it would terminate, unless a
closing of the transactions contemplated occurred on or before October 31, 2014.
The transactions did not close, and the Share Exchange Agreement terminated
pursuant to its terms on October 31, 2014. The associated granted options did
not vest and expired on October 15, 2014 according to the terms of the
grant.
In addition to options under the 1989 Stock Option Plan and
2007 EIP, the Company previously issued non- plan options outside of these
plans, exercisable over various terms up to a maximum of ten years.
Stock option and warrant activity, both within the 1989 Stock
Option Plan and 2007 EIP and outside of these plans, for the three months ended
September 30, 2014, are as follows:
|
Stock
Options |
Stock
Warrants |
|
|
Weighted |
|
Weighted |
|
|
Average |
|
Exercise |
|
Shares |
Price |
Shares |
Price |
Outstanding at June 30, 2014
|
8,925,000 |
$0.24 |
25,283,511 |
$0.62 |
Granted |
7,500,000 |
$0.055 |
--- |
--- |
Canceled |
(6,525,000) |
$0.36 |
--- |
--- |
Expired |
--- |
--- |
(112,263) |
$1.06 |
Exercised |
--- |
--- |
--- |
--- |
Outstanding at September 30, 2014 |
9,900,000 |
$0.12 |
25,171,248 |
$0.62
|
Stock options and warrants outstanding and exercisable at
September 30, 2014, are as follows:
|
|
Outstanding
and Exercisable Options |
|
|
|
|
|
Outstanding
and Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
Weighted |
|
Exercise |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
Exercise |
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
Price |
|
Outstanding |
|
|
Exercisable |
|
|
Life |
|
|
Exercise |
|
|
Price |
|
|
Outstanding |
|
|
Exercisable |
|
|
Life |
|
|
Exercise |
|
Range |
|
Number |
|
|
Number |
|
|
(in Years) |
|
|
Price |
|
|
Range |
|
|
Number |
|
|
Number |
|
|
(in Years) |
|
|
Price |
|
$0.055 |
|
7,500,000 |
|
|
-- |
|
|
.04 |
|
$ |
0.055 |
|
$ |
0.135 |
|
|
6,750,000 |
|
|
6,750,000 |
|
|
0.25 |
|
$ |
0.135 |
|
$0.08 |
|
400,000 |
|
|
400,000 |
|
|
4.28 |
|
$ |
0.08 |
|
$ |
0.38 |
|
|
523,434 |
|
|
523,434 |
|
|
2.96 |
|
$ |
0.38 |
|
$0.14 |
|
600,000 |
|
|
600,000 |
|
|
3.85 |
|
$ |
0.14 |
|
$ |
0.40 |
|
|
11,306,786 |
|
|
11,306,786 |
|
|
2.72 |
|
$ |
0.40 |
|
$0.32 |
|
450,000 |
|
|
450,000 |
|
|
3.25 |
|
$ |
0.32 |
|
$ |
0.87 |
|
|
500,000 |
|
|
500,000 |
|
|
1.84 |
|
$ |
0.87 |
|
$0.36 |
|
700,000 |
|
|
700,000 |
|
|
3.25 |
|
$ |
0.36 |
|
$ |
1.00 |
|
|
600,000 |
|
|
600,000 |
|
|
2.11 |
|
$ |
1.00 |
|
$1.00 |
|
250,000 |
|
|
250,000 |
|
|
.54 |
|
$ |
1.00 |
|
$ |
1.25 |
|
|
250,000 |
|
|
250,000 |
|
|
0.30 |
|
$ |
1.25 |
|
|
|
-- |
|
|
-- |
|
|
|
|
|
|
|
$ |
1.50 |
|
|
933,334 |
|
|
933,334 |
|
|
1.13 |
|
$ |
1.50 |
|
|
|
-- |
|
|
-- |
|
|
|
|
|
|
|
$ |
1.625 |
|
|
461,539 |
|
|
461,539 |
|
|
0.25 |
|
$ |
1.625 |
|
|
|
-- |
|
|
-- |
|
|
|
|
|
|
|
$ |
1.70 |
|
|
3,846,155 |
|
|
3,846,155 |
|
|
0.31 |
|
$ |
1.70 |
|
|
|
9,900,000 |
|
|
2,400,000 |
|
|
|
|
|
|
|
|
|
|
|
25,171,248 |
|
|
25,171,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
.83 |
|
$ |
0.12 |
|
|
Outstanding Warrants
|
|
|
|
|
|
1.47 |
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options |
|
|
3.29 |
|
$ |
0.32 |
|
|
Exercisable Warrants |
|
|
|
|
|
1.47 |
|
$ |
0.62 |
|
20
As of September 30, 2014, the aggregate intrinsic value of all
stock options and warrants vested and expected to vest was $20,000 and the
aggregate intrinsic value of currently exercisable stock options and warrants
was $20,000. 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 or
warrant share 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 quarter and sold the underlying shares at the closing stock price on such
day. The intrinsic value calculation is based on the $0.13 closing stock price
of the common stock on September 30, 2014. There were 400,000 options
and warrants vested and exercisable as of September 30, 2014.
The total intrinsic value associated with options exercised
during the three months ended September 30, 2014, was $-0-. Intrinsic value of
exercised shares is the total value of such shares on the date of exercise less
the cash received from the option or warrant holder to exercise the options.
The total fair value of options and warrants granted and
extended during the three months ended September 30, 2014, was approximately
$-0-. The total grant-date fair value of option and warrant shares vested during
the three months ended September 30, 2014 was $-0-.
NOTE 12 LEGAL PROCEEDINGS
In October 2013 Lone Mountain Ranch, LLC, owner of the surface
estate overlying our Ortiz gold property, filed a lawsuit against the Company
and our lessor, Ortiz Mines, Inc. The lawsuit seeks to clarify Lone Mountain
Ranch's rights and obligations under the split estate regime. Specifically, Lone
Mountain Ranch seeks a declaratory judgment that it may participate in permit
hearings, agency proceedings, and private activities related to the permitting
of the Ortiz project without being in violation of common law duties to not
interfere with development of the mineral estate. The Company is conducting a
strategic evaluation as whether or not to continue with the Ortiz Gold Project.
We are in litigation with two vendors for claims for
approximately $140,400 and $125,876, respectively against us. We are in
discussion with them regarding delaying payment until additional funding can be
obtained. If the Company is unsuccessful in raising additional funding, we may
not be able to pay resolve these lawsuits and our business may not continue as a
going concern. In the event we cannot raise the necessary capital or we cannot
restructure through negotiated modifications, we may be required to effect under
court supervision pursuant to a voluntary bankruptcy filing under Chapter 11 or
Chapter 7 of the U.S. Bankruptcy Code (Chapter 11 or Chapter 7). See Risk
factors.
We are subject from time to time to litigation, claims and
suits arising in the ordinary course of business. Other than the above-described
litigation, as of September 30, 2014, we were not a party to any material
litigation, claim or suit whose outcome could have a material effect on our
financial statements.
In accordance with accounting standards regarding loss
contingencies, the Company accrues an undiscounted liability for those
contingencies where the incurrence of a loss is probable and the amount can be
reasonably estimated, and the Company discloses the amount accrued and the
amount of a reasonably possible loss in excess of the amount accrued, if such
disclosure is necessary for its financial statements not to be misleading. The
Company does not record liabilities when the likelihood that the liability has
been incurred is probable but the amount cannot be reasonably estimated, or when
the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are inherently unpredictable, the
Companys evaluation of legal proceedings often involves a series of complex
assessments by management about future events and can rely heavily on estimates
and assumptions. If the assessments indicate that loss contingencies that could
be material to any one of its financial statements are not probable, but are
reasonably possible, or are probable, but cannot be estimated, then the Company
discloses the nature of the loss contingencies, together with an estimate of the
range of possible loss or a statement that such loss is not reasonably
estimable. While the consequences of certain unresolved proceedings are not
presently determinable, and an estimate of the probable and reasonably possible
loss or range of loss in excess of amounts accrued for such proceedings cannot
be reasonably made, an adverse outcome from such proceedings couldhave a
material adverse effect on its financial statements in any given reporting
period. However, in the opinion of Management, after consulting with legal
counsel, the ultimate liability related to the current outstanding litigation is
not expected to have a material adverse effect on its financial statements.
21
NOTE 13 SUBSEQUENT EVENTS
The Share Exchange Agreement dated July 15, 2014, provided that it will terminate, unless a closing of the transactions contemplated occurred on or before October 15, 2014. The transactions did not close and the Share Exchange Agreement terminated
pursuant to its terms on October 31, 2014. The associated granted five year stock options for 7,500,000 shares of common stock at an exercise price of $0.055 did not vest and expired on October 15, 2014 according to the terms of the grant.
The Company did not exercise the Mogollon option agreement, as restated and amended, it expired in accordance with its terms on November 21, 2014. The Company will write down the payments of $876,509 made under the various Option Agreements in
the second quarter ending December 31, 2014.
22
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-Q contains certain forward-looking
statements as such term is defined by the Securities and Exchange Commission in
its rules, regulations and releases, which represent the Companys expectations
or beliefs, including but not limited to, statements concerning the Companys
strategy, operations, economic performance, financial condition, resource
drilling strategies, investments, and future operational plans. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as may, will, expect, believe,
anticipate, intent, could, estimate, might, plan, predict or
continue or the negative or other variations thereof or comparable terminology
are intended to identify forward-looking statements. This information may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by any
forward-looking statements. This Form 10-Q contains forward-looking statements,
many assuming that the Company secures adequate financing and is able to
continue as a going concern, including statements regarding, among other things:
|
our ability to continue as a going
concern; |
|
|
|
we will require additional financing in
the future restart production at the Summit Mine property and to
bring it into sustained commercial production;
|
|
|
our dependence on our Summit project for
our future operating revenue, which property currently has
limited proven or probable reserves; |
|
|
our mineralized material calculations at
the Summit property and other projects are only estimates and
are based principally on historic data; |
|
|
actual capital costs, operating costs,
production and economic returns may differ significantly from
those that we have anticipated; |
|
|
exposure to all of the risks associated with
restarting and establishing new mining operations, if the
development of one or more of our mineral projects is found to
be economically feasible; |
|
|
title to some of our mineral properties
may be uncertain or defective; |
|
|
|
land reclamation and mine closure may be
burdensome and costly; |
|
|
|
significant risk and hazards associated
with mining operations; |
|
|
|
we will require additional financing in
the future to develop a mine at any other projects, including the
Ortiz and Mogollon projects; |
|
|
the requirements that we obtain, maintain and renew
environmental, construction and mining permits, which
is often a costly and time-consuming process and may be opposed by local
environmental group; |
|
|
our anticipated needs for working
capital; |
|
|
|
our ability to secure financing;
|
|
|
|
claims and legal proceedings against
us; |
|
|
|
our lack of necessary financial resources
to complete development of our projects and the uncertainty of
our future financing plans,
|
23
|
our exposure to material costs,
liabilities and obligations as a result of environmental laws and
regulations (including changes thereto) and permits; |
|
|
|
changes in the price of silver and
gold; |
|
|
|
extensive regulation by the U.S.
government as well as state and local governments; |
|
|
|
our projected sales and
profitability; |
|
|
|
our growth strategies; |
|
|
|
anticipated trends in our
industry; |
|
|
|
unfavorable weather conditions;
|
|
|
|
the lack of commercial acceptance of our
product or by-products; |
|
|
|
problems regarding availability of
materials and equipment; |
|
|
|
failure of equipment to process or
operate in accordance with specifications, including expected
throughput, which could prevent the production of commercially
viable output; and |
|
|
|
our ability to seek out and acquire high
quality gold, silver and/or copper properties.
|
The Company does not intend to undertake to update the
information in this Form 10-Q if any forward-looking statement later turns out
to be inaccurate.
The following discussion summarizes the results of our
operations for the three month period ended September 30, 2014, and compares
those results to the three month period ended September 30, 2013. It also
analyzes our financial condition at September 30, 2014. This discussion should
be read in conjunction with the Managements Discussion and Analysis, including
the audited financial statements for the years ended June 30, 2014 and 2013 and
Notes to the audited financial statements, in our Form 10-K for our fiscal year
ended June 30, 2014.
The discussion also presents certain Non-GAAP performance
measures that are important to management in its evaluation of our operational
results and which are used by management to compare our performance with that of
comparable peer group mining companies. For a detailed description of each of
the Non-GAAP financial measures, please see discussion under Non-GAAP
Measures.
Overview
During our current three month period ended September 30, 2014,
we generated sales of $71,518 and incurred a net loss $944,472 as compared to
the three month period ended September 30, 2013 in which we generated sales of
$1,193,683 and incurred a net loss of $3,999,575. In order to fund operations in
the fiscal year ended June 30, 2014, we relied on proceeds from the sale of gold
and silver products aggregating $2,096,774, proceeds from notes of $1,792,116,
proceeds from convertible debentures aggregating $1,250,000 and equipment net
sales proceeds of $475,160. During the quarter ended September 30, 2014, the
Company relied on short term loans aggregating $220,000 to meet the working
capital needs of the Company.
The results of operations for the fiscal year ended June 30,
2014 reflect a continued under-capitalization of our Summit silver-gold project
which requires additional funding to be able to achieve full project performance
and sustained profitability. On November 8, 2013, we suspended all mining
operations and placed its Summit mine and mill on a care and maintenance program
due to significant operating losses resulting in part from this
under-capitalization.
We are dependent on additional financing to resume our mining
operations and continue our exploration efforts in the future if warranted. In
the event that we are unable to raise additional capital to satisfy the terms
and conditions of the negotiated restructuring of our senior secured
indebtedness, we may be forced to seek reorganization or liquidation under the
U.S. Bankruptcy Code.
24
On July 15, 2014, we entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Canarc Resource Corp., a British Columbia, Canada corporation whose common shares are listed on the TSX Exchange under the symbol CCM ("Canarc").
Under the terms of the Share Exchange Agreement, we will issue 66,000,000 shares of its common stock to Canarc; and, in exchange, Canarc will issue 33,000,000 of its common shares to the us (the "Share Exchange"). Upon consummation of the Share
Exchange, would own approximately 17 % of Canarc's outstanding shares and Canarc would own approximately 34% of Santa Fe's outstanding common shares. The Share Exchange Agreement contains representations, warranties, conditions and covenants of the
parties customary for transactions of this type. Commencing October 15, 2014, either Santa Fe or Canarc can terminate the Share Exchange Agreement.
On July 28, 2014, we entered into an amended and restated Agency Agreement with Euro Pacific Capital, Inc. ("Euro Pacific") pursuant to which Euro Pacific agreed to act as placement agent for the Company. In this regard, Euro Pacific committed to
act as the Registrant's agent and use its "best-efforts" to complete the proposed private placement of 8% Subordinated Secured Redeemable GLD Share Delivery Notes and a Detachable Common Stock Purchase Warrant in the aggregate principal amount
between $20 million to $25 million. The best efforts placement agreement expired on October 31, 2014. Euro Pacific did not sell any the Convertible Gold Notes or place any securities pursuant to its best efforts
placement agency agreement with the Company.
The Share Exchange Agreement provided that it would terminate, unless a closing of the transactions contemplated occurred on or before October 15, 2014. Since the transactions did not close, the Share Exchange Agreement terminated pursuant to its
terms on October 15, 2014.
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. 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.
We have a total accumulated deficit of $86,926,960 at September 30, 2014. To continue as a going concern, we are dependent on continued fund raising. However, currently we have no commitment in place from any party to provide additional capital
and there is no assurance that such funding will be available, or if available, that its terms will be favorable to us.
Basis of Presentation and Going Concern
The consolidated unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. 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.
At September 30, 2014, we have a total accumulated deficit of $86,926,960 and have a working capital deficit of $25,118,704. To continue as a going concern, we are dependent on continued fund raising or other a strategic alternative
financing vehicles. See Liquidity and Capital Resources; Plan of Operation below for additional details.
Our consolidated unaudited financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue in
existence.
Liquidity and Capital Resources; Plan of Operation
As of September 30, 2014, we had cash of $410 as compared to $83,825 at June 30, 2014 and we had a working capital deficit of $25,118,704. We also had an accumulated deficit of $86,926,960. Our consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
At September 30, 2014 we were in arrears on payments totaling approximately $8.9 million under its Senior Secured Gold Stream Credit Agreement (the Credit Agreement) with Waterton and approximately $6.8 million under a gold
stream agreement (the Gold Stream Agreement) with Sandstorm.
On January 23, 2014, we entered into a definitive merger agreement (the Merger Agreement) with Tyhee Gold Corp. (TSX Venture: TDC) (Tyhee), and Tyhee Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of
Tyhee (Merger Sub), which was terminated on March 20, 2014, by the Company.
25
The Merger Agreement provided that in the event that Tyhee
failed to consummate a qualified financing of at least $20 million on or before
March 15, 2014, then we could elect to terminate the Merger Agreement. Because
Tyhee failed to timely consummate a qualified financing, Santa Fes Independent
Special Committee determined that it was in the best interest of us and our
stockholders to terminate the Merger Agreement. As such we provided Tyhee with
notice of its election to terminate the Merger Agreement. The Merger Agreement
provides that Tyhee shall promptly pay to us break fee of $300,000 due to
failure to timely consummate a qualified financing by March 15, 2014.
In conjunction with the Merger Agreement, Tyhee and the Company
entered into a Bridge Loan Agreement, pursuant to which Tyhee was obligated to
advance up to $3.0 million to Santa Fe in accordance with the terms thereof.
Tyhee advanced Santa Fe $1,745,092 of principal and accrued interest under the
Bridge Loan. The Bridge Loan bears interest at a rate of 2.0% per month. At this
time the Company and Tyree are in disagreement as to the due date of the Bridge
Loan. Tyhee has provided Santa Fe with notice of default under the Bridge Loan
Agreement. Given the terms of the Bridge Loan and Merger Agreement, Santa Fe
believes Tyhees default notice is wrongful. At June 30, 2014, the Company
recorded merger expenses that are due to Tyhee of $269,986 and is included in
accrued liabilities. This amount is net of a break fee of $300,000 due the
Company from Tyhee.
On June 30, 2013, the Company signed a Waiver of Default Letter
(the Letter) with Waterton wherein the Company agreed to sell, convey, assign
and transfer certain accounts receivable as consideration for a waiver for
non-payment to Waterton under the Credit Agreement. Waterton may revoke the
waiver at anytime and note the Company in default under the Credit Agreement.
The transfer of the accounts receivable to Waterton were to be treated as
payment towards outstanding interest payable amounts with any remaining transfer
of receivables to be treated as a payment towards other indebtedness under the
Credit Agreement, including principal on the note. The measurement of
receivables transferred was subject to revaluation in accordance with
mark-to-market adjustments and final settlement of the invoices. The valuation
of receivables under the Letter was $1,053,599 at June 30, 2013. Under terms of
the Letter, interest payable was reduced by $116,693 and the principal portion
of the note was reduced by $768,263, while the remaining $168,643 was recorded
as financing costs in interest expense at June 30, 2013.
On September 30, 2013, the valuation of receivables sold under
the Letter was finalized at $1,018,056. Accordingly, final valuation adjustments
were made to increase the principal portion of the note outstanding by $29,145
and to decrease financing costs by $6,398. After recording final valuation
adjustments, the principal portion of the note was ultimately reduced by
$739,118, while the amount recorded over two quarters as financing costs in
interest expense was $162,245. There was no final valuation adjustment to
interest payable. The outstanding principal balance on the note after reduction
for the transferred receivables is $7,040,427 at June 30, 2014and $7,011,282 at
June 30, 2013. Additionally, $813,919 of collected accounts receivable sold to
Waterton remains to be remitted to them and is recorded in Accrued Liabilities
at September 30, 2014.
Waterton may revoke the waiver at any time and note the Company
in default under the Credit Agreement. In the event that Debt Restructurings are
not consummated, or should any of Watertons indebtedness be accelerated, the
Company will not have adequate liquidity to fund its operations, meet its
obligations (including its debt payment obligations) and continue as a going
concern, and will likely be forced to seek relief under Chapter 11 or 15 of the
U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or
similar creditor action may be filed against it.
On July 15, 2014, we entered into a Share Exchange Agreement
with Canarc. Under the terms of the Share Exchange Agreement, we would issue
66,000,000 shares of its common stock to Canarc; and, in exchange, Canarc would
issue 33,000,000 of its common shares to the Company (the "Share Exchange").
Upon consummation of the Share Exchange, we would own approximately 17% of
Canarc's outstanding shares and Canarc would own approximately 34% of Santa Fe's
outstanding common shares. Commencing October 15, 2014, either Santa Fe or
Canarc can terminate the Share Exchange Agreement.
In connection with the Share Exchange Agreement, the Company
and Carnac entered into an interim financing facility pursuant to which Canarc
advanced $220,000 to us. The loan bears interest at a rate of 1% per month and
is due and payable upon the closing of a gold bond financing by us on or before
January 15, 2015.
Effective October 15, 2014, either Santa Fe or Canarc may
terminate the Share Exchange Agreement. If the transaction contemplated by the
Share Exchange Agreement is not consummated and an alternative strategic
relationship is not available to Santa Fe or if Santa Fe is unable to secure
another experienced management team, or if the Company fails to restructure or
refinance its secured indebtedness with Waterton and Sandstorm (the Debt
Restructurings), or should any of such indebtedness be accelerated, the Company
will not have adequate liquidity to fund its operations, meet its obligations (including its
debt payment obligations) and continue as a going concern, and will likely be
forced to seek relief under Chapters 11 or 7 of the U.S. Bankruptcy Code (or an
involuntary petition for bankruptcy relief or similar creditor action may be
filed against it).
26
In July 2014 we entered into a shares for debt settlement with
five individuals wherein an aggregate of $200,000 of debt was settled by the
aggregate issuance of 4,000,000 shares of common stock.
On July 28, 2014, we entered into an amended and restated
Agency Agreement with Euro Pacific Capital, Inc. ("Euro Pacific") pursuant to
which Euro Pacific agreed to act as placement agent for the Company. In this
regard, Euro Pacific committed to act as the Registrant's agent and use its
"best-efforts" to complete the proposed private placement of 8% Subordinated
Secured Redeemable GLD Share Delivery Notes and a Detachable Common Stock
Purchase Warrant in the aggregate principal amount between $20 million to $25
million. The best efforts placement agreement expired September 30, 2014. Euro
Pacific did not sell any the Convertible Gold Notes or place any securities
pursuant to its best efforts placement agency agreement with the Company.
Pursuant to Share Exchange Agreement with Canarc, the Company
granted five year stock options for 7,500,000 shares of common stock at an
exercise price of $0.055, the closing price on the date of grant. The stock
options vest 100% upon the closing of a qualified financing. The expiry date is
July 15, 2019 if a qualified financing is consummated, or October 15, 2014 if a
qualified financing is not consummated by October 31, 2014. A qualified
financing is debt or equity financing of at least $20.0 million.
The Share Exchange Agreement provided that it would terminate,
unless a closing of the transactions contemplated occurred on or before October
15, 2014. The transactions did not close, and the Share Exchange Agreement
terminated pursuant to its terms on October 15, 2014. The associated granted
options did not vest and expired on October 15, 2014 according to the terms of
the grant.
Because Euro Pacific failed to place any securities, and
because the gold and silver prices have declined sharply in recent months, the
Company has changed its operational strategy from a mine restart plan to a
resource drilling and engineering program. Presently, in light of recent
historical operational results, combined with lower metal prices, the Company is
reporting no reserves for the Summit property. As such, the Companys strategy
is to conduct additional technical work, including drilling and sampling, to
reclassify some of the mineralized material at the Summit project as reserves.
Our management and independent special committee have both
discussed this change in strategy with Santa Fes senior secured creditor,
Waterton Global Value, L.P. (Waterton). Waterton has indicated support for the
Companys resource drilling strategy. In this regard, we are in advanced
discussions with a qualified strategic investor to provide necessary funding to
complete our anticipated resource drilling strategy and a restart the Summit
mine and mill. No assurances can be given that funding for the drilling program
will be secured or that the program will be successful. See Risk Factors.
Derivative Financial Instruments
In connection with the issuance of debt or equity instruments,
we may issue options or warrants to purchase our common stock. In certain
circumstances, these options or warrants may be classified as derivative
liabilities, rather than as equity. Additionally, the debt or equity instruments
may contain embedded derivative instruments, such as conversion options, which
in certain circumstances, may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative instrument
liability.
The identification of, and accounting for, derivative
instruments is complex. Our derivative instrument liabilities are revalued at
the end of each reporting period, with changes in the fair value of the
derivative liability recorded as charges or credits to income, in the period in
which the changes occur. For warrants that are accounted for as a derivative
instrument liability, we determined the fair value of these warrants using the
Black-Scholes option pricing model. That model requires assumptions related to
the remaining term of the instruments and risk-free rates of return, our current
common stock price and expected dividend yield, and the expected volatility of
our common stock price over the life of the warrants. The identification of, and
accounting for, derivative instruments and the assumptions used to value them
can significantly affect our consolidated financial statements.
27
RESULTS OF OPERATIONS
Operating Results for the Three Months Ended September 30,
2014 and 2013
Sales, net
During the three months ended September 30, 2014, we recorded
71,518 in concentrate and flux sales, net of treatment charges, compared to
$1,193,683 for the three months ended September 30, 2013, a decrease of
$1,122,165. The change is the result of a drop-off in production as we suspended
all mining operations in early November 2013 and placed the mine and mill on a
care and maintenance program.
Costs applicable to sales
During the three months ended September 30, 2014, costs
applicable to sales totaled $40,000 as compared to $2,176,917 for the same
comparable period in 2013. The decrease for the period corresponds with the
decrease in production of tons processed as compared to the prior year
comparable period and reflected by our decision to temporarily suspend all
mining operations in early November 2013.
Exploration
Exploration and other mine related costs were $196,168 for the
three months ended September 30, 2014, as compared to $90,613 for the comparable
period of measurement, an increase of $105,555. The increase in the current
period of measurement is mainly attributable to various costs included in costs
applicable to sales when in production were pushed down to exploration and other
mine related costs during the post period of suspended mining operations.
General and Administrative
General and administrative expenses decreased to $369,643 for
the three months ended September 30, 2014, from $843,238 for the comparative
three month period ended September 30, 2013, a decrease of approximately
$473,595, or 56%. General and administrative expenses include salaries and
benefits, stock-based compensation, professional and consulting fees, marketing
and investor relations, and travel costs. The decrease is mainly attributable to
cutbacks in current operations due to the Companys decision to suspended all
mining operations in early November 2013 and placed the mine and mill on a care
and maintenance program and cutbacks at the administrative support office
including cancellation of the office lease.
Depreciation and Amortization
Depreciation and amortization expense decreased to $480,806 for
the three months ended September 30, 2014, as compared to $774,459 for the three
months ended September 30, 2013. The decrease in the current period is
attributable primarily to the decrease in production and a corresponding
decrease in the amortization of mine development costs which are amortized on a
units-of-production basis. Reduced depreciation on fully depreciated equipment
also contributed to the decrease.
Other Income and
Expenses
Other income and (expenses) for the three months ended
September 30, 2014, was $72,069 as compared to $(1,307,517) for the three months
ended September 30, 2013, a decrease in other expenses of approximately
$1,380,000.
The net decrease in other expenses for the three months ended
September 30, 2014, compared to the same comparable period in 2013, is mainly
comprised of the following components: increased gain recognized on foreign
currency translation of approximately $280,000; an increased loss on derivative
instrument liabilities of approximately $(221,000); a decrease in financing
costs related to the commodity supply agreements approximating $1,447,000; and
an increase in interest expense of approximately $108,000. Further information
regarding the changes in the various components of Other Income and Expenses is
discussed in the categories below.
Gain (Loss) on Derivative
Financial Instruments
For the three months ended September 30, 2014, the loss on
derivative financial instruments totaled $512,715 as compared to $291,996 for
the three months ended September 30, 2013. The changes in derivative financial
instruments are non-cash items and arise from adjustments to record the
derivative financial instruments at fair values in accordance with pronounced
accounting standards. These changes are attributable mainly to adjustments to
record the change in fair value for the embedded conversion feature of
derivative financial instruments, warrants previously issued under our
registered direct offerings, changes in the market price of our common stock,
which is a component of the calculation model, and the issuance of
additional warrants resulting in derivative treatment. We use the Black-Scholes
option pricing model to estimate the fair value of the derivative financial
instruments. Because Black-Scholes uses our stock price, changes in the stock
price will result in volatility to the earnings in future periods as we continue
to reflect the derivative financial instruments at fair values.
28
Financing costs commodity
supply agreements
The financing costs for commodity supply agreements relate
directly to production for the period and the subsequent delivery of refined
precious metals to Sandstorm and Waterton. These financing costs are adjusted
period-to-period based upon the total number of undelivered gold and silver
ounces outstanding at the end of each period valued at current spot prices. For
the three months ended September 30, 2014, these adjusted financing costs
resulted in $756,372 of income as compared to $(690,887) of expense for the
three months ended September 30, 2013. The reduction of expense from September
30, 2013 period of measurement and subsequent recording of income in the current
period is driven by the significant decrease in precious metals prices in the
current period of measurement.
Interest expense
For the three months ended September 30, 2014, interest expense
totaled $435,374 as compared to $327,027 for the three months ended September
30, 2013. The increase of approximately $108,000 is mainly attributable to the
Tyhee note payable outstanding in the current period of measurement.
Production Statistics, Sales Statistics, and Cash
Costs
Presented below are selected key
operating measures for our Summit underground mine and Banner mill processing
facility for the three months ended September 30, 2014 and September 30, 2013.
In the presentation of our production statistics, we utilize the terms
contained metals and payable metals. Contained metals represent the number
of ounces before metallurgical losses, primarily recoveries, and payable metals
deductions levied by a smelter; whereas payable metals represents the number of
ounces after metallurgical losses, primarily recoveries, and payable metals
deductions levied by a smelter. Payable metals sold represent the final number
of ounces which are used to record sales.
We temporarily suspended all mining operations in early
November 2013 and placed the mine and mill on a care and maintenance program.
PRODUCTION STATISTICS
|
|
3 Months |
|
|
3 Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
9/30/14 |
|
|
9/30/13 |
|
Production
Summary |
|
|
|
|
|
|
Tons Processed |
|
--- |
|
|
9,405 |
|
Tons Processed per Day |
|
--- |
|
|
149 |
|
|
|
|
|
|
|
|
Grade |
|
|
|
|
|
|
Average Gold Grade(oz./ton) |
|
--- |
|
|
0.084 |
|
Average Silver Grade(oz./ton)
|
|
--- |
|
|
3.719 |
|
|
|
|
|
|
|
|
Contained
Metals |
|
|
|
|
|
|
Gold (Oz.'s) |
|
--- |
|
|
782 |
|
Silver (Oz's.)
|
|
--- |
|
|
34,183 |
|
SALES STATISTICS
|
|
3 Months |
|
|
3 Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
9/30/14 |
|
|
9/30/13 |
|
Average metal prices -
Realized |
|
|
|
|
|
|
Gold (Oz's.) |
$ |
1,256 |
|
$ |
1,375 |
|
Silver (Oz's.)
|
$ |
19 |
|
$ |
24 |
|
|
|
|
|
|
|
|
Payable metals
sold |
|
|
|
|
|
|
Gold (Oz.'s) |
|
34 |
|
|
422 |
|
Silver (Oz's.)
|
|
1,768 |
|
|
25.648 |
|
|
|
|
|
|
|
|
Gold equivalent ounces
sold |
|
|
|
|
|
|
Gold Ounces |
|
34 |
|
|
422 |
|
Gold Equivalent
Ounces from Silver |
|
27 |
|
|
421 |
|
Total Gold Equivalent Ounces |
|
61 |
|
|
843 |
|
|
|
|
|
|
|
|
Sales (in thousands): |
|
|
|
|
|
|
Gross before provisional
pricing |
$ |
76 |
|
$ |
1,303 |
|
Provisional pricing mark-to-market |
|
--- |
|
|
(58 |
) |
Gross after provisional
pricing |
|
76 |
|
|
1,245 |
|
Treatment and refining charges |
|
(3 |
) |
|
(51 |
) |
Net Revenues |
$ |
73 |
|
$ |
1,194 |
|
|
|
|
|
|
|
|
Average realized price
per gold equivalent ounce: |
|
|
|
|
|
|
Gross before adjustments |
$ |
1,230 |
|
$ |
1,545 |
|
Provisional pricing
mark-to-market |
|
--- |
|
|
(69 |
) |
Gross after provisional pricing |
|
1,230 |
|
|
1,476 |
|
Treatment and refining
charges |
|
(54 |
) |
|
(61 |
) |
Net realized price per gold equivalent ounce
|
$ |
1,176 |
|
$ |
1,415 |
|
29
Total Cash Cost per Gold Equivalent Ounce Sold
We utilize total cash cost (including royalties and resource
taxes) per gold equivalent ounce sold, calculated in accordance with the Gold
Institutes Standard, as one indicator for comparative monitoring of our mining
operations from period to period. Total cash costs are calculated using cost of
sales, plus treatment and refining charges (which are netted against revenues).
Total cash costs are divided by gold equivalent ounces sold (gold sold, plus
gold equivalent ounces of silver sold converted to gold using our realized gold
price to silver price ratio to arrive at total cash cost per gold equivalent
ounce sold.
We also utilize operating cash costs per gold equivalent ounce
to measure our performance. The principal difference between operating cash
costs and total cash costs is that operating cash costs exclude royalty payments
and resource taxes whereas total cash costs include royalty payments and
resource taxes. Total cash cost per ounce figures for all periods presented in
this Managements Discussion and Analysis are presented on an ounces sold basis.
There can be no assurance that our reporting of these Non-GAAP measures is
similar to that reported by other mining companies.
We have reconciled operating cash cost per gold equivalent
ounce sold and total cash cost per gold equivalent ounce sold to reported U.S.
GAAP measures in the table below. The most comparable financial measures to our
operating cash cost and total cash cost is costs applicable to sales calculated
in accordance with U.S. GAAP. Costs applicable to sales are obtained from the
unaudited consolidated statements of operations.
The decrease in cash costs per gold equivalent ounce between
the three month comparable periods is the result of a decrease in production
resulting from fewer tons processed during the current period and accompanied by
a decrease in the average grade for silver. Equipment issues and production
downtime continued to be encountered during the current period, and the mining
operations were suspended on November 8, 2013 pending the sourcing of sufficient
capital to recapitalize the project and resume profitable operations.
CASH COST STATISTICS
|
|
3 Months |
|
|
3 Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
930/14 |
|
|
9/30/13 |
|
Total Gold Equivalent
Ounces Sold |
|
61 |
|
|
843 |
|
|
|
|
|
|
|
|
Costs applicable to sales |
$ |
40,000 |
|
$ |
2,176,917
|
|
Treatment & Refining Charges |
$ |
5,383 |
|
$ |
51,166 |
|
Royalties |
$ |
--- |
|
$ |
69,645 |
|
Resource Taxes |
$ |
--- |
|
$ |
(37,000 |
) |
Total Operating Cash Costs
|
$ |
45,383 |
|
$ |
2,260,228 |
|
|
|
|
|
|
|
|
Operating Cash Cost per
Gold Equivalent Ounce Sold |
$ |
744 |
|
$ |
2,680 |
|
|
|
|
|
|
|
|
Operating Cash Costs |
$ |
45,383 |
|
$ |
2,260,228 |
|
Royalties |
$ |
--- |
|
$ |
(69,645 |
) |
Resource Taxes |
$ |
--- |
|
$ |
37,500 |
|
Total Cash Costs |
$ |
45,383 |
|
$ |
2,228,083 |
|
|
|
|
|
|
|
|
Total Cash Cost per Gold Equivalent Ounce
Sold |
$ |
744 |
|
$ |
2,642 |
|
30
Factors Affecting Future Operating Results
We continue to deploy our plan to place the Company on an
improved financial footing, including refinancing existing debt obligations and
securing additional production equipment and corresponding working capital
related to increased production. We plan to procure capital with a combination
of short and long term financing arrangements and/or equity placements as
required. If we are able to secure required financing on acceptable terms, we
believe we will be in a position to execute our business plan on our current
property sites and to strengthen our overall financial position.
Currently we have no current commitment from any party to
provide additional working capital, or if one becomes available, there is no
certainty that its terms will be favorable or acceptable to the Company. We are
currently in process of discussions with various strategic financing
alternatives. It is unknown if such discussions will be successful in attaining
a financing facility which will allow the Company to continue operations under a
revised business plan. If discussions with these financing sources are
unsuccessful we will not be able to continue as a going concern, and will likely
be forced to seek relief under the U.S. Bankruptcy Code.
Off-Balance Sheet Arrangements
Stock option holders have the right to exercise stock options
on a cashless basis, whereby the stock option holders can exercise their stock
options without cash payments to us whereby we will issue that number of stock
of common shares based upon the difference between the market price of the
common shares at the time of exercise and the exercise price of the stock
options being exercised.
Contractual Obligations as of September 30, 2014
Contractual obligations |
Payments due by period |
|
|
Total |
Less than 1 year
|
1-3 years |
3-5 years |
More than 5 years
|
Capital Lease Obligations |
None |
|
|
|
|
Operating Lease Obligations |
None |
|
|
|
|
Purchase Obligations |
None |
|
|
|
|
Asset Retirement Obligation |
242,521 |
|
|
|
$242,521 |
Total |
$242,521 |
|
|
|
$242,521 |
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
There has been no material change in the market risks discussed
in Item 7A of Santa Fe Golds Form 10-K for the fiscal year ended June 30, 2014.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(d) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act)) 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 recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that our disclosure controls and procedures are effective in alerting management on a timely basis to material information required to be
disclosed in our periodic reports. Under the supervision of, and the participation of our management, our Chief Executive Officer, or persons performing similar functions, has conducted an evaluation of our disclosure controls and procedures as of
September 30, 2014. This evaluation included certain areas in which we have made, and are continuing to make, changes to improve and enhance controls.
31
Based on this evaluation, our Chief Executive Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in
reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required, and are effective in alerting management on a timely basis to material information required to be disclosed
in our periodic reports.
During the quarter ended September 30, 2014, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2013 Lone Mountain Ranch, LLC, owner of the surface estate overlying our Ortiz gold property, filed a lawsuit against the Company and our lessor, Ortiz Mines, Inc. The lawsuit seeks to clarify Lone Mountain Ranch's rights and obligations
under the split estate regime. Specifically, Lone Mountain Ranch seeks a declaratory judgment that it may participate in permit hearings, agency proceedings, and private activities related to the permitting of the Ortiz project without being in
violation of common law duties to not interfere with development of the mineral estate.
We are in litigation with two vendors for claims for approximately $140,400 and $125,876, respectively against us. We are in discussion with them regarding delaying payment until additional funding can be obtained. If the Company is
unsuccessful in raising additional funding, we may not be able to pay resolve these lawsuits and our business may not continue as a going concern. In the event we cannot raise the necessary capital or we cannot restructure through negotiated
modifications, we may be required to effect under court supervision pursuant to a voluntary bankruptcy filing under Chapter 11 or Chapter 7 of the U.S. Bankruptcy Code (Chapter 11 or Chapter 7). See Risk factors.
We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. Other than the above-described litigation, as of June 30 31, 2014, we were not a party to any material litigation, claim or suit whose
outcome could have a material effect on our financial statements.
In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company
discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood
that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are inherently unpredictable, the Companys evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the
assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss
contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the
probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on its financial statements in any
given reporting period. However, in the opinion of Management, after consulting with legal counsel, the ultimate liability related to the current outstanding litigation is not expected to have a material adverse effect on its financial statements.
32
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks and uncertainties described in our
annual report on Form 10-K for our year fiscal ended June 30, 2014, in addition
to the other information included in this quarterly report. If any of the risks
described actually occurs, our business, financial condition or results of
operations would likely suffer. In that case, the trading price of our common
stock could fall.
Except as set forth herein, as of September 30, 2014, there
have not been any material changes to the risk factors disclosed in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2014, although we may
disclose changes to such risk factors or disclose additional risk factors from
time to time in our future filings with the SEC.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(The Act) requires the operators of mines, including gold and silver mines, to
include in each periodic report filed with the Securities and Exchange
Commission certain specified disclosures regarding the companys history of mine
safety.
In evaluating these disclosures, consideration should be given
to factors such as: (i) the number of citations and orders may vary depending on
the size of the mine, (ii) the number of citations issued will vary from
inspector to inspector and mine to mine, and (iii) citations and orders can be
contested and appealed, and in that process, are often reduced in severity and
amount, and are sometimes dismissed.
Specified disclosures relating to The Act and pertaining to the
Summit Mine for the three months ended September 30, 2014 are as follows:
Item
|
Summit Mine
29-02356 |
Banner Mill
29-02357
|
Section 104 S&S Citations |
9 |
0 |
Section 104(b) Orders |
1 |
0 |
Section 104(d) Citations and Orders |
1 |
0 |
Section 110(b)(2) Violations |
0 |
0 |
Section 107(a) Orders |
0 |
0 |
Total Dollar Value of MSHA Assessments Proposed |
$ 6,996 |
0 |
Total Number of Mining Related Fatalities |
0 |
0 |
Received Notice of Pattern of Violations Under Section 104e
|
No |
No |
Received Notice of Potential to Have Pattern Under Section
104e |
No |
No |
Legal Actions Pending as of Last Day of Period |
0 |
0 |
Legal Actions Initiated During Period |
2 |
0 |
Legal Actions Resolved During Period |
2 |
0 |
ITEM 5. OTHER INFORMATION
None
33
ITEM 6. EXHIBITS
(a) The following exhibits are filed as
part of this report:
34
SIGNATURES:
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 26, 2014 |
/s/ Jakes Jordaan |
|
Jakes Jordaan |
|
Chief Executive Officer,
President, and Director |
35
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE
SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF
THE SARBANES-OXLEY ACT OF 2002
I, Jakes Jordaan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Santa
Fe Gold Corporation (the registrant);
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and
5. The registrants other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrants
internal control over financial reporting.
Date: November 26, 2014 |
/s/Jakes Jordaan |
|
Jakes Jordan |
|
Chief Executive Officer,
President, and Director |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE
SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF
THE SARBANES-OXLEY ACT OF 2002
I, Frank G. Mueller, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Santa
Fe Gold Corporation (the registrant);
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and
5. The registrants other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrants
internal control over financial reporting.
Date: November 26, 2014 |
/s/ Frank G. Mueller |
|
Frank G. Mueller |
|
Interim Chief Financial
Officer |
|
Principal Accounting
Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER
PURSUANT TO 18 U.S.C. SECTOION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly
Report of Santa Fe Gold Corporation, (the Company) on Form 10-Q for the three
month period ended September 30, 2014, as filed with the Securities and Exchange
Commission on the date hereof (the Report), the undersigned officers of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our
knowledge:
|
1. |
The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and |
|
|
|
|
2. |
The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company, as of, and for the periods presented in the
Report. |
Date: November 26, 2014 |
/s/ Jakes Jordaan |
|
Jakes Jordan |
|
Chief Executive
Officer, President, Director |
|
|
|
|
|
/s/ Frank G. Mueller |
|
Frank G. Mueller |
|
Interim Chief Financial
Officer, |
|
Principal Accounting
Officer |