This prospectus relates to the offer and resale
of up to 25,000,000 shares of our common stock, par value $0.001 per share, by the selling stockholder, River North Equity, LLC
(“River North”). All of such shares represent shares that River North has agreed to purchase from us
pursuant to the terms and conditions of an Equity Purchase Agreement we entered into with them on March 16, 2016 (the “Equity
Purchase Agreement”). Subject to the terms and conditions of the Equity Purchase Agreement, we have the right
to “put,” or sell, up to $5,000,000 worth of shares of our common stock to River North. This arrangement
is also sometimes referred to herein as the “Equity Line.”
For more information on the selling stockholder,
please see the section of this prospectus entitled “Selling Stockholder” beginning on page 16.
River North may sell any shares offered
under this prospectus at fixed prices, prevailing market prices at the time of sale, at varying prices or negotiated prices.
River North is an “underwriter”
within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the resale
of our common stock under the Equity Line, and any broker-dealers or agents that are involved in such resales may be deemed to
be “underwriters” within the meaning of the Securities in connection therewith. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. For more information, please see the section of this prospectus
titled “Plan of Distribution” beginning on page 17.
We will not receive any proceeds from the resale
of shares of common stock by River North. We will, however, receive proceeds from the sale of shares directly to River
North pursuant to the Equity Line.
Our common stock is quoted on the OTCQB Marketplace
operated by the OTC Markets Group, Inc., or “OTCQB,” under the ticker symbol “ECPN.” On April 7, 2016,
the average of the high and low sales prices of our common stock was $0.039 per share.
Investing in our common stock involves risk.
See “Risk Factors” beginning on page 5 of this prospectus.
RISK FACTORS
An investment in our common stock involves
a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information
in this prospectus in evaluating our company and our business before purchasing our securities. Our business, operating results
and financial condition could be seriously harmed as a result of the occurrence of any of the following risks. You could lose
all or part of your investment due to any of these risks. You should invest in our common stock only if you can afford to lose
your entire investment.
Risks Relating to Our Business
The volatility of precious metal
prices may negatively affect our potential earnings.
We anticipate that a significant portion of
our future revenues will come from the sale of our El Capitan Property. Our earnings will be directly affected by the prices of
precious metals believed to be located on such property. Demand for precious metals can be influenced by economic conditions,
including worldwide production, attractiveness as an investment vehicle, the relative strength of the U.S. dollar and local investment
currencies, interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is not within
our control and is impossible to predict with accuracy. The price of precious metals has on occasion been subject to very rapid
short-term changes due to speculative activities. Downward fluctuations in precious metal prices may adversely affect the value
of any discoveries made at the site with which our Company is involved. If the market prices for these precious metals falls below
the mining and development costs we incur to produce such precious metals, we will experience the inability to sell our El Capitan
Property.
We have not had revenue-generating
operations and may never generate revenues.
With the exception of immaterial revenue from
the sale of two ore bars, we have not yet had revenue-generating operations, and it is possible that we will not find marketable
amounts of minerals on our El Capitan Property or that the property will ever be sold. Should we fail to obtain working
capital through other avenues, our ability to continue to market our El Capitan Property could be curtailed.
Until we confirm recoverable precious
metals on our El Capitan Property, we may not have any potential of generating any revenue.
Our ability to sell the El Capitan Property
depends on the success of our exploration programs and the development of a cost-effective process for recovering precious metals
and iron extracted from the mineralized materials at the El Capitan Property. We have not established proven or probable mineral
deposits at our El Capitan Property. Even if exploration leads to a valuable deposit, it might take several years for us
to enter into an agreement for sale or joint venture development of the property. During that time, depending on economic conditions
and the underlying market values of the precious metals that may be recovered, it might become financially or economically unfeasible
to extract the minerals at the property.
We may not be able to sell the
El Capitan Property or on terms acceptable to us.
We are concentrating our efforts on developing
a strategic plan to sell the El Capitan Property or potentially enter into a joint venture with a major mining company to operate
the mining operation. There is no guarantee that we will be able to find a potential acquirer or joint venture partner on terms
that are acceptable to us or at all.
Our inability to establish the
existence of mineral resources in commercially exploitable quantities on our El Capitan Property may cause our business to fail.
The El Capitan Property has transitioned from
an exploration stage to operations stage during the latter part of our current fiscal year. To date, we have not established a
mineral reserve on the El Capitan Property. A “reserve,” as defined by the Securities and Exchange Commission’s
Industry Guide 7, is that part of a mineral deposit that can be economically and legally extracted or produced at the time of
the reserve determination. A reserve requires a feasibility study demonstrating with reasonable certainty that the deposit can
be economically and legally extracted and produced. At this time it is not ascertainable or it is possible that the
El Capitan Property does not contain a reserve and all resources we spend on exploration of this property may be lost. We have
not received feasibility studies. As a result, we have no reserves at the El Capitan Property. In the event we are unable to establish
reserves or measured resources acceptable under industry standards, we may be unable to sell or enter into a joint venture with
respect to the development of the El Capitan Property, and the business of the Company may fail as a result.
Uncertainty of mineralization estimates
may diminish our ability to properly value our property.
We rely on estimates of the content of mineral
deposits on our properties, which estimates are inherently imprecise and depend to some extent on statistical inferences drawn
from both limited drilling on our properties and the placement of drill holes that may not be spaced close enough to one another
to enable us to establish probable or proven results. These estimates may prove unreliable. Additionally, we have previously relied
upon various certified independent laboratories to assay our samples, which may produce results that are not as consistent as
a larger commercial laboratory might produce. Reliance upon erroneous estimates may have an adverse effect upon the
financial success of the Company.
Any loss of the industry experience
of members of our Board and/or our officers may affect our ability to achieve our business objectives.
The skills of the Company’s directors
span mining, business and legal expertise. The Company relies on contractors and consultants for certain industry matters.
All of these relationships and the background of the directors would be difficult to replace. Fulfilling the Company’s
objectives might be negatively impacted or prove more costly to obtain if we were to lose the services of these directors, contractors
or consultants. The Company does not own life insurance on any of our officers, directors, contractors or consultants.
The nature of mineral exploration
is inherently risky, and we may not ever discover marketable amounts of precious minerals.
Exploration for minerals is highly speculative
and involves greater risk than many other businesses. Most exploration programs fail to result in the discovery of economically
feasible mineralization. Our exploration and mining efforts are subject to the operating hazards and risks common to the industry,
such as:
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economically insufficient mineralized
materials;
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decrease in values due to lower metal
prices;
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fluctuations in production cost that may
make mining uneconomical;
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unanticipated variations in grade and
other geologic problems;
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unusual or unexpected formations;
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difficult surface conditions;
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metallurgical and other processing problems;
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environmental hazards;
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water conditions; and
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government regulations.
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Any of these risks can adversely affect the
feasibility of development of our El Capitan Property, production quantities and rates, and costs and expenditures. We currently
have no insurance to guard against any of these risks. If we determine that capitalized costs associated with our El Capitan
Property are likely not to be recovered, a write-down of our investment would be necessary. All of these factors may result in
unrecoverable losses or cause us to incur potential liabilities, which could have a material adverse effect on our financial position.
The effect of these factors cannot be accurately
predicted, and the combination of any of these factors may prevent us from selling or otherwise developing the El Capitan Property
and receiving an adequate return on our invested capital.
Extensive government regulation
and environmental risks may require us to discontinue or delay our marketing activities for the sale of El Capitan Property.
Our business is subject to extensive federal,
state and local laws and regulations governing exploration, development, production, labor standards, occupational health, waste
disposal, use of toxic substances, environmental regulations, mine safety and other matters. Additionally, new legislation and
regulations may be adopted at any time that may affect our business. Compliance with these changing laws and regulations could
require increased capital and operating expenditures and could prevent or delay the sale of the El Capitan Property.
Any failure to obtain government
approvals and permits may require us to discontinue future exploration on our El Capitan Property.
We are required to seek and maintain federal
and state government approvals and permits in order to conduct exploration and other activities on our El Capitan Property. The
permitting requirements for our respective claims and any future properties we may acquire will be somewhat dependent upon the
state in which the property is located, but generally will require an initial filing and fee (of approximately $25) relating to
giving notice of an intent to make a claim on such property, followed by a one-time initial filing of a location notice with respect
to such claim (approximately $165), an annual maintenance filing for each claim (generally $155 per claim per year), annual filings
for bulk fuel and water well permits (typically $5 per year each) and, to the extent we intend to take any significant action
on a property (other than casual, surface-level activity), a one-time payment of a reclamation bond to the BLM, which is to be
used for the reclamation of the property upon completion of exploration or other significant activity. In order to take any such
significant action on a property, we are required to provide the BLM with either a notice of operation or a plan of operation
setting forth our intentions. The amount of the reclamation bond is determined by the BLM based upon the scope of the activity
described in the notice or plan of operation. With respect to the current plan of operations on the El Capitan Property, the reclamation
bond was $15,000, but this amount has been increased to $74,499 with the approval of our modified mining permit in December 2014
and subsequently issued on March 25, 2015.
Obtaining the necessary permits can be a complex
and time-consuming process involving multiple jurisdictions, and requiring annual filings and the payment of annual fees. Additionally,
the duration and success of our efforts to obtain permits are contingent upon many variables outside of our control and may increase
costs of or cause delay to our mining endeavors. There can be no assurance that all necessary approvals and permits will be obtained,
and if they are obtained, that the costs involved will make it economically unfeasible to continue our exploration of the El Capitan
Property.
As of the filing this prospectus, we were issued
all our required permits.
Mineral exploration is extremely
competitive, and we may not have adequate resources to successfully compete.
There is a limited supply of desirable mineral
properties available for claim staking, lease or other acquisition in the areas where we contemplate participating in exploration
activities. We compete with numerous other companies and individuals, including competitors with greater financial,
technical and other resources than we possess, and that are in a better position than us to search for and acquire attractive
mineral properties. We have no intention to expand our mineral properties interest outside of the El Capitan Property.
Title to any of our properties
may prove defective, possibly resulting in a complete loss of our rights to such properties.
The primary portion of our holdings includes
unpatented mining claims. The validity of unpatented claims is often uncertain and may be contested. These claims are located
on federal land or involve mineral rights that are subject to the claims procedures established by the General Mining Law of 1872,
as amended. We are required to make certain filings with the county in which the land or mineral is situated and annually with
the BLM and pay an annual holding fee of $140 per claim. If we fail to make the annual holding payment or make the required filings,
our mining claims would become invalid. In accordance with the mining industry practice, generally a company will not obtain title
opinions until it is determined to sell a property. Also no title insurance is available for mining. Accordingly, it is possible
that title to some of our claims may be defective and in that event we would not have good and valid title to the El Capitan Property,
and we would be forced to curtail or cease our exploratory programs on the property site.
Risks Related to Our Common Stock
Our common stock is thinly traded,
and there is no guarantee of the prices at which the shares will trade.
Trading of our common stock is conducted on
the OTCQB Marketplace operated by the OTC Markets Group, Inc., or “OTCQB,” under the ticker symbol “ECPN.” Not
being listed for trading on an established securities exchange has an adverse effect on the liquidity of our common stock, not
only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions
and reduction in security analysts’ and the media’s coverage of the Company. This may result in lower prices
for your common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices
for our common stock. Historically, our common stock has been thinly traded, and there is no guarantee of the prices
at which the shares will trade, or of the ability of stockholders to sell their shares without having an adverse effect on market
prices.
Our stock price may be volatile
and as a result you could lose all or part of your investment.
In addition to volatility associated with securities
traded on the OTCQB in general, the value of your investment could decline due to the impact of any of the following factors upon
the market price of our common stock:
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adverse changes in the worldwide prices
for gold or silver;
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disappointing results from our exploration
or development efforts;
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failure to meet operating budget;
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decline in demand for our common stock;
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downward revisions in securities analysts’
estimates or changes in general market conditions;
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technological innovations by competitors
or in competing technologies;
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investor perception of our industry or
our prospects; and
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general economic trends.
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In addition, stock markets have experienced
extreme price and volume fluctuations and the market prices of securities generally have been highly volatile. These fluctuations
commonly are unrelated to operating performance of a company and may adversely affect the market price of our common stock. As
a result, investors may be unable to resell their shares at a fair price.
We have never paid dividends on
our common stock and we do not anticipate paying any dividends in the foreseeable future.
We have not paid dividends on our common stock
to date, and we may not be in a position to pay dividends in the foreseeable future. Our ability to pay dividends depends on our
ability to successfully develop the El Capitan Property and generate revenue from future operations. Further, our initial earnings,
if any, will likely be retained to finance our growth. Any future dividends will depend upon our earnings, our then-existing financial
requirements and other factors and will be at the discretion of our Board of Directors.
Because our common stock is a “penny
stock,” it may be difficult to sell shares of our common stock at times and prices that are acceptable.
Our common stock is a “penny stock.”
Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk disclosure document prepared
by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the
penny stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding
broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser,
and obtain the purchaser’s written agreement to the purchase. The penny stock rules may make it difficult for you to sell
your shares of our common stock. Because of these rules, many brokers choose not to participate in penny stock transactions and
there is less trading in penny stocks. Accordingly, you may not always be able to resell shares of our common stock publicly at
times and prices that you feel are appropriate.
In addition to the “penny stock”
rules described above, the Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
We may raise additional capital
to fund our operations. The manner in which we raise any additional funds may affect the value of your investment in our common
stock.
We may be required to pursue financings beyond
those contemplated by the Equity Purchase Agreement with River North. We have no other current committed sources of additional
capital. We do not know whether additional financing will be available on terms favorable or acceptable to us when needed, if
at all. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution.
In addition, we may grant future investors rights superior to those of our existing stockholders. If we raise additional funds
by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation
that could affect the manner in which we conduct our business. If adequate additional capital is not available when required,
we may be forced to reduce or eliminate our exploration activities and our marketing efforts for the sale of the El Capitan Property,
or suspend our operations entirely.
Our management concluded that our
internal control over financial reporting was not effective as of September 30, 2015. Compliance with public company regulatory
requirements, including those relating to our internal control over financial reporting, have and will likely continue to result
in significant expenses and, if we are unable to maintain effective internal control over financial reporting in the future, investors
may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be
negatively affected.
As a public reporting company, we are subject
to the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, as well as to the information and reporting requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and other federal securities laws. As a result, we incur significant legal,
accounting, and other expenses, including costs associated with our public company reporting requirements and corporate governance
requirements. As an example of public reporting company requirements, we evaluate the effectiveness of disclosure controls and
procedures and of our internal control over financing reporting in order to allow management to report on such controls.
Management conducted an evaluation of the effectiveness,
as of September 30, 2015, of our internal control over financial reporting and concluded that we did not maintain sufficient personnel
with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted
accounting principles commensurate with the complexity of our equity and equity instruments issued with debt transactions. As
a result, there is a lack of monitoring of the accounting and reporting process for these types of transactions. To address these
types of transactions and concur on their accounting treatment, we intend to have an independent qualified professional review
the transaction treatment prior to recording on the books of the Company.
If significant deficiencies or other material
weaknesses are identified in our internal control over financial reporting that we cannot remediate in a timely manner, investors
and others may lose confidence in the reliability of our financial statements and the trading price of our common stock and ability
to obtain any necessary equity or debt financing could suffer. This would likely have an adverse effect on the trading price of
our common stock and our ability to secure any necessary additional equity or debt financing.
Risks Relating to this Offering
Resales of shares purchased by
River North under the Equity Purchase Agreement may cause the market price of our common stock to decline.
The common stock to be issued to River North
pursuant to the Equity Purchase Agreement will be purchased at 85% of least a 15% (and up to a 20% discount if the Company is
not deposit/withdrawal at custodian (“DWAC”) eligible and a 25% discount if the Company is under Depository Trust
Company (“DTC”) “chill” status) to the average of the two lowest closing bid prices on the OTCQB, as reported
by Bloomberg Finance L.P., during the five trading days following the Company’s delivery of a put notice to River North;
provide, however that additional 5% will be added to the discount if (i) we are not DWAC eligible and (ii) an additional 10% will
be added to the discount if we are under Depository Trust Company (“DTC”) “chill” status on date of the
applicable put notice. River North will have the financial incventive to sell the shares of our common stock issuable
under the Equity Purchase Agreement in advance of or upon receiving such shares and to realize the profit equal to the difference
between the discounted price and the current market price of the shares. This may cause the market price of our common stock to
decline.
Puts under Equity Purchase Agreement
may cause dilution to existing shareholders.
Under
the terms of the Equity Purchase Agreement, River North has committed to purchase up to $5,000,000 worth of shares of our common
stock. From time to time during the term of the Equity Purchase Agreement, and at our sole discretion, we may present River North
with a put notice requiring River North to purchase shares of our common stock. As a result, our existing stockholders will experience
immediate dilution upon the purchase of any of the shares by River North. River North may resell some, if not all, of the shares
that we issue to it under the Equity Purchase Agreement and such sales could cause the market price of the common stock to decline
significantly. To the extent of any such decline, any subsequent puts would require us to issue and sell a greater number of shares
to River North in exchange for each dollar of the put amount. Under these circumstances, the existing stockholders of our company
will experience greater dilution. The effect of this dilution may, in turn, cause the price of our common stock to decrease further,
both because of the downward pressure on the stock price that would be caused by a large number of sales of our shares into the
public market by River North, and because our existing stockholders may disagree with a decision to sell shares to River North
at a time when our stock price is low, and may in response decide to sell additional shares, further decreasing our stock price.
If we draw down amounts under the Equity Line when our share price is decreasing, we will need to issue more shares to raise the
same amount of funding.
There is no guarantee that we will
satisfy the conditions to the Equity Purchase Agreement.
Although
the Equity Purchase Agreement provides that we can require River North to purchase, at our discretion, up to $5,000,000 worth
of shares of our common stock in the aggregate, our ability to put shares to River North and obtain funds when requested is limited
by the terms and conditions of the Equity Purchase Agreement, including restrictions on when we may exercise our put rights, restrictions
on the amount we may put to River North at any one time, which is determined in part by the trading volume of our common stock,
and a limitation on our ability to put shares to River North to the extent that it would cause River North to beneficially own
more than 9.99% of the outstanding shares of our common stock.
We may not have access to
the full amount available under the Equity Purchase Agreement with River North.
Our ability to draw down funds and sell shares
under the Equity Purchase Agreement requires that the registration statement of which this prospectus forms a part to be declared
effective and continue to be effective. The registration statement of which this prospectus forms a part registers the resale
of 25,000,000 shares issuable under the Equity Purchase Agreement, and our ability to sell any additional shares issuable under
the Equity Purchase Agreement is subject to our ability to prepare and file one or more additional registration statements registering
the resale of such additional shares. These registration statements may be subject to review and comment by the staff of the Securities
and Exchange Commission, and will require the consent of our independent registered public accounting firm. Therefore, the timing
of effectiveness of these registration statements cannot be assured. The effectiveness of these registration statements is a condition
precedent to our ability to sell all of the shares of our common stock to River North under the Equity Purchase Agreement. Even
if we are successful in causing one or more registration statements registering the resale of some or all of the shares issuable
under the Equity Purchase Agreement to be declared effective by the Securities and Exchange Commission in a timely manner, we
may not be able to sell the shares unless certain other conditions are met. For example, we might have to increase the number
of our authorized shares in order to issue the shares to River north. Increasing the number of our authorized shares will require
board and stockholder approval. Accordingly, because our ability to draw down any amounts under the Equity Purchase Agreement
with River North is subject to a number of conditions, there is no guarantee that we will be able to draw down any portion or
all of the proceeds of $5,000,000 under the Equity Purchase Agreement.
DESCRIPTION
OF SECURITIES
Capital Stock
Pursuant to our articles of incorporation,
as amended to date, our authorized capital stock consists of 405,000,000 shares, comprised of 400,000,000 shares of common stock,
par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share. As of March 31, 2016, there were
311,181,187 shares of common stock and 51 shares of preferred stock issued and outstanding. Our common stock is quoted on the
OTCQB Marketplace operated by the OTC Markets Group, Inc., under the trading symbol “ECPN.”
The following description summarizes the material
terms of our capital stock. This summary is, however, subject to the provisions of our articles of incorporation and bylaws. For
greater detail about our capital stock, please refer to our articles of incorporation and bylaws.
Common Stock
Voting.
Holders of our common
stock are entitled to one vote for each outstanding share of common stock owned by such stockholder on every matter properly submitted
to the stockholders for their vote. Stockholders are not entitled to vote cumulatively for the election of directors. At any meeting
of the stockholders, a quorum as to any matter shall consist of a majority of the votes entitled to be cast on the matter, except
where a larger quorum is required by law, by our articles of incorporation or by our bylaws.
Dividend Rights.
Holders
of our common stock are entitled to receive ratably dividends and other distributions of cash or any other right or property as
may be declared by our Board of Directors out of our assets or funds legally available for such dividends or distributions. The
dividend rights of holders of common stock are subject to the dividend rights of the holders of any series of preferred stock
that may be issued and outstanding from time to time.
Liquidation Rights.
In the
event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, holders of our common stock would
be entitled to share ratably in our assets that are legally available for distribution to stockholders after payment of liabilities.
If we have any preferred stock outstanding at such time, the holders of such preferred stock may be entitled to distribution and/or
liquidation preferences that require us to pay the applicable distribution to the holders of preferred stock before paying distributions
to the holders of common stock.
Conversion, Redemption and Preemptive Rights.
Holders
of our common stock have no conversion, redemption, preemptive, subscription or similar rights.
The transfer agent and registrar for our common
stock is OTR, Inc., 1001 SW 5th Avenue, Suite 1550, Portland, Oregon 97204-1143.
Preferred Stock
Pursuant to resolutions adopted by our Board
of Directors, on August 1, 2014, we filed a Certificate of Designation with the Nevada Secretary of State creating a series of
preferred stock by and designating 51 shares of previously undesignated preferred stock as Series B Convertible Preferred Stock
(the “Series B Preferred Stock”).
Voting Rights.
Solely with respect
to matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent and relate to Company
capitalization (including, without limitation, increasing and/or decreasing the number of authorized shares of common stock and/or
preferred stock, and implementing forward and/or reverse stock splits) and changes in the Company’s name, the holders of
the outstanding shares of Series B Preferred Stock vote together with the holders of common stock without regard to class, except
as to those matters on which separate class voting is required by applicable law or the Company’s articles of incorporation
or bylaws. The holders of the outstanding shares of Series B Preferred Stock do not otherwise have the right to vote on matters
brought before the Company’s stockholders. In matters on which holders of shares of Series B Preferred Stock are entitled
to vote, each share of the Series B Preferred Stock has voting rights equal to (x) (i) 0.019607 multiplied by the total of (A)
the issued and outstanding shares of common stock eligible to vote at the time of the respective vote, plus (B) the number of
votes which all other series or classes of securities other than this Series B Preferred Stock are entitled to cast together with
the holders of the Company’s common stock at the time of the relevant vote (the amount determined by this clause (i), the
“Numerator”), divided by (ii) 0.49, minus (y) the Numerator.
If the Company affects a stock split which
either increases or decreases the number of shares of common stock outstanding and entitled to vote, the voting rights of the
Series B Preferred Stock are not subject to adjustment unless specifically authorized. So long as any shares of Series B Preferred
Stock are outstanding, the Company may not, without the affirmative vote of the holders of the Series B Preferred Stock, (a) alter
or change adversely the powers, preferences or rights given to the Series B Preferred Stock, (b) alter or amend the certificate
of designation of the Series B Preferred Stock, (c) amend the Company’s articles of incorporation, bylaws or other charter
documents so as to affect adversely the rights of the holders of the Series B Preferred Stock, (d) increase the authorized or
designated number of shares of Series B Preferred Stock, (e) issue any additional shares of Series B Preferred Stock, or (f) enter
into any agreement with respect to the foregoing.
Liquidation
. The Series B Preferred
Stock, with respect to rights on liquidation, dissolution and winding-up of the Company, ranks on parity with each other class
or series of capital stock of the Company the terms of which do not expressly provide that such class or series shall rank senior
or junior to the Series B Preferred Stock. Except for distributions in the event of a liquidation, dissolution or winding-up of
the Company (whether voluntary or involuntary), or a merger or consolidation by the Company with another corporation or other
entity (in each case, other than where the Company is the surviving entity) (a “Liquidation”), holders of Series B
Preferred Stock are not be entitled to receive dividends on the Series B Preferred Stock. In the event of a Liquidation, the holders
of Series B Preferred Stock are be entitled to receive out of the assets of the Company, an amount equal to the $1.00 per share
of Series B Preferred Stock (subject to adjustment), after any distribution or payment with respect to such Liquidation is made
to the holders of any senior securities and prior to any distribution or payment with respect to such Liquidation shall be made
to the holders of any junior securities.
Conversion
. Shares of Series B Preferred
Stock may, at the option of the holder, be converted into one share of common stock (subject to adjustment, the “Conversion
Ratio”). In the event of any Transfer (as defined in the certificate of designation for the Series B Preferred Stock) of
any share of Series B Preferred Stock, such share will automatically convert into common stock based upon the Conversion Ratio
applicable at the time of such Transfer. If, at any time while any shares of Series B Preferred Stock remain outstanding, the
Company effectuates a stock split or reverse stock split of its common stock or issues a dividend on its common stock consisting
of shares of common stock, the Conversion Ratio and any other amounts calculated as contemplated by the certificate of designation
for the Series B Preferred Stock shall be equitably adjusted to reflect such action.
In addition, we have authorized Series A Junior
Participating Preferred Stock, with the rights set forth in Certificate of Designation of Series A Junior Participating Preferred
Stock filed with the Secretary of State of the State of Nevada on August 25, 2011. Series A Junior Participating Preferred Stock
has certain rights in connection with the Preferred Rights Agreement described below under the caption “Anti-Takeover Provisions.”
Anti-Takeover Provisions
Some features of the Nevada Revised Statutes,
which are further described below, may have the effect of deterring third parties from making takeover bids for control of our
company or may be used to hinder or delay a takeover bid.
This would decrease the chance that our stockholders
would realize a premium over market price for their shares of common stock as a result of a takeover bid.
Acquisition of Controlling Interest
The Nevada Revised Statutes contain provisions
governing acquisition of controlling interest of a Nevada corporation. These provisions provide generally that any person or entity
that acquires a certain percentage of the outstanding voting shares of a Nevada corporation may be denied voting rights with respect
to the acquired shares, unless the holders of a majority of the voting power of the corporation, excluding shares as to which
any of such acquiring person or entity, an officer or a director of the corporation, and an employee of the corporation exercises
voting rights, elect to restore such voting rights in whole or in part. These provisions apply whenever a person or entity acquires
shares that, but for the operation of these provisions, would bring voting power of such person or entity in the election of directors
within any of the following three ranges:
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•
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20% or more but less than
33-1/3%;
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•
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33-1/3% or more but less than or equal
to 50%; or
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•
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more than 50%.
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The stockholders or board of directors of a
corporation may elect to exempt the stock of the corporation from these provisions through adoption of a provision to that effect
in the articles of incorporation or bylaws of the corporation. Our articles of incorporation and bylaws do not exempt our common
stock from these provisions.
These provisions are applicable only to a Nevada
corporation, which:
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•
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has 200 or more stockholders
of record, at least 100 of whom have addresses in Nevada appearing on the stock ledger of the corporation; and
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•
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does business in Nevada directly or through
an affiliated corporation.
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At this time, we do not believe that these
provisions apply to acquisitions of our shares and will not until such time as these requirements have been met. At such time
as they may apply to us, these provisions may discourage companies or persons interested in acquiring a significant interest in
or control of our company, regardless of whether such acquisition may be in the interest of our stockholders.
Combination with Interested Stockholder
The Nevada Revised Statutes contain provisions
governing combination of a Nevada corporation that has 200 or more stockholders of record with an interested stockholder. As of
April 7, 2016, we had approximately 1,423 stockholders of record. Therefore, we believe that these provisions governing combination
of a Nevada corporation apply to us and may have the effect of delaying or making it more difficult to effect a change in control
of our company.
A corporation affected by these provisions
may not engage in a combination within three years after the interested stockholder acquires his, her or its shares unless the
combination or purchase is approved by the board of directors before the interested stockholder acquired such shares. Generally,
if approval is not obtained, then after the expiration of the three-year period, the business combination may be consummated with
the approval of the board of directors before the person became an interested stockholder or a majority of the voting power held
by disinterested stockholders, or if the consideration to be received per share by disinterested stockholders is at least equal
to the highest of:
|
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•
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the highest price per share
paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination
or within three years immediately before, or in, the transaction in which he, she or it became an interested stockholder,
whichever is higher;
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•
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the market value per share on the date
of announcement of the combination or the date the person became an interested stockholder, whichever is higher; or
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•
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if higher for the holders of preferred
stock, the highest liquidation value of the preferred stock, if any.
|
Generally, these provisions define an interested
stockholder as a person who is the beneficial owner, directly or indirectly of 10% or more of the voting power of the outstanding
voting shares of a corporation. Generally, these provisions define combination to include any merger or consolidation with an
interested stockholder, or any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a
series of transactions with an interested stockholder of assets of the corporation having:
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•
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an aggregate market value
equal to 5% or more of the aggregate market value of the assets of the corporation;
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•
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an aggregate market value equal to 5%
or more of the aggregate market value of all outstanding shares of the corporation; or
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•
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representing 10% or more of the earning
power or net income of the corporation.
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Articles of Incorporation and Bylaws
Our articles of incorporation, specifically
the Certificate of Designation of Series A Junior Participating Preferred Stock as it related to the Preferred Rights Agreement
described below, contains provisions that would delay, defer or prevent a change in control of our company and that would operate
only with respect to an extraordinary corporate transaction involving our company, such as merger, reorganization, tender offer,
sale or transfer of substantially all of its assets, or liquidation.
Preferred Rights Agreement
Our Board of Directors has adopted a shareholder
rights plan (commonly referred to as a “poison pill”), as set forth in the Rights Agreement, dated as of August 25,
2011 with OTR, Inc., as rights agent (the “Rights Agreement”). Pursuant to the Rights Agreement, our Board of Directors
declared a dividend distribution of one right (the “Preferred Rights”) for each outstanding share of common stock
to shareholders of record as of the close of business on August 25, 2011 (the “Record Date”). In addition,
one Preferred Right will automatically attach to each share of common stock issued, if any, between the Record Date and the Distribution
Date (defined below). Each Preferred Right entitles the registered holder thereof to purchase from the Company one-ten
thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company (the “Preferred
Stock”) at a cash exercise price of $20.00 (the “Exercise Price”), subject to adjustment, under certain conditions
specified in the Rights Agreement and summarized below.
Initially, the Preferred Rights are not exercisable
and are attached to and trade with all shares of common stock outstanding as of, and issued subsequent to, the Record Date. The
Preferred Rights will separate from the common stock and will become exercisable upon the earlier of (i) the close of business
on the tenth day following the first public announcement that a person or group of affiliated or associated persons (an “Acquiring
Person”) has acquired beneficial ownership of 10% or more of the outstanding shares of common stock, other than as a result
of repurchases of stock by the Company or certain inadvertent actions by a shareholder (the date of said announcement being referred
to as the “Stock Acquisition Date”), or (ii) the close of business on the tenth business day (or such later day as
the Board of Directors may determine) following the commencement of, or first public announcement of the intent any person or
group to conduct, a tender offer or exchange offer that could result upon its consummation in such person or group becoming the
beneficial owner of 10% or more of the outstanding shares of common stock (the earlier of such dates being herein referred to
as the “Distribution Date”).
In the event that a Stock Acquisition Date
occurs, proper provision will be made so that each holder of a Preferred Right (other than an Acquiring Person or its associates
or affiliates, whose Preferred Rights shall become null and void) will thereafter have the right to receive upon exercise that
number of shares common stock of the Company having a market value equal to two times the exercise price of the Preferred Right
(such right being referred to as the “Subscription Right”). In the event that, at any time following the
Stock Acquisition Date, (i) the Company consolidates with, or merges with and into, any other person, and the Company is not the
continuing or surviving corporation, (ii) any person consolidates with the Company, or merges with and into the Company and the
Company is the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the shares
of common stock are changed into or exchanged for stock or other securities of any other person or cash or any other property,
or (iii) 50% or more of the Company’s assets or earning power is sold, mortgaged or otherwise transferred, each holder of
a Preferred Right (other than an Acquiring Person or its associates or affiliates, whose Preferred Rights shall become
null and void) will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a market
value equal to two times the exercise price of the Preferred Right (such right being referred to as the “Merger Right”). The
holder of a Preferred Right will continue to have the Merger Right whether or not such holder has exercised the Subscription Right. Preferred
Rights that are or were beneficially owned by an Acquiring Person may (under certain circumstances specified in the Rights Agreement)
become null and void.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview of Business
The Company is an exploration stage company
as defined by the Securities and Exchange Commission’s (“SEC”) Industry Guide 7 as the Company has no established
reserves as required under the Industry Guide 7.We have owned interests in several properties located in the southwestern United
States in the past. We are principally engaged in the exploration of precious metals and other minerals on the El Capitan property
located near Capitan, New Mexico (the “El Capitan Property”). We have not engaged in any revenue-producing operations.
We have accomplished significant steps in our strategic business plan in our fiscal year 2015 and expect to begin expanded mineral
exploration activity in January 2016. We have not yet demonstrated the existence of proven or probable reserves at our El Capitan
Property. As a result, and in accordance with accounting principles generally accepted in the United States for exploration
stage companies, all expenditures for exploration and evaluation of our properties are expensed as incurred.
For complete details regarding the business
of the Company, see “
Description of Business
” and “
Description of Property
,”
above.
Results of Operations - Fiscal Year ended September 30, 2015
compared to Fiscal Year ended September 30, 2014.
As of September 30, 2015, we had not yet realized
any material revenue from operations through our fiscal year 2015. We realized a net decrease in operating expenses of $514,192,
from $2,778,221 for the fiscal year ended September 30, 2014 to $2,264,029 for the fiscal year ended September 30, 2015. The decrease
is comprised mainly of decreases in professional fees of $139,572 and exploration costs of $788,455. These decreases were
offset by increases in legal and accounting of $169,641 and other general and administrative expenses of $190,942.
The decrease in professional fees in the current
year is mainly attributable to decreases in stock compensation for investor relations of $113,594, public relations of $6,418
and administrative consulting of $12,000. The decrease in exploration costs is mainly attributable to a decrease of $800,000 in
stock non-cash costs related to the equipment purchase and a decrease of $100,000 in mineralized material processing costs. The
increase in legal and accounting expenses occurred due to increased legal fees related to the negotiation and preparation of contracts
and agreements as we transition into an operating entity. The increase in other general and administrative expenses were attributable
to increased costs associated with options of $89,694, non-cash financing costs of $67,550 and depreciation of $58,367.
Our net loss decreased by $10,570 from $2,854,043
for the fiscal year ended September 30, 2014 to $2,843,473 for the current fiscal year ended September 30, 2015. The decrease
in net loss is mainly attributable to the net decrease in operating expenses detailed above and an increase in non-cash debt discounts
aggregating $286,687.
Results of Operations - Three Months Ended
December 31, 2015 and 2014.
Revenues
We realized nominal revenue from exploration
activities on deliveries of iron ore test loads to a construction contractor for material approval during the three months ended
December 31, 2015. No revenues were recorded during the comparable prior year period.
Expenses and Net Loss
Our operating expenses decreased $333,071 from
$706,929 for the three months ended December 31, 2014 to $373,858 for the three months ended December 31, 2015. The decrease is
mainly attributable to decreases in other general and administrative expenses of $385,219, offset by an increase in legal and
accounting expenses of $50,107.
The decrease in general and administrative
expenses is mainly attributable to decreases in costs associated with options and warrants of $355,012; travel and food of $21,974
and stockholder meeting costs of $10,805. The cost decreases were offset by the increase in legal costs incurred of $52,106. The
increase in legal was incurred with implementation of our new 2015 Incentive Equity Plan and legal work related to new contract
agreements and debt financing facility scenarios.
Our net loss for the three months ended December
31, 2015 decreased to $554,798 from a net loss of $780,745 incurred for the comparable three month period ended December 31, 2014.
The decrease in net loss of $222,812 for the current period is mainly attributable to the decreases in net operating expenses
and offset by an increase in other expenses of $113,209. The increase in other expenses is mainly comprised of a non-cash loss
on extinguishment of debt of $84,270 and increased interest expense of $28,926.
Liquidity and Capital Resources
As of March 31, 2016, we had cash on hand
of $87,541 and an estimated working capital deficit of $1,366,700. The actual working capital deficit at March 31, 2016 will be determined upon completion of our March 31, 2016
financial statements. Based upon our budgeted burn rate, we currently have
operating capital for approximately a three months. The Company has historically relied on equity or debt financings to
finance its ongoing operations and currently has a minimum source of revenue to cover its costs until weather permits
deliveries of iron ore product. These conditions raise substantial doubt about the Company’s ability to continue as a
going concern. To continue as a going concern, the Company is dependent on achievement of cash flow and profits from entering
the production stage of operations or obtaining short-term operational strategic financing alternatives or equity infusion.
The Company does not have adequate liquidity to fund its current operations, meet its obligations and continue as a going
concern.
Currently we anticipate funding our future
operations from a revolving credit line associated with our agreements with Logistica (described under the caption “Description
of Business – Business Operations” above), sales of iron extracted from mineralized material at the El Capitan Property,
and sales of mineralized materials under our new prospective contract for the purchase of mineralized material. However, unless
and until we commence sales and shipments under the aforementioned contracts, and/or enter similar agreements for the purchase
of mineralized material, and produce sufficient cash flow from future revenues, we will continue to rely on equity and/or debt
financing to fund our operations.
Our current
financing arrangements are summarized below under the caption “Recent Financing Activities.” Our only committed source
of future financing is pursuant to the Equity Line. To the extent that we are required to raise additional capital, we do not
know whether it will be available on terms favorable or acceptable to us when needed, if at all. To the extent that we raise additional
capital by issuing equity securities, our stockholders may experience dilution. In addition, we may grant future investors rights
superior to those of our existing stockholders. If we raise additional funds by incurring debt, we could incur significant interest
expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct
our business. If adequate additional capital is not available when required, we may be forced to reduce or eliminate our exploration
activities and our marketing efforts for the sale of the El Capitan Property, or suspend our operations entirely.
Recent Financing Activities
On July 30, 2014, we entered into an Equity
Purchase Agreement (the “2014 Agreement”) with Southridge Partners, LP (“Southridge”), pursuant to which
the Company had the right from time to time, in its discretion, to sell newly-issued shares of its common stock to Southridge
for aggregate gross proceeds of up to $1,900,000. Southridge’s purchase commitment was scheduled to terminate on the earlier
of July 30, 2016, or the date on which aggregate purchases by Southridge under the 2014 Agreement total $1,900,000. The Company
had no obligation to sell any shares under the 2014 Agreement. The offering of shares under the 2014 Agreement was made pursuant
to a registration statement on Form S-3 (Registration Statement No. 333-193208) filed by the Company with the Securities and Exchange
Commission, and prospectus supplements thereto. For a summary of the 2014 Agreement, see
“Note 11 – Stockholders’
Equity – Equity Purchase Agreement”
to the Consolidated Financial Statements for the fiscal year ended September
30, 2015. Because our public float was less than $75 million upon the filing of our Annual Reports on Form 10-K for fiscal 2014
and 2015, we are no longer eligible to utilize Form S-3 registration statements for the primary offering of securities. As a result,
we are no longer able to sell shares to Southridge under the 2014 Agreement.
On October 17, 2014, we entered into a private
Note and Warrant Purchase Agreement with an accredited investor pursuant to which the Company borrowed $500,000 against delivery
of a promissory note in such amount and issued warrants to purchase 882,352 shares of our common stock pursuant to the Note and
Warrant Purchase Agreement. The promissory note carries an interest rate of 8% per annum, was initially due on July 17, 2015 and
is secured by a first priority security interest in all right, title and interest of the Company in and to the net proceeds received
by the Company from its sale of tailings separated from iron recovered by the Company at the El Capitan Property. On August 24,
2015, the note was mutually extended from July 17, 2015 to January 17, 2016. In consideration of the extension, the Company amended
the common stock purchase warrant to purchase 4,714,286 shares (subject to adjustment) of the Company’s common stock at
an exercise price of $0.07 per share. The warrant dated October 17, 2014 was cancelled. The amended agreement provides that if
the loan should be paid in full prior to the extended maturity date, the amended common stock purchase warrants will be reduced
to an amount equal to the percentage of days the principal balance was outstanding during the extension period to the total days
in the extension period times 4,714,286. On January 19, 2016, the note was extended from January 17, 2016 to September 19, 2016.
In consideration of the extension, the Company issued to the investor a three year common stock purchase warrant to purchase 471,429
shares (subject to adjustment) of common stock of the Company at an exercise price of $0.051 per share.
On February 4, 2015, the Company issued unsecured
promissory notes in the aggregate principal amount of $63,000. Outstanding amounts under these notes accrue interest at 18% per
year, with all principal and accrued interest being due and payable on February 4, 2016. The Company’s obligations under
both notes were personally guaranteed by the Company’s director and Chief Executive Officer. As additional consideration
for the loan, the Company issued a total of 400,000 shares of restricted common stock of the Company to the lenders. On February
4, 2016, the promissory notes were amended to extend the maturity date from February 4, 2016 to February 4, 2017 and reduced the
interest rate to 10% per year. In consideration of the amendments, the Company issued a total of 300,000 shares of restricted
common stock of the Company to the lenders.
On April 16, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender committed to loan the Company a total of $200,000
in installments. Installments on this loan have been advanced as follows:
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Installment
Date
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Amount
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April 17, 2015
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$
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50,000
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May 15, 2015
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$
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50,000
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June 16, 2015
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$
|
25,000
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July 20, 2015
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$
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25,000
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August 18, 2015
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$
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25,000
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September 18, 2015
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$
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25,000
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The loan accrues interest at 10% per year,
with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the
lender a security interest in the AuraSource heavy metals separation system located on the El Capitan Property. As additional
consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the note holder.
The note, including a portion of accrued interest of $7,500, was satisfied in its entirety in December 2015 in exchange for 3,772,728
restricted shares of the Company’s common stock. Unpaid accrued interest remained of $2,466.
On August 31, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender committed to loan the Company $100,000 for working
capital. As an incentive for the financing, the Company issued 2,000,000 of restricted common stock. The investor decided not
to accept the shares because of income tax implications and they were returned to the Company’s transfer agent and returned
to the treasury. The agreement had an annual interest rate of 2% and was due November 15, 2015. The agreement provided for payment
of one-half (1/2) of the gross revenues that the Company may receive from its mining activities towards the principal and accrued
interest. The note, including accrued interest, was satisfied in its entirety in December 2015 in exchange for 3,500,000 restricted
shares of the Company’s common stock.
On December 2, 2015, we entered into a Securities
Purchase Agreement for two $114,400 convertible notes with an accredited investor for an aggregate principal amount of $228,800
with an annual interest rate of 9%. Each note contains an original issue discount of $10,400 and related legal and due diligence
costs of $12,000. The net proceeds from each note to be received by the Company will be $92,000. The maturity date on the first
note is December 2, 2017. An amendment to the note on January 12, 2016, allows the Company to prepay in full the unpaid principal
and interest on the note, upon notice, any time prior to May 29, 2016. Any prepayment is at 140% face amount outstanding and accrued
interest. The redemption must be closed and paid for within three business days of the Company sending the redemption demand.
The note may not be prepaid after the May 29, 2016. The note is convertible into shares of the Company’s common stock at
any time beginning on May 30, 2016. The conversion price is equal to 55% of the lowest trading price of the Company’s common
stock as reported on the QTCQB for the ten prior trading days (and may include the day of the Notice of Conversion under certain
circumstances). The Company agreed to reserve an initial 5,033,000 shares of common stock for conversions under the note. The
Company also agreed to adjust the share reserve to ensure that it equals at least four times the total number of common stock
that is issuable upon conversion of the note from time to time.
On January 26, 2016 (the “Effective Date”),
the Company entered into a Securities Purchase Agreement (the “SPA”) for an $180,000 convertible note with an accredited
investor, with an annual interest rate of 7%. The note contains an original issuance discount (“OID”) of $18,000 and
related legal costs of $6,000. The net proceeds received by the Company were $156,000. The maturity date of the note is January
26, 2017. Interest is due on or before the maturity date. The Company may redeem the note by prepaying the unpaid principal and
interest on the note, upon notice, any time prior to 180 days after the Effective Date. If redemption is (i) prior to the 30
th
day the note is in effect (including the 30
th
day), the redemption will be 105% of the unpaid principal amount
and accrued interest; (ii) if the redemption is on the 31
st
day up to and including the 60
th
day the note
is in effect, the redemption price will be 115% of the unpaid principle amount of the note along with any accrued interest; (iii)
if the redemption is on the 61
st
day up to and including the 120
th
day the note is in effect, the redemption
price will be 135% of the unpaid principle amount of the note along with any accrued interest; if the redemption is on the 121
st
day up to and including the 180
th
day the note is in effect, the redemption price will be 150% of the unpaid
principle amount of the note along with any accrued interest. The redemption must be closed and paid for within three business
days of the Company sending the redemption demand. The note may not be prepaid and redeemed after the 180
th
day. The
note is convertible into shares of the Company’s common stock at any time beginning on the date which is 181 days following
the Effective Date. The conversion price is equal to 55% of the lowest trading price of the Company’s common stock as reported
on the QTCQB for the ten prior trading days and may include the day of the Notice of Conversion under certain circumstances. The
Company agreed to reserve an initial 10,800,000 shares of common stock for conversions under the note (the “Share Reserve”).
We also agreed to adjust the Share Reserve to ensure that it always equals at least three times the total number of shares of
common stock that is actually issuable if the entire note were to be converted. The note has an embedded conversion option which
qualifies for derivative accounting and bifurcation under ASC 815-15
Derivatives and Hedging
. Pursuant to ASC 815,
the Company will recognize the fair value of the embedded conversion feature as a derivative liability when the Note becomes convertible
on July 24, 2016. The OID interest of $18,000 and related loan costs of $6,000 was recorded as a discount to the note and is being
amortized over the life of the loan as interest expense.
As discussed above, on March 16, 2016, we and
River North entered into an Equity Purchase Agreement pursuant to which we have the right to “put,” or sell, up to
$5,000,000 worth of shares of our common stock to River North. For further information, please see “The Offering”
on page 14. In connection with this transaction, on March 16, 2016, we issued to River North a “commitment” convertible
promissory note (the “Commitment Note”) in the principal amount of $35,000. The Commitment Note accrues interest at
a rate of 10% per annum and matures on March 16, 2017.
Also on March 16, 2016, we entered into a Securities
Purchase Agreement with River North pursuant to which the Company issued a convertible promissory note (the “Bridge Note”)
to River North, in the original principal amount of $90,000, in consideration of the payment by River North of a purchase price
equal to $81,000, with $9,000 retained by River North as original issue discount. The Bridge Note accrues interest at a rate of
10% per annum and matures on March 16, 2017.
Factors Affecting Future Mineral Exploration Results
We have generated no revenues, other than interest
income and miscellaneous revenue from the sale of two ore bars, since inception. As a result, we have only a limited history upon
which to evaluate our future potential performance. Our potential must be considered by evaluation of all risks and difficulties
encountered by exploration companies which have not yet established business operations and anticipated results and situations
of entering active exploration activities.
The price of gold and silver has experienced
increases and decreases in value over the past five years. A historical chart of their respective prices is contained
in “
Description of Business
” portion of this prospectus. Beginning in April 2013, the price of gold
and silver has experienced a downward swing. A significant permanent drop in the price of gold, silver or other precious metals
may have a materially adverse effect on the future results of potential exploration activities and the opportunity to market the
sale of the El Capitan Property and the potential future revenue derived from the sale of concentrates. The El Capitan Property
is an open pit mine with lower production costs and a material increase in costs associated with the recovery of precious metals
may also cause a material adverse effect on the financial success of the Company and our ability to market the sale of the El
Capitan Property.
Time delays in obtaining the necessary approvals
from the various governmental agencies, both federal and state, may also cause delays, all of which are not under our control,
in achieving our strategic business plan and current plan of operation.
Off-Balance Sheet Arrangements
During the fiscal year ended September 30,
2015, we did not engage in any off-balance sheet arrangements as set forth in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies
Our consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to
make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of the consolidated financial statements.
Note 1
,
“
Business, Basis of Presentation and Significant Accounting Policies
” to the Consolidated Financial
Statements for the fiscal year ended September 30, 2015, describes our significant accounting policies which are reviewed by management
on a regular basis.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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Annual Report on Form 10-K for Fiscal Year Ended September
30, 2015:
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Report of Independent Registered Public
Accounting Firm
|
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F-2
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Consolidated Balance Sheets - As
of September 30, 2015 and 2014
|
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F-3
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Consolidated Statements of Expenses
– Years ended September 30, 2015 and 2014
|
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F-4
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Consolidated Statements of
Changes in Stockholders’ Equity - Years ended September 30, 2015 and 2014
|
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F-5
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Consolidated Statements of Cash Flows
- Years ended September 30, 2015 and 2014
|
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F-6
|
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|
Notes to Consolidated Financial Statements
|
|
F-8
|
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|
Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
December 31, 2015:
|
|
|
|
|
|
|
|
Consolidated Balance Sheets - As
of December 31, 2015 (Unaudited) and September 30, 2015
|
|
F-29
|
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|
|
|
|
Consolidated Statements of Operations
– Three months ended December 31, 2015 and 2014 (Unaudited)
|
|
F-30
|
|
|
|
|
|
Consolidated Statements of Cash Flows
– Three months ended December 31, 2015 and 2014 (Unaudited)
|
|
F-31
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-33
|
![[MALONEBAILEY LLP (HEADER)]](http://content.edgar-online.com/edgar_conv_img/2016/04/21/0001076542-16-000274_MALONE-1.GIF)
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
El Capitan Precious Metals, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated
balance sheets of El Capitan Precious Metals, Inc. and its subsidiaries (collectively, the “Company”) as of September
30, 2015 and 2014, and the related consolidated statements of expenses, stockholder’s equity, and cash flows for each of
the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of El Capitan Precious Metals, Inc. and its subsidiaries
as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has no source of revenue to cover its costs, incurred a net loss for the year ended September 30, 2015
and has a working capital deficit as of September 30, 2015. The Company requires additional funds to meet its obligations and
the costs of its operations. These factors raise substantial doubt about its ability to continue as a going concern. Management’s
plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
January 11, 2016
![[MALONEBAILEY LLP (FOOTER)]](http://content.edgar-online.com/edgar_conv_img/2016/04/21/0001076542-16-000274_MALONE-2.JPG)
CONSOLIDATED
BALANCE SHEETS
|
|
|
September 30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,393
|
|
|
$
|
218,513
|
|
|
Prepaid expense and other current assets
|
|
|
61,654
|
|
|
|
99,086
|
|
|
Inventory
|
|
|
52,279
|
|
|
|
—
|
|
|
Total Current Assets
|
|
|
185,326
|
|
|
|
317,599
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation
of $63,470 and $3,017, respectively
|
|
|
588,067
|
|
|
|
567,566
|
|
|
Exploration property
|
|
|
1,864,608
|
|
|
|
1,864,608
|
|
|
Restricted cash
|
|
|
74,499
|
|
|
|
15,000
|
|
|
Deposits
|
|
|
22,440
|
|
|
|
22,440
|
|
|
Total Assets
|
|
$
|
2,734,940
|
|
|
$
|
2,787,213
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
251,834
|
|
|
$
|
132,580
|
|
|
Notes payable, net of unamortized discounts of $77,157 and $158,559, respectively
|
|
|
1,168,187
|
|
|
|
491,441
|
|
|
Note payable, related party net of unamortized discounts
of $4,438 and $0, respectively
|
|
|
25,562
|
|
|
|
—
|
|
|
Accrued compensation - related parties
|
|
|
228,975
|
|
|
|
—
|
|
|
Accrued liabilities
|
|
|
592,764
|
|
|
|
149,314
|
|
|
Total Current Liabilities
|
|
|
2,267,322
|
|
|
|
773,335
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 51 and 51 shares issued and outstanding, respectively
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.001 par value; 400,000,000 shares authorized;
285,398,000 and 278,053,877 shares issued and outstanding, respectively
|
|
|
285,398
|
|
|
|
278,054
|
|
|
Additional paid-in capital
|
|
|
207,701,091
|
|
|
|
206,411,222
|
|
|
Accumulated deficit
|
|
|
(207,518,871
|
)
|
|
|
(204,675,398
|
)
|
|
Total Stockholders’ Equity
|
|
|
467,618
|
|
|
|
2,013,878
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
2,734,940
|
|
|
$
|
2,787,213
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF EXPENSES
|
|
|
Years Ended September 30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
208,720
|
|
|
$
|
348,292
|
|
|
Administrative consulting fees
|
|
|
260,000
|
|
|
|
260,000
|
|
|
Legal and accounting fees
|
|
|
341,667
|
|
|
|
172,026
|
|
|
Exploration costs
|
|
|
624,950
|
|
|
|
1,413,405
|
|
|
Other general and administrative
|
|
|
828,692
|
|
|
|
637,750
|
|
|
Gain on settlement of accounts payable
|
|
|
—
|
|
|
|
(53,252
|
)
|
|
Total Operating Expenses
|
|
|
2,264,029
|
|
|
|
2,778,221
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(2,264,029
|
)
|
|
|
(2,778,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23
|
|
|
|
93
|
|
|
Interest expense
|
|
|
(355,243
|
)
|
|
|
(75,915
|
)
|
|
Interest expense - related party
|
|
|
(3,521
|
)
|
|
|
—
|
|
|
Loss on debt extinguishment
|
|
|
(220,703
|
)
|
|
|
—
|
|
|
Total Other Income (Expense)
|
|
|
(579,444
|
)
|
|
|
(75,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,843,473
|
)
|
|
|
(2,854,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,843,473
|
)
|
|
$
|
(2,854,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Per Share Data:
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
280,599,695
|
|
|
|
271,783,390
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
Preferred
Stock
|
|
|
|
Paid-In
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Deficit
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2013
|
|
|
262,604,345
|
|
|
|
262,604
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,879,146
|
|
|
|
(201,821,355
|
)
|
|
|
2,320,395
|
|
|
Common stock issued for services
|
|
|
4,350,000
|
|
|
|
4,350
|
|
|
|
—
|
|
|
|
—
|
|
|
|
845,275
|
|
|
|
—
|
|
|
|
849,625
|
|
|
Common stock issued with note payable
|
|
|
2,500,000
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219,722
|
|
|
|
—
|
|
|
|
222,222
|
|
|
Options expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
509,604
|
|
|
|
—
|
|
|
|
509,604
|
|
|
Options exercised
|
|
|
100,000
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,400
|
|
|
|
—
|
|
|
|
21,500
|
|
|
Reversal of deferred costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,476
|
)
|
|
|
—
|
|
|
|
(20,476
|
)
|
|
Sale of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
|
Sales of common stock
|
|
|
8,499,532
|
|
|
|
8,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956,500
|
|
|
|
—
|
|
|
|
965,000
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,854,043
|
)
|
|
|
(2,854,043
|
)
|
|
Balances at September 30, 2014
|
|
|
278,053,877
|
|
|
$
|
278,054
|
|
|
|
51
|
|
|
$
|
—
|
|
|
$
|
206,411,222
|
|
|
$
|
(204,675,398
|
)
|
|
$
|
2,013,878
|
|
|
Common stock issued for services
|
|
|
2,500,000
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
235,050
|
|
|
|
—
|
|
|
|
237,550
|
|
|
Options expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
525,703
|
|
|
|
—
|
|
|
|
525,703
|
|
|
Sales of common stock for cash
|
|
|
594,318
|
|
|
|
594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49,406
|
|
|
|
—
|
|
|
|
50,000
|
|
|
Common stock issued with notes payable
|
|
|
3,400,000
|
|
|
|
3,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116,159
|
|
|
|
—
|
|
|
|
119,559
|
|
|
Stock issued for related party payables
|
|
|
849,805
|
|
|
|
850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52,684
|
|
|
|
—
|
|
|
|
53,534
|
|
|
Warrants issued with debt extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220,703
|
|
|
|
—
|
|
|
|
220,703
|
|
|
Warrants issued with notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,053
|
|
|
|
—
|
|
|
|
73,053
|
|
|
Warrants issued as deferred financing cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,111
|
|
|
|
—
|
|
|
|
17,111
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,843,473
|
)
|
|
|
(2,843,473
|
)
|
|
Balances at September 30, 2015
|
|
|
285,398,000
|
|
|
$
|
285,398
|
|
|
|
51
|
|
|
$
|
—
|
|
|
$
|
207,701,091
|
|
|
$
|
(207,518,871
|
)
|
|
$
|
467,618
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Years Ended
September 30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,843,473
|
)
|
|
$
|
(2,854,043
|
)
|
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
Warrant and option expense
|
|
|
525,703
|
|
|
|
509,604
|
|
|
Stock-based compensation
|
|
|
237,550
|
|
|
|
849,625
|
|
|
Amortization of debt discounts
|
|
|
269,576
|
|
|
|
63,663
|
|
|
Amortization of deferred financing cost
|
|
|
17,111
|
|
|
|
—
|
|
|
Depreciation
|
|
|
60,453
|
|
|
|
2,087
|
|
|
Loss on debt extinguishment
|
|
|
220,703
|
|
|
|
—
|
|
|
Gain on settlement of accounts payable
|
|
|
—
|
|
|
|
(53,252
|
)
|
|
Net change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
37,432
|
|
|
|
(20,509
|
)
|
|
Deferred costs
|
|
|
—
|
|
|
|
100,000
|
|
|
Inventory
|
|
|
(52,279
|
)
|
|
|
—
|
|
|
Accounts payable
|
|
|
172,788
|
|
|
|
70,955
|
|
|
Accrued compensation - related parties
|
|
|
228,975
|
|
|
|
—
|
|
|
Accrued liabilities
|
|
|
405,127
|
|
|
|
9,900
|
|
|
Interest payable
|
|
|
38,323
|
|
|
|
118,814
|
|
|
Net Cash Used in Operating Activities
|
|
|
(682,011
|
)
|
|
|
(1,222,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(80,954
|
)
|
|
|
(168,723
|
)
|
|
Restricted cash
|
|
|
(59,499
|
)
|
|
|
—
|
|
|
Net Cash Used in Investing Activities
|
|
|
(140,453
|
)
|
|
|
(168,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
50,000
|
|
|
|
965,000
|
|
|
Proceeds from option exercise
|
|
|
—
|
|
|
|
21,500
|
|
|
Proceeds from notes payable
|
|
|
583,000
|
|
|
|
250,000
|
|
|
Proceeds from note payable – related party
|
|
|
30,000
|
|
|
|
—
|
|
|
Increase in finance contracts
|
|
|
39,960
|
|
|
|
17,439
|
|
|
Payments on finance contracts
|
|
|
(27,616
|
)
|
|
|
(17,439
|
|
|
Net Cash Provided by Financing Activities
|
|
|
675,344
|
|
|
|
1,236,500
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) IN CASH
|
|
|
(147,120
|
)
|
|
|
(155,179
|
)
|
|
CASH, BEGINNING OF YEAR
|
|
|
218,513
|
|
|
|
373,692
|
|
|
CASH, END OF YEAR
|
|
$
|
71,393
|
|
|
$
|
218,513
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
33,435
|
|
|
$
|
—
|
|
|
Cash paid for income taxes
|
|
|
—
|
|
|
|
—
|
|
(Continued)
The
accompanying notes are an integral part of the consolidated financial statements.
EL CAPITAN
PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
Years Ended
September 30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Debt issued for equipment purchase
|
|
$
|
—
|
|
|
$
|
400,000
|
|
|
Common stock issued with note payable
|
|
|
119,559
|
|
|
|
222,222
|
|
|
Reversal of common stock granted for deferred costs
|
|
|
—
|
|
|
|
20,476
|
|
|
Warrants issued for deferred financing costs
|
|
|
17,111
|
|
|
|
—
|
|
|
Warrants issued with notes payable
|
|
|
73,053
|
|
|
|
—
|
|
|
Common stock issued for related party payables
|
|
|
53,534
|
|
|
|
—
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
Business, Operations and Organization
On July 26, 2002, El Capitan Precious Metals,
Inc. was incorporated as a Delaware corporation to engage in the business of acquiring properties containing precious metals,
principally gold, silver, and platinum (“El Capitan Delaware”). On March 18, 2003, El Capitan Delaware entered into
a share exchange agreement with DML Services, Inc. (“DML”), a Nevada corporation, and became the wholly owned subsidiary
of DML. On April 11, 2003, DML changed its name to El Capitan Precious Metals, Inc. The results of El Capitan Precious Metals,
Inc., a Nevada corporation (formerly DML Services, Inc.), and its wholly owned Delaware subsidiary of the same name (collectively
the “Company”) are presented on a consolidated basis.
The transaction was recorded as a reverse acquisition
based on factors demonstrating that El Capitan Delaware constituted the accounting acquirer. The shareholders of El Capitan Delaware
received 85% of the post-acquisition outstanding common stock of DML. In addition, post-acquisition management personnel and the
sole board member of El Capitan Delaware consisted of individuals previously holding positions with El Capitan Delaware. The historical
stockholders’ equity of El Capitan Delaware prior to the exchange was retroactively restated (a recapitalization) for the
equivalent number of shares received in the exchange after giving effect to any differences in the par value of the DML and El
Capitan Delaware common stock, with an offset to additional paid-in capital. The restated consolidated deficit accumulated during
the development stage of the accounting acquirer (El Capitan Delaware) has been carried forward after the exchange.
The Company owns 100% of the outstanding common
stock of El Capitan Delaware. Prior to January 19, 2011, El Capitan Delaware owned a 40% interest in El Capitan, Ltd., an Arizona
corporation (“ECL”). On January 19, 2011, we acquired the remaining 60% interest in ECL from Gold and Minerals
Company, Inc. (“G&M”) by merging an acquisition subsidiary created by the Company with and into G&M. In connection
with the merger, each share of G&M common and preferred stock outstanding was exchanged for approximately 1.414156 shares of
the Company’s common stock, resulting in the issuance of an aggregate of 148,127,043 shares of the Company’s common
stock to former G&M stockholders. Upon closing of the merger, G&M became a wholly-owned subsidiary of the Company and
our consolidated Company acquired 100% of ECL. As a result, we now own 100% of the El Capitan Property site (described below).
El Capitan Precious Metals, Inc., a Nevada
corporation, together with its consolidated subsidiaries are collectively hereinafter referred to as the “Company,”
“our” or “we.”
The Company is an exploration stage company
as defined by the Securities and Exchange Commission’s (“SEC”) Industry Guide 7 as the Company has no established
reserves as required under the Industry Guide 7. We are principally engaged in the exploration of precious metals and other minerals
on the El Capitan property located near Capitan, New Mexico (the “El Capitan Property”). The Company is in mineral
exploration state activities and has obtained permitting with the State of New Mexico Minerals and Mining Division to expand the
Company’s mineral exploration activities and the process of entering into the production stage of operations.
The Company has completed certain acquisitions
and transactions prior to fiscal 2015, but has not had any material revenue producing operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries El Capitan Precious Metals, Inc., a Delaware corporation; Gold and
Minerals Company, Inc., a Nevada corporation; and El Capitan, Ltd., an Arizona corporation. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Basis of Presentation and Going Concern
The Company's consolidated financial statements
are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United
States of America ("GAAP"), and have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities in the normal course of business. The Company currently has no source of revenue to cover its
costs. The Company has incurred a loss of $2,843,473 for the fiscal year ended September 30, 2015 and has a working capital
deficit of $2,081,996 as of September 30, 2015. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern.
To continue as a going concern, the Company
is dependent on achievement of cash flow and profits from entering the production stage of operations. The Company does not have
adequate liquidity to fund its current operations, meet its obligations and continue as a going concern. The Company secured working
capital loans in the amounts of $200,000 in April 2015 and $100,000 in August 2015 to assist bridging into mining operations.
The Company is also pursuing other short-term operational strategic financing alternatives or equity infusion.
The Company’s 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 should the Company be unable to continue in existence.
Fair Value of Financial Instruments
The fair values of the Company’s financial
instruments, which include cash, investments, accounts payable, accrued expenses and notes payable, approximate their carrying
amounts because of the short maturities of these instruments or because of restrictions.
Management Estimates and Assumptions
The preparation of the Company’s 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 financial statements and the reported amounts of expenses during the reporting periods. Management
makes these estimates using the best information available at the time the estimates are made; however, actual results could differ
materially from these estimates.
Cash and Cash Equivalents
The Company considers those short-term, highly
liquid investments with maturities of three months or less as cash and cash equivalents. At times, cash in banks may be in excess
of the FDIC limits. The Company has no cash equivalents.
Inventory
Inventories include mineralized material stockpile,
concentrate and iron ore inventories, as described below. Inventories are carried at the lower of average cost or net realizable
value, in the case of mineralized material stockpile and concentrate inventories and minimal cost is attributable to the iron
ore inventories. The net realizable value of mineralized material stockpile inventories represents the estimated future sales
price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the
product to sale. Concentrate inventories are carried at the lower of full cost of production or net realizable value based on
current metals prices. Write-downs of inventory will be reported as a component of production costs applicable to sales.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Mineralized Material
Stockpile
Inventories
Mineralized material stockpile inventories
represent mineralized materials that have been mined and are available for further processing. Costs are allocated to mineralized
material stockpile inventories based on relative values of material stockpiled and processed using current mining costs incurred
up to the point of stockpiling the mineralized material.
Concentrates
Concentrates inventory include metal concentrates
located either at the Company’s El Capitan Property mine site or in transit to a customer’s port. Inventories consist
of mineralized material that contains gold and silver mineralization.
Iron Ore
The high grade iron ore material is inventoried
until the market prices are reestablished at a higher market demand and are valued at five percent of the market price. Any proceeds
from the sale of iron ore will offset the cost of mining the mineralized ore.
Property and Equipment
Property and equipment are recorded at cost
less accumulated depreciation. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation
are removed from the accounts, with any resultant gain or loss being recognized as a component of operating income or expense.
Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Maintenance and repairs
are charged to operations as incurred.
Restricted Cash
Restricted cash consists of two certificates
of deposits in favor of the New Mexico Minerals and Mining Division for a total of $74,497. The amount was increased $59,495 during
the fiscal year ended September 30, 2015 with the issuance of the Company’s expanded mining permit and is posted as a financial
assurance for required reclamation work to be completed on mined acreage.
Exploration Property Costs
Exploration property costs are expensed as
incurred until such time as economic reserves are quantified. To date the Company has not established any proven or probable reserves
on the El Capitan Property. The Company has capitalized $1,864,608 of exploration property acquisition costs reflecting its investment
in the El Capitan Property.
Net Income (Loss) Per Share
The Company calculates net income (loss) per
share as required by Accounting Standards Codification subtopic 260-10, Earnings per Share (ASC 260-10”). 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 years ended September 30, 2015 and 2014, the impact of outstanding stock equivalents
has not been included as they would be anti-dilutive. 10,387,500 and 7,900,000 options and 4,861,344 and 0 warrants were excluded
during the years ended September 30, 2015 and 2014, respectively.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Stock-Based Compensation
FASB ASC 718 requires companies to measure
all stock compensation awards using a fair value method and recognize the related compensation cost in its financial statements.
Beginning with the Company’s quarterly period that began on October 1, 2006, the Company adopted the provisions of FASB
ASC 718 and expenses the fair value of employee stock options and similar awards in the financial statements. The Company accounts
for share based payments in accordance with ASC 718,
Compensation - Stock Compensation
, which requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant
date fair value of the award. In accordance with ASC 718-10-30-9,
Measurement Objective – Fair Value at Grant Date
,
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 relative to the number
of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.
The Company accounts for stock-based compensation
to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the
earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments and is recognized
as expense over the service period.
The Company recognized stock-based administrative
compensation aggregating $525,703 and $509,604 for common stock options issued to administrative personnel and consultants during
the years ended September 30, 2015 and 2014, respectively. Also during the years ended September 30, 2015 and 2014, the Company
paid stock-based compensation consisting of common stock issued to non-employees aggregating $237,550 and $849,625, respectively.
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 under ASC 360-10-35-17, Measurement of an Impairment Loss, if events or circumstances
indicate that their carrying amount might not be recoverable. As of September 30, 2015, precious metals recovery process for precious
metals is on target with the Company’s updated report from our independent geologist in January 2012 and no events or circumstances
have happened to indicate the related carrying values of the properties may not be recoverable. When the Company determines that
an impairment analysis should be done, the analysis will be performed using the rules of ASC 930-360-35,
Asset Impairment
,
and 360-10-15-3 through 15-5,
Impairment or Disposal of Long-Lived Assets
.
An impairment loss is recognized when estimated
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. Assets to be disposed
of are recorded at the lower of net book value or fair market value less cost to sell at the date management commits to a plan
of disposal. There were no impairments to long-lived assets for the Company’s fiscal years ended September 30, 2015 or 2014.
Income Taxes
The Company computes deferred income taxes
under the asset and liability method prescribed by FASB ASC 740. Under this method, deferred tax assets and liabilities are recognized
for temporary differences between the financial statement amounts and the tax basis of certain assets and liabilities by applying
statutory rates in effect when the temporary differences are expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount more likely than not to be realized.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Revenue Recognition
When revenue is generated from operations,
it will be recognized in accordance with FASB ASC 605. In general, the Company will recognize revenue when (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and
(iv) collectability is reasonably assured. Revenue generated and costs incurred under this agreement will be reported on a net
basis in accordance with FASB ASC 605-45. There was no revenue generated for the Company’s fiscal years ended September
30, 2015 or 2014.
Gain on Settlement of Accounts Payable
During the fiscal year ended September 30,
2014, the Company recorded a gain on settlement of accounts payable of $53,252.
Comprehensive Income (Loss)
FASC Topic No. 220, “
Comprehensive
Income,”
establishes standards for reporting and display of comprehensive income and its components in a full set of
general-purpose financial statements. As at September 30, 2015 and 2014, the Company had no material items of other
comprehensive
income.
Recently
Issued Accounting Pronouncements
Other than as set forth below, management does
not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on the accompanying financial statements.
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,
Compensation – Stock 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 Company’s reported financial position or results of operations.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern
, which is effective for financial statements issued for interim and annual periods
beginning on or after December 15, 2016. This update contains amendments that clarify the principles for management’s assessment
of an entity’s ability to continue as a going concern. This standard is not expected to have an effect on the Company’s
reported financial position or results of operations.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In April 2015, the FASB issued
ASU No. 2015-03 “
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs.”
ASU No. 2015-03 provides that an entity: (1) present debt issuance costs in the balance sheet as a direct deduction
from the carrying value of the associated debt liability rather than as an asset; and (2) report amortization of debt issuance
costs as interest expense. ASU No. 2015-03 will become effective for the Company in the first quarter of fiscal 2017. The Company
does not expect the adoption of this update will have a material impact on its consolidated financial statements.
In July 2015, the FASB has issued Accounting
Standards Update (ASU) No. 2015-11,
“Inventory (Topic 330): Simplifying the Measurement of Inventory
.” Topic
330, “
Inventory
,” currently requires an entity to measure inventory at the lower of cost or market. Market
could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments
do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply
to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity
should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update more
closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December
15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively
with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is
not expected to have a material impact on the Company’s consolidated financial statements.
Other recent accounting pronouncements issued
by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period did not, or
are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 2 – RELATED PARTY TRANSACTIONS
Consulting Agreements
Effective May 1, 2009, the Company has informal
arrangements with two individuals, one of whom is an officer and is also director of the Company, pursuant to which such individuals
serve as support staff for the functioning of the home office and all related corporate activities and projects. Effective June
1, 2010, the Company amended the aggregate monthly payments with these two individuals under the arrangements to $16,667. Effective
August 1, 2013, the monthly compensation was increased to $21,667. There are no written agreements with these individuals. Total
administrative consulting fees expensed under these informal agreements for the fiscal years ended September 30, 2015 and 2014
was $260,000. Accrued and unpaid compensation under these arrangements of $93,975 was recorded in accrued compensation –
related parties at September 30, 2015.
In January 2012, the Company retained
Management Resource Initiatives, Inc. (“MRI”), a company controlled by the Chief Financial Officer and a Director
of the Company, for services with a monthly consulting fee of $10,000, which monthly fee was increased to $15,000 effective August
1, 2013. Total consulting fees expensed to MRI for the fiscal years ended September 30, 2015 and 2014 was $180,000. MRI had accrued
and unpaid compensation of $135,000 recorded in accrued compensation – related parties at September 30, 2015.
On February 4, 2015, the Company signed a note
payable to MRI for $30,000 at 18% interest per annum and due February 4, 2016. The note provides an incentive for the issuance
of 200,000 shares of restricted common stock of the Company for the loan. See
Note 6
.
In September 2015, the Company issued 849,805
common shares to the controller of the Company as payment of accrued compensation of $53,534. The fair value of the stock was
$53,534.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 – INVENTORY
The following table provides the components
of inventory as of September 30, 2015 and 2014:
|
|
|
September
30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineralized material
stockpile
|
|
$
|
52,279
|
|
|
$
|
—
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment together
with their estimated useful lives, consisted of the following at September 30, 2015 and 2014:
|
|
|
Useful
|
|
|
September
30,
|
|
|
|
|
Lives
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and office equipment
|
|
|
3 years
|
|
|
$
|
8,486
|
|
|
$
|
7,389
|
|
|
Automotive equipment
|
|
|
5 years
|
|
|
|
15,042
|
|
|
|
15,042
|
|
|
Mine equipment
|
|
|
3-10 years
|
|
|
|
532,493
|
|
|
|
500,000
|
|
|
Equipment structures and other
|
|
|
7-10 years
|
|
|
|
79,289
|
|
|
|
31,925
|
|
|
Permits
|
|
|
15 years
|
|
|
|
16,227
|
|
|
|
16,227
|
|
|
|
|
|
|
|
|
|
651,537
|
|
|
|
570,583
|
|
|
Less: accumulated
depreciation
|
|
|
|
|
|
|
(63,470
|
)
|
|
|
(3,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and
equipment
|
|
|
|
|
|
$
|
588,067
|
|
|
$
|
567,566
|
|
Depreciation expense during the fiscal years
ended September 30, 2015 and 2014 totaled $60,453 and $2,087, respectively.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following at September
30, 2015 and 2014:
|
|
|
September
30,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Compensation and consulting
|
|
$
|
62,000
|
|
|
$
|
—
|
|
|
Mining costs
|
|
|
203,626
|
|
|
|
100,000
|
|
|
Accounting and legal
|
|
|
277,000
|
|
|
|
37,500
|
|
|
Interest
|
|
|
50,138
|
|
|
|
11,814
|
|
|
|
|
$
|
592,764
|
|
|
$
|
149,314
|
|
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 – NOTES PAYABLE
Under an agreement with Logistica U.S. Terminals,
LLC (“Logistica”) dated February 28, 2014, Logistica agreed to remit a $400,000 payment on the Company’s behalf
that represented the remaining balance of the Company’s purchase price for a heavy ore trailing separation line to be used
for processing of mineralized material at the El Capitan Property mine site. The Company previously remitted $100,000 toward the
purchase of such equipment. In consideration for Logistica remitting such payment, the Company agreed to deliver a $400,000 promissory
note to Logistica and issued 2,500,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock
Incentive Plan. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of the
Company’s proceeds from sale of iron extracted from mineralized material as part of the Company’s exploration activities.
The relative fair value of the common stock was determined to be $222,222 and was recorded as a discount to the promissory note
that was amortized to interest expense over the expected life of the note through August 31, 2015. During the fiscal years ended
September 30, 2015 and 2014, amortization expense of $158,559 and $63,663 was recognized, respectively. The outstanding balance
under this note payable was $400,000 and the unamortized discount on the note payable was $0 as of September 30, 2015. Accrued
interest on the note at September 30, 2015 was $28,553.
On September 8, 2014, the Company received
an advance of $250,000 under a $500,000 Note and Warrant Purchase Agreement entered into on October 17, 2014 (the “2014
Note”). The 2014 Note is secured by the net proceeds received by the Company from its sale of tailings separated from iron
recovered by the Company at the El Capitan Property, carries an interest rate of 8% per annum, and matured on July 17, 2015. The
remaining $250,000 was advanced to the Company on October 17, 2014. On October 17, 2014, the Company also issued warrants to purchase
an aggregate of 882,352 shares of common stock in connection with the 2014 Note of which 735,294 were issued to the lender and
147,058 were issued to a third party at a purchase price equal to $0.17 per share. The relative fair value of the 735,294 warrants
was determined to be $73,053 and was recorded as a discount to the promissory note and amortized to interest expense over the
life of the note through July 17, 2015. During the fiscal year ended September 30, 2015, amortization expense of $73,053 was recognized.
The unamortized discount on the 2014 Note is $0 as of September 30, 2015. The fair value of the 147,058 warrants was determined
to be $17,111 and was recorded as deferred financing costs and amortized to interest expense over the life of the note through
July 17, 2015. During the fiscal year ended September 30, 2015, amortized expense of $17,111 was recognized and the unamortized
deferred financing costs balance was $0 as of September 30, 2015.
On August 24, 2015, the 2014 Note was mutually
extended to a new Maturity Date from July 17, 2015 to January 17, 2016 (the “Amended 2014 Note”). In consideration
of the extension the Company amended the common stock purchase warrant to purchase 4,714,286 shares (subject to adjustment) at
an exercise price of $0.07 per share. The warrant dated October 17, 2014 was cancelled. The amended agreement provides that if
the loan should be paid in full prior to the amended Maturity Date, the amended common stock purchase warrants will be reduced
to an amount equal to the percentage of days the principle balance was outstanding during the extension period to the total days
in the extension period times 4,714,286. The Company evaluated the modification under ASC 470-50 and determined that it was a
substantial modification that qualified as an extinguishment of debt. The fair value of the 4,714,286 amended warrants was determined
to be $220,703 and was expensed as a loss on debt extinguishment in the year ended September 30, 2015. The outstanding balance
under the Amended 2014 Note is $500,000. Accrued interest on Amended 2014 Note at September 30, 2015 was $8,219.
On November 20, 2014, the Company entered into
an agreement to finance a portion of its insurance premiums in the amount of $22,968 at an interest rate of 9.0% with equal payments
of $2,393 including interest, due monthly beginning December 21, 2014 and continuing through September 21, 2015. As of September
30, 2015, the outstanding balance under this note payable was $0.
On February 4, 2015, the Company signed two
notes with different investors for $63,000 at 18% interest per annum and due February 4, 2016. Each note provides an incentive
for the issuance of 200,000 shares of restricted common stock of the Company for the loan. One maker of the loans is affiliated
with the Company and provided $30,000. See
Note 2
. Accrued interest on the notes at September 30, 2015 was $7,394.
The relative fair value of the common stock was determined to be $21,211 and was recorded as discounts to the promissory notes
that are being amortized to interest expense over the life of the notes. During the fiscal year ended September 30, 2015, amortization
expense of $12,235 was recognized. The outstanding balance under these notes payable was $63,000 and the unamortized discounts
on the notes payable was $8,976 as of September 30, 2015.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On April 16, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender has committed to loan the Company a total of $200,000
in installments. Installments on this loan have been advanced as follows:
|
Installment Date
|
|
|
Amount
|
|
|
|
|
|
|
|
|
April 17, 2015
|
|
$
|
50,000
|
|
|
May 15, 2015
|
|
$
|
50,000
|
|
|
June 16, 2015
|
|
$
|
25,000
|
|
|
July 20, 2015
|
|
$
|
25,000
|
|
|
August 18, 2015
|
|
$
|
25,000
|
|
|
September 18, 2015
|
|
$
|
25,000
|
|
The loan accrues interest at 10% per year,
with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the
lender a security interest in the AuraSource Heavy Metals Separation System located on the El Capitan Property. As additional
consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the note holder.
The relative fair value of the common stock was determined to be $98,349 and is recorded as discounts to the promissory note tranches
as of the date received and are being amortized to interest expense over the life of the note tranches. During the fiscal year
ended September 30, 2015, amortization expense of $25,729 was recognized. The outstanding balance under these notes payable was
$200,000 and the allocated unamortized discounts on the notes payable was $72,619 as of September 30, 2015. Accrued interest on
these notes at September 30, 2015 was $5,801.
On July 14, 2015, the Company entered into
an agreement to finance a portion of its insurance premiums in the amount of $15,116 at an interest rate of 8.76% with equal payments
of $1,573 including interest, due monthly beginning July 14, 2015 and continuing through April 14, 2016. In August 2015, an increase
in premium of $1,876 occurred due an increase in coverage and the remaining payments increased to $1,815. As of September 30,
2015, the outstanding balance under this note payable was $12,344.
On August 31, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender has committed to loan the Company $100,000 for working
capital. As an incentive for the financing, the Company issued 2,000,000 shares of restricted common stock of the Company. The
investor decided not to accept the shares and they were returned to the Company’s transfer agent and returned to the treasury.
The agreement has an annual interest rate of 2% and is due November 15, 2015. The agreement provides payment of one-half (1/2)
of the gross revenues which the Company may receive from its mining activities towards the principal and accrued interest. The
note and accrued interest was paid off in December 2015 in exchange for 3,500,000 restricted shares of the Company’s common
stock.
The components of
the notes payable, including the note payable to related party, at September 30, 2015 are as follows:
|
|
|
Principal
|
|
|
Unamortized
|
|
|
|
|
|
|
Amount
|
|
|
Discount
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
1,2
45,344
|
|
|
|
(77,157
|
)
|
|
|
1,1
68,187
|
|
Notes payable – related party
|
|
|
30,000
|
|
|
|
(4,438
|
)
|
|
|
25,562
|
|
|
|
$
|
1,275,344
|
|
|
$
|
(81,595
|
)
|
|
$
|
1,193,749
|
The components of
the notes payable at September 30, 2014 are as follows:
|
|
|
Principal
|
|
|
Unamortized
|
|
|
|
|
|
|
Amount
|
|
|
Discount
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
650,000
|
|
|
$
|
(158,559
|
)
|
|
$
|
491,441
|
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 7 – FAIR VALUE MEASUREMENTS
U.S. accounting standards require disclosure
of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. In September 2006, the FASB issued new
accounting guidance, which establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”)
and expands disclosures about fair value measurements. The Company previously partially adopted this guidance for all instruments
recorded at fair value on a recurring basis. In the second quarter of fiscal 2010, the Company adopted the remaining provisions
of the guidance for all non-financial assets and liabilities that are not re-measured at fair value on a recurring basis. The
adoption of these provisions did not have an impact on the Company’s consolidated financial statements.
Fair value standards define fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Additionally, the standards establish a three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use
of unobservable inputs. The three levels of the fair-value hierarchy are described as follows:
Level 1 – Quoted prices are available
in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions
for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level
1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than
quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3 – Pricing inputs include significant
inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies
that result in management’s best estimate of fair value.
The following table sets forth by level with
the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on September 30, 2015 and
2014:
|
September 30, 2015:
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Exploration property
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,864,608
|
|
|
$
|
1,864,608
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
September 30, 2014:
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Exploration property
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,864,608
|
|
|
$
|
1,864,608
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
The exploration property
associated with the El Capitan Property, which the Company is intending to continue to market for sale to a major mining company,
is classified as Level 3. The fair value of the exploration property is determined based upon the cost basis the of the Company’s
investment in the exploration property under U.S. GAAP. There was no change in the carrying valuation of the exploration property
during the years ended September 30, 2015 or 2014.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Related Party
In January 2012, the Company retained Management
Resource Initiatives, Inc. (“MRI”) for managing and overseeing the process of marketing and selling the El Capitan
Property and performing other services aimed at furthering the Company's strategic goals pursuant to an unwritten consulting arrangement.
Under this arrangement, the Company pays MRI a current monthly consulting fee of $15,000. The Company made or accrued aggregate
payments of $180,000 to MRI during the fiscal year ended September 30, 2015 and 2014, respectively. MRI is a related party because
it is a corporation that is wholly-owned by John F. Stapleton who is the Company’s Chief Financial Officer and a Director.
MRI had accrued and unpaid compensation of $135,000 recorded in accrued compensation – related parties at September 30,
2015.
Purchase Contract with Glencore
AG
On March 10, 2014, the Company entered into
a life-of-mine off take agreement with Glencore AG (“Glencore”) for the sale of iron extracted from mineralized material
at the El Capitan Property (such agreement is referred to herein as the “Glencore Purchase Contract”). Under the terms
of the Glencore Purchase Contract, the Company agreed to sell to Glencore, and Glencore agreed to purchase from the Company, iron
that meets the applicable specifications from the El Capitan Property mine. Payment for the iron is to be made pursuant an irrevocable
letter of credit in favor of the Company. The purchase price is based on an index price less an applicable discount. Either party
may terminate the Glencore Purchase Contract following a breach by the other party that remains uncured for a specified period
after receipt of written notice. Because of current market iron ore prices, the contract has not been implemented or terminated.
Agreements with Logistica U.S. Terminals, LLC
In anticipation of, and in conjunction with,
the Glencore Purchase Contract, the Company entered into a Master Services Agreement (the “Master Agreement”) and
corresponding Iron Ore Processing Agreement (the “Processing Agreement”) with Logistica U.S. Terminals, LLC (“Logistica”),
each effective as of February 28, 2014. Pursuant to these agreements, Logistica agreed to, among other things, provide the logistics
required for the Company to fulfill its obligations under the Glencore Purchase Contract, to assist the Company in financing the
costs of processing and delivering iron under the Glencore Purchase Contract, and to provide and/or manage the processing that
iron. Because of current market iron ore prices, the contract has not been implemented and has not been terminated.
The contracts with Logistica are currently
in process of being modified and amended to encompass the handling and processing of our concentrates and replace the current
contract with Logistica and other salient provisions therein.
Master Agreement with Logistica
Under the Master Agreement, the Company agreed
that Logistica will be the exclusive logistics agent for the purpose of moving iron extracted from mineralized material at the
El Capitan Property from the El Capitan Property to Glencore’s designated exporting port or final destination. Logistics
services include operational supplement chain management and supervision of all logistics providers and operations from the El
Capitan Property mine to the vessel loading port. Logistics services do not include obtaining and maintaining operating, environmental
and mining permits, and land and mineral rights, which are the responsibility of the Company. Also under the Master Agreement,
Logistica is required to use its best efforts to establish an operating credit line capable of funding all processing and delivery
costs and, upon opening and funding such a credit line, will disburse as needed all operating costs contemplated under the Glencore
Purchase Contract. The Company is required to reimburse Logistica for all such amounts, without interest, out of payments received
from Glencore in respect of the purchase of the iron.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In consideration for Logistica’s funding
and logistic services, the Company will pay Logistica a percentage of the Company’s profits from the sale of iron under
the Glencore Purchase Contract. If any sale of iron under the Glencore Purchase Contract results in a loss instead of a profit,
as a result of a decrease in index pricing of iron or otherwise, then the Company is required to make up the shortfall out of
profits from any precious metals processing and refining business, to the extent of available profits there from, or otherwise.
If iron index prices drop below the price in place at inception of the Glencore Purchase Contract by more than 5%, then the Company
will be required to provide Logistica with a greater percentage of profits commensurate with and equivalent to Logistica’s
loss of profit share due to the reduction in iron index prices. At inception of the Glencore Purchase Contract, the Platts 62%
FE CFR China iron index price was $121.24. In the event of a future sale of the El Capitan Property, the Company must either ensure
that its agreements with Logistica are assumed by the purchaser or pay Logistica a termination fee.
Either party may terminate the Master Agreement
following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Master Agreement will
otherwise continue indefinitely.
Because of current market iron ore prices,
the contract has not been implemented and has not been terminated.
The contracts with Logistica are currently
in process of being modified and amended to encompass the handling and processing of our concentrates and replace the current
contract with Logistica and other salient provisions therein.
Processing
Agreement with Logistica
Under the Processing Agreement, Logistica has
agreed to deliver iron processing equipment to the El Capitan Property and to use it best efforts to process, to contract specification,
stock pile and load for delivery iron that the Company has contracted to sell to Glencore under the Glencore Purchase Contract.
In order to do so, Logistica will act as the Company’s turn-key contractor for all of the Company’s iron processing
and delivery activities at the El Capitan Property. In consideration for such services, the Company will pay Logistica a set price
per metric ton of iron that is processed in accordance with the Glencore Purchase Contract specifications and purchased by Glencore.
As additional compensation for entering into the Processing Agreement, the Company issued 4,000,000 shares of common stock to
a designee of Logistica under the Company’s 2005 Stock Incentive Plan valued at $800,000. The shares vested immediately
upon grant and the $800,000 was expensed in full during the fiscal year ended September 30, 2014.
Either party may terminate the Processing Agreement
following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Processing Agreement
will otherwise continue indefinitely.
Because of the drop in the market iron ore
prices under the contract price, the contract has not been implemented during the current fiscal year and has not been terminated
as of September 30, 2015.
The contracts with Logistica are currently
in process of being modified and amended to encompass the handling and processing of our concentrates and replace the current
contract with Logistica and other salient provisions therein.
NOTE 9
– INCOME TAXES
The Company has incurred no income taxes during
the period from July 26, 2002 (inception) through September 30, 2015. The calculated tax deferred benefit at September 30, 2015
and 2014 is based on the current Federal statutory income tax rate of 35% applied to the loss before provision for income taxes.
The tax years open for Internal Revenue Service review are fiscal years ended September 30, 2012 to 2015.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The following table accounts for the differences
between the actual income tax benefit and amounts computed for the years ended September 30, 2015 and 2014:
|
|
|
Years Ended September 30,
|
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Tax benefit at the federal statutory rate
|
|
$
|
632,495
|
|
|
$
|
797,304
|
|
|
State tax benefit
|
|
|
125,957
|
|
|
|
158,777
|
|
|
Cumulative effect of Federal tax rate change
|
|
|
—
|
|
|
|
—
|
|
|
Expiration of state operating losses
|
|
|
(82,972
|
)
|
|
|
(28,216
|
)
|
|
Increase in valuation allowance
|
|
|
(675,480
|
)
|
|
|
(927,865
|
)
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of the deferred tax asset and
deferred tax liability at September 30, 2015 and 2014 are as follows:
|
|
|
September 30,
|
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
8,651,232
|
|
|
$
|
7,975,752
|
|
|
Valuation allowance
|
|
|
(8,651,232
|
)
|
|
|
(7,975,752
|
)
|
|
Net deferred tax asset after valuation allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
A valuation allowance has been provided to
reduce the net deferred tax asset, as management determined that it is more likely than not that the deferred tax assets will
not be realized.
At September 30, 2015, the Company has net
operating loss carry forwards for financial statement purposes for Federal income tax approximating $22,925,000. These losses
expire in varying amounts between September 30, 2022 and September 30, 2035.
At September 30, 2015, the Company has net
operating loss carry forwards for financial statement purposes for State income tax approximating $9,000,574. These losses expire
in varying amounts between September 30, 2016 and September 30, 2020.
NOTE 10 – 2005 STOCK INCENTIVE PLAN
On June 2, 2005, the Board of Directors adopted
the Company’s 2005 Stock Incentive Plan (the “2005 Plan”) and reserved 8,000,000 shares for issuance under the
2005 Plan out of the authorized and unissued shares of par value $0.001 common stock of the Company. On July 8, 2005, the Board
of Directors authorized the Company to take the steps necessary to register the 2005 Plan shares under a registration statement
on Form S-8. On July 19, 2005, the Form S-8 was filed with the SEC for 5,000,000 shares. On October 18, 2007, a Form S-8 was filed
with the SEC for registering the remaining 3,000,000 shares. On July 30, 2008, the Board of Directors increased the
number of shares of the Company’s common stock authorized for issuance under the 2005 Plan to 16,000,000 shares. On August
21, 2009, a Form S-8 was filed with the SEC to register the remaining 8,000,000 shares authorized under the 2005 Plan. On July
7, 2011, the Board of Directors increased the number of shares of the Company’s common stock authorized for issuance under
the 2005 Plan to 30,000,000 shares. On October 20, 2011, a Form S-8 was filed with the SEC to register the 14,000,000 share increase
authorized under the 2005 Plan. The 2005 Plan expired in our fiscal year 2015. See
Note 12
.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 11
– STOCKHOLDERS’ EQUITY
Authorized Common Shares
At the Company’s annual meeting of stockholders
held September 25, 2014, the Company’s stockholders approved an amendment (the “Amendment”) to the Company’s
Articles of Incorporation to increase the number of authorized shares of the Company’s common stock from 300,000,000 to
400,000,000 shares. The change in the authorized number of shares of common stock was effected pursuant to an Certificate
of Amendment (the “Certificate of Amendment”) filed with the Secretary of State of the State of Nevada on October
1, 2014 and was effective as of such date.
Series B Preferred Stock
Pursuant to resolutions adopted by the Board,
on August 1, 2014, the Company filed a Certificate of Designation (the “Certificate of Designation”) with the Nevada
Secretary of State creating a series of Preferred Stock by and designating fifty-one (51) shares of previously undesignated preferred
stock as Series B Convertible Preferred Stock (the “Series B Preferred Stock”).
Liquidation
. The Series B Preferred
Stock, with respect to rights on liquidation, dissolution and winding-up of the Corporation, ranks on parity with each other class
or series of capital stock of the Company the terms of which do not expressly provide that such class or series shall rank senior
or junior to the Series B Preferred Stock. Except for distributions in the event of a liquidation, dissolution or winding-up of
the Company (whether voluntary or involuntary), or a merger or consolidation by the Corporation with another corporation or other
entity (in each case, other than where the Company is the surviving entity) (a “Liquidation”), holders of Series B
Preferred Stock are not be entitled to receive dividends on the Series B Preferred Stock. In the event of a Liquidation, the holders
of Series B Preferred Stock are be entitled to receive out of the assets of the Company, an amount equal to the $1.00 per share
of Series B Preferred Stock (subject to adjustment), after any distribution or payment with respect to such Liquidation is made
to the holders of any senior securities and prior to any distribution or payment with respect to such Liquidation shall be made
to the holders of any junior securities.
Voting Rights
. Solely with respect to
matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent and relate to Company
capitalization (including, without limitation, increasing and/or decreasing the number of authorized shares of common stock and/or
preferred stock, and implementing forward and/or reverse stock splits) and changes in the Company’s name, the holders of
the outstanding shares of Series B Preferred Stock vote together with the holders of common stock without regard to class, except
as to those matters on which separate class voting is required by applicable law or the Company’s articles of incorporation
or bylaws. The holders of the outstanding shares of Series B Preferred Stock do not otherwise have the right to vote on matters
brought before the Company’s stockholders. In matters on which holders of shares of Series B Preferred Stock are entitled
to vote, each share of the Series B Preferred Stock has voting rights equal to (x) (i) 0.019607 multiplied by the total of (A)
the issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote, plus (B) the number of
votes which all other series or classes of securities other than this Series B Preferred Stock are entitled to cast together with
the holders of the Company’s common stock at the time of the relevant vote (the amount determined by this clause (i), the
“Numerator”), divided by (ii) 0.49, minus (y) the Numerator.
Conversion
. Shares of Series B Preferred
Stock may, at the option of the holder, be converted into one share of common stock (subject to adjustment, the “Conversion
Ratio”). In the event of any Transfer (as defined in the Certificate of Designation) of any share of Series B Preferred
Stock, such share will automatically convert into common stock based upon the Conversion Ratio applicable at the time of such
Transfer. If, at any time while any shares of Series B Preferred Stock remain outstanding, the Company effectuates a stock split
or reverse stock split of its common stock or issues a dividend on its common stock consisting of shares of common stock, the
Conversion Ratio and any other amounts calculated as contemplated by the Certificate of Designation shall be equitably adjusted
to reflect such action.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Equity Purchase Agreement
On July 11, 2011, the Company entered into
an Equity Purchase Agreement (the “2011 Agreement”) with Southridge Partners II, LP (“Southridge”). Under
the 2011 Agreement, we had the right, but not an obligation, to sell newly-issued shares of our common stock to Southridge. Southridge
had no obligation to purchase shares under the 2011 Agreement to the extent that such purchase would cause Southridge to own more
than 9.99% of the Company’s common stock. The original term of the 2011 Agreement was two years, subject to the Company’s
right to terminate at any time. The purchase commitment of Southridge under the 2011 Agreement was scheduled to expire
on the earlier of July 11, 2013, or the date on which aggregate purchases by Southridge under the 2011 Agreement totaled $5,000,000.
On April 3, 2013, we entered into an amendment (the “Amendment”) to the 2011 Agreement pursuant to which the parties
agreed to extend the purchase commitment of Southridge under the 2011 Agreement for an additional year, expiring July 11, 2014.
The maximum amount of the aggregate purchase commitment of Southridge under the 2011 Agreement remained unchanged at $5,000,000.
On July 11, 2014, the 2011 Agreement expired.
For each share of the Company’s common
stock purchased under the 2011 Agreement, Southridge paid 94.0% of the Market Price, which is defined as the average of the two
lowest closing bid prices on the Over-the-Counter Bulletin Board, as reported by Bloomberg Finance L.P., during the five trading
days following the date on which the Company notified Southridge of a pending sale (the “Valuation Period”). After
the expiration of the Valuation Period, Southridge purchased the applicable number of shares subject to customary closing conditions.
The offering of shares under the 2011 Agreement
were made pursuant to a registration statement on Form S-3 (Registration Statement No. 333-175038) previously filed by the Company
with the Securities and Exchange Commission, and prospectus supplements thereto. The S-3 registration statement utilized a “shelf”
registration process. Under this shelf registration process, from time to time, the Company sold any combination of the securities
described in a prospectus supplement in one or more offerings, up to a total dollar amount of $5,000,000.
On July 30, 2014, we entered into a new Equity
Purchase Agreement (the “2014 Agreement”) with Southridge, pursuant to which the Company may from time to time, in
its discretion, sell newly-issued shares of its common stock to Southridge for aggregate gross proceeds of up to $1,900,000. Southridge
will have no obligation to purchase shares under the 2014 Agreement to the extent that such purchase would cause Southridge to
own more than 9.99% of the Company’s common stock. Unless terminated earlier, the purchase commitment of Southridge will
automatically terminate on the earlier of July 30, 2016, or the date on which aggregate purchases by Southridge under the 2014
Agreement total $1,900,000. The Company has no obligation to sell any shares under the 2014 Agreement.
As provided in the 2014 Agreement, the Company
may require Southridge to purchase shares of our common stock from time to time by delivering a put notice to Southridge specifying
the total purchase price for the shares to be purchased (the “Investment Amount”). The Company may determine the Investment
Amount, provided that such amount may not be more than the lesser of (a) $500,000, or (b) 250% of the average daily trading dollar
volume of the Company’s common stock for the 20 trading days preceding the date on which the Company delivers the applicable
put notice. For this purpose, the trading dollar volume for each day is determined by multiplying the closing bid price of the
Company’s common stock on the Over-the-Counter Bulletin Board (or such other principal market on which the Company’s
stock trades) on such date by the trading volume of the Company’s common stock on the Over-the-Counter Bulletin Board (or
such other principal market on which the Company’s stock trades) on such date. The number of shares issuable in connection
with each put notice will be computed by dividing the applicable Investment Amount by the purchase price for such common stock.
For each share of our common stock purchased
under the 2014 Agreement, Southridge will pay a purchase price equal to 94.0% of the Market Price, which is defined as the average
of the two lowest closing bid prices on the Over-the-Counter Bulletin Board, as reported by Bloomberg Finance L.P., during the
five trading days following delivery of the put notice (the “Valuation Period”). After the expiration of the Valuation
Period, Southridge will purchase the applicable number of shares subject to customary closing conditions.
The 2014 Agreement contains covenants, representations
and warranties of the Company and Southridge that are typical for transactions of this type. In addition, the Company and Southridge
have granted each other customary indemnification rights in connection with the 2014 Agreement. The 2014 Agreement may be terminated
by the Company at any time.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The offering of shares under the 2014 Agreement
has been made pursuant to a registration statement on Form S-3 (Registration Statement No. 333-193208) previously filed by the
Company with the Securities and Exchange Commission, and prospectus supplements thereto. The benefits and representations and
warranties set forth in the 2014 Agreement are not intended to and do not constitute continuing representations and warranties
of the Company or any other party to persons not a party thereto, including without limitation, any future or other investor.
As of September 30, 2015, we have sold shares
of common stock to Southridge under the 2011 and 2014 Agreements for aggregate proceeds of $4,300,000, and have the right, subject
to certain conditions, to sell to Southridge $1,600,000 of newly-issued shares of the Company common stock pursuant to the 2014
Agreement, subject to the satisfaction of applicable closing conditions. However, because the Company’s public float was
less than $75 million upon the December 29, 2014 filing of its Annual Report on Form 10-K, the Company is no longer eligible to
utilize Form S-3 registration statements on a primary basis. As a result, the Company will be required to amend the structure
of the 2014 Agreement in order to continue to obtain financing from Southridge.
Preferred
Stock Issuances
On August 1, 2014, the Company issued fifty-one
(51) shares of Series B Preferred Stock to John F. Stapleton (the “Series B Stockholder”) for a purchase price equal
to $1.00 per share. The offer and sale of such shares were not registered under the Securities Act of 1933, as amended (the “Securities
Act”) at the time of sale, and therefore may not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. For this issuance, the Company relied on the exemption from federal registration under
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder, based on the Company’s belief that the offer
and sale of the shares has not and will not involve a public offering as the Series B Stockholder is an “accredited investor”
as defined under Section 501 promulgated under the Securities Act and no general solicitation has been involved in the offering.
As a result of the voting rights of the Series
B Preferred Stock, the Series B Stockholder holds in the aggregate approximately 51% of the total voting power of all issued and
outstanding voting capital of the Company solely with respect to matters upon which stockholders are entitled to vote or to which
stockholders are entitled to give consent and relate to the Company’s capitalization (including, without limitation, increasing
and/or decreasing the number of authorized shares of common stock and/or preferred stock, and implementing forward and/or reverse
stock splits) and changes in the Company’s name. The Series B Stockholder does not otherwise have the right under the Certificate
of Designation to vote on matters brought before the Company’s stockholders. The Company’s Board of Directors believes
that the issuance of the Series B Preferred Stock to the Series B Stockholder will facilitate the Company’s ability to manage
its affairs with respect to the limited matters on which the Series B Stockholder is entitled to vote.
During the fiscal year ended September 30,
2015, the Company did not issue any shares of preferred stock.
Common Stock Issuances
During the fiscal year
ended September 30, 2015, the Company:
|
|
(i)
|
Issued 400,000 shares of restricted common stock, as provided for in two loan agreements
entered into in February 2015. The relative fair value of the stock was determined to be $21,211 and was accounted for as
a discount to the loans and will be amortized over the life of the loans;
|
|
|
(ii)
|
Issued 3,000,000 shares of restricted common stock, as provided for in a working capital
loan entered into in April 2015. The relative fair value of the stock was determined to be $98,349 and was accounted for as
a discount to the loans and will be amortized over the life of the loans;
|
|
|
(iii)
|
Issued 500,000 shares of restricted common stock to a creditor for carrying a significant
balance. The market value of the shares issued was $67,550 and was classified as non-cash financing costs in the fiscal year
ended September 30, 2015;
|
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
(iv)
|
Issued 2,000,000 shares of S-8 common stock as consideration for a commitment consulting
fee to a six month mining agreement. The market value of the shares issued was $170,000;
|
|
|
(v)
|
Issued 849,805 shares of restricted common stock in connection with a conversion accrued
compensation valued at $53,534; and
|
|
|
(vi)
|
Issued 594,318 shares of common stock under the 2014 Agreement with Southridge for cash
proceeds of $50,000.
|
During the fiscal year
ended September 30, 2014, the Company:
|
|
(i)
|
Issued 6,544,987 shares of common stock under the 2011 and 2014 Agreements with Southridge
and received cash proceeds of $750,000;
|
|
|
(ii)
|
Issued 350,000 shares of common stock for non-employee consulting services valued at $49,625;
|
|
|
(iii)
|
Issued 100,000 shares of common stock upon the exercise of non-statutory stock options and
the Company received cash proceeds of $21,500;
|
|
|
(iv)
|
Issued 1,954,545 shares of common stock to four accredited investors and the Company received
cash proceeds of $215,000;
|
|
|
(v)
|
issued 2,500,000 shares of common stock in connection with financing the acquisition of
heavy mining equipment valued at $222,222; and
|
|
|
(vi)
|
Issued 4,000,000 shares of common stock under the processing agreement valued at $800,000
which is included as stock issued for services in the statements of stockholders’ equity. See
Note 6
.
|
Warrants
During the fiscal year
ended September 30, 2015, the Company:
|
|
(i)
|
Issued to an investor 735,294 three-year fully vested warrants at an exercise price of $0.17
per share as related to the $500,000 2014 Note. The relative fair value of the warrants was determined to be $73,053 using
the Black-Scholes option pricing model and was recorded as a discount to the 2014 Note and is being amortized to interest
expense over the expected life of the note through July 17, 2015. During the fiscal year ended September 30, 2015, amortization
expense of $73,053 was recognized and the unamortized discount was $0 as of September 30, 2015.
|
|
|
(ii)
|
Issued 147,058 three-year fully vested warrants at an exercise price of $0.17 per share
as placement fees related to the $500,000 2014 Note. The fair value of the warrants was determined to be $17,111 using the
Black-Scholes option pricing model and was recorded as deferred financing costs to be amortized over the expected life of
the note through July 17, 2015. During the fiscal year ended September 30, 2015, amortization expense of $17,111 was recognized
and the unamortized deferred financing costs balance was $0 as of September 30, 2015.
|
|
|
(iii)
|
Issued to an investor 4,714,286 three-year fully vested warrants at an exercise price of $0.07 per share as related to
the amended $500,000 2014 Note on August 18, 2015. The prior issued warrants aggregating 735,294 were cancelled under the
terms of the amendment. The relative fair value of the amended warrants was determined to be $220,703 using the Black-Scholes
option pricing model and was recorded as loss on debt extinguishment.
|
During the fiscal ended September 30, 2014,
the Company did not issue any warrants and as of September 30, 2014, there were no warrants outstanding.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Options
Aggregate options expense recognized was $525,703
and $509,604 for the fiscal years ended September 30, 2015 and 2014, respectively related to the option grants described below.
As of September 30, 2015 there was no unamortized option expense.
During the fiscal year ended September 30,
2015, the Company:
|
|
(i)
|
Granted, pursuant to the 2005 Stock Incentive Plan, (a) to two directors of the Company
each a ten-year stock option to purchase 500,000 shares of the Company’s common stock, (b) to two directors of
the Company each a ten-year stock option to purchase 250,000 shares of the Company’s common stock, and (c) to the controller
a ten-year stock option to purchase 250,000 shares of the Company’s common stock, all of which vested immediately, at
an exercise price of $0.15 per share. The fair value of the options was determined to be $218,471 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2015.
|
|
|
(ii)
|
Granted to a consultant a ten-year stock option to purchase an aggregate of 500,000 shares
of the Company’s common stock at an exercise price of $0.15 per share with the options vesting on the date of grant.
The fair value of the options was determined to be $73,158 using the Black-Scholes option pricing model and was expensed as
warrant and option costs during the fiscal year ended September 30, 2015.
|
|
|
(iii)
|
Granted to a consultant a ten-year stock option to purchase an aggregate of 1,500,000 shares
of the Company’s common stock at an exercise price of $0.15 per share with the options vesting equally over a nine-month
period from the date of the grant. The fair value of the options was determined to be $219,473 using the Black-Scholes option
pricing model and $219,473 was expensed as warrant and option costs during the fiscal year ended September 30, 2015.
|
During the fiscal year
ended September 30, 2014, the Company:
|
|
(i)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to each of two new directors of the
Company five-year options to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.3452 per
share which will vest in equal monthly installments over two years, commencing on April 17, 2014. The fair value of the options
was determined to be $233,638 using the Black-Scholes option pricing model and will be expensed as warrant and option costs
over the vesting period. One of the new directors left the board without notice and without any options vesting. During the
fiscal years ended September 30, 2015 and 2014, $14,601 and $38,940, respectively, was expensed as warrant and option costs.
|
|
|
(ii)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to each of two existing directors of
the Company a five-year stock option to purchase 500,000 shares of the Company’s common stock at an exercise price of
$0.31 per share, all of which vested immediately. The fair value of the options was determined to be $209,896 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2014.
|
|
|
(iii)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options
to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.31 per share with
the options vesting on the date of grant. The fair value of the options was determined to be $26,505 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2014.
|
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
(iv)
|
Amended the expiration date of an aggregate of 500,000 outstanding common stock options.
The options were originally scheduled to expire on January 31, 2014. The expiration date of the 500,000 options was extended
to January 31, 2019. The incremental increase in the fair value of the options was determined to be $27,718 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2014.
|
|
|
(v)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to each of three directors of the Company
a five-year stock option to purchase 500,000 of the Company’s common stock at an exercise price of $0.16 per share,
all of which vested immediately. The fair value of the options was determined to be $159,456 using the Black-Scholes option
pricing model and was expensed as warrant and option costs during the during the fiscal year ended September 30, 2014.
|
|
|
(vi)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options
to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.14 per share with
the options vesting on the date of grant. The fair value of the options was determined to be $12,423 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2014.
|
|
|
(vii)
|
Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options
to purchase an aggregate of 300,000 shares of the Company’s common stock at an exercise price of $0.13 per share with
the options vesting on the date of grant. The fair value of the options was determined to be $34,666 using the Black-Scholes
option pricing model and was expensed as warrant and option costs during the fiscal year ended September 30, 2014.
|
The Company utilizes the Black-Scholes option
pricing model to estimate the fair value of its option awards and warrants. The following table summarizes the significant assumptions
used in the model during the years ended September 30, 2015 and 2014:
|
Year Ended September 30, 2015:
|
|
|
|
|
Exercise
prices
|
|
|
$0.07 - $0.17
|
|
Expected volatilities
|
|
|
115.01% - 139.28%
|
|
Risk free interest
rates
|
|
|
0.79% - 2.36%
|
|
Expected terms
|
|
|
3.0 - 10.0 years
|
|
Expected dividends
|
|
|
—
|
|
|
|
|
|
|
Year Ended September 30, 2014:
|
|
|
|
|
Exercise prices
|
|
|
$0.14 - $0.38
|
|
Expected volatilities
|
|
|
120.72% - 140.83%
|
|
Risk free interest
rates
|
|
|
0.51% - 1.55%
|
|
Expected terms
|
|
|
2.5 - 5.0 years
|
|
Expected dividends
|
|
|
—
|
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Stock option activity, both within and outside
the 2005 Stock Incentive Plan and warrant activity, for the fiscal years ended September 30, 2015 and 2014, are as follows:
|
|
|
|
Stock
Options
|
|
|
|
Stock
Warrants
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
6,100,000
|
|
|
$
|
0.42
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
4,000,000
|
|
|
|
0.24
|
|
|
|
—
|
|
|
|
—
|
|
Canceled
|
|
|
(2,100,000
|
)
|
|
|
0.23
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
.22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2014
|
|
|
7,900,000
|
|
|
$
|
0.38
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
3,750,000
|
|
|
|
0.15
|
|
|
|
5,596,638
|
|
|
|
0.09
|
|
Canceled
|
|
|
(312,500
|
)
|
|
|
0.35
|
|
|
|
(735,294
|
)
|
|
|
0.17
|
|
Expired
|
|
|
(950,000
|
)
|
|
|
0.56
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
|
10,387,500
|
|
|
$
|
0.3
|
|
|
|
4,861,344
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2015
|
|
|
10,387,500
|
|
|
$
|
0.3
|
|
|
|
4,861,344
|
|
|
$
|
0.07
|
The range of exercise prices and remaining
weighted average life of the options outstanding at September 30, 2015 were $0.13 to $1.02 and 5.55 years, respectively. The aggregate
intrinsic value of the outstanding options at September 30, 2015 was $0.
The range of exercise prices and remaining
weighted average life of the warrants outstanding at September 30, 2015 were $0.07 to $0.17and 2.77 years, respectively. The aggregate
intrinsic value of the outstanding warrants at September 30, 2015 was $0.
During the fiscal year 2015 our 2005 Plan expired.
See
Note 12
.
EL CAPITAN
PRECIOUS METALS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS
Our 2005 Stock Incentive Plan expired during
our fiscal year ended September 30, 2015. On October 8, 2015, the Board of Directors of the Company approved the El Capitan Precious
Metals, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan enables the Board of Directors to grant to
employees, directors, and consultants of the Company and its subsidiaries a variety of forms of equity-based compensation, including
grants of options to purchase shares of common stock, shares of restricted common stock, restricted stock units, stock appreciation
rights, other stock-based awards and performance-based awards. The maximum number of shares of common stock of the Company that
may be issued or awarded under the 2015 Plan is 15,000,000 shares. On October 14, 2015, the Company filed Form S-8 Registration
Statement No. 333-207399 with the SEC registering the 15,000,000 shares of common stock authorized for issuance pursuant to the
2015 Plan. On December 15, 2015, the Board of Directors of the Company adopted Amendment No. 1 to the Company’s 2015 Equity
Incentive Plan (the “2015 Plan”) pursuant to which the number of shares of common stock issuable under the 2015 Plan
was increased from 15,000,000 to 23,000,000.
Effective November 23, 2015, the Board elected
Dr. Clyde L. Smith to serve as a director of the Company, filling an existing vacancy on the Board. Upon his election to the Board,
the Company granted Dr. Smith an option to purchase up to 250,000 shares of the Company’s common stock with an exercise
price equal to $0.05 per share, the closing price of the Company’s common stock on the grant date. The option was vested
in its entirety upon grant and has a ten year term.
On December 2, 2015 (the “Effective Date”),
the Company entered into a Securities Purchase Agreement (the “SPA”) for two $114,400 Convertible Notes with an accredited
investor for an aggregate principal amount of $228,800 with an annual interest rate of 9%. Each Note contains an Original Issuance
Discount (“OID”) of $10,400 and related legal and due diligence costs of $12,000. The net proceeds to be received
by the Company will be $92,000. The Maturity Date on the first Note is December 2, 2017. The Company may prepay in full the unpaid
principal and interest on the Note, upon notice, any time prior to 180 days after the Effective Date. Any prepayment is at140%
face amount outstanding and accrued interest. The redemption must be must be closed and paid for within three business days of
the Company sending the redemption demand. The Note may not be prepaid after the 180
th
day. The Note is convertible
into shares of our Common Stock at any time beginning on the date which is 181 day following the Effective Date. The conversion
price is equal to 55% of the lowest trading price of our Common Stock as reported on the QTCQB for the ten prior trading days
and may include the include the day of the Notice of Conversion under certain circumstances. We agreed to reserve an initial 5,033,000
shares of Common Stock for conversions under the Note (the "Share Reserve"). We also agreed to adjust the Share Reserve
to ensure that it always equals at least four times the total number of Common Stock that is actually issuable if the entire Note
would be converted. The Note has an embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15
Derivatives
and Hedging
. Pursuant to ASC 815, “
Derivatives and Hedging
”, the Company will recognize the fair value
of the embedded conversion features as a derivative liability when the Note becomes convertible on May 29, 2016.
Effective December 4, 2015, the Board elected
Timothy J. Gay to serve as a director of the Company, filling an existing vacancy on the Board. Upon his election to the Board,
the Company granted Mr. Gay a ten year option to purchase up to 250,000 shares of the Company’s common stock with an exercise
price equal to $0.062 per share, the closing price of the Company’s common stock on the grant date. The option was vested
in its entirety upon grant and has a ten year term.
Subsequent to our year end the Company issued
22,283,187 shares of Common Stock as follows:
|
Accrued compensation
|
|
|
1,663,186
|
|
|
Accrued liability for legal services
|
|
|
2,147,273
|
|
|
Compensation for mining services
|
|
|
11,200,000
|
|
|
Notes payable conversion
|
|
|
7,272,728
|
|
|
|
|
|
22,283,187
|
|
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2015
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,223
|
|
|
$
|
71,393
|
|
|
Prepaid expense and other current assets
|
|
|
212,007
|
|
|
|
61,654
|
|
|
Inventory
|
|
|
502,276
|
|
|
|
52,279
|
|
|
Total Current Assets
|
|
|
748,506
|
|
|
|
185,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation
of $79,940 and $63,470, respectively
|
|
|
572,384
|
|
|
|
588,067
|
|
|
Exploration property
|
|
|
1,864,608
|
|
|
|
1,864,608
|
|
|
Restricted cash
|
|
|
74,500
|
|
|
|
74,499
|
|
|
Deposits
|
|
|
22,440
|
|
|
|
22,440
|
|
|
Total Assets
|
|
$
|
3,282,438
|
|
|
$
|
2,734,940
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
269,103
|
|
|
$
|
251,834
|
|
|
Notes payable, net of unamortized discounts of $1,369
and $77,157, respectively
|
|
|
971,534
|
|
|
|
1,168,187
|
|
|
Note payable, related party net of unamortized discounts
of $1,354 and $4,438, respectively
|
|
|
28,646
|
|
|
|
25,562
|
|
|
Derivative instrument liability
|
|
|
293,833
|
|
|
|
—
|
|
|
Accrued compensation - related parties
|
|
|
230,000
|
|
|
|
228,975
|
|
|
Accrued liabilities
|
|
|
434,352
|
|
|
|
592,764
|
|
|
Total Current Liabilities
|
|
|
2,227,468
|
|
|
|
2,267,322
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT:
|
|
|
|
|
|
|
|
|
|
Convertible note payable, net of unamortized discounts
of $113,018 and $0, respectively
|
|
|
1,382
|
|
|
|
—
|
|
|
Total Liabilities
|
|
|
2,228,850
|
|
|
|
2,267,322
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 51 and 51 shares issued and outstanding, respectively
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.001 par value; 400,000,000 shares authorized;
307,681,187 and 285,398,000 shares issued and outstanding, respectively
|
|
|
307,681
|
|
|
|
285,398
|
|
|
Additional paid-in capital
|
|
|
208,819,576
|
|
|
|
207,701,091
|
|
|
Accumulated deficit
|
|
|
(208,073,669
|
)
|
|
|
(207,518,871
|
)
|
|
Total Stockholders’ Equity
|
|
|
1,053,588
|
|
|
|
467,618
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
3,282,438
|
|
|
$
|
2,734,940
|
|
T
he
accompanying notes are an integral part of these unaudited consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three Months Ended
December
31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
2,950
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS ASSOCIATED WITH REVENUES
|
|
|
3,300
|
|
|
|
—
|
|
|
Gross Loss
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
Mine and exploration costs
|
|
|
102,513
|
|
|
|
105,317
|
|
|
Professional fees
|
|
|
49,504
|
|
|
|
51,393
|
|
|
Administrative consulting fees
|
|
|
65,000
|
|
|
|
65,000
|
|
|
Legal and accounting fees
|
|
|
78,348
|
|
|
|
28,241
|
|
|
Other general and administrative
|
|
|
75,193
|
|
|
|
459,978
|
|
|
Total Operating Expenses
|
|
|
370,558
|
|
|
|
706,929
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(370,908
|
)
|
|
|
(706,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
15
|
|
|
Gain on derivative instrument
|
|
|
3,693
|
|
|
|
—
|
|
|
Loss on debt extinguishment
|
|
|
(84,270
|
)
|
|
|
—
|
|
|
Interest expense – related party
|
|
|
(2,456
|
)
|
|
|
—
|
|
|
Interest expense
|
|
|
(100,859
|
)
|
|
|
(73,831
|
)
|
|
Total Other Income (Expense)
|
|
|
(183,890
|
)
|
|
|
(73,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(554,798
|
)
|
|
|
(780,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(554,798
|
)
|
|
$
|
(780,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Per Share Data:
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share - basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
296,586,821
|
|
|
|
278,053,877
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three Months Ended
December
31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(554,798
|
)
|
|
$
|
(780,745
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Warrant and option expense
|
|
|
22,367
|
|
|
|
377,379
|
|
|
Stock-based compensation
|
|
|
102,207
|
|
|
|
—
|
|
|
Amortization of debt discounts
|
|
|
80,254
|
|
|
|
55,216
|
|
|
Amortization of deferred financing costs
|
|
|
—
|
|
|
|
4,701
|
|
|
Depreciation
|
|
|
16,470
|
|
|
|
10,627
|
|
|
Loss on debt extinguishment
|
|
|
84,270
|
|
|
|
—
|
|
|
Gain on derivative instrument
|
|
|
(3,693
|
)
|
|
|
—
|
|
|
Net change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(30,016
|
)
|
|
|
(24,176
|
)
|
|
Inventory
|
|
|
(71,567
|
)
|
|
|
(33,254
|
)
|
|
Deposits
|
|
|
—
|
|
|
|
(19,149
|
)
|
|
Accounts payable
|
|
|
135,369
|
|
|
|
12,446
|
|
|
Accrued compensation – related parties
|
|
|
110,000
|
|
|
|
—
|
|
|
Accrued liabilities
|
|
|
(59,547
|
)
|
|
|
(3,664
|
)
|
|
Interest payable
|
|
|
12,743
|
|
|
|
25,556
|
|
|
Net Cash Used in Operating Activities
|
|
|
(155,941
|
)
|
|
|
(375,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of furniture and equipment
|
|
|
(787
|
)
|
|
|
(40,225
|
)
|
|
Restricted cash
|
|
|
(1
|
)
|
|
|
—
|
|
|
Net Cash Used in Investing Activities
|
|
|
(788
|
)
|
|
|
(40,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
92,000
|
|
|
|
250,000
|
|
|
Increase in finance contracts
|
|
|
32,773
|
|
|
|
22,968
|
|
|
Payments on finance contracts
|
|
|
(5,214
|
)
|
|
|
(2,221
|
)
|
|
Net Cash Provided by Financing Activities
|
|
|
119,559
|
|
|
|
270,747
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(37,170
|
)
|
|
|
(144,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD
|
|
|
71,393
|
|
|
|
218,513
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
34,223
|
|
|
$
|
73,972
|
|
(Continued)
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
|
|
Three Months Ended
December
31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,315
|
|
|
$
|
172
|
|
|
Cash paid for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Common
stock issued for third party payables
|
|
|
217,431
|
|
|
|
—
|
|
|
Common
stock issued for related party payables
|
|
|
102,849
|
|
|
|
—
|
|
|
Common
stock issued on settlement of debt and accrued interest
|
|
|
307,982
|
|
|
|
—
|
|
|
Common
stock issued for inventory
|
|
|
378,430
|
|
|
|
—
|
|
|
Common
stock issued for prepayment of services
|
|
|
120,337
|
|
|
|
—
|
|
|
Debt
discount from derivative liabilities
|
|
|
92,000
|
|
|
|
—
|
|
|
Reclassification
of warrants from equity to derivative liabilities
|
|
|
205,526
|
|
|
|
—
|
|
|
Warrants issued with debt
|
|
|
—
|
|
|
|
73,053
|
|
|
Warrants issued for deferred financing costs
|
|
|
—
|
|
|
|
17,111
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Business, Operations and Organization
The accompanying unaudited interim financial
statements of El Capitan Precious Metals, Inc. (“El Capitan” or the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the financial statements
do not include all information and footnotes required by generally accepted accounting principles in the United States (“GAAP”)
for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed interim financial
statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation.
Interim operating results are not necessarily indicative of results that may be expected for the fiscal year ending September 30,
2016, or for any subsequent period. These interim financial statements should be read in conjunction with the Company’s
audited financial statements and notes thereto for the fiscal year ended September 30, 2015, included in the Company’s Annual
Report on Form 10-K, filed with the SEC on January 11, 2016 (the “2015 Form 10-K”). The consolidated balance
sheet at September 30, 2015, has been derived from the audited financial statements included in the 2015 Form 10-K.
Notes to the financial statements which would
substantially duplicate the disclosure contained in the audited financial statements for fiscal 2015 as reported in the 2015 Form
10-K have been omitted. Certain prior year amounts have been reclassified to conform to the current year presentation.
El Capitan Precious Metals, Inc., a Nevada
corporation, together with its consolidated subsidiaries are collectively hereinafter referred to as the “Company,”
“our” or “we.”
The Company is an exploration stage company
as defined by the SEC Industry Guide 7 as the Company has no established reserves as required under the Industry Guide 7. We are
principally engaged in the exploration of precious metals and other minerals on the El Capitan property located near Capitan,
New Mexico (the “El Capitan Property”). The Company is in mineral exploration state activities and has obtained permitting
from the State of New Mexico Minerals and Mining Division to expand the Company’s mineral exploration activities and the
process of entering into the production stage of operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries El Capitan Precious Metals, Inc., a Delaware corporation; Gold and
Minerals Company, Inc., a Nevada corporation; and El Capitan, Ltd., an Arizona corporation. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
Basis of Presentation and Going Concern
The Company's consolidated financial statements
are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United
States of America ("GAAP"), and have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities in the normal course of business. The Company currently has a minimum source of revenue to cover
its costs. The Company has incurred a loss of $554,798 for the three months ended December 31, 2015 and has a working capital
deficit of $1,478,962 as of December 31, 2015. These conditions raise substantial doubt about the Company’s ability to continue
as a going concern.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
To continue as a going concern, the Company
is dependent on achievement of cash flow and profits from entering the production stage of operations. The Company does not have
adequate liquidity to fund its current operations, meet its obligations and continue as a going concern. The Company secured working
capital loans with net proceeds of $92,000 in December 2015 and $156,000 in January 2016 to assist in financing its activities
in the near term. The Company is also pursuing other financing alternatives, including short-term operational strategic financing
or equity financing, to fund its activities until it can achieve cash flow and profits from its operations.
The Company’s 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 should the Company be unable to continue in existence.
Fair Value of Financial Instruments
The fair values of the Company’s financial
instruments, which include cash, investments, accounts payable, accrued expenses and notes payable, approximate their carrying
amounts because of the short maturities of these instruments or because of restrictions.
Management Estimates and Assumptions
The preparation of the Company’s 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 financial statements and the reported amounts of expenses during the reporting periods. Management
makes these estimates using the best information available at the time the estimates are made; however, actual results could differ
materially from these estimates.
Cash and Cash Equivalents
The Company considers those short-term, highly
liquid investments with maturities of three months or less as cash and cash equivalents. At times, cash in banks may be in excess
of the FDIC limits. The Company has no cash equivalents.
Inventory
Inventories include mineralized material stockpile,
concentrate and iron ore inventories, as described below. Inventories are carried at the lower of average cost or net realizable
value, in the case of mineralized material stockpile and concentrate inventories and minimal cost is attributable to the iron
ore inventories. The net realizable value of mineralized material stockpile inventories represents the estimated future sales
price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the
product to sale. Concentrate inventories are carried at the lower of full cost of production or net realizable value based on
current metals prices. Write-downs of inventory will be reported as a component of production costs applicable to sales.
Ore Stockpile Inventory
Ore stockpile inventory represents mineralized
materials that have been mined and are available for further processing. Costs are allocated to mineralized material stockpile
inventories based on relative values of material stockpiled and processed using current mining costs incurred up to the point
of stockpiling the mineralized material.
Concentrates
Concentrates inventory include metal concentrates
located either at the Company’s El Capitan Property mine site or in transit to a customer’s site for additional processing
and/or refining. Inventories consist of mineralized material that contains mainly gold and silver mineralization. Concentrate
inventories are carried at the lower of full cost of production or market based on current metals prices.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Iron Ore
The high grade iron ore material is inventoried
and valued at the lower of cost or market. Any proceeds from the sale of iron ore will offset the cost of mining the mineralized
ore.
Restricted Cash
Restricted cash consists of two certificates
of deposits in favor of the New Mexico Minerals and Mining Division for a total of $74,500. The amount was increased $59,495 during
the fiscal year ended September 30, 2015 with the issuance of the Company’s expanded mining permit and is posted as a financial
assurance for required reclamation work to be completed on mined acreage.
Exploration Property Costs
Exploration property costs are expensed as
incurred until such time as economic reserves are quantified. To date the Company has not established any proven or probable reserves
on the El Capitan Property. The Company has capitalized $1,864,608 of exploration property acquisition costs reflecting its investment
in the El Capitan Property.
Derivative
Financial Instruments
The Company does not use
derivative instruments to hedge exposures to cash flow or, market 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, 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.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based Compensation
El Capitan recognized stock-based administrative
compensation aggregating $124,574 and $377,379 for common stock options and common stock issued to administrative personnel and
consultants during the three months ended December 31, 2015 and 2014, respectively.
Revenue Recognition
When revenue is generated from operations,
it will be recognized in accordance with FASB ASC 605. In general, the Company will recognize revenue when (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and
(iv) collectability is reasonably assured. Revenue generated and costs incurred under this agreement will be reported on a net
basis in accordance with FASB ASC 605-45. There was nominal revenue generated for the Company’s quarter ended December 31,
2015 from test loads of iron ore to the construction contractor.
Recently Issued Accounting Pronouncements
Other than as set forth below, management does
not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on the accompanying financial statements.
In April 2015, the FASB issued ASU No. 2015-03
“
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”
ASU No. 2015-03 provides that an entity: (1) present debt issuance costs in the balance sheet as a direct deduction from the
carrying value of the associated debt liability rather than as an asset; and (2) report amortization of debt issuance costs as
interest expense. Company has elected to adopt ASU No. 2015-03 has of December 31, 2015 and has no material impact on the financial
statements.
In July 2015, the FASB has issued Accounting
Standards Update (ASU) No. 2015-11,
“Inventory (Topic 330): Simplifying the Measurement of Inventory
.” Topic
330, “
Inventory
,” currently requires an entity to measure inventory at the lower of cost or market. Market
could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments
do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply
to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity
should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update more
closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December
15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The Company adopted of ASU 2015-11 as of
December 31, 2015, and has no material impact on the consolidated financial statements.
In November 2015 the FASB issued Accounting
Standards Update (ASU) 2015-17,
Income Taxes (Topic 740) Related to the Balance Sheet Classification of Deferred Taxes
which will require entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified
balance sheet. The ASU simplifies the current guidance (ASC 740-10-45-4), which requires entities to separately present
DTAs and DTLs as current and noncurrent in a classified balance sheet. The ASU is effective for annual reporting periods
beginning on or after December 15, 2016, and interim periods within those annual periods. The Board decided to allow all
entities to early adopt the ASU for financial statements that had not been issued. The Company has adopted this ASU at December
31, 2015, which has no material impact on the consolidated financial statements.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01,
“Financial Instruments
- Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10).”
The amendments require
all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those
accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments also
require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose
the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the
requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet for public business entities. This guidance is effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not
expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its
consolidated financial statements.
NOTE 2 – RELATED PARTY TRANSACTIONS
Consulting Agreements
Effective May 1, 2009, El Capitan has informal
arrangements with two individuals, one of whom is an officer and is also director of El Capitan, pursuant to which such individuals
serve as support staff for the functioning of the home office and all related corporate activities and projects. Effective June
1, 2010, El Capitan amended the aggregate monthly payments with these two individuals under the arrangements to $16,667. Effective
August 1, 2013, the monthly compensation was increased to $21,667. There are no written agreements with these individuals. Total
administrative consulting fees expensed under these informal agreements for the three months ended December 31, 2015 and 2014
was $65,000. Accrued and unpaid compensation under these arrangements of $50,000 was recorded in accrued compensation –
related parties at September 30, 2015. During the three months ended December 31, 2015, the Company issued 1,663,186 common shares
to the president of the Company as payment of accrued compensation of $108,975. The fair value of the stock was $102,849 and the
Company recorded a gain on the debt conversion of $6,126.
In January 2012, the Company retained Management
Resource Initiatives, Inc., a company controlled by the Chief Financial Officer and a Director of the Company, for services with
a monthly consulting fee of $10,000, which monthly fee was increased to $15,000 effective August 1, 2013. Total consulting fees
expensed to Management Resource Initiatives, Inc. for the three months ended December, 2015 and 2014 was $45,000. MRI had accrued
and unpaid compensation of $180,000 recorded in accrued compensation – related parties at December 31, 2015.
On February 4, 2015, the Company signed a note
payable with Management Resource Initiatives, Inc. for $30,000 at 18% interest per annum and due February 4, 2016. The Company
issued 200,000 shares of restricted common stock of the Company to Management Resource Initiatives, Inc. as incentive for the
loan (see Note 5).
NOTE 3 – INVENTORY
The following table provides
the components of inventory as of December 31, 2015 and September 30, 2015:
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore stockpiles
|
|
$
|
502,276
|
|
|
$
|
52,279
|
|
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of
December 31, 2015 and September 30, 2015:
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Compensation and consulting
|
|
$
|
74,000
|
|
|
$
|
62,000
|
|
|
Mining costs
|
|
|
100,000
|
|
|
|
203,626
|
|
|
Accounting and legal
|
|
|
205,450
|
|
|
|
277,000
|
|
|
Interest
|
|
|
54,902
|
|
|
|
50,138
|
|
|
|
|
$
|
434,352
|
|
|
$
|
592,764
|
|
During the three months ended December 31,
2015, the Company issued
2,147,273 common shares as
payment of accrued legal fees of $118,100. The fair value of the stock was $113,805 and the Company recorded a gain on the debt
conversion of $4,295. The Company issued shares as payment of accrued mining cost of $103,626.
Note
5 - Derivative Instrument Liabilities
The fair market value of the derivative instruments
liabilities at December 31, 2015, was determined to be $293,8
33 using
the Black-Scholes Option Pricing Model with the following assumptions: (1) risk free interest rate of 0.977% to 1.219%, (2) remaining
contractual life of 1.8 to 2.64 years, (3) expected stock price volatility of 106.443% to 122.915%, and (4) expected dividend
yield of zero. Based upon the change in fair value, the Company has recorded a gain on derivative instruments for the three months
ended December 31, 2015,
of $3,693 and a corresponding decrease in the derivative instruments liability.
|
|
|
Derivative
|
|
|
Derivative
|
|
|
Gain for three
|
|
|
|
|
Liability as of
|
|
|
Liability as of
|
|
|
months ended
|
|
|
|
|
September 30, 2015
|
|
|
December 31, 2015
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
—
|
|
|
$
|
157,743
|
|
|
$
|
(157,743
|
)
|
|
Convertible notes
|
|
|
—
|
|
|
|
136,090
|
|
|
|
(136,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
293,833
|
|
|
|
(293,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to note discount at inception
|
|
|
|
|
|
|
|
|
|
|
92,000
|
|
|
Amount allocated to equity at inception
|
|
|
|
|
|
|
|
|
|
|
205,526
|
|
|
Gain on derivatives
|
|
|
|
|
|
|
|
|
|
$
|
3,693
|
|
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.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Warrants
During the three months ended December 31,
2015, the Company did not issue any warrants. A total of 4,861,344 warrants are tainted due to the convertible note issued in
December, 2015 and were reclassified from equity to derivative liabilities.
NOTE 6 – NOTES PAYABLE
Under an agreement with Logistica U.S. Terminals,
LLC (“Logistica”) dated February 28, 2014, Logistica agreed to remit a $400,000 payment on the Company’s behalf
that represented the remaining balance of the Company’s purchase price for a heavy ore trailing separation line to be used
for processing of mineralized material at the El Capitan Property mine site. The Company previously remitted $100,000 toward the
purchase of such equipment. In consideration for Logistica remitting such payment, the Company agreed to deliver a $400,000 promissory
note to Logistica and issued 2,500,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock
Incentive Plan. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of the
Company’s proceeds from sale of iron extracted from mineralized material as part of the Company’s exploration activities.
The relative fair value of the common stock was determined to be $222,222 and was recorded as a discount to the promissory note
that was amortized to interest expense over the expected life of the note through August 31, 2015. During the fiscal years ended
September 30, 2015 and 2014, amortization expense of $158,559 and $63,663 was recognized, respectively. The outstanding balance
under this note payable was $400,000 and the unamortized discount on the note payable was $0 as of December 31, 2015. Accrued
interest on the note at December 31, 2015 was $33,090.
On September 8, 2014, the Company received
an advance of $250,000 under a $500,000 Note and Warrant Purchase Agreement entered into on October 17, 2014 (the “2014
Note”). The 2014 Note is secured by the net proceeds received by the Company from its sale of tailings separated from iron
recovered by the Company at the El Capitan Property, carries an interest rate of 8% per annum, and matured on July 17, 2015. The
remaining $250,000 was advanced to the Company on October 17, 2014. On October 17, 2014, the Company also issued warrants to purchase
an aggregate of 882,352 shares of common stock in connection with the 2014 Note, of which 735,294 were issued to the lender and
147,058 were issued to a third party, at a purchase price equal to $0.17 per share. The relative fair value of the 735,294 warrants
was determined to be $73,053 and was recorded as a discount to the promissory note and amortized to interest expense over the
life of the note through July 17, 2015. During the fiscal year ended September 30, 2015, amortization expense of $73,053 was recognized.
The fair value of the 147,058 warrants was determined to be $17,111 and was recorded as deferred financing costs and amortized
to interest expense over the life of the note through July 17, 2015. During the fiscal year ended September 30, 2015, amortized
expense of $17,111 was recognized.
On August 24, 2015, the 2014 Note was amended
to extend the maturity date from July 17, 2015 to January 17, 2016 (the “Amended 2014 Note”). In consideration of
the extension, the Company cancelled the original warrant issued October 17, 2014 and issued a new common stock purchase warrant
to purchase 4,714,286 shares (subject to adjustment) at an exercise price of $0.07 per share. Under the amended arrangement, if
the loan should be paid in full prior to the amended maturity date, the number of shares issuable upon exercise of the common
stock purchase warrants will be reduced to an amount equal to 4,714,286 multiplied by the number of days that the principal balance
was outstanding during the extension period expressed as a percentage of the total days in the extension period. The Company evaluated
the modification under ASC 470-50 and determined that it was a substantial modification that qualified as an extinguishment of
debt. The fair value of the 4,714,286 amended warrants was determined to be $220,703 and was expensed as a loss on debt extinguishment
in the year ended September 30, 2015. The outstanding balance under the Amended 2014 Note is $500,000. Accrued interest on Amended
2014 Note at December 31, 2015 was $8,219. The Company is currently in negotiations to further extend the maturity date of the
Amended 2014 Note.
On December 2, 2015, the warrants issued under
note and to a third party, became tainted with the issuance of a convertible note to an accredited investor and were required
to be fair valued. The fair value of the warrants on December 2, 2015 using the Black-Scholes option pricing model was determined
to be $205,526.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 4, 2015, the Company signed two
notes with different investors for $63,000 at 18% interest per annum and due February 4, 2016. The Company issued 200,000 shares
of restricted common stock of the Company to each investor as incentive for the loan. One of these investors is affiliated with
the Company and provided $30,000 of the $63,000 loaned funds. See
Note 2
. Accrued interest on the notes at December
31, 2015 was $10,253. The relative fair value of the common stock was determined to be $21,211 and was recorded as discounts to
the promissory notes that are being amortized to interest expense over the life of the notes. During the three months ended December
31, 2015, amortization expense of $6,253 was recognized. The outstanding balance under these notes payable was $63,000 and the
unamortized discounts on the notes payable was $2,723 as of December 31, 2015.
On April 16, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender has committed to loan the Company a total of $200,000
in installments. Installments on this loan have been advanced as follows:
|
Installment Date
|
|
|
Amount
|
|
|
|
|
|
|
|
|
April 17, 2015
|
|
$
|
50,000
|
|
|
May 15, 2015
|
|
$
|
50,000
|
|
|
June 16, 2015
|
|
$
|
25,000
|
|
|
July 20, 2015
|
|
$
|
25,000
|
|
|
August 18, 2015
|
|
$
|
25,000
|
|
|
September 18, 2015
|
|
$
|
25,000
|
|
The loan accrues interest at 10% per year,
with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the
lender a security interest in the AuraSource Heavy Metals Separation System located on the El Capitan Property. As additional
consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the note holder.
The relative fair value of the common stock was determined to be $98,349 and was recorded as discounts to the promissory note
tranches as of the date received and are being amortized to interest expense over the life of the note tranches. During the three
months ended December 31, 2015, amortization expense of $72,619 was recognized as the note obligation and a portion of accrued
interest was retired with the issuance of 3,772,728 restricted shares of the Company’s common stock. The note and accrued
interest retired aggregated $207,500 and the fair value of the stock was $215,423. The Company recorded a loss on the debt conversion
of $7,923. Remaining accrued interest on the retired note tranches at December 31, 2015 was $2,466.
On July 14, 2015, the Company entered into
an agreement to finance a portion of its insurance premiums in the amount of $15,116 at an interest rate of 8.76% with equal payments
of $1,573 including interest, due monthly beginning July 14, 2015 and continuing through April 14, 2016. In August 2015, an increase
in premium of $1,876 occurred due an increase in coverage and the remaining payments increased to $1,815. As of December 31, 2015,
the outstanding balance under this note payable was $7,130.
On August 31, 2015, the Company entered into
an agreement with a third party financing source pursuant to which the lender has committed to loan the Company $100,000 for working
capital. As an incentive for the financing, the Company issued 2,000,000 shares of restricted common stock of the Company; however
the investor decided not to accept the shares and they were returned to the Company’s transfer agent and returned to the
treasury. The loan had an annual interest rate of 2%, required that one-half (1/2) of the gross revenues which the Company may
receive from its mining activities be used to repay the principal and accrued interest, and was due November 15, 2015. Repayment
of principal and accrued interest was satisfied in full in December 2015 in exchange for 3,500,000 restricted shares of the Company’s
common stock. The principal and accrued interest retired aggregated $100,482 and the fair value of the stock was $187,250. The
Company recorded a loss on the debt conversion of $86,768.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 2, 2015 (the “Effective Date”),
the Company entered into a Securities Purchase Agreement (the “SPA”) for two $114,400 convertible notes with an accredited
investor for an aggregate principal amount of $228,800, with an annual interest rate of 9%. Each note contains an original issuance
discount (“OID”) of $10,400 and related legal and due diligence costs of $12,000. The net proceeds received by the
Company was $92,000. The maturity date on the first note is December 2, 2017. The note is convertible into shares of the Company’s
common stock at any time beginning on the date which is 181 days following the Effective Date. The conversion price is equal to
55% of the lowest trading price of the Company’s common stock as reported on the QTCQB for the ten prior trading days and
may include the day of the Notice of Conversion under certain circumstances. The Company agreed to reserve an initial 5,033,000
shares of common stock for conversions under the note (the “Share Reserve”). We also agreed to adjust the Share Reserve
to ensure that it always equals at least four times the total number of shares of common stock that is actually issuable if the
entire note were to be converted. The note has an embedded conversion option that qualifies for derivative accounting and bifurcation
under ASC 815-15
Derivatives and Hedging
as originally drafted. The fair value of the embedded conversion features
as a derivative liability was determined using the Black-Scholes option pricing model and was determined to be $224,068 and a
one day derivative loss was recognized of $132.068. The OID interest of $10,400 and related loan costs of $12,000 was recorded
as a discount to the note and is being amortized over the life of the loan as interest expense. For the three months ended December
31, 2015, the discount amortization was $1,382 and the loan discount balance at December 31, 2015 was $113,018. The note balance
at December 31, 2015 was $114,400 and accrued interest was $874.
The note was subsequently amended on January
12, 2016. The Company may redeem the note by prepaying in full the unpaid principal and interest on the note, upon notice, any
time prior to 180 days after the Effective Date. Any prepayment is at 140% face amount outstanding and accrued interest. The redemption
must be closed and paid for within three business days of the Company sending the redemption demand. The note may not be prepaid
and redeemed after the 180
th
day.
On November 19, 2015, the Company entered into
an agreement to finance insurance premiums in the amount of $26,031 at an interest rate of 7.05% with equal payments of $2,687
including interest, due monthly beginning December 21, 2015 and continuing through September 21, 2016. As of December 31, 2015,
the outstanding balance under this note payable was $26,031.
On December 31, 2015, the Company entered into
an agreement to finance additional insurance premiums in the amount of $6,741.70 at an interest rate of 8.752% with equal payments
of $2,283 including interest, due monthly beginning February14, 2016 and continuing through April 14, 2016. As of December 31,
2015, the outstanding balance under this note payable was $6,741.70
The components of
the notes payable, including the note payable to a related party, at December 31, 2015 are as follows:
|
|
|
Principal
|
|
|
Unamortized
|
|
|
|
|
|
|
Amount
|
|
|
Discount
|
|
|
Net
|
|
CURRENT NOTES PAYABLE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
972,903
|
|
|
|
(1,369
|
)
|
|
|
971,534
|
|
Notes payable – related party
|
|
|
30,000
|
|
|
|
(1,354
|
)
|
|
|
28,646
|
|
|
|
$
|
1,002,903
|
|
|
$
|
(2,723
|
)
|
|
$
|
1,000,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM CONVERTIBLE NOTE PAYABLE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
$
|
114,400
|
|
|
$
|
(113,018
|
)
|
|
$
|
1,382
|
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of the notes payable, including
the note payable to a related party, at September 30, 2015 are as follows:
|
|
|
Principal
|
|
|
Unamortized
|
|
|
|
|
|
|
Amount
|
|
|
Discount
|
|
|
Net
|
|
CURRENT NOTES PAYABLE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
1,245,344
|
|
|
|
(77,157
|
)
|
|
|
1,168,187
|
|
Notes payable – related party
|
|
|
30,000
|
|
|
|
(4,438
|
)
|
|
|
25,562
|
|
|
|
$
|
1,275,344
|
|
|
$
|
(81,595
|
)
|
|
$
|
1,193,749
|
NOTE 7 – FAIR VALUE MEASUREMENTS
U.S. accounting standards require disclosure
of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. In September 2006, the FASB issued new
accounting guidance, which establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”)
and expands disclosures about fair value measurements. The Company previously partially adopted this guidance for all instruments
recorded at fair value on a recurring basis. In the second quarter of fiscal 2010, the Company adopted the remaining provisions
of the guidance for all non-financial assets and liabilities that are not re-measured at fair value on a recurring basis. The
adoption of these provisions did not have an impact on the Company’s consolidated financial statements.
Fair value standards define fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Additionally, the standards establish a three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use
of unobservable inputs. The three levels of the fair-value hierarchy are described as follows:
Level 1 – Quoted prices are available
in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions
for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level
1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than
quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3 – Pricing inputs include significant
inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies
that result in management’s best estimate of fair value.
The following table sets forth by level with
the fair value hierarchy the Company’s assets and liabilities measured at fair value as of:
|
December 31, 2015:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,833
|
|
|
$
|
293,833
|
|
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Related Party
In January 2012, the Company retained Management
Resource Initiatives, Inc. (“MRI”) for managing and overseeing the process of marketing and selling the El Capitan
Property and performing other services aimed at furthering the Company's strategic goals pursuant to an unwritten consulting arrangement.
Under this arrangement, the Company pays MRI a current monthly consulting fee of $15,000. MRI is a related party because it is
a corporation that is wholly-owned by John F. Stapleton, who is the Company’s Chief Financial Officer and a Director. MRI
had accrued and unpaid compensation of $180,000 recorded in accrued compensation – related parties at December 31, 2015.
Purchase Contract with Glencore
AG
On March 10, 2014, the Company entered into
a life-of-mine off take agreement with Glencore AG (“Glencore”) for the sale of iron extracted from mineralized material
at the El Capitan Property (such agreement is referred to herein as the “Glencore Purchase Contract”). Under the terms
of the Glencore Purchase Contract, the Company agreed to sell to Glencore, and Glencore agreed to purchase from the Company, iron
that meets the applicable specifications from the El Capitan Property mine. Payment for the iron is to be made pursuant an irrevocable
letter of credit in favor of the Company. The purchase price is based on an index price less an applicable discount. Either party
may terminate the Glencore Purchase Contract following a breach by the other party that remains uncured for a specified period
after receipt of written notice. Because of current market iron ore prices, the contract has not been implemented or terminated.
Agreements with Logistica U.S. Terminals, LLC
In anticipation of, and in conjunction with,
the Glencore Purchase Contract, the Company entered into a Master Services Agreement (the “Master Agreement”) and
corresponding Iron Ore Processing Agreement (the “Processing Agreement”) with Logistica U.S. Terminals, LLC (“Logistica”),
each effective as of February 28, 2014. Pursuant to these agreements, Logistica agreed to, among other things, provide the logistics
required for the Company to fulfill its obligations under the Glencore Purchase Contract, to assist the Company in financing the
costs of processing and delivering iron under the Glencore Purchase Contract, and to provide and/or manage the processing that
iron. Because of current market iron ore prices, the contract has not been implemented and has not been terminated.
The contracts with Logistica were superseded
by a new agreement entered into on January 5, 2016.
See Note 11
.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Master Agreement with Logistica
Under the Master Agreement, the Company agreed
that Logistica will be the exclusive logistics agent for the purpose of moving iron extracted from mineralized material at the
El Capitan Property from the El Capitan Property to Glencore’s designated exporting port or final destination. Logistics
services include operational supplement chain management and supervision of all logistics providers and operations from the El
Capitan Property mine to the vessel loading port. Logistics services do not include obtaining and maintaining operating, environmental
and mining permits, and land and mineral rights, which are the responsibility of the Company. Also under the Master Agreement,
Logistica is required to use its best efforts to establish an operating credit line capable of funding all processing and delivery
costs and, upon opening and funding such a credit line, will disburse as needed all operating costs contemplated under the Glencore
Purchase Contract. The Company is required to reimburse Logistica for all such amounts, without interest, out of payments received
from Glencore in respect of the purchase of the iron.
In consideration for Logistica’s funding
and logistic services, the Company will pay Logistica a percentage of the Company’s profits from the sale of iron under
the Glencore Purchase Contract. If any sale of iron under the Glencore Purchase Contract results in a loss instead of a profit,
as a result of a decrease in index pricing of iron or otherwise, then the Company is required to make up the shortfall out of
profits from any precious metals processing and refining business, to the extent of available profits there from, or otherwise.
If iron index prices drop below the price in place at inception of the Glencore Purchase Contract by more than 5%, then the Company
will be required to provide Logistica with a greater percentage of profits commensurate with and equivalent to Logistica’s
loss of profit share due to the reduction in iron index prices. At inception of the Glencore Purchase Contract, the Platts 62%
FE CFR China iron index price was $121.24 and at December 31, 2015 was $39.60. In the event of a future sale of the El Capitan
Property, the Company must either ensure that its agreements with Logistica are assumed by the purchaser or pay Logistica a termination
fee.
Either party may terminate the Master Agreement
following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Master Agreement will
otherwise continue indefinitely.
Because of current market iron ore prices,
the contract has not been implemented and has not been terminated.
The contracts with Logistica were superseded
by a new agreement entered into on January 5, 2016.
See Note 11
.
Processing Agreement with Logistica
Under the Processing Agreement, Logistica has
agreed to deliver iron processing equipment to the El Capitan Property and to use it best efforts to process, to contract specification,
stock pile and load for delivery iron that the Company has contracted to sell to Glencore under the Glencore Purchase Contract.
In order to do so, Logistica will act as the Company’s turn-key contractor for all of the Company’s iron processing
and delivery activities at the El Capitan Property. In consideration for such services, the Company will pay Logistica a set price
per metric ton of iron that is processed in accordance with the Glencore Purchase Contract specifications and purchased by Glencore.
As additional compensation for entering into the Processing Agreement, the Company issued 4,000,000 shares of common stock to
a designee of Logistica under the Company’s 2005 Stock Incentive Plan valued at $800,000. The shares vested immediately
upon grant and the $800,000 was expensed in full during the fiscal year ended September 30, 2014.
Either party may terminate the Processing Agreement
following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Processing Agreement
will otherwise continue indefinitely.
Because of the drop in the market iron ore
prices under the contract price, the contract has not been implemented during the current fiscal year and has not been terminated
as of December 31, 2015.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The contracts with Logistica were superseded
by a new agreement entered into on January 5, 2016.
See Note 11
.
NOTE 9 – 2015 EQUITY INCENTIVE PLAN
On October 8, 2015, the Board of Directors of
the Company approved the El Capitan Precious Metals, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan
enables the Board of Directors to grant to employees, directors, and consultants of the Company and its subsidiaries a variety
of forms of equity-based compensation, including grants of options to purchase shares of common stock, shares of restricted common
stock, restricted stock units, stock appreciation rights, other stock-based awards and performance-based awards. At the time it
was adopted, the maximum number of shares of common stock of the Company that could be issued or awarded under the 2015 Plan was
15,000,000 shares. On October 14, 2015, the Company filed Form S-8 Registration Statement No. 333-207399 with the SEC registering
the 15,000,000 shares of common stock authorized for issuance pursuant to the 2015 Plan. On December 15, 2015, the Board of Directors
of the Company adopted Amendment No. 1 to the 2015 Plan, pursuant to which the number of shares of common stock issuable under
the 2015 Plan was increased from 15,000,000 to 23,000,000. On January 14, 2016, the Company filed Form S-8 Registration Statement
No. 333-208991 with the SEC registering the additional 8,000,000 shares of common stock authorized for issuance pursuant to the
2015 Plan.
NOTE 10 – STOCKHOLDERS’ EQUITY
Preferred Stock Issuances
During the three months ended December 31,
2015, the Company did not issue any shares of preferred stock.
Common Stock Issuances
During the three months
ended December 31, 2015, the Company:
|
|
(i)
|
Issued 700,000 shares of restricted common stock and 963,186 shares of S-8 common stock
for accrued compensation payable to an officer valued at $102,849 on the date of issuances;
|
|
|
(ii)
|
Issued 2,147,273 shares of S-8 common stock for accrued legal services at a market value
of $113,805;
|
|
|
(iii)
|
Issued 11,200,000 shares of S-8 common stock to our contract miners at a market value of
$704,600, including payment of $103,626 for accrued mining cost, payment of $102,208 for services, payment of $378,430 for
inventory, and a prepayment of $120,337 for services; and
|
|
|
(iv)
|
Issued 7,272,728 shares of restricted common stock to two investors for the retirement of
notes payable at a market value of $402,673.
|
Options
Aggregate options expense recognized was $22,367
for the three months ended December 31 2015.
During the three months ended December 31,
2015, the Company:
|
|
(i)
|
Granted to two directors of the Company, pursuant to the 2015 Plan, each a ten-year stock
option to purchase 250,000 shares of the Company’s common stock, all of which vested immediately, at an exercise price
of $0.05 per share for 250,000 options and the other 250,000 options at $0.062 per share. The fair value of the options was
determined to be $22,367 using the Black-Scholes option pricing model and was expensed as warrant and option costs during
the three months ended December 31, 2015.
|
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Warrants
During the three months ended December 31,
2015, the Company did not issue any warrants.
The Company utilizes the Black-Scholes option
pricing model to estimate the fair value of its warrant and option awards. The following table summarizes the significant assumptions
used in the model during the three months ended December 31, 2015:
|
Exercise prices
|
|
|
$0.02475 - $0.17
|
|
Expected volatilities
|
|
|
106.443% - 122.915%
|
|
Risk free interest rates
|
|
|
0.888% - 1.68%
|
|
Expected terms
|
|
|
1.8 - 10.0 years
|
|
Expected dividends
|
|
|
—
|
Stock option activity, both within and outside
the 2015 Plan, and warrant activity for the three months ended December 31, 2015, are as follows:
|
|
|
|
Stock Options
|
|
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
|
10,387,500
|
|
|
$
|
0.28
|
|
|
|
4,861,344
|
|
|
$
|
0.07
|
|
Granted
|
|
|
500,000
|
|
|
|
0.056
|
|
|
|
—
|
|
|
|
—
|
|
Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
10,887,500
|
|
|
$
|
0.27
|
|
|
|
4,861,344
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
10,887,500
|
|
|
$
|
0.27
|
|
|
|
4,861,344
|
|
|
$
|
0.07
|
The range of exercise prices and remaining
weighted average life of the options outstanding at December 31, 2015 were $0.05 to $1.02 and 5.51 years, respectively. The aggregate
intrinsic value of the outstanding options at December 31, 2015 was $450.
The range of exercise prices and remaining
weighted average life of the warrants outstanding at December 31, 2015 were $0.07 to $0.17 and 2.61 years, respectively. The aggregate
intrinsic value of the outstanding warrants at December 31, 2015 was $0.
The Company adopted its 2015 Incentive Equity
Plan (the “2015 Plan”) pursuant to which the Company reserved and registered 23,000,000 shares for stock and option
grants. As of December 31, 2015, there were 8,689,541 shares available for grant under the 2015 Plan, excluding the 10,887,500
options outstanding.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – SUBSEQUENT EVENTS
On December 15, 2015, the Board of Directors
of the Company adopted Amendment No. 1 to the 2015 Plan, pursuant to which the number of shares of common stock issuable under
the 2015 Plan was increased from 15,000,000 to 23,000,000. On January 14, 2016, the Company filed Form S-8 Registration Statement
No. 333-208991 with the SEC registering the additional 8,000,000 shares of common stock authorized for issuance pursuant to the
2015 Plan.
The Securities Purchase Agreement dated December
2, 2015, was subsequently amended during January 2016. The Company may redeem the note by prepaying in full the unpaid principal
and interest on the note, upon notice, any time prior to 180 days after the Effective Date. Any prepayment is at 140% face amount
outstanding and accrued interest. The redemption must be closed and paid for within three business days of the Company sending
the redemption demand. The note may not be prepaid and redeemed after the 180
th
day.
On January 5, 2016, the Company entered into
a new agreement with Logistica U.S. Terminals, LLC (“Logistica”). Under the agreement the Company will provide to
Logistica concentrated ore to their specifications at the mine site. Logistica will transport, process, and refine the precious
metals concentrates to sell to precious metals buyers. This agreement is in addition to and complements the previously announced
agreement for the sale of iron ore for use in construction. The terms of the new agreement provide for the recovery of hard costs
related to the concentrates by both parties prior to the distribution of profits. The agreement also provides for the future issuance
of 10,000,000 shares of the Company’s restricted common stock and the elimination of a $100,000 accrued liability to Logistica
for prior services rendered. The issuance date of the restricted shares is undetermined at this time. The new agreement supersedes
the previous agreements with Logistica.
On January 20, 2016 (the “Effective Date”),
the Company extended a promissory note from January 17, 2016 to September 19, 2016. In consideration for the extension, the Company
granted a three year fully vested warrant to purchase 471,429 shares of Common Stock at the exercise price of $0.051, the closing
price on the date of the agreed extension agreement.
On January 26, 2016 (the “Effective Date”),
the Company entered into a Securities Purchase Agreement (the “SPA”) for a $180,000 convertible note with an accredited
investor, with an annual interest rate of 7%. The note contains an original issuance discount (“OID”) of $18,000 and
related legal costs of $6,000. The net proceeds received by the Company was $156,000. The maturity date of the note is January
26, 2017. Interest is due on or before the maturity date. The Company may redeem the note by prepaying the unpaid principal and
interest on the note, upon notice, any time prior to 180 days after the Effective Date. If redemption is (i) prior to the 30
th
day the note is in effect (including the 30
th
day), the redemption will be 105% of the unpaid principal amount
and accrued interest; (ii) if the redemption is on the 31
st
day up to and including the 60
th
day the note
is in effect, the redemption price will be 115% of the unpaid principle amount of the note along with any accrued interest; (iii)
if the redemption is on the 61
st
day up to and including the 120
th
day the note is in effect, the redemption
price will be 135% of the unpaid principle amount of the note along with any accrued interest; if the redemption is on the 121
st
day up to and including the 180
th
day the note is in effect, the redemption price will be 150% of the unpaid
principle amount of the note along with any accrued interest. The redemption must be closed and paid for within three business
days of the Company sending the redemption demand. The note may not be prepaid and redeemed after the 180
th
day. The
note is convertible into shares of the Company’s common stock at any time beginning on the date which is 181 days following
the Effective Date. The conversion price is equal to 55% of the lowest trading price of the Company’s common stock as reported
on the QTCQB for the ten prior trading days and may include the day of the Notice of Conversion under certain circumstances. The
Company agreed to reserve an initial 10,800,000 shares of common stock for conversions under the note (the “Share Reserve”).
We also agreed to adjust the Share Reserve to ensure that it always equals at least three times the total number of shares of
common stock that is actually issuable if the entire note were to be converted. The note has an embedded conversion option which
qualifies for derivative accounting and bifurcation under ASC 815-15
Derivatives and Hedging
. Pursuant to ASC 815,
the Company will recognize the fair value of the embedded conversion feature as a derivative liability when the Note becomes convertible
on July 24, 2016.The OID interest of $18,000 and related loan costs of $6,000 was recorded as a discount to the note and is being
amortized over the life of the loan as interest expense.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 1, 2016, the Company issued 3,500,000
shares of S-8 common stock to our contract miners at a market value of $148,750 based on an estimated budget for March 2016 of
$127,000.
On March 16, 2016, El Capitan Precious Metals,
Inc. (the “Company”) entered into an Equity Purchase Agreement (the “Purchase Agreement”) with River North
Equity, LLC (“River North”), pursuant to which the Company may from time to time, in its discretion, sell shares of
its common stock to River North for aggregate gross proceeds of up to $5,000,000. Unless terminated earlier, River North’s
purchase commitment will automatically terminate on the earlier of the date on which River North shall have purchased Company
shares pursuant to the Purchase Agreement for an aggregate purchase price of $5,000,000 or March 16, 2018. The Company has no
obligation to sell any shares under the Purchase Agreement.
As provided in the Purchase Agreement, the
Company may require River North to purchase shares of common stock from time to time by delivering a put notice to River North
specifying the total purchase price for the shares to be purchased (the “Investment Amount”); provided
there must be a minimum of ten trading days between delivery of each put notice. The Company may determine the Investment
Amount, provided that such amount may not be more than the average daily trading volume in dollar amount for the Company’s
common stock during the 10 trading days preceding the date on which the Company delivers the applicable put notice. Additionally,
such amount may not be lower than $5,000 or higher than $150,000 without prior approval of River North. The number of shares issuable
in connection with each put notice will be computed by dividing the applicable Investment Amount by the purchase price for such
common stock. River North will have no obligation to purchase shares under the Purchase Agreement to the extent that such purchase
would cause River North to own more than 9.99% of the Company’s common stock.
For each share of the Company’s common
stock purchased under the Purchase Agreement, River North will pay a purchase price equal to 85% of the Market Price, which
is defined as the average of the two lowest closing bid prices on the OTCQB Marketplace, as reported by Bloomberg
Finance L.P., during the five consecutive Trading Days including and immediately prior to the date on which the applicable put
notice is delivered to River North (the “Pricing Period”). If the Company is not deposit/withdrawal at custodian (“DWAC”)
eligible, River North will pay a purchase price equal to 80% of the Market Price, and if the Company is under Depository Trust
Company (“DTC”) “chill” status, River North will pay a purchase price equal to 75% of the Market Price.
On the first trading day after the Pricing Period, River North will purchase the applicable number of shares subject to customary
closing conditions, including without limitation a requirement that a registration statement remain effective registering the
resale by River North of the shares to issued pursuant to the Purchase Agreement as contemplated by the Registration Rights Agreement
described below.
The Purchase Agreement contains covenants,
representations and warranties of the Company and River North that are typical for transactions of this type. In addition, the
Company and River North have granted each other customary indemnification rights in connection with the Purchase Agreement. The
Purchase Agreement may be terminated by the Company at any time.
Also on March 16, 2016, the Company entered
into a Registration Rights Agreement with River North requiring the Company to prepare and file, within 45 days of the effective
date of the Registration Rights Agreement, a registration statement registering the resale by River North of the shares to be
issued under the Purchase Agreement for the shares, to use commercially reasonable efforts to cause such registration statement
to become effective, and to keep such registration statement effective until (i) three months after the last closing of a sale
of shares under the Purchase Agreement, (ii) the date when River North may sell all the shares under Rule 144 without volume limitations,
or (iii) the date River North no longer owns any of the shares.
As partial consideration for the above-mentioned
agreements, on March 16, 2016, the Company issued to River North a “commitment” convertible promissory note (the “Commitment
Note”) in the principal amount of $35,000. The Commitment Note accrues interest at a rate of 10% per annum and matures on
March 16, 2017. Upon the registration statement contemplated by the Registration Rights Agreement being declared effective, $10,000
of the principle balance of the Commitment Note and accrued interest thereon will be extinguished and deemed to have been repaid.
EL
CAPITAN PRECIOUS METALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
After 180 days following the date of the Commitment
Note, or earlier upon the occurrence of an event of default that remains uncured, the Commitment Note may be converted into shares
of the Company’s common stock at the election of River North at a conversion price per share equal 60% of the Current Market
Price, which is defined as the lowest closing bid price for the common stock as reported by Bloomberg, LP for the 10 trading days
ending on the trading day immediately before the conversion. Among other things, a failure by the Company to file the registration
statement contemplated by the Registration Rights Agreement with 45 days following the issuance of the Commitment Note will constitute
an event of default thereunder.
On March 16, 2016, the Company entered into
a Securities Purchase Agreement with River North pursuant to which the Company issued a convertible promissory note (the “Bridge
Note”) to River North, in the original principal amount of $90,000, in consideration of the payment by River North of a
purchase price equal to $81,000, with $9,000 retained by River North as original issue discount. The Company issued the Bridge
Note on March 16, 2016. The Bridge Note accrues interest at a rate of 10% per annum and matures on March 16, 2017.
The Bridge Note provides for conversion rights
and events of default on substantially the same terms and conditions as the Commitment Note; provided however that an event of
default under the Bridge Note will also be triggered if the Company fails to use at least 15% of the proceeds from each sale of
shares under the Purchase Agreement to prepay a portion of the Bridge Note.
25,000,000
Shares
Common Stock
_________________________________
PROSPECTUS
_________________________________
April 20,
2016