As used in this Annual Report on Form 10-K,
unless otherwise indicated, the terms “we,” “us,” “our” and “the Company” refer
to Inception Mining, Inc., a Nevada corporation.
This Annual Report on Form 10-K/A (“Form 10-K/A”)
is being filed as Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed
with the Securities and Exchange Commission on May 3, 2016 (the “Original Filing”).
The restatements are being made in accordance
with ASC 250, “Accounting Changes and Error Corrections.” The disclosure provision of ASC 250 requires a company that
corrects an error to disclose that its previously issued financial statements have been restated, a description of the nature
of the error, the effect of the correction on each financial statement line item and any per share amount affected for each prior
period presented, and the cumulative effect on retained earnings (deficit) in the statement of financial position as of the beginning
of the each period presented.
The effects of the adjustments on the Company’s
previously issued 2015 consolidated financial statement are summarized as follows:
The adjustments above reflect restatement
due to revised valuations of derivative liabilities on convertible notes payable and the associated debt discounts being recognized
during the year, together with the change in the derivative liability and the amortization of the debt discounts during the year.
The adjustments to the derivative liabilities were caused by an error in the VWAP calculation used to determine the valuation
of the derivative liabilities.
For the convenience of the reader, this
Form 10-K/A sets forth the Original Filing in its entirety. However, this Form 10-K/A only amends and restates the Items described
above, and we have not modified or updated other disclosures presented in our Original Filing, with the exception of a few typographical
errors in the original file. Accordingly, this Amendment No. 1 does not reflect events occurring after the filing of our Original
Filing and does not modify or update those disclosures affected by subsequent events, except as specifically referenced herein.
Information not affected by this restatement is unchanged and reflects the disclosures made at the time of the Original Filing
on May 3, 2016.
PART
I
ITEM
1. BUSINESS
As
used in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,” “us,” “our”
and “the Company” refer to Inception Mining, Inc., a Nevada corporation.
Forward-Looking
Statements and Associated Risks. This Annual Report on Form 10-K contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, (1) discussions about mineral resources and mineralized material, (2) our projected
sales and profitability, (3) our growth strategies, (4) anticipated trends in our industry, (5) our future financing plans, (6)
our anticipated needs for working capital, (7) our lack of operational experience and (8) the benefits related to ownership of
our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations,
are generally identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend,” or “project” or the
negative of these words or other variations on these words or comparable terminology. These statements constitute forward-looking
statements. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results,
performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied
by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as well as in this filing generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined
under Item 1A below and other risks and matters described in this filing and in our other SEC filings. In light of these risks
and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur as
projected. We do not undertake any obligation to update any forward-looking statements.
The
Company
Overview
We
are a mining company that was formed in Nevada on July 2, 2007. As a mining company, we are engaged in the production of previous
metals. Our activities are not limited to production and they also include acquisition, exploration, and development of mineral
properties, primarily for gold, from owned mining properties. Inception Mining has acquired two projects, as described below.
Our target properties are those that have been the subject of historical exploration. We have generated revenue from mining operations.
On
October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held
Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession
through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico,
S.A. de C.V. and holds other mining concessions. Its workings include several historical underground mining operations dating
back to the early Mayan and Spanish occupation.
On
January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock with a record date of January
11, 2016. The reverse split has not yet been approved and announced by FINRA.
On
February 25, 2013, the Company acquired certain real property and the associated exploration permits and mineral rights commonly
known as the U.P. and Burlington Gold Mine (“UP & Burlington”) pursuant to that certain asset purchase agreement
entered between the Company, its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary,
Inception Development Inc. (the “Subsidiary”) on one hand, and Inception Resources on the other hand, dated February
25, 2013 (the “Asset Purchase Agreement”). We are presently in the exploration stage at UP & Burlington. UP &
Burlington contains two Federal patented mining claims which Inception Resources acquired for the purpose of the exploration and
potential development of gold on the 40 acres which comprises UP & Burlington.
As
part of our initial Plan of Operations for UP & Burlington, we have two-phases. During Phase I, we have obtained the necessary
permitting to make an additional access road and surface improvements. We have implemented a bulk sample project on the surface
of a 2,500 foot per day-lighted vein to depths of 40-60 feet. We plan to implement a Confirmatory Core Drilling Program that will
be (NI43-101) compliant, with Vein Definition and Ore Valuation. In Phase II, we plan to contract an underground mining and operations
plan, expand portal development leveraging existing underground access and implement underground mining to a depth based on optimizing
costs versus processed ore value. There is no guarantee that we will be successful in implementing either Phase I or Phase II.
The
Company and its independent consultants have developed a detailed exploration-drilling program to confirm and expand mineralized
zones in these mines and collect additional environmental and technical data. The first phase of confirmation and expansion will
begin in 2015 and the Company intends to continue evaluation, metallurgical testing, engineering and environmental programs and
studies during 2016 and soon thereafter update the historic feasibility study and environmental permit applications.
We
also plan to review opportunities and acquire additional mineral properties with current or historic precious and base metal mineralization
with meaningful exploration potential.
Competition
and Mineral Prices
We
compete with many companies in the mining business, including larger, more established mining companies with substantial capabilities,
personnel and financial resources. There is a limited supply of desirable mineral lands available for claim-staking, lease or
acquisition in the United States and other areas where we may conduct exploration activities. Because we compete with individuals
and companies that have greater financial resources and larger technical staffs, we may be at a competitive disadvantage in acquiring
desirable mineral properties. From time to time, specific properties or areas that would otherwise be attractive to us for exploration
or acquisition are unavailable due to their previous acquisition by other companies or our lack of financial resources. Competition
in the mining industry is not limited to the acquisition of mineral properties but also extends to the technical expertise to
find, advance, and operate such properties; the labor to operate the properties; and the capital needed to fund the acquisition
and operation of such properties. Competition may result in our company being unable not only to acquire desired properties, but
to recruit or retain qualified employees, to obtain equipment and personnel to assist in our exploration activities or to acquire
the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these
resources would have a material adverse effect on our results of operation and business. The mineral exploration industry is highly
fragmented, and we are a very small participant in this sector. Many of our competitors explore for a variety of minerals and
control many different properties around the world. Many of them have been in business longer than we have and have established
strategic partnerships and relationships and have greater financial resources than we do.
There
is significant competition for properties suitable for gold exploration. As a result, we may be unable to continue to acquire
interests in attractive properties on terms that we consider acceptable. We will be subject to competition and unforeseen limited
sources of supplies in the industry in the event spot shortages arise for supplies such as dynamite, and certain equipment such
as drill rigs, bulldozers and excavators that we will need to conduct exploration. If we are unsuccessful in securing the products,
equipment and services we need we may have to suspend our exploration plans until we are able to secure them.
Market
for Gold
In
the event that gold is produced from our property, we believe that wholesale purchasers for the gold would be readily available,
as many purchasers of precious metals exist in the United States and abroad. Among the largest are Handy & Harman, Engelhard
Industries and Johnson Matthey, Ltd. Historically, these markets are liquid and volatile. Wholesale purchase prices for precious
metals can be affected by a number of factors, all of which are beyond our control, including but not limited to:
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in the supply of, demand, and market price for gold;
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mining
activities of our competitors;
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sale
or purchase of gold by central banks and for investment purposes by individuals and financial institutions;
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interest
rates;
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currency
exchange rates;
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inflation
or deflation;
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fluctuation
in the value of the United States dollar and other currencies; and
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political
and economic conditions of major gold or other mineral-producing countries.
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If
we find gold that is deemed of economic grade and in sufficient quantities to justify removal, we may seek additional capital
through equity or debt financing to build a mine and processing facility, or enter into joint venture or other arrangements with
large and more experienced companies better able to fund ongoing exploration and development work, or find some other entity to
mine our property on our behalf, or sell or lease our rights to mine the gold. Upon mining, the ore would be processed through
a series of steps that produces a rough concentrate. This rough concentrate is then sold to refiners and smelters for the value
of the minerals that it contains, less the cost of further concentrating, refining and smelting. Refiners and smelters then sell
the gold on the open market through brokers who work for wholesalers including the major wholesalers listed above. We have not
found any gold as of today, and there is no assurance that we will find any gold in the future.
Compliance
with Government Regulation
Mining
Operations
UP
and BURLINGTON (Lemhi County, Idaho)
Mine
operation is governed by both federal and state law. We will be required to comply with all regulations, rules and directives
of governmental authorities and agencies applicable to the exploration of minerals in the United States generally. Federal laws,
such as those governing the purchase, transport or storage of explosives, and those governing mine safety and health, also apply.
The Company plans to obtain a Lemhi County Conditional Use Permit, an Idaho Department of Lands Surface Reclamation Bond and permitting
for the U.S. Forest Service Access Road.
When
this mine comes into production we will also be subject to the rules and regulations of the Mine Safety and Health Administration,
a Division of the United States Department of Labor.
CLAVO
RICO (Honduras, Central America)
The
mining operations in Honduras are governed by the national entities Honduran Institute of Geology and Mines (INHGEOMIN) and Ministry
of Natural Resources and Environment (SERNA). The Clavo Rico mine has operated under a grandfathered concession granted many years
ago and has now complied with all regulatory requirements of the above agencies and the recently adopted Honduran Mining laws
(The General Mining Law was approved by Legislative Decree No. 238-2012, dated January 23, 2013), including employee health and
safety regulations, Environmental requirements, water discharge requirements, and potential reclamation requirements. As the above
ministries have only limited operational experience and the new mining law has only recently been adopted, the interpretation,
adoption and enforcement of many regulations are evolving. Other local ordinances (municipality of El Corpus) minor and most regulatory
efforts are as a result of interaction between the mine and the local populace, (examples include use of the mine haul road for
local traffic, restricting mine operations to daylight hours for noise considerations, watering for dust control, etc.) where
no regulation or law exists, we have attempted to duplicate best practices as required in other business climates.
These
laws and regulations are continually changing and, as a general matter, are becoming more restrictive. The Company’s policy
is to conduct our business in a manner that safeguards public health and mitigates the environmental effects of our business activities.
To comply with these laws and regulations, we have made, and in the future may be required to make, capital and operating expenditures.
Environmental
Laws
Mining
activities at the Company’s properties are also subject to various environmental laws, both federal and state, including
but not limited to the federal National Environmental Policy Act, CERCLA (as defined below), the Resource Recovery and Conservation
Act, the Clean Water Act, the Clean Air Act and the Endangered Species Act, and certain Idaho state laws governing the discharge
of pollutants and the use and discharge of water. Various permits from federal and state agencies are required under many of these
laws. Local laws and ordinances may also apply to such activities as construction of facilities, land use, waste disposal, road
use and noise levels.
These
laws and regulations are continually changing and, as a general matter, are becoming more restrictive. The Company’s policy
is to conduct our business in a manner that safeguards public health and mitigates the environmental effects of our business activities.
To comply with these laws and regulations, we have made, and in the future may be required to make, capital and operating expenditures.
The
Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), imposes strict, joint, and
several liabilities on parties associated with releases or threats of releases of hazardous substances. Liable parties include,
among others, the current owners and operators of facilities at which hazardous substances were disposed or released into the
environment and past owners and operators of properties who owned such properties at the time of such disposal or release. This
liability could include response costs for removing or remediating the release and damages to natural resources. Our properties,
because of past mining activities, could give rise to potential liability under CERCLA.
Under
the Resource Conservation and Recovery Act (RCRA) and related state laws, mining companies may incur costs for generating, transporting,
treating, storing, or disposing of hazardous or solid wastes associated with certain mining-related activities. RCRA costs may
also include corrective action or cleanup costs.
Mining
operations may produce air emissions, including fugitive dust and other air pollutants, from stationary equipment, such as crushers
and storage facilities, and from mobile sources such as trucks and heavy construction equipment. All of these sources are subject
to review, monitoring, permitting, and/or control requirements under the federal Clean Air Act and related state air quality laws.
Air quality permitting rules may impose limitations on our production levels or create additional capital expenditures in order
to comply with the permitting conditions.
Under
the federal Clean Water Act and the delegated Colorado water-quality program, point-source discharges into waters of the State
are regulated by the National Pollution Discharge Elimination System (NPDES) program. Storm water discharges also are regulated
and permitted under that statute. Section 404 of the Clean Water Act regulates the discharge of dredge and fill material into
Waters of the United States, including wetlands. All of those programs may impose permitting and other requirements on our operations.
The
National Environmental Policy Act (NEPA) requires an assessment of the environmental impacts of major federal actions. The federal
action requirement must be satisfied if the project involves federal land or if the federal government provides financing or permitting
approvals. NEPA does not establish any substantive standards, but requires the analysis of any potential impacts. The scope of
the assessment process depends on the size of the project. An Environmental Assessment (EA) may be adequate for smaller projects.
An Environmental Impact Statement (EIS), which is much more detailed and broader in scope than an EA, is required for larger projects.
NEPA compliance requirements for any of our proposed projects could result in additional costs or delays.
The
Endangered Species Act (ESA) is administered by the U.S. Fish and Wildlife Service of the U.S. Department of Interior. The purpose
of the ESA is to conserve and recover listed endangered and threatened species and their habitat. Under the ESA, endangered means
that a species is in danger of extinction throughout all or a significant portion of its range. The term threatened under such
statute means that a species is likely to become endangered within the foreseeable future. Under the ESA, it is unlawful to take
a listed species, which can include harassing or harming members of such species or significantly modifying their habitat. Future
identification of endangered species or habitat in our project areas may delay or adversely affect our operations.
U.S.
federal and state reclamation requirements often mandate concurrent reclamation and require permitting in addition to the posting
of reclamation bonds, letters of credit or other financial assurance sufficient to guarantee the cost of reclamation. If reclamation
obligations are not met, the designated agency could draw on these bonds or letters of credit to fund expenditures for reclamation
requirements. Reclamation requirements generally include stabilizing, contouring and re-vegetating disturbed lands, controlling
drainage from portals and waste rock dumps, removing roads and structures, neutralizing or removing process solutions, monitoring
groundwater at the mining site, and maintaining visual aesthetics.
Capital
Equipment and Research & Development Expenditures
During
the year ended December 31, 2015, we did not incur any expense related to research and development. Additionally, we are not currently
conducting any research and development activities other than those relating to the possible acquisition of new gold and/or silver
properties or projects of which there is no guarantee. As we proceed with our exploration programs, we may need to engage additional
contractors and consider the possibility of adding additional permanent employees, as well as the possible purchase or lease of
equipment.
Employees
As
of the date of this filing, we currently employ ninety-five (95) full-time employees and generally around twenty-one (21) temporary
employees in the United States and Honduras. We have contracts with various independent contractors and consultants to fulfill
additional needs, including investor relations, exploration, development, permitting, and other administrative functions, and
may staff further with employees as we expand activities and bring new projects on line.
Patents,
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
We
do not currently own any patents or trademarks. Also, we are not a party to any license or franchise agreements, concessions,
royalty agreements or labor contracts arising from any patents or trademarks.
Company
Information
The
public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov. Further information about the
Company may be found at its website: www.inceptionmining.com. The Company makes available its filings to investors, free of charge,
on this website.
RISK
FACTORS
An
investment in our securities involves a high degree of risk. You should consider carefully the following risks, along with all
of the other information included in this report, before deciding to buy our common stock. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also impair our business operations. If we are unable
to prevent events that have a negative effect from occurring, then our business may suffer.
Risks
Relating to Our Company
We
have incurred losses since our inception in 2007 and may never be profitable, which raises doubt about our ability to continue
as a going concern.
Since
our inception in 2007, we have had nominal operations and incurred operating losses. As of December 31, 2015, our accumulated
deficit since inception was $30,353,270. We have substantial current obligations and at December 31, 2015, we had $34,886,375
of current liabilities compared to only $1,140,777 of current assets. Since inception, we have been able to raise only minimal
additional capital, and we have minimal cash on hand. Accordingly, the Company does not have sufficient cash resources or current
assets to pay its current obligations, and we have been meeting many of our obligations through the issuance of our common stock
to our employees, consultants and advisors as payment for the goods and services.
Our
management continues to search for additional financing; however, considering the difficult U.S. and global economic conditions
along with the substantial turmoil in the capital and credit markets, there is a significant possibility that we will be unable
to obtain financing to continue our operations.
As
we are in the beginning stages of our exploration activities on UP & Burlington, and such property has not generated revenue
in the recent past, we expect to incur additional losses in the foreseeable future, and such losses may continue to be significant.
To become profitable, we must be successful in raising capital to continue with our mining efforts, exploration activities, meet
the work commitment requirements on UP & Burlington and Clavo Rico, discover economically feasible mineralization deposits
and establish reserves, successfully develop the properties and finally realize adequate prices on our minerals in the marketplace.
It could be years before we receive any revenues from gold production, if ever. Thus, we may never be profitable.
These
circumstances raise substantial doubt about our ability to continue as a going concern as described in an explanatory paragraph
to our independent registered public accounting firm’s report on our audited financial statements as of and for the year
ended December 31, 2015. If we are unable to continue as a going concern, investors will likely lose all of their investment in
our company.
We
have a limited operating history.
As
an early stage company that has recently made acquisitions, we are subject to all the risks inherent in the initial organization,
financing, expenditures, complications, and delays inherent in a new business. Investors should evaluate an investment in us in
light of the uncertainties encountered by developing companies in a competitive environment. Our business is dependent upon the
implementation of our business plan. There can be no assurance that our efforts will be successful or that we will ultimately
be able to attain profitability. Additionally, the Company’s recent merger with the operating foreign entity was based on
a review of all historical data and potential revenue streams and resources as could be ascertained from the submission of documents
and a thorough review of all data made available. We believe the materials to be accurate and have attempted to discount the valuations
due to perceived risks of foreign operations and the tasks of incorporating a non-public entity into inception.
The
feasibility of mineral extraction from UP & Burlington has not yet been established, as we have not completed exploration
or other work necessary to determine if it is commercially feasible to develop the properties.
UP
& Burlington does not have any proven or probable reserves. A “reserve,” as defined by the SEC, is that part of
a mineral deposit which could 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 extracted and produced.
We have not yet completed our feasibility study with regard to UP & Burlington. As a result, we currently have no reserves
and there are no assurances that we will be able to prove that there are reserves on UP & Burlington.
Exploring
for gold is an inherently speculative business.
Natural
resource exploration, and exploring for gold in particular, is a business that by its nature is very speculative. There is a strong
possibility that we will not discover gold or any other resources that can be mined or extracted at a profit. Even if we do discover
gold or other deposits, the deposit may not be of the quality or size necessary for us to make a profit after extracting it. Few
properties that are explored are ultimately developed into producing mines. Unusual or unexpected geological formations, geological
formation pressures, fires, power outages, labor disruptions, flooding, explosions, cave-ins, landslides, and the inability to
obtain suitable or adequate machinery, equipment or labor are just some of the many risks involved in mineral exploration programs
and the subsequent development of gold deposits.
We
will require significant additional capital to continue our exploration activities, and, if warranted, to develop mining operations.
We
will be required to raise significantly more capital in order to develop UP & Burlington for mining production, assuming economically
viable reserves exist. There is no assurance that our investments in UP & Burlington will be financially productive. We will
also be required to raise significantly more capital in order to fund our Clavo Rico operations. Our ability to obtain necessary
funding depends upon a number of factors, including the price of gold, base metals, and other minerals we are able to mine, the
status of the national and worldwide economy, and the availability of funds in the capital markets. If we are unable to obtain
the required financing in the near future for these or other purposes, our exploration activities would be delayed or indefinitely
postponed, we would likely may lose our lease and options to acquire an ownership interest in UP & Burlington and be unable
to fund our operations at the Clavo Rico mine in Honduras. This would likely lead to failure of our Company. Even if financing
is available, it may be on terms that are not favorable to us, in which case, our ability to become profitable or to continue
operating would be adversely affected. If we are unable to raise funds, the market value of our securities will likely decline,
and our investors may lose some or all of their investment.
The
global financial conditions may have an impact on our business and financial condition in ways that we currently cannot predict.
The
continued pressure on commodities markets and related turmoil in the global financial system may have an impact on our business
and financial position. The recent high costs of consumables may negatively impact costs of our operations. In addition, current
financial market conditions may limit our ability to raise capital through credit and equity markets. As discussed further below,
the prices of the metals that we may produce are affected by a number of factors, and it is unknown how these factors will be
impacted by a continuation of the financial crisis.
Fluctuating
gold and mineral prices could negatively impact our business plan.
The
potential for profitability of our gold and mineral mining operations and the value of any mining properties we may acquire will
be directly related to the market price of gold and minerals that we mine. Historically, gold and other mineral prices have widely
fluctuated, and are influenced by a wide variety of factors, including inflation, currency fluctuations, regional and global demand,
and political and economic conditions. Fluctuations in the price of gold and other minerals that we mine may have a significant
influence on the market price of our common stock and a prolonged decline in these prices will have a negative effect on our results
of operations and financial condition.
Our
business is subject to extensive environmental regulations which may make exploring for or mining prohibitively expensive, and
which may change at any time.
All
of our operations are subject to extensive environmental regulations, which could make exploration expensive or prohibit it altogether.
We may be subject to potential liabilities associated with the pollution of the environment and the disposal of waste products
that may occur as the result of exploring and other related activities on our properties. We may have to pay to remedy environmental
pollution, which may reduce the amount of money that we have available to use for exploration. This may adversely affect our financial
position, which may cause you to lose your investment. If we are unable to fully remedy an environmental problem, we might be
required to suspend operations or to enter into interim compliance measures pending the completion of the required remedy. If
a decision is made to mine our properties and we retain any operational responsibility for doing so, our potential exposure for
remediation may be significant, and this may have a material adverse effect upon our business and financial position. We have
not yet purchased insurance for potential environmental risks (including potential liability for pollution or other hazards associated
with the disposal of waste products from our exploration activities). However, if we mine one or more of our properties and retain
operational responsibility for mining, then such insurance may not be available to us on reasonable terms or at a reasonable price.
All of our exploration and, if warranted, development activities may be subject to regulation under one or more local, state and
federal environmental impact analyses and public review processes. It is possible that future changes in applicable laws, regulations
and permits or changes in their enforcement or regulatory interpretation could have significant impact on some portion of our
business, which may require our business to be economically re-evaluated from time to time. These risks include, but are not limited
to, the risk that regulatory authorities may increase bonding requirements beyond our financial capability. Inasmuch as posting
of bonding in accordance with regulatory determinations is a condition to the right to operate under all material operating permits,
increases in bonding requirements could prevent operations even if we are in full compliance with all substantive environmental
laws.
We
may be denied the government licenses and permits which we need to explore on our properties. In the event that we discover commercially
exploitable deposits, we may be denied the additional government licenses and permits which we will need to mine our properties.
Exploration
activities usually require the granting of permits from various governmental agencies. For example, exploration drilling on unpatented
mineral claims requires a permit to be obtained from the United States Bureau of Land Management, which may take several months
or longer to grant the requested permit. Depending on the size, location and scope of the exploration program, additional permits
may also be required before exploration activities can be undertaken. Prehistoric or Indian grave yards, threatened or endangered
species, archeological sites or the possibility thereof, difficult access, excessive dust and important nearby water resources
may all result in the need for additional permits before exploration activities can commence. As with all permitting processes,
there is the risk that unexpected delays and excessive costs may be experienced in obtaining required permits. The needed permits
may not be granted at all. Delays in or our inability to obtain necessary permits will result in unanticipated costs, which may
result in serious adverse effects upon our business.
The
values of our properties are subject to volatility in the price of gold and any other deposits we may seek or locate.
Our
ability to obtain additional and continuing funding, and our profitability in the event we ever commence mining operations or
sell our rights to mine, will be significantly affected by changes in the market price of gold. Further, the gold deposits that
are recovered from our Clavo Rico mine with also be subject to the volatility in the price of gold. Gold prices fluctuate widely
and are affected by numerous factors, all of which are beyond our control. Some of these factors include the sale or purchase
of gold by central banks and financial institutions; interest rates; currency exchange rates; inflation or deflation; fluctuation
in the value of the United States dollar and other currencies; speculation; global and regional supply and demand, including investment,
industrial and jewelry demand; and the political and economic conditions of major gold or other mineral producing countries throughout
the world, such as Russia and South Africa. The price of gold or other minerals have fluctuated widely in recent years, and a
decline in the price of gold could cause a significant decrease in the value of our properties, limit our ability to raise money,
and render continued exploration and development of our properties impracticable. If that happens, then we could lose our rights
to our properties and be compelled to sell some or all of these rights. Additionally, the future development of our properties
beyond the exploration stage is heavily dependent upon the level of gold prices remaining sufficiently high to make the development
of our properties economically viable. You may lose your investment if the price of gold decreases. The greater the decrease in
the price of gold, the more likely it is that you will lose money.
Our
property titles may be challenged. We are not insured against any challenges, impairments or defects to our mineral claims or
property titles. We have not fully verified title to our properties.
Our
future unpatented claims will be created and maintained in accordance with the federal General Mining Law of 1872. Unpatented
claims are unique U.S. property interests and are generally considered to be subject to greater title risk than other real property
interests because the validity of unpatented claims is often uncertain. This uncertainty arises, in part, out of the complex federal
and state laws and regulations under the General Mining Law. Defending any challenges to our future property titles may be costly,
and may divert funds that could otherwise be used for exploration activities and other purposes. In addition, unpatented claims
are always subject to possible challenges by third parties or contests by the federal government, which, if successful, may prevent
us from exploiting our discovery of commercially extractable gold. Challenges to our title may increase our costs of operation
or limit our ability to explore on certain portions of our properties. We are not insured against challenges, impairments or defects
to our property titles, nor do we intend to carry extensive title insurance in the future. Potential conflicts to our mineral
claims are discussed in detail elsewhere herein.
Honduran
mining operations have increased exposure.
Sustaining
foreign mining operations, such as those in Honduras, comes with increased uncertainty, due to less stable governments, political
interruptions, volatility in taxes and fees, implementation of new laws and regulations, and more. The effect of this exposure
can lead to closure of operations, nationalization, and strikes, all of which are beyond the company’s control. Granting
and maintaining concessions is highly subject to political whim and maintaining the concessions is subject to a number of factors
and variables beyond the company’s control. We do not currently insure against these interruptions but have chosen to structure
our operations to minimize exposure to capital assets by subcontracting major areas of work, and to otherwise keep our financial
exposure limited even at the expense of operation costs and our bottom line.
Foreign
operations involve numerous risks associated with fluctuating exchange rates and other financial risks.
Foreign
operations involve numerous risks associated with fluctuating exchange rates and with increasing taxes and fees associated with
importing of necessary goods, equipment and services not adequately found in country and with exporting of the finished gold doré.
Recent enactment of the Honduran mining laws has helped stabilize the fees, but continual review by the various government operations,
and central bank subject the historical operations to review and could impact our ability to export on a timely basis and/or face
possible fines etc. associated with repatriation of past revenues, etc.
Possible
amendments to the General Mining Law could make it more difficult or impossible for us to execute our business plan.
The
U.S. Congress has considered proposals to amend the General Mining Law of 1872 that would have, among other things, permanently
banned the sale of public land for mining. The proposed amendment would have expanded the environmental regulations to which we
might be subject and would have given Indian tribes the ability to hinder or prohibit mining operations near tribal lands. The
proposed amendment would also have imposed a royalty of 8% of gross revenue on new mining operations located on federal public
land, which might have applied to our future properties. The proposed amendment would have made it more expensive or perhaps too
expensive to recover any otherwise commercially exploitable gold deposits which we might find on our future properties. While
at this time the proposed amendment is no longer pending, this or similar changes to the law in the future could have a significant
impact on our business model.
Market
forces or unforeseen developments may prevent us from obtaining the supplies and equipment necessary to explore for gold and other
resources.
Gold
exploration, and resource exploration in general, demands contractors available for such work, and unforeseen shortages of supplies
and/or equipment could result in the disruption of our planned exploration activities. Current demand for exploration drilling
services, equipment and supplies is robust and could result in suitable equipment and skilled manpower being unavailable at scheduled
times for our exploration program. Fuel prices are extremely volatile as well. We will attempt to locate suitable equipment, materials,
manpower and fuel if sufficient funds are available. If we cannot find the equipment and supplies needed for our various exploration
programs, we may have to suspend some or all of them until equipment, supplies, funds and/or skilled manpower become available.
Any such disruption in our activities may adversely affect our exploration activities and financial condition.
We
may not be able to maintain the infrastructure necessary to conduct exploration activities.
Our
exploration activities depend upon adequate infrastructure. Reliable roads, bridges, power sources, and water supply are important
factors that affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference
in the maintenance or provision of such infrastructure could adversely affect our exploration activities and financial condition.
Our
exploration activities may be adversely affected by the local climates, which could prevent or impair us from exploring our properties
year round.
The
local climate in our area of operations may impair or prevent us from conducting exploration activities on our properties year
round. Because of its rural location and limited infrastructure in this area, our property is generally impassible for several
days each year as a result of significant rain or snow events. Earthquakes, heavy rains, snowstorms, and floods could result in
serious damage to or the destruction of facilities, equipment or means of access to our properties, or may otherwise prevent us
from conducting exploration activities on our properties.
We
do not currently carry any property or casualty insurance.
Our
business is subject to a number of risks and hazards generally, including but not limited to, adverse environmental conditions,
industrial accidents, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory
environment, and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result
in damage to our properties, equipment, infrastructure, personal injury or death, environmental damage, delays, monetary losses
and possible legal liability. You could lose all or part of your investment if any such catastrophic event occurs. We do not carry
any property or casualty insurance at this time (but we will carry all insurances that we are required to by law, such as motor
vehicle and workers’ compensation, plus other coverage that may be in the best interest of the Company). Even if we do obtain
insurance, it may not cover all of the risks associated with our operations. Insurance against risks such as environmental pollution
or other hazards as a result of exploration and operations are often not available to us or to other companies in our business
on acceptable terms. Should any events against which we are not insured actually occur, we may become subject to substantial losses,
costs and liabilities, which will adversely affect our financial condition.
Reclamation
obligations could require significant additional expenditures.
We
are responsible for the reclamation obligations related to any exploratory and mining activities. The satisfaction of current
and future bonding requirements and reclamation obligations will require a significant amount of capital. There is a risk we will
be unable to fund these additional bonding requirements, and further, increases to our bonding requirements or excessive actual
reclamation costs will negatively affect our financial position and results of operation.
Title
to mineral properties can be uncertain, and we are at risk of loss of ownership of our property.
Our
ability to explore and mine future leased and optioned properties depends on the validity of title to that property. These uncertainties
relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, failure to meet statutory
guidelines, assessment work and possible conflicts with other claims not determinable from descriptions of record. Since a substantial
portion of all mineral exploration, development and mining in the United States now occurs on unpatented mining claims, this uncertainty
is inherent in the mining industry. Thus, there may be challenges to the title to future properties, which, if successful, could
impair development and/or operations.
The
probability of a mining claim having the necessary quantity and quality to result in a profitable mining operation is uncertain,
and our claims, even with large investments by us, may never generate a profit.
We
are dependent upon the successful exploration of our mining property and the discovery of valuable mineralization on the property.
All anticipated future revenues would come directly or indirectly from the UP & Burlington and Clavo Rico projects. Should
we fail to locate economically extractable mineralization on our property, or enter into an agreement to option and sell our interests
to some other mining operation, we will have no revenue and our business will fail.
Our
ongoing operations and past mining activities of others are subject to environmental risks, which could expose us to significant
liability and delay, suspension or termination of our operations.
Mining
exploration and exploitation activities are subject to federal, state and local laws, regulations and policies, including laws
regulating the removal of natural resources from the ground and the discharge of materials into the environment. These regulations
mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations
on the generation, transportation, storage and disposal of solid and hazardous waste. Exploration and exploitation activities
are also subject to federal, state and local laws and regulations which seek to maintain health and safety standards by regulating
the design and use of exploration methods and equipment.
Environmental
and other legal standards imposed by federal, state or local authorities are constantly evolving, and typically in a manner which
will require stricter standards and enforcement, and increased fines and penalties for non-compliance. Such changes may prevent
us from conducting planned activities or increase our costs of doing so, which would have material adverse effects on our business.
Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus
causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages that
we may not be able to or elect not to insure against due to prohibitive premium costs and other reasons. Unknown environmental
hazards may exist on UP & Burlington and/or on Clavo Rico, or we may acquire properties in the future that have unknown environmental
issues caused by previous owners or operators, or that may have occurred naturally.
We
could be exposed to significant liability for violations of hazardous substances laws because of the use or presence of such substances
at our project.
Our
mining operations are subject to numerous federal, state, and local statutory and regulatory standards relating to the use, storage,
and disposal of hazardous substances. We use cyanide, propane and industrial lubricants and other substances at our mining locations,
which are or could become classified as hazardous substances. If it is discovered that any hazardous substances have been released
into the environment at or by the project in concentrations that exceed regulatory limits, we could become liable for the investigation
and removal of those substances, regardless of their source and time of release. If we fail to comply with these laws, ordinances
or regulations (or any change thereto), we could be subject to civil or criminal liability, the imposition of liens or fines,
and large expenditures to bring the project into compliance. Furthermore, we may be held liable for the cleanup of releases of
hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release
at that location. The cost of any remediation activities in connection with a spill or other release of such substances could
be significant.
UP
& Burlington and Clavo Rico are subject to royalties on production.
As
part of our purchase of UP & Burlington, we granted a Net Smelter Royalty (“NSR”) of 3%. Additionally, our Clavo
Rico project has a NSR of 5% in addition to a refinery royalty of 3%. In addition, claims made by currently-unknown third parties
for historical royalties may be asserted against us.
Our
industry is highly competitive, attractive mineral lands are scarce, and we may not be able to obtain quality properties.
We
compete with many companies in the mining industry, including large, established mining companies with capabilities, personnel
and financial resources that far exceed our limited resources. In addition, there is a limited supply of desirable mineral lands
available for claim-staking, lease or acquisition in the United States, and other areas where we may conduct exploration activities.
We are at a competitive disadvantage in acquiring mineral properties, since we compete with these larger individuals and companies,
many of which have greater financial resources and larger technical staffs. Likewise, our competition extends to locating and
employing competent personnel and contractors to prospect, develop and operate mining properties. Many of our competitors can
offer attractive compensation packages that we may not be able to meet. Such competition may result in our company being unable
not only to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund
our operation and advance our properties. Our inability to compete with other companies for these resources would have a material
adverse effect on our results of operation and business.
We
depend on our Chief Executive Officer and Chief Financial Officer and the loss of these individuals could adversely affect our
business.
Our
company is completely dependent on our Chief Executive Officer, Michael Ahlin, and our Chief Financial Officer, Trent D’Ambrosio
who are also members of our Board of Directors. As of the date of this report the two are significant to the company. Thus, the
loss of either Ahlin or D’Ambrosio could significantly and adversely affect our business, and certainly the loss of both
of these individuals on or about the same time could result in a complete failure of the Company. We do not carry any life insurance
on the life of Ahlin or D’Ambrosio.
The
nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses
that could materially and adversely affect our operations.
Exploration
for minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result
in the discovery of economically feasible mineralization. Few properties that are explored are ultimately advanced to the stage
of producing mines. We are subject to all of the operating hazards and risks normally incident to exploring for and developing
mineral properties such as, but not limited to:
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economically
insufficient mineralized material;
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fluctuations
in production costs that may make mining uneconomical;
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labor
disputes;
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unanticipated
variations in grade and other geologic problems;
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environmental
hazards;
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water
conditions;
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difficult
surface or underground conditions;
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industrial
accidents, such as personal injury, fire, flooding, cave-ins, and landslides;
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metallurgical
and other processing problems;
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mechanical
and equipment performance problems; and
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decreases
in revenues and reserves due to lower gold and mineral prices.
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Any
of these risks can materially and adversely affect, among other things, the development of properties, production quantities and
rates, costs and expenditures and production commencement dates. We currently have no insurance to guard against any of these
risks. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we
would incur a write-down of our investment in these interests. All of these factors may result in losses in relation to amounts
spent that are not recoverable.
Our
operations are subject to permitting requirements that could require us to delay, suspend or terminate our operations on our mining
property.
Our
operations and exploration activities require permits from the local, state and federal governments. We may be unable to obtain
these permits in a timely manner, on reasonable terms or at all. If we cannot obtain or maintain the necessary permits, or if
there is a delay in receiving these permits, our timetable and business plan for Inception will be adversely affected.
We
may never find commercially viable gold or other reserves on UP and Burlington.
Mineral
exploration and development involve a high degree of risk and few properties that are explored are ultimately developed into producing
mines. We cannot assure you that any future mineral exploration and development activities will result in any discoveries of proven
or probable reserves as defined by the SEC since such discoveries are remote. Nor can we provide any assurance that, even if we
discover commercial quantities of mineralization, a mineral property will be brought into commercial production. Development of
our mineral properties will follow only upon obtaining sufficient funding and satisfactory exploration results.
Mineral
deposit estimates are imprecise and subject to error.
Mineral
deposit estimation calculations may prove unreliable. Assumptions made regarding the supporting data may prove inaccurate and
unforeseen events may lead to further inaccuracies. Sample variability, mining and processing adjustments, environmental changes,
metal price fluctuations, and law and regulation changes are all factors that could lead to deviances from any original estimations.
Despite future investment in exploration activities, there is no guarantee we will locate additional commercially viable ore deposits
or reserves. Most exploration projects do not result in discovery of commercially viable and mineable ore deposits. With little
capital available, we will have to limit our exploration, which decreases the chances of finding a commercially viable ore body.
Even if potentially promising mineralization is identified at UP & Burlington, we may choose to not begin production due to
high extraction costs, low gold prices, or inadequate amount and reduced recovery rates. Further, we may cease our production
operations at Clavo Rico due to high extraction costs, low gold prices, or inadequate amount and reduced recovery rates. If exploration
activities do not suggest a commercially successful prospect, then we may altogether abandon plans to pursue efforts to further
develop these properties.
Historical
production of gold at UP & Burlington and Clavo Rico may not be indicative of the potential for future development or revenue.
Historical
production of gold and minerals from UP & Burlington and Clavo Rico cannot be relied upon as an indication that these mines
will have commercially feasible reserves. Investors in our securities should not rely on historical operations of UP & Burlington
and Clavo Rico as an indication that we will be able to place them into commercial production again. We expect to incur losses
unless and until such time as the properties enter into commercial production and generate sufficient revenue to fund our continuing
operations.
Our
independent auditors have expressed substantial doubt about our ability to continue as a going concern.
In
their audit opinion issued in connection with our consolidated balance sheets as of December 31, 2015 and our related consolidated
statements of operations, deficiency in stockholders’ deficit, and cash flows for the year ended December 31, 2015, our
auditors have expressed substantial doubt about our ability to continue as a going concern given our recurring net losses, negative
cash flows from operations and the limited amount of funds on our balance sheet. We have prepared our financial statements on
a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the
normal course of business. The consolidated financial statements do not include any adjustments that might be necessary should
we be unable to continue in existence. This could make it more difficult to raise capital in the future.
Risks
Associated with Our Common Stock
Trading
on the Over the Counter markets may be volatile and sporadic, which could depress the market price of our common stock and make
it difficult for our stockholders to resell their shares.
Our
common stock is quoted on the OTC Pink tier of the over-the-counter markets administered by OTC Markets Group, Inc under the symbol
“IMII”. Trading in stock quoted on over the counter markets is often thin, volatile, and characterized by wide fluctuations
in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could
depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the over the counter markets
are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of
securities listed on other stock exchanges such as the NASDAQ Stock Market, New York Stock Exchange or American Stock Exchange.
Accordingly, our shareholders may have difficulty reselling any of their shares.
Our
stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations and the FINRA’s
sales practice requirements, which may limit a stockholders’ ability to buy and sell our stock.
Our
stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has
a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and accredited investors. The term accredited investor refers generally to institutions
with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000
or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides
information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide
the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction and monthly account statements showing the market value of each penny stock held in the customers’ account.
The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally
or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from
these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability or willingness of broker-dealers to trade our securities. We believe that the penny
stock rules discourage broker-dealer and investor interest in, and limit the marketability of, our common stock.
Our
common stock may be affected by limited trading volume and price fluctuation which could adversely impact the value of our common
stock.
There
has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will
either develop or be maintained. Our common stock has experienced, and is likely to experience in the future, significant price
and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy
or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations
may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot
predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be
stable or appreciate over time.
FINRA
sales practice requirements may also limit a stockholders’ ability to buy and sell our stock.
In
addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA
rules 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 stock, which may limit the ability to buy and
sell our stock and have an adverse effect on the market value for our shares.
Because
the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling
to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment
to decline.
Our
shares are classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange
Act”) which imposes additional sales practice requirements on broker-dealers who sell our securities in this offering or
in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written
agreement prior from you to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices,
it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your
shares and may cause the value of your investment to decline.
A
decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our
ability to continue operations and we may go out of business.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction
in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct
our planned operations through the sale of equity securities, or convertible debt instruments, a decline in the price of our common
stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest
in our stock. If we are unable to raise the funds we require for all our planned operations, we may be forced to reallocate funds
from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability
to develop new products and continue our current operations. a result, our business may suffer, and not be successful and we may
go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale
of our common stock and we may be forced to go out of business.
Our
stock price may be volatile.
The
stock market in general has experienced volatility that often has been unrelated to the operating performance of any specific
public company. The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response
to various factors, many of which are beyond our control, including the following:
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changes
in our industry;
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competitive
pricing pressures;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel;
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limited
“public float” in the hands of a small number of persons whose sales or lack of sales could result in positive
or negative pricing pressure on the market prices of our common stock;
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sales
of our common stock;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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loss
of any strategic relationship;
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regulatory
developments;
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economic
and other external factors; and
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period-to-period
fluctuations in our financial results.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
We
have never paid a cash dividend on our common stock and we do not anticipate paying any in the foreseeable future.
We
have not paid a cash dividend on our common stock to date, and we do not intend to pay cash dividends in the foreseeable future.
Our ability to pay dividends will depend on our ability to successfully develop one or more properties and generate revenue from
operations. Notwithstanding, we will likely elect to retain any earnings, if any, to finance our growth. Future dividends may
also be limited by bank loan agreements or other financing instruments that we may enter into in the future. The declaration and
payment of dividends will be at the discretion of our Board of Directors.
We
have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited
protections against interested director transactions, conflicts of interest and similar matters.
Recent
federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures
designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted
in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures
that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors’
independence, audit committee oversight and the adoption of a code of ethics. While our Board of Directors has adopted a Code
of Ethics and Business Conduct, we have not yet adopted any of these corporate governance measures and, since our securities are
not listed on a national securities exchange or NASDAQ, we are not required to do so. It is possible that if we were to adopt
some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal
corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct.
For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors,
decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may
be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should
bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Difficulties
we may encounter managing our growth could adversely affect our results of operations.
As
our business needs expand, we may need to hire a significant number of employees. This expansion may place a significant strain
on our managerial and financial resources. To manage the potential growth of our operations and personnel, we will be required
to:
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improve
existing, and implement new, operational, financial and management controls, reporting systems and procedures;
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install
enhanced management information systems; and
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train,
motivate, and manage our employees.
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We
may not be able to install adequate management information and control systems in an efficient and timely manner, and our current
or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable
to manage growth effectively, our business would be seriously harmed.
If
we lose key personnel or are unable to attract and retain additional qualified personnel, we may not be able to successfully manage
our business and achieve our objectives.
We
believe our future success will depend upon our ability to retain our key management, Mr. Ahlin, our Chief Executive Officer,
Mr. D’Ambrosio, our Chief Financial Officer, and Mr. Cluff our Consulting Director. We may not be successful in attracting,
assimilating and retaining our employees in the future.
Offers
or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If
our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding
period, under Rule 144, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly
referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence
of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional
financing through the sale of equity or equity related securities in the future at a time and price that we deem reasonable or
appropriate.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
UP
& Burlington Gold Mine, Salmon, Lemhi County, Idaho
On
February 25, 2013 the Company acquired certain real property and the associated exploration permits and mineral rights commonly
known as the UP and Burlington Gold Mine (“UP & Burlington”) pursuant to an asset purchase agreement. We are presently
in the exploration stage at UP & Burlington. UP & Burlington contains two federal patented mining claims, which Inception
Resources acquired for the purpose of the exploration and potential development of gold on the 40 acres which comprises this property.
Discovered
in 1892, UP & Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP
& Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 3,994 feet. The UP & Burlington
site is located six miles from the city of Salmon; is 0.6 miles away from the closest major road (Ridge Rd.); and is 1.56 miles
away from the closest major power line. We believe Salmon, along with the surrounding County of Lemhi, provides an excellent infrastructure
for our mine. Salmon has a population of 3,122 and Lemhi County has a population of 7,806. In September 2011, heavy maintenance
and right-of-way repair was completed and a new road to UP & Burlington was constructed.
UP
& Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres. Subsequently,
in 1989, a U.S. Forest Survey was performed on the UP & Burlington site confirming that the patented claims cover an area
that is six hundred feet by three thousand feet (600‘x3000’). The Mine’s patented claims remove the challenges
associated when working on U.S. Forest lands, Bureau of Land Management (“BLM”), state or other property types. With
our purchase of UP & Burlington, we have the benefit of working on private land, which requires only a hauling/road permit
to commence significant operations.
The
Company has obtained the necessary permitting, cut additional access roads, made surface improvements, and initiated surface mining
on a 2,500 foot per day lighted vein for bulk sampling, vein definition and ore valuation. In Phase II, we plan to contract an
underground mining and operations plan, expand portal development leveraging existing underground access, and implement underground
mining to a depth based on optimizing costs versus processed ore value. There is no guarantee that we will be successful in implementing
any stage of our plans.
Our
tactical plan includes obtaining a Lemhi County Conditional Use Permit, an Idaho Department of Lands Surface Reclamation Bond,
and permitting for the U.S. Forest Service Access Road, as well as obtaining major contracts such as geotechnical contracts, surface
mining contracts, toll processing contracts and underground mine plan contracts.
The
Company and its independent consultants have developed a detailed exploration-drilling program to confirm and expand mineralized
zones in the Mine and collect additional environmental and technical data. The first phase of confirmation and expansion drilling
began in 2013. The Company intends to continue drilling, metallurgical testing, engineering and environmental programs and studies
and has updated the historic feasibility study and environmental permit applications.
Clavo
Rico Gold Mine, Honduras, Central America
On
October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held
Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession
through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico,
S.A. de C.V. and holds other mining concessions. Its workings include several historical underground mining operations dating
back to the early Mayan and Spanish occupation.
The
Company’s primary mine is located on the 200 hectare Clavo Rico Concession, located in southern Honduras. This mine was
originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía
Minera Cerros del Sur, S. de R.L. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest
and later increased its ownership to 99.5%. This company has since invested over five million dollars in the expansion and development
of the mine and surrounding properties.
Corporate
Headquarters
We
currently maintain our corporate offices at 5330 South 900 East STE 280, Murray, Utah 84117. During the year ended December 31,
2015, we paid monthly rent of approximately $450 for use of a corporate office, which we anticipate will be sufficient until we
commence full operations.
ITEM
3. LEGAL PROCEEDINGS
We
are not aware of any material pending legal proceedings to which we are a party or of which our property is the subject. We also
know of no proceedings to which any of our directors, officers or affiliates, or any registered or beneficial holders of more
than 5% of any class of our securities, or any associate of any such director, officer, affiliate or security holder are an adverse
party or have a material interest adverse to us.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable as the Company conducts no mining operations in the U.S. or its territories.
Notes
to Consolidated Financial Statements
As
of December 31, 2015 and 2014
1.
Nature of Business
Inception
Mining, Inc. (formerly known as Gold American Mining Corp.) was incorporated under the name of Golf Alliance Corporation and under
the laws of the State of Nevada on July 2, 2007. Inception Mining, Inc. is a precious metal mineral acquisition, exploration and
development company. Inception Development, Inc., its wholly owned subsidiary was incorporated under the laws of the State of
Idaho on January 28, 2013.
Golf
Alliance Corporation pursued its original business plan to provide opportunities for golfers to play on private golf courses normally
closed to them due to the membership requirements of the private clubs. During the year ended July 31, 2010, the Company decided
to redirect its business focus toward precious metal mineral acquisition and exploration.
On
March 5, 2010, the Company amended its articles of incorporation to (1) to change its name to Silver America, Inc. and (2) increased
its authorized common stock from 100,000,000 to 500,000,000.
On
June 23, 2010 the Company amended its articles of incorporation to change its name to Gold American Mining Corp.
On
November 21, 2012, the Company implemented a 200 to 1 reverse stock split. Upon effectiveness of the stock split, each shareholder
canceled 200 shares of common stock for every share of common stock owned as of November 21, 2012. This reverse stock split was
effective on February 13, 2013. All share and per share references have been retroactively adjusted to reflect this 200 to 1 reverse
stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the stock
split as if it occurred on the first day of the first period presented.
On
February 25, 2013, Gold American Mining Corp. and its majority shareholder (the “Majority Shareholder”), and its wholly-owned
subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement (the “Asset
Purchase Agreement”) with Inception Resources, LLC, a Utah corporation (“Inception Resources”), pursuant to
which Inception purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock of Inception,
the assumption of promissory notes in the amount of $950,000 and the assignment of a 3% net royalty. Inception Resources was an
entity owned by and under the control of the majority shareholder. This transaction is deemed an asset purchase by entities under
common control. The Asset Purchase Agreement closed on February 25, 2013 (the “Closing”). Inception was a “shell
company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior
to our acquisition of the gold mine pursuant to the terms of the Asset Purchase Agreement. As a result of such acquisition, the
Company’s operations are now focused on the ownership and operation of the mine acquired from Inception Resources. Consequently,
the Company believes that acquisition has caused us to cease to be a shell company as it no longer has nominal operations.
On
May 17, 2013, the Company amended its articles of incorporation to change its name to Inception Mining, Inc. (“Inception”
or the “Company”).
On
October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held
Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession
through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico,
S.A. de C.V. and holds other mining concessions. Pursuant to the agreement, the Company issued of 240,225,901 shares of common
stock of Inception and assumed promissory notes in the amount of $5,488,980 and accrued interest of $3,434,426. Under this merger
agreement, there was a change in control and it has been treated for accounting purposes as a reverse recapitalization with Clavo
Rico, Ltd. being the surviving entity. Its workings include several historical underground operations dating back to the early
Mayan and Spanish occupation.
The
Company’s primary mine is located on the 200 hectare Clavo Rico Concession, located in southern Honduras. This mine was
originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compa
ñí
a
Minera Cerros del Sur, S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest
and later increased its ownership to 99.9%.
2.
Summary of Significant Accounting Policies
Going
Concern -
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated
financial statements during year ended December 31, 2015, the Company incurred net losses of $27,165,344 and provided $34,933
in cash for operating activities. These factors among others indicate that the Company may be unable to continue as a going concern
for a reasonable period of time.
The
Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional
funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or
the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
Management is currently working to make changes
that will result in profitable operations and to obtain additional funding sources to meet the Company’s need for cash during
the next twelve months and beyond.
Principles
of Consolidation -
The accompanying consolidated financial statements include the accounts of Inception Mining, Inc. and its
wholly owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compa
ñí
a
Minera Cerros del R
í
o, S.A. de C.V., and its controlling interest subsidiaries,
Compa
ñí
a Minera Cerros del Sur, S.A. de C.V. and Compa
ñía
Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been eliminated
upon consolidation.
Basis
of Presentation -
The Company prepares its consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America.
Cash
and Cash Equivalents -
The Company considers all highly liquid temporary cash investments with an original maturity of three
months or less to be cash equivalents. At December 31, 2015 and December 31, 2014, the Company had no cash equivalents.
Inventories,
Stockpiles and Mineralized Material on Leach Pads -
Inventories, including stockpiles and mineralized material on leach pads
are carried at the lower of cost or net realizable value. Net realizable value 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. Write-downs of stockpiles, mineralized material on leach pads and inventories to net realizable value are reported as
a component of costs applicable to mining revenue. Cost is comprised of production costs for mineralized material produced and
processed. Production costs include the costs of materials, costs of processing, direct labor, mine site and processing facility
overhead costs, stock-based compensation, and depreciation, amortization and depletion.
Stockpiles
-
Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing.
Stockpiles are measured by estimating the number of tons added and removed from the stockpile. Stockpile tonnages are verified
by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current
mining costs incurred up to the point of stockpiling the material, including applicable overhead, depreciation, and depletion
relating to mining operations, and removed at each stockpile’s average cost per ton.
Mineralized
Material on Leach Pads
-
The Company utilizes a heap leaching process to recover gold from its mineralized material.
Under this method, the mineralized material is placed on leach pads where it is treated with a chemical solution that dissolves
the gold contained in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered.
Costs are added to mineralized material on leach pads based on current mining and processing costs, including applicable depreciation
relating to mining and processing operations. Costs are transferred from mineralized material on leach pads to subsequent stages
of in-process inventories as the gold-bearing solution is processed. The value of such transferred costs of mineralized material
on leach pads is based on the average cost per estimated recoverable ounce of gold on the leach pad.
The
estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured
tons added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.
Although
the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material
placed on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature
of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing
process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated
quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted
for on a prospective basis.
In-process
Inventories
-
In-process inventories represent mineralized materials that are currently in the process of being converted
to a saleable product through the absorption, desorption, recovery (ADR) process. The value of in-process material is measured
based on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued
at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles
and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred
to that point in the process.
Finished
Goods Inventories
-
Finished goods inventories include gold that has been processed through the Company’s ADR
facility and are valued at the average cost of their production.
Exploration
and Development Costs -
Costs of acquiring mining properties and any exploration and development costs are expensed as incurred
unless proven and probable reserves exist and the property is a commercially mineable property in accordance with FASB ASC 930,
Extractive Activities- Mining
. Mine development costs incurred either to develop new gold and silver deposits, expand the
capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred
to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects
are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining
costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable
value and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any
related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value.
The
Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the
prospects for economic productions are reasonably certain.
Capitalized
costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.
Mineral
Rights and Properties -
We defer acquisition costs until we determine the viability of the property. Since we do not have
proven and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration
expenditures are expensed as incurred. We expense care and maintenance costs as incurred.
We
review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment.
Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties
affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current
estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral
claims and properties and possibly require future asset impairment write-downs.
Where
estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability
of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production
method to deplete the mineral rights and properties.
Fair
Value Measurements -
The fair value of a financial instrument is the amount that could be received upon the sale of an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets
are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition,
the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair
value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability
of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level
of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The
carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and
other current assets and liabilities approximate fair value because of their short-term maturity.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the
Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.
Long-Lived
Assets -
We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment.
An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event
the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally
determined based on discounted future cash flows.
Properties,
Plant and Equipment -
We record properties, plant and equipment at historical cost. We provide depreciation and amortization
in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value.
We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for
maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful
lives as follows:
Building
|
|
7
to 15 years
|
Vehicles
and equipment
|
|
3
to 7 years
|
Processing
and laboratory
|
|
5
to 15 years
|
Furniture
and fixtures
|
|
2
to 3 years
|
Reclamation
Liabilities and Asset Retirement Obligations -
Minimum standards for site reclamation and closure have been established for
us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair
value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized
and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated
present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation
and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation
at each mine site.
Revenue
Recognition -
Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable,
the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably
assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable
at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are
credited to costs applicable to mining revenue.
All
accounts receivable amounts are due from a single customer. Substantially all mining revenues recorded in the current period also
related to the same customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically
dependent on a limited number of customers for the sale of its product.
Stock
Issued For Goods and Services -
Common and preferred shares issued for goods and services are valued based upon the fair market
value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.
Stock-Based
Compensation -
For stock-based transactions, compensation expense is recognized over the requisite service period, which is
generally the vesting period, based on the estimated fair value on the grant date of the award.
Loss
per Common Share -
Basic net loss per common share is computed by dividing net loss, less the preferred stock dividends, by
the weighted average number of common shares outstanding. Dilutive loss per share includes any additional dilution from common
stock equivalents, such as stock options and warrants, and convertible instruments, if the impact is not antidilutive. Since the
Company incurred net losses for the periods presented, all equity-linked instruments are considered anti-dilutive. Accordingly,
common share equivalents of 149,562,926 have been excluded from the loss per share calculation.
Comprehensive
Loss -
Comprehensive loss is made up of the exchange differences arising on translating foreign operations and the net loss
for the years ended December 31, 2015 and 2014.
Derivative
Liabilities -
Derivatives liabilities are recorded at fair value when issued and the subsequent change in fair value each
period is recorded in other income (expense) in the consolidated statements of operations. We do not hold or issue any derivative
financial instruments for speculative trading purposes.
Income
Taxes -
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment
of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income
tax expense.
Deferred
income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating
the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent
financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state
and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent
with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance
for deferred tax assets for which the Company does not consider realization of such deferred tax assets to be more likely than
not.
Changes
in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of
any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
Business
Segments
– The Company operates in one segment and therefore segment information is not presented.
Use
of Estimates –
In preparing financial statements in conformity with generally accepted accounting principles, we are
required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual
results could differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized
material on leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties,
deferred tax assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation
and payments, and contingent liabilities.
Non-Controlling Interest Policy
–
Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who
has a controlling interest and consolidates the subsidiary's financial results with its own. The amount of equity relating to
the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of the net income
(loss) relating to the non-controlling interest is separately identified on the statement of operations.
Recently
Issued Accounting Pronouncements –
In July 2015, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.
This ASU provides that an entity that measured inventory by using first-in, first-out or average cost should measure inventory
at the lower of cost and net realizable value. Net realizable value is the estimated selling prices of such inventory in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged
for inventory measured using last-in, first-out or the retail inventory method. The update is effective for fiscal years beginning
after December 15, 2016, including interim periods within these fiscal years. Early application of this ASU is permitted as of
the beginning of an interim or annual reporting period. The Company elected early application of this ASU, which did not have
a material impact on the consolidated financial statements.
In
August 2014, the FASB issued ASU 2014-15. This ASU requires management to assess an entity’s ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the
ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim
periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures
when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement
and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after
the date that the financial statements are issued (or available to be issued). This standard is effective for the fiscal years
ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company
is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable
users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers,
including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments,
and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after
December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance
to determine the impact it will have on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement
to present deferred tax liabilities and assets as current and noncurrent amounts in a classified statement of financial position.
Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent in a statement of financial
position. This standard is effective financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early application is permitted. The Company is evaluating the timing of its adoption of this
ASU. The Company elected early application of this ASU, which did not have a material impact on the consolidated financial statements.
Reclassifications
-
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current
period presentation.
3.
Inventories, Stockpiles and Mineralized Materials on Leach Pads
Inventories,
stockpiles and mineralized materials on leach pads at December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Supplies
|
|
$
|
124,598
|
|
|
$
|
185,385
|
|
Mineralized Material on Leach Pads
|
|
$
|
315,954
|
|
|
$
|
1,518,497
|
|
ADR Plant
|
|
|
206,105
|
|
|
|
-
|
|
Finished Ore
|
|
|
323,329
|
|
|
|
-
|
|
Total Inventories
|
|
$
|
969,986
|
|
|
$
|
1,703,882
|
|
There
were no stockpiles at December 31, 2015 and 2014.
During 2015, the Company evaluated the mineralized
material on the leach pad and determined that all ore placed on the pad prior to January 1, 2015 had dropped below the economically
viable level to recover materials. It was determined that the value of this mineralized material should be written to zero. The
Company recognized a write-down of this mineralized material on the leach pad in the amount of $1,518,497 from its inventory-in-process
amounts.
4.
Derivative Financial Instruments
The
Company adopted the provisions of ASC subtopic 825-10,
Financial Instruments
(“ASC 825-10”) on January 1, 2008.
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets
and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market
in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such
as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC
825-10 establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or
liabilities.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The
carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and
other current assets and liabilities approximate fair value because of their short-term maturity.
As
of December 31, 2015 or December 31, 2014, the Company did not have any items that would be classified as level 1 or 2 disclosures.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
The
derivative liability as of December 31, 2015, in the amount of $26,934,356 has a level 3 classification.
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31, 2015 and 2014:
|
|
Debt
Derivative Liabilities
|
|
|
Warrant
Derivative Liabilities
|
|
|
Total
|
|
Balance, December 31, 2013
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Transfers in upon initial fair value
of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of derivative liabilities
and warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transfers to permanent equity upon conversion
of note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transfers in upon initial
fair value of derivative liabilities
|
|
|
29,683,472
|
|
|
|
106,804
|
|
|
|
29,790,276
|
|
Change in fair value of derivative liabilities
and warrant liability
|
|
|
(
2,868,971
|
)
|
|
|
13,051
|
|
|
|
(
2,855,920
|
)
|
Transfers to permanent equity upon conversion
of note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2015
|
|
$
|
26,814,501
|
|
|
$
|
119,855
|
|
|
$
|
26,934,356
|
|
Net gain for the period included in
earnings relating to the liabilities held at December 31, 2015
|
|
$
|
(
2,868,971
|
)
|
|
$
|
13,051
|
|
|
$
|
(
2,855,920
|
)
|
Net gain for the period included in
earnings relating to the liabilities held at December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Debt
derivatives –
As described in Note 4, the Company issued convertible promissory notes which are convertible into common
stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified
the embedded derivatives related to these notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record
fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.
At
December 31, 2015, the Company marked to market the fair value of the debt derivatives and determined a fair value of $26,814,501.
The Company recorded a gain from change in fair value of debt derivatives of $2,868,971 for the year ended December 31,
2015. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 213.00% to 309.45%, (3) weighted average risk-free interest rate of 0.14%
to 1.06% (4) expected life of 0.10 to 1.94 years, and (5) the quoted market price of the Company’s common stock at each
valuation date.
Based
upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of
ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based
upon earliest issuance date.
Warrant
liabilities –
As described in Note 4, the Company issued warrants in conjunction with the issuance with the Typenex,
JMJ Financial and Firstfire Global Convertible Promissory Notes. These warrants contain certain reset provisions. The accounting
treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception
date (issuance date) and to fair value as of each subsequent reporting date.
At
December 31, 2015, the Company marked to market the fair value of the warrant liability and determined a fair value of $119,855.
The Company recorded a loss from change in fair value of warrant liability of $13,051 for the year ended December 31, 2015.
The fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 339.39% to 377.99%, (3) weighted average risk-free interest rate of 1.31%
to 1.76% (4) expected life of 3.75 to 4.59 years, and (5) the quoted market price of the Company’s common stock at each
valuation date.
Liabilities
measured at fair value on a recurring basis are summarized as follows:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Long-term investments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrant derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
119,855
|
|
|
|
119,855
|
|
Debt derivative
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
26,814,501
|
|
|
|
26,814,501
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,934,356
|
|
|
$
|
26,934,356
|
|
5.
Properties, Plant and Equipment, Net
Properties,
plant and equipment at December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Land
|
|
$
|
11,562
|
|
|
$
|
12,022
|
|
Buildings
|
|
|
2,289,865
|
|
|
|
2,190,374
|
|
Mining Machinery and Equipment
|
|
|
964,651
|
|
|
|
1,255,574
|
|
Office Equipment and Furniture
|
|
|
42,289
|
|
|
|
15,880
|
|
Vehicles
|
|
|
88,160
|
|
|
|
84,910
|
|
|
|
|
3,396,527
|
|
|
|
3,558,760
|
|
Less Accumulated
Depreciation
|
|
|
(1,636,854
|
)
|
|
|
(1,269,030
|
)
|
Total Property,
Plant and Equipment
|
|
$
|
1,759,673
|
|
|
$
|
2,289,730
|
|
During
the years ended December 31, 2015 and 2014, the Company recognized depreciation expense of $328,408 and $390,528, respectively.
6. Mineral Rights and Properties
On October 2, 2015, the Company consummated
a merger with Clavo Rico Ltd. Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central
America. Clavo Rico operates the Clavo Rico mining concession through its subsidiary, Compa
ñí
a
Minera Cerros del Sur, S.A. de C.V. and holds other mining concessions. Its workings include several historical underground operations
dating back to the early Mayan and Spanish occupation. The Company’s primary mine is located on the 200 hectare Clavo Rico
Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish,
and more recently has been operated by Compa
ñí
a Minera Cerros del Sur,
S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased
its ownership to 99.9%. The Company has released its claim on some of the concessions and wrote-off the remaining balance of the
mining rights for these concessions during the year ended December 31, 2015. The Company recognized an impairment of mining rights
of $135,450,
|
|
Mining Rights
|
|
Balance, December 31, 2013
|
|
$
|
225,726
|
|
Accretion of Mining Rights
|
|
|
(9,600
|
)
|
Balance, December 31, 2014
|
|
|
216,126
|
|
Accretion of Mining Rights
|
|
|
(80,676
|
)
|
Impairment of Mining Rights
|
|
|
(135,450
|
)
|
Balance, December 31, 2015
|
|
$
|
-
|
|
7.
Mine Reclamation Liability
The
Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various
portions of our site after mining and mineral processing operations are completed. These reclamation efforts are conducted in
accordance with plans reviewed and approved by the appropriate regulatory agencies.
The fair value of the long-term liability
of $77,716 and $29,637 as of December 31, 2015 and 2014, respectively, for our obligation to reclaim our mine facility is based
on our most recent reclamation plan, as revised, submitted and approved by the Honduran Institute of Geology and Mines (INHGEOMIN)
and Ministry of Natural Resources and Environment (SERNA). Such costs are based on management’s current estimate of then
expected amounts for the remediation work, assuming the work is performed in accordance with current laws and regulations and
using a risk free rate of 3.74% and an inflation rate of 2%. It is reasonably possible that, due to uncertainties associated with
the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate
cost of reclamation and remediation could change in the future. We periodically review the accrued reclamation liability for information
indicating that our assumptions should change.
The
increases in the reclamation liability in 2015 and 2014 were related to the expansion of the heap leach facility and related infrastructure.
Changes to the asset retirement obligation
were as follows:
|
|
2015
|
|
|
2014
|
|
Balance, Beginning of Year
|
|
$
|
29,637
|
|
|
$
|
22,991
|
|
Liabilities incurred
|
|
|
48,079
|
|
|
|
6,646
|
|
Disposal
|
|
|
-
|
|
|
|
-
|
|
Balance, End of Year
|
|
$
|
77,716
|
|
|
$
|
29,637
|
|
8.
Accrued Liabilities
Accrued
liabilities at December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Accrued Liabilities
|
|
$
|
725,897
|
|
|
$
|
122,221
|
|
Accrued Salaries and Benefits
|
|
|
144,651
|
|
|
|
57,514
|
|
Advances Payable
|
|
|
258,041
|
|
|
|
-
|
|
Smelter Royalties Payable
|
|
|
13,154
|
|
|
|
-
|
|
Advances Payable - related parties
|
|
|
728,543
|
|
|
|
839,054
|
|
Accrued Interest
Payable
|
|
|
3,741,948
|
|
|
|
-
|
|
Total Accrued
Liabilities
|
|
$
|
5,612,234
|
|
|
$
|
1,018,789
|
|
9.
Notes Payable
Pine
Valley Investments –
On September 9, 2015, the Company issued
an unsecured Short-Term Promissory Note (“Note”) to PineValley Investments in the principal amount of $250,000 (the
“Note”) due on September 28, 2015 and bears a 10% interest rate. The Company made a payment of $275,000 for the principal
and accrued interest balance of $25,000 on September 28, 2015. The note and accrued interest were paid in full. The Company recognized
$25,000 in interest expense for the year ended December 31, 2015.
On
November 11, 2015, the Company issued an unsecured Short-Term Promissory Note (“Note”) to PineValley Investments in
the principal amount of $35,000 (the “Note”) due on November 18, 2015 and bears a 10% interest rate. The Company made
a payment of $35,350 for the principal and accrued interest balance of $350 on December 9, 2015. The note and accrued interest
were paid in full. The Company recognized $350 in interest expense for the year ended December 31, 2015.
On
November 18, 2015, the Company issued an unsecured Short-Term Promissory Note (“Note”) to PineValley Investments in
the principal amount of $170,000 (the “Note”) due on December 5, 2015 and bears a 10% interest rate. The Company made
a payment of $187,000 for the principal and accrued interest balance of $17,000 on December 9, 2015. The note and accrued interest
were paid in full. The Company recognized $17,000 in interest expense for the year ended December 31, 2015.
On
December 10, 2015, the Company issued an unsecured Short-Term Promissory Note (“Note”) to PineValley Investments in
the principal amount of $170,000 (the “Note”) due on January 9, 2016 and bears a 10% interest rate. The Company made
a payment of $100,000 towards the principal balance on December 22, 2015. As of December 31, 2015, the outstanding balance of
the note was $70,000.
10.
Convertible Notes Payable
Convertible
notes payable were comprised of the following as of December 31, 2015 and December 31, 2014:
|
|
12/31/2015
|
|
|
12/31/2014
|
|
Short-term Convertible Notes Payable
|
|
|
|
|
|
|
|
|
Dave Waverek convertible note payable
|
|
|
4,500
|
|
|
|
-
|
|
Iconic Holdings convertible note payable
|
|
|
55,000
|
|
|
|
-
|
|
JMJ Financial convertible note payable
|
|
|
55,000
|
|
|
|
-
|
|
Jonathan Shane convertible note payable
|
|
|
55,000
|
|
|
|
-
|
|
Typenex convertible note payable
|
|
|
58,000
|
|
|
|
-
|
|
UP and Burlington convertible note payable
|
|
|
10,000
|
|
|
|
-
|
|
Total Short-term Convertible Notes Payable
|
|
|
237,500
|
|
|
|
-
|
|
Phil Zobrist convertible note payable
|
|
|
60,000
|
|
|
|
60,000
|
|
Total convertible notes payable
|
|
|
297,500
|
|
|
|
60,000
|
|
Less unamortized discount
|
|
|
(181,292
|
)
|
|
|
-
|
|
Total Convertible Notes Payable, Net of Unamortized Debt Discount
|
|
|
116,208
|
|
|
|
60,000
|
|
Less: Current Portion
|
|
|
(114,553
|
)
|
|
|
(60,000
|
)
|
Total Long-term Convertible Notes Payable, Net of Unamortized
Debt Discount
|
|
$
|
1,655
|
|
|
$
|
-
|
|
Dave Wavrek –
On June 7, 2014,
the Company entered into an unsecured Note Purchase Agreement for the sale of a 20% convertible promissory note in which the Company
will receive the principal amount of $100,000. The note bears interest at the rate of 20% per annum and all interest and principal
must be repaid on December 31, 2015. The note is convertible, at the holder’s option into shares of the Company’s
common stock at $0.45 per share. A beneficial conversion feature on the new note was recorded for $100,000. For the year ended
December 31, 2015, the Company amortized $0 of debt discount to current period operations as interest expense. As of December
31, 2015 the gross balance of the note was $4,500 and accrued interest was $40,000. The note is currently in default.
Firstfire
Global
– On June 23, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Firstfire
Global in the principal amount of $115,000 (the “Note”) due on September 23, 2015 and bears 8% per annum interest,
due at maturity. The total net proceeds the Company received was $94,000 (less an original issue discount (“OID”)
of $21,000). The Note is convertible into common stock, at holder’s option, at a price of $0.10 or a 55% discount to the
lowest bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded
derivatives related to the above described note. These embedded derivatives included certain conversion features. On September
23, 2015 the Company negotiated an extension of the note to October 20, 2015. As part of the agreement, the Company made payments
of $46,050 and issued 150,000 shares of common stock valued at $17,145. The Company recorded a gain on the extinguishment of debt
of $26,102 due to the derivative valuation and the shares of common stock issued. On October 13, 2015, the Company made a payment
of $25,000. On October 20, 2015, the Company negotiated another extension of the note to November 19, 2015. As part of the agreement,
the Company made payments of $20,000 and issued 100,000 shares of common stock valued at $30,000. The Company recorded a loss
on the extinguishment of debt of $30,581 due to the derivative valuation and the shares of common stock issued. The Company paid
the outstanding balance of the note and accrued interest on November 19, 2015. The Company also had to pay a prepayment penalty
of $28,750, which was recorded as interest expense. The total payments made were $55,529.
In
connection with the issuance of the Note, the Company issued detachable warrants granting the holder the right to acquire an aggregate
of 250,000 shares of the Company’s common stock at $1.25 per share. The warrants expire on June 23, 2020. The warrants contain
certain reset (anti-dilutive) provisions.
The
Company has identified the embedded derivatives related to the above described note and detached warrants. These embedded derivatives
included certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires
that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent
reporting date. At the inception of the Note, the Company determined the fair value of $310,952 and $50,000 of embedded derivatives
related to the Note and warrants, respectively. The fair value of the embedded derivatives were determined using the Binominal
Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 38.05% and 788.08%
(3) weighted average risk-free interest rate of 0.00% and 1.76%, (4) expected life of 0.02 and 5.01 years, and (5) the quoted
market price of the Company’s common stock of $0.114 to $0.30 per share.
The
determined fair value of the aggregate derivatives of $360,952 were charged as a debt discount up to the net proceeds of the note
with the remainder $266,952 charged to current period operations as non-cash interest expense. For the year ended December 31,
2015, the Company amortized $0 of debt discount to current period operations as interest expense. As of December
31, 2015 the gross balance of the note was $0 and accrued interest was $0.
Iconic
Holdings
– On November 17, 2015, the Company entered into an unsecured Note Purchase Agreement in which the Company
will receive the principal amount of $55,000 with an original issue discount of 10% of loaned funds. The Company has received
funds totaling $50,000 and recorded additional principal due to the original issue discount totaling $5,000. The note bears interest
at the rate of 10% per annum and all interest and principal must be repaid on June 1, 2016. The note is convertible into common
stock, at the holder’s option, at the lower of $0.15 or 60% of the lowest three trading prices of the Company’s common
stock during the 20 consecutive trading days prior to the date of conversion. The Company has identified the embedded derivatives
related to the note. The embedded derivatives relate to conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the notes and to fair value as of each subsequent reporting date, which at December 31, 2015 was $175,516.
At the inception of the notes, the Company determined the aggregate fair value of $222,296 of the embedded derivatives. The fair
value of the embedded derivatives were determined using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 289.73% to 309.45%, (3) weighted average risk-free interest rate of 0.34%
to 0.49%, (4) expected lives of 0.42 to 0.54 years, and (5) estimated fair value of the Company’s common stock from $0.20
to $0.28 per share based upon quoted market price. The initial fair value of the embedded debt derivatives of $222,296 were allocated
as a debt discount up to the proceeds of the notes ($55,000) with the remainder ($167,296) charged to current period operations
as interest expense. For the year ended December 31, 2015, the Company amortized $12,284 of debt discount to current period
operations as interest expense. As of December 31, 2015 the gross balance of the note was $55,000 and accrued interest was $663.
JMJ
Financial Services
– On December 9, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”)
to JMJ Financial Services (“JMJ”), in the principal amount of $55,000 (the “Note”) due on December 9,
2017 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original
issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at the lesser
of $0.25 or a 40% discount of the lowest trading price of the common stock during the 25 trading day period prior to conversion.
The Company has identified the embedded derivatives related to the note. The embedded derivatives relate to conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the notes and to fair value as of each subsequent reporting date, which at December 31, 2015 was $188,474.
At the inception of the notes, the Company determined the aggregate fair value of $138,644 of the embedded derivatives. The fair
value of the embedded derivatives were determined using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 211.34% to 213.61%, (3) weighted average risk-free interest rate of 0.93%
to 1.06%, (4) expected lives of 1.94 to 2.00 years, and (5) estimated fair value of the Company’s common stock from $0.20
to $0.25 per share based upon quoted market price. The initial fair value of the embedded debt derivatives of $138,644 were allocated
as a debt discount up to the proceeds of the notes ($55,000) with the remainder ($83,644) charged to current period operations
as interest expense. For the year ended December 31, 2015, the Company amortized $1,505 of debt discount to current period operations
as interest expense. As of December 31, 2015 the gross balance of the note was $55,000 and accrued interest was $403.
Jonathan
Shane
– On June 15, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Jonathan
Shane in the principal amount of $25,000 (the “Note”) due on June 14, 2016 and bears 12% per annum interest, due at
maturity. The total net proceeds the Company received was $25,000. The Note is convertible into common stock, at holder’s
option, at a price of $0.59 or a 40% discount to the average of the three lowest trading prices of the common stock during the
25 trading day period prior to conversion. The Company has identified the embedded derivatives related to the above described
note. These embedded derivatives included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $40,716 of embedded derivatives related to the Note. The fair value of the embedded derivatives were
determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 188.8% to 298.31%, (3) weighted average risk-free interest rate of 0.28% to 0.49%, (4) expected life of 0.45 to
1.00 year, and (5) the quoted market price of the Company’s common stock of $0.12 to $0.20 per share. The determined fair
value of the aggregate derivatives of $40,716 were charged as a debt discount up to the net proceeds of the note with the remainder
$15,716 charged to current period operations as non-cash interest expense.
On
July 7, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Jonathan Shane in the principal
amount of $30,000 (the “Note”) due on July 6, 2016 and bears 12% per annum interest, due at maturity. The total net
proceeds the Company received was $30,000. The Note is convertible into common stock, at holder’s option, at a price of
$0.59 or a 40% discount to the average of the three lowest trading prices of the common stock during the 25 trading day period
prior to conversion. The Company has identified the embedded derivatives related to the above described note. These embedded derivatives
included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $84,695 of embedded derivatives related to the Note. The fair value of the embedded derivatives were
determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 201.56% to 290.58%, (3) weighted average risk-free interest rate of 0.25% to 0.49%, (4) expected life of 0.52 to
1.00 year, and (5) the quoted market price of the Company’s common stock of $0.13 to $0.205 per share. The determined fair
value of the aggregate derivatives of $84,695 were charged as a debt discount up to the net proceeds of the note with the remainder
$54,695 charged to current period operations as non-cash interest expense.
For
the year ended December 31, 2015, the Company amortized $7,397 of debt discount to current period operations as interest expense.
As of December 31, 2015 the gross balance of the note was $55,000 and accrued interest was $2,538.
Phil
Zobrist
– On January 11, 2013, the Company issued an unsecured Promissory Note (“Note”) to Phil Zobrist
in the principal amount of $60,000 (the “Note”) due on demand and bearing 0% per annum interest. The total net proceeds
the Company received was $60,000. On October 2, 2015, the Company entered into a new convertible note with Phil Zobrist that matures
on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in
the amount of $29,412 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible
into common stock, at holder’s option, at a price of $0.18 or a 50% discount to the average of the three lowest VWAP of
the common stock during the 20 trading day period prior to conversion. The Company has identified the embedded derivatives related
to the above described note. These embedded derivatives included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $284,799 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% to 261.78%, (3) weighted average risk-free interest rate of 0.25% to 0.65%, (4) expected life of 1.00 to
1.25 year, and (5) the quoted market price of the Company’s common stock of $0.15 to $0.20 per share. The determined fair
value of the aggregate derivatives of $284,799 were charged as a debt discount up to the net proceeds of the note with
the remainder $224,799 charged to current period operations as non-cash interest expense. For the year ended December 31,
2015, the Company amortized $11,842 of debt discount to current period operations as interest expense. As of December 31,
2015 the gross balance of the note was $60,000 and accrued interest was $32,075.
Typenex
– On July 7, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Typenex Co-Investment
LLC (“Typenex”), in the principal amount of $58,000 (the “Note”) due on February 7, 2016 and bears 10%
per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original issue discount
(“OID”) of $5,000 and legal fees reimbursement of $3,000). The Note is convertible into common stock, at holder’s
option, at a 40% discount to the average of the three lowest bid prices of the common stock during the 20 trading day period prior
to conversion. However, should the average of the three lowest bid prices as described above fall below $0.60, then the applicable
discount increases to 45%. In addition, the conversion price is to subject to be reduced should the Company issue or grant common
stock or equivalents (as defined) at a lower issuance price (dilutive issuance).
In
connection with the issuance of the Note, the Company issued detachable warrants granting the holder the right to acquire an aggregate
of 250,000 shares of the Company’s common stock at $.25 per share. The warrants expire on June 30, 2020. The warrants contain
certain reset (anti-dilutive) provisions.
The
Company has identified the embedded derivatives related to the above described note and detached warrants. These embedded derivatives
included certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires
that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent
reporting date. At the inception of the Note, the Company determined the fair value of $123,304 and $51,250 of embedded derivatives
related to the Note and warrants, respectively. The fair value of the embedded derivatives were determined using the Binominal
Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 168.78% to 704.06%
(3) weighted average risk-free interest rate of 0.06% and 1.55%, (4) expected life of 0.10 and 5.01 years, and (5) the quoted
market price of the Company’s common stock of $0.13 to $0.205 per share.
The
determined fair value of the aggregate derivatives of $174,554 were charged as a debt discount up to the net proceeds of the note
with the remainder $124,554 charged to current period operations as non-cash interest expense. For the year ended December 31,
2015, the Company amortized $24,279 of debt discount to current period operations as interest expense. As of December 31, 2015
the gross balance of the note was $58,000 and accrued interest was $2,978.
UP
and Burlington Development
– On February 25, 2013, the Company, its majority shareholder, and its wholly-owned subsidiary,
Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement with Inception Resources,
LLC, a Utah corporation, pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000
shares of common stock valued at $160 (valued at par value of $0.00001 because of the entities being under common control), the
assumption of promissory notes in the amount of $800,000 and $150,000 and the assignment of a 3% net royalty. The Asset Purchase
Agreement closed on February 25, 2013. On November 1, 2013, one of the notes was renegotiated with the note holder. The original
note was restructured and treated as an extinguishment and as such is now convertible into shares of the Company’s common
stock at $0.45 per share. All the other points of the note remained the same. A beneficial conversion feature on the new note
was recorded for $630,000. On February 11, 2014, the Company converted $130,000 of principal into 288,889 shares of common stock.
On December 10, 2014, the note holder elected to convert $41,250 of the principle balance of the note into 91,666 shares of common
stock at $0.45 per share. On December 17, 2014, the note holder elected to convert $300,000 of the principle balance of the note
into 666,666 shares of common stock at $0.45 per share. On December 17, 2014, the note holder elected to forgive $148,750 of the
principle balance of the note. As of December 31, 2015, the outstanding balance on this note was $10,000.
11.
Convertible Note Payable – Related Parties
|
|
12/31/2015
|
|
|
12/31/2014
|
|
Claymore Management convertible note payable
|
|
$
|
185,000
|
|
|
$
|
185,000
|
|
GAIA Ltd convertibe note payable
|
|
|
1,150,000
|
|
|
|
1,150,000
|
|
Legends Capital convertible note payable
|
|
|
765,000
|
|
|
|
765,000
|
|
LWB Irrev Trust convertible note payable
|
|
|
1,101,000
|
|
|
|
1,101,000
|
|
Silverbrook Corporation convertible note payable
|
|
|
2,227,980
|
|
|
|
2,027,980
|
|
MDL Ventures convertible note payable
|
|
|
774,635
|
|
|
|
-
|
|
Total convertible notes payable
|
|
|
6,203,615
|
|
|
|
5,228,980
|
|
Less unamortized discount
|
|
|
(4,357,470
|
)
|
|
|
-
|
|
Total convertible notes payable, net of unamortized debt discount
|
|
$
|
1,846,145
|
|
|
$
|
5,228,980
|
|
Claymore
Management
– On March 18, 2011, the Company issued an unsecured Promissory Note (“Note”) to Claymore Management
in the principal amount of $185,000 (the “Note”) due on demand and bears 0% per annum interest. The total net proceeds
the Company received was $185,000. On October 2, 2015, the Company entered into a new convertible note with Claymore Management
that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from March 18, 2011
in the amount of $151,355 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible
into common stock, at holder’s option, at a price of $0.18 or a 50% discount to the average of the three lowest VWAP of
the common stock during the 20 trading day period prior to conversion. The Company has identified the embedded derivatives related
to the above described note. These embedded derivatives included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $1,071,380 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% (3) weighted average risk-free interest rate of 0.25%, (4) expected life of 1.25 year, and (5) the quoted
market price of the Company’s common stock of $0.15 per share. The determined fair value of the aggregate derivatives of
$1,071,380 were charged as a debt discount up to the net proceeds of the note with the remainder $886,380 charged
to current period operations as non-cash interest expense. For the year ended December 31, 2015, the Company amortized $36,513
of debt discount to current period operations as interest expense. As of December 31, 2015 the gross balance of the note was $185,000
and accrued interest was $159,566.
GAIA
Ltd.
– Between December 2011 and October 2012, the Company issued seven unsecured Promissory Notes (“Notes”)
to GAIA Ltd. for a total principal amount of $1,150,000 (the “Notes”) due on demand and bearing 0% per annum interest.
The total net proceeds the Company received was $1,150,000. On October 2, 2015, the Company entered into a new convertible note
with GAIA Ltd. that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from
inception of these Notes in the amount of $724,463 and charged this amount to interest expense during the year ended December
31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.18 or a 50% discount to the average
of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. The Company has identified
the embedded derivatives related to the above described note. These embedded derivatives included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $5,970,658 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% (3) weighted average risk-free interest rate of 0.25%, (4) expected life of 1.25 year, and (5) the quoted
market price of the Company’s common stock of $0.15 per share. The determined fair value of the aggregate derivatives of
$5,970,658 were charged as a debt discount up to the net proceeds of the note with the remainder $4,820,658 charged
to current period operations as non-cash interest expense. For the year ended December 31, 2015, the Company amortized $226,974
of debt discount to current period operations as interest expense. As of December 31, 2015 the gross balance of the note was $1,150,000
and accrued interest was $775,504.
Legends
Capital Group
– Between October 2011 and September 2012, the Company issued eleven unsecured Promissory Notes (“Notes”)
to Legends Capital Group for a total principal amount of $765,000 (the “Notes”) due on demand and bearing 0% per annum
interest. The total net proceeds the Company received was $765,000. On October 2, 2015, the Company entered into a new convertible
note with Legends Capital Group that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue
interest from inception of these Notes in the amount of $504,806 and charged this amount to interest expense during the year ended
December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.18 or a 50% discount
to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. The Company
has identified the embedded derivatives related to the above described note. These embedded derivatives included certain conversion
features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $4,044,667 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% to 261.78%, (3) weighted average risk-free interest rate of 0.25% to 0.65%, (4) expected life of 1.00 to
1.25 year, and (5) the quoted market price of the Company’s common stock of $0.15 to $0.20 per share. The determined fair
value of the aggregate derivatives of $4,044,667 were charged as a debt discount up to the net proceeds of the note with
the remainder $3,279,667 charged to current period operations as non-cash interest expense. For the year ended December
31, 2015, the Company amortized $150,987 of debt discount to current period operations as interest expense. As of December 31,
2015 the gross balance of the note was $765,000 and accrued interest was $538,759.
LW
Briggs Irrevocable Trust
– Between December 2010 and January 2013, the Company issued eight unsecured Promissory Notes
(“Notes”) to LW Briggs Irrevocable Trust for a total principal amount of $1,101,000 (the “Notes”) due
on demand and bearing 0% per annum interest. The total net proceeds the Company received was $1,101,000. On October 2, 2015, the
Company entered into a new convertible note with LW Briggs Irrevocable Trust that matures on December 31, 2016 and bears 18% per
annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $814,784 and charged this
amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s
option, at a price of $0.18 or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading
day period prior to conversion. The Company has identified the embedded derivatives related to the above described note. These
embedded derivatives included certain conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $6,102,276 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% to 261.78%, (3) weighted average risk-free interest rate of 0.25% to 0.65%, (4) expected life of 1.00 to
1.25 year, and (5) the quoted market price of the Company’s common stock of $0.15 to $0.20 per share. The determined fair
value of the aggregate derivatives of $6,102,276 were charged as a debt discount up to the net proceeds of the note with
the remainder $5,001,276 charged to current period operations as non-cash interest expense. For the year ended December
31, 2015, the Company amortized $217,303 of debt discount to current period operations as interest expense. As of December 31,
2015 the gross balance of the note was $1,101,000 and accrued interest was $863,650.
MDL
Ventures
– The Company entered into an unsecured convertible note payable agreement with MDL Ventures, LLC, which is
100% owned by a Company officer, effective October 1, 2014, due on December 31, 2016 and bears 18% per annum interest, due at
maturity. Principal on the convertible note is convertible into common stock at the holder’s option at a price of the lower
of $0.18 or 50% of the lowest three daily volume weighted average prices of the Company’s common stock during the 20 consecutive
days prior to the date of conversion.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $600,937 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 121.06% to 265.70%, (3) weighted average risk-free interest rate of 0.00% to 0.14%, (4) expected life of 0.17 to
1.00 year, and (5) the quoted market price of the Company’s common stock of $0.11 to $0.88 per share. The determined fair
value of the aggregate derivatives of $600,937 were charged as a debt discount up to the net proceeds of the note with the remainder
$242,521 charged to current period operations as non-cash interest expense.
For the year ended December 31, 2015, the
Company amortized $0 of debt discount to current period operations as interest expense. As of December 31, 2015 the gross balance
of the note was $774,635 and accrued interest was $0.
Silverbrook
Corporation
– Between March 2011 and February 2015, the Company issued 23 unsecured Promissory Notes (“Notes”)
to Silverbrook Corporation for a total principal amount of $2,227,980 (the “Notes”) due on demand and bearing 0% per
annum interest. The total net proceeds the Company received was $2,227,980. On October 2, 2015, the Company entered into a new
convertible note with Silverbrook Corporation that matures on December 31, 2016 and bears 18% per annum interest. The Company
agreed to accrue interest from inception of these Notes in the amount of $1,209,606 and charged this amount to interest expense
during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.18
or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion.
The Company has identified the embedded derivatives related to the above described note. These embedded derivatives included certain
conversion features.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of the Notes and to fair value as of each subsequent reporting date. At the inception of the Note, the Company
determined the fair value of $10,949,616 of embedded derivatives related to the Note. The fair value of the embedded derivatives
were determined using the Binominal Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 214.29% to 261.78%, (3) weighted average risk-free interest rate of 0.25% to 0.65%, (4) expected life of 1.00 to
1.25 year, and (5) the quoted market price of the Company’s common stock of $0.15 to $0.20 per share. The determined fair
value of the aggregate derivatives of $10,949,616 were charged as a debt discount up to the net proceeds of the note
with the remainder $8,721,636 charged to current period operations as non-cash interest expense. For the year ended December
31, 2015, the Company amortized $439,733 of debt discount to current period operations as interest expense. As of December
31, 2015 the gross balance of the note was $2,227,980 and accrued interest was $1,308,492.
12.
Stockholders’ Deficit
Common
Stock
On October 2, 2015, the Company issued 14,757,683
shares of common stock in exchange for the issued and outstanding shares of Clavo Rico, Ltd. Clavo Rico, Ltd. Became a wholly
owned subsidiary of the Company. Under this merger agreement, there was a change in control and it has been treated for accounting
purposes as a reverse recapitalization with Clavo Rico, Ltd. being the surviving entity.
On
October 20, 2015, the Company issued 100,000 shares of common stock for negotiation of a note extension. The Company recorded
$30,000 ($0.30 per shares) as a loss on extinguishment of debt.
On
October 20, 2015, a shareholder returned 150,000 shares of common stock to the Company for cancellation. There was no cost to
the Company for these shares.
On
December 15, 2015, a shareholder returned 83,333 shares of common stock to the Company for cancellation. There was no cost to
the Company for these shares.
On
December 17, 2015, the Company issued 500,000 shares of common stock for cash at $0.098 per share. The Company received cash proceeds
of $49,000.
Warrants
The
following tables summarize the warrant activity during the years ended December 31, 2015 and 2014:
Stock
Warrants
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
Balance at December 31, 2013
|
|
|
112,250
|
|
|
$
|
0.90
|
|
Granted
|
|
|
300,765
|
|
|
|
1.02
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2014
|
|
|
413,015
|
|
|
|
1.04
|
|
Granted
|
|
|
600,000
|
|
|
|
0.66
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2015
|
|
|
1,013,015
|
|
|
$
|
0.71
|
|
2015
Outstanding Warrants
|
|
Warrants
Exercisable
|
|
Range
of
Exercise Price
|
|
Number
Outstanding at
July 31, 2015
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable at
April 30, 2015
|
|
|
Weighted
Average Exercise Price
|
|
$ 0.205 - 1.25
|
|
|
1,013,015
|
|
|
|
2.63
years
|
|
|
$
|
0.71
|
|
|
|
1,013,015
|
|
|
$
|
0.71
|
|
13.
Net Loss Per Common Share
Basic
earnings per share is computed by dividing net loss available to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if stock
options, warrants, and convertible securities to issue common stock were exercised or converted into common stock. The following
is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,165,344
|
)
|
|
$
|
(182,277
|
)
|
Non-Controlling
Interest
|
|
|
3,294
|
|
|
|
3,370
|
|
Loss available
to Controlling Shareholders
|
|
$
|
(27,162,050
|
)
|
|
$
|
(178,907
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
243,944,759
|
|
|
|
240,225,901
|
|
Effect of Dilutive
Securities
|
|
|
-
|
|
|
|
-
|
|
Diluted Weighted Average Shares
Outstanding
|
|
|
243,944,759
|
|
|
|
240,225,901
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.00
|
)
|
The
following table includes the number of common stock equivalent shares that are not included in the computation of diluted loss
per share, because the Company has a net loss and the inclusion of such shares would be antidilutive.
|
|
Shares
|
|
|
|
2015
|
|
|
2014
|
|
Convertible Notes Payable
|
|
|
149,560,507
|
|
|
|
-
|
|
Warrants
|
|
|
2,419
|
|
|
|
-
|
|
|
|
|
149,562,926
|
|
|
|
-
|
|
14.
Income Taxes
The
Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The
provision for income tax expense (recovery) is comprised the following amounts:
|
|
2015
|
|
|
2014
|
|
Expected
income tax (recovery) expense at the statutory rate of 34%
|
|
$
|
(9,236,217
|
)
|
|
$
|
(61,874
|
)
|
Tax
effect of expenses that are not deductible for tax purposes (net of other amounts deductible for tax purposes)
|
|
|
186
|
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
9,236,031
|
|
|
|
61,874
|
|
Provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of deferred income tax in the accompanying balance sheets are as follows:
|
|
2015
|
|
|
2014
|
|
Deferred
income tax asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$
|
1,269,221
|
|
|
$
|
1,087,091
|
|
Section
195 Startup Costs
|
|
|
1,393,346
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Debt
Discount
|
|
|
(1,543,179
|
)
|
|
|
-
|
|
Derivative
Liability
|
|
|
9,157,681
|
|
|
|
-
|
|
Mineral
Property
|
|
|
46,053
|
|
|
|
-
|
|
Valuation
allowance
|
|
|
(10,323,122
|
)
|
|
|
(1,087,091
|
)
|
Deferred
income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2015 and December 31, 2014, the Company had net operating loss carryforwards for U.S. federal income tax purposes
of approximately $9,236,000 and $3,197,000 million, respectively. A portion of the federal amount, $1,710,000, is subject
to an annual limitation of approximately $17,000 as a result of a change in the Company’s ownership through February 2013,
as defined by Federal Internal Revenue Code Section 382 and the related income tax regulations. As a result of the 20-year federal
carryforward period and the limitation, approximately, $1,400,000 of the net operating loss will expire unutilized. These net
operating loss carry-forwards will expire through the year ending 2035.
The
valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized.
This is necessary due to the Company’s continued operating losses and the uncertainty of the Company’s ability to
utilize all of the net operating loss carry-forwards before they will expire through the year 2035.
The
net change in the valuation allowance for the year ended December 31, 2015 was an approximate increase of $9,236,031.
The
Company is subject to income tax in the U.S. federal jurisdiction. The Company has not been audited by the U.S. Internal Revenue
Service in connection with income taxes. The Company’s tax years beginning with the year ended June 30, 2010 through December
31, 2015 generally remain open to examination by the Internal Revenue Service until its net operating loss carryforwards are utilized
and the applicable statutes of limitation have expired.
15.
Related Party Transactions
Acquisition
of Mining Rights –
On February 25, 2013, the Company, its majority shareholder, and its wholly-owned subsidiary, Inception
Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement with Inception Resources, LLC, a Utah
corporation, pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of
common stock valued at $160 (valued at par value of $0.00001 because of the entities being under common control), the assumption
of promissory notes in the amount of $800,000 and $150,000 and the assignment of a 3% net royalty (see Note 2). The Asset Purchase
Agreement closed on February 25, 2013. As of December 31, 2015, the outstanding balances on these notes were $10,000 and $0, respectively.
On November 1, 2013, one of the notes was renegotiated with the note holder. The original note was restructured and treated as
an extinguishment and as such is now convertible into shares of the Company’s common stock at $0.45 per share. All the other
points of the note remained the same. A beneficial conversion feature on the new note was recorded for $630,000. During the year
ended December 31, 2014, $630,000 of the beneficial conversion feature was accreted as interest expense. During the year ended
December 31, 2015, the note holders agreed to forgive $161,750 of these notes resulting in the Company recognizing a gain on forgiveness
of debt in the amount of $161,750. As of July 31, 2015, the Company determined that it was too costly for the mine to produce
gold effectively and the mining claim should be impaired. The Company recognized a loss on impairment of the mining claim for
$950,160 for the year ended July 31, 2015.
Consulting
Agreement
– In February 2014, the Company entered into a consulting agreement with a stockholder/director. The Company
agreed to pay $18,000 per month for twelve months. As of December 31, 2015, the Company owed $375,341 to the stockholder/director
in accrued consulting fees.
Lease
– The Company leases office space from a related affiliate, MDL Ventures, LLC, which includes month to month terms.
Rent expense for the year ended December 31, 2015 amounted to $1,588.
Employment
Agreements
– On February 25, 2013, the Company entered into an employment agreement with Michael Ahlin pursuant to which
he was appointed as the Chief Executive Officer, President, Treasurer, Secretary and Director of the Company. Under the terms
of his employment agreement, Mr. Ahlin will become eligible to receive an annual salary, bonus and stock option upon the Company
achieving positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in two consecutive quarters
as reflected in its filings with the Securities and Exchange Commission (“SEC”). On August 1, 2015, the Company amended
the previously entered into employment agreement with Michael Ahlin pursuant to which the eligibility requirements of the Company
achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC were removed.
On
February 25, 2013, the Company entered into an employment agreement with Whit Cluff pursuant to which he was appointed as the
Chief Financial Officer and Director of the Company. Under the terms of his employment agreement, Mr. Cluff will become eligible
to receive an annual salary, bonus and stock option upon the Company achieving positive EBITDA in two consecutive quarters as
reflected in its filings with the SEC. Mr. Cluff resigned as the Chief Financial Officer of the Company on November 3, 2015.
16.
Commitments and Contingencies
Litigation
The
Company at times is subject to other legal proceedings that arise in the ordinary course of business. In the opinion of management,
as of December 31, 2015, the amount of ultimate liability with respect to such matters, if any, is not likely to have a material
impact on the Company’s business, financial position, results of operations or liquidity. However, as the outcome of litigation
and other claims is difficult to predict significant changes in the estimated exposures could exist.
17.
Subsequent Events
On
January 5, 2016, 100,000 shares of common stock were issued to Brunson Chandler & Jones PLLC as payment for legal services
performed for the Company. These shares were issued pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among
other things, the transactions did not involve a public offering.
On
January 11, 2016, the Company issued 5,194,537 shares of common stock to The Panamera Trust pursuant to the exercise of a warrant.
These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended
pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions
did not involve a public offering.
On
January 11, 2016, the Company issued 5,925,192 shares of common stock to Cornerstone Holdings LTD pursuant to the exercise of
a warrant. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933,
as amended pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things,
the transactions did not involve a public offering.
On
December 15, 2015, the Company entered into a Settlement Agreement with Brian Brewer through which he agreed to return up to 500,000
shares of common stock in the Company. Pursuant to the terms of that Settlement Agreement, 83,333 shares of the Company were returned
to the Company for cancellation on January 15, 2016, 83,333 shares of the Company were returned to the Company for cancellation
on February 17, 2016, 83,333 shares of the Company were returned to the Company for cancellation on March 15, 2015, and 83,333
shares of the Company were returned to the Company for cancellation on April 20, 2016.
On
January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock with a record date of January
11, 2016. The reverse split has not yet been approved and announced by FINRA.
On
January 13, 2016, the Company issued a convertible promissory note in the amount of $27,577 to its legal counsel for previous
services rendered. The note may be converted at 90% of the volume weighted average price of such common stock (representing a
10% discount) during the three trading days immediately preceding the conversion.
On January 25, 2016, the Company issued an
unsecured Short-Term Promissory Note (“Note”) to 3-2-1 Partners LLC in the principal amount of $75,000 (the “Note”)
due on February 6, 2016 and bears a 10% interest rate. The Company made a payment of $82,500 for the principal and accrued interest
balance of $7,500 on January 27, 2016. The note and accrued interest were paid in full.
On February 1, 2016, the Company issued an
unsecured Short-Term Promissory Note (“Note”) to 3-2-1 Partners LLC in the principal amount of $50,000 (the “Note”)
due on February 16, 2016 and bears a 10% interest rate. The Company made a payment of $55,000 for the principal and accrued interest
balance of $5,000 on February 10, 2016. The note and accrued interest were paid in full.
On March 7, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”)
to 3-2-1 Partners LLC in the principal amount of $25,000 (the “Note”) due on March 18, 2016 and bears a 10% interest
rate. The Company made a payment of $26,250 for the principal and accrued interest balance of $1,250 on March 15, 2016. The note
and accrued interest were paid in full.
18.
Restatement
The
Company has restated the 2015 financial statements as originally presented in its 10K filed on May 3, 2016. The changes and explanation
of such are as follows:
Consolidated
balance sheet as of December 31, 2015:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Convertible
notes payable
|
|
$
|
117,235
|
|
|
$
|
(2,682
|
)
|
|
$
|
114,553
|
|
Convertible
notes payable - related parties
|
|
|
1,885,958
|
|
|
|
(39,813
|
)
|
|
|
1,846,145
|
|
Derivative
liaibility
|
|
|
9,966,095
|
|
|
|
16,968,261
|
|
|
|
26,934,356
|
|
Total
current liabilities
|
|
|
17,960,609
|
|
|
|
16,925,766
|
|
|
|
34,886,375
|
|
Total
liabilities
|
|
|
18,039,980
|
|
|
|
16,925,766
|
|
|
|
34,965,746
|
|
Accumulated
deficit
|
|
|
(13,427,504
|
)
|
|
|
(16,925,766
|
)
|
|
|
(30,353,270
|
)
|
Total
controlling interest
|
|
|
(15,106,611
|
)
|
|
|
(16,925,766
|
)
|
|
|
(32,032,377
|
)
|
Total
stockholders’ Equity (Deficit)
|
|
$
|
(15,114,761
|
)
|
|
$
|
(16,925,766
|
)
|
|
$
|
(32,040,527
|
)
|
Consolidated
Statement of Operations and Comprehensive Loss for the year ended December 31, 2015:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Change
in derivative liability
|
|
$
|
(2,944,510
|
)
|
|
$
|
5,800,430
|
|
|
$
|
2,855,920
|
|
Interest
expense
|
|
|
(5,395,737
|
)
|
|
|
(22,726,196
|
)
|
|
|
(28,121,933
|
)
|
Total
other income (expense)
|
|
|
(8,477,700
|
)
|
|
|
(16,925,766
|
)
|
|
|
(25,403,466
|
)
|
Loss
from operations before income taxes
|
|
|
(10,239,578
|
)
|
|
|
(16,925,766
|
)
|
|
|
(27,165,344
|
)
|
Net
loss
|
|
|
(10,239,578
|
)
|
|
|
(16,925,766
|
)
|
|
|
(27,165,344
|
)
|
Net
loss - controlling interest
|
|
|
(10,236,284
|
)
|
|
|
(16,925,766
|
)
|
|
|
(27,162,050
|
)
|
Net
loss per share - basic and diluted
|
|
|
(0.04
|
)
|
|
|
(0.07
|
)
|
|
|
(0.11
|
)
|
Total
comprehensive loss
|
|
|
(10,432,249
|
)
|
|
|
(16,925,766
|
)
|
|
|
(27,358,015
|
)
|
Total
comprehensive loss - controlling interest
|
|
$
|
(10,428,766
|
)
|
|
$
|
(16,925,766
|
)
|
|
$
|
(27,354,532
|
)
|
The
adjustments above reflect restatement due to revised valuations of derivative liabilities on convertible notes payable and associated
debt discounts being recognized during the year, together with the change in the derivative liability and amortization of debt
discounts during the year.
In
addition to the restatement of the 2015 financial statements, the Company has restated the financial statements presented in the
10-Q for periods of March 31, 2016 and June 30, 2016 because of the same revised valuations of derivative liabilities on convertible
notes payable and associated debt discounts. The changes are as follows:
Condensed
consolidated balance sheet as of March 31, 2016:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Convertible
notes payable
|
|
$
|
151,330
|
|
|
$
|
(11,076
|
)
|
|
$
|
140,254
|
|
Convertible
notes payable - related parties
|
|
|
3,455,343
|
|
|
|
(29,914
|
)
|
|
|
3,425,429
|
|
Derivative
liaibility
|
|
|
7,017,470
|
|
|
|
17,960,574
|
|
|
|
24,978,044
|
|
Total
current liabilities
|
|
|
16,959,543
|
|
|
|
17,919,584
|
|
|
|
34,879,127
|
|
Total
liabilities
|
|
|
17,058,772
|
|
|
|
17,919,584
|
|
|
|
34,978,356
|
|
Accumulated
deficit
|
|
|
(11,781,956
|
)
|
|
|
(17,919,584
|
)
|
|
|
(29,701,540
|
)
|
Total
controlling interest
|
|
|
(13,506,097
|
)
|
|
|
(17,919,584
|
)
|
|
|
(31,425,681
|
)
|
Total
stockholders’ Equity (Deficit)
|
|
$
|
(13,514,034
|
)
|
|
$
|
(17,919,584
|
)
|
|
$
|
(31,433,618
|
)
|
Condensed
consolidated Statement of Operations and Comprehensive Loss for the three month period ended March 31, 2016:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Change
in derivative liability
|
|
$
|
2,932,472
|
|
|
$
|
(976,456
|
)
|
|
$
|
1,956,016
|
|
Interest
expense
|
|
|
(1,504,860
|
)
|
|
|
(17,360
|
)
|
|
|
(1,522,220
|
)
|
Total
other income (expense)
|
|
|
1,413,918
|
|
|
|
(993,816
|
)
|
|
|
420,102
|
|
Loss
from operations before income taxes
|
|
|
1,645,761
|
|
|
|
(993,816
|
)
|
|
|
651,945
|
|
Net
income
|
|
|
1,645,761
|
|
|
|
(993,816
|
)
|
|
|
651,945
|
|
Net
income - controlling interest
|
|
|
1,645,548
|
|
|
|
(993,816
|
)
|
|
|
651,732
|
|
Net
income per share - basic and diluted
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
Total
comprehensive income
|
|
|
1,523,304
|
|
|
|
(993,816
|
)
|
|
|
529,488
|
|
Total
comprehensive income - controlling interest
|
|
$
|
1,523,054
|
|
|
$
|
(993,816
|
)
|
|
$
|
529,238
|
|
Condensed
consolidated balance sheet as of June 30, 2016:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Convertible
notes payable
|
|
$
|
128,561
|
|
|
$
|
(2,480
|
)
|
|
$
|
126,081
|
|
Convertible
notes payable - related parties
|
|
|
4,627,314
|
|
|
|
(20,016
|
)
|
|
|
4,607,298
|
|
Derivative
liaibility
|
|
|
3,681,112
|
|
|
|
6,822,875
|
|
|
|
10,503,987
|
|
Total
current liabilities
|
|
|
14,097,050
|
|
|
|
6,800,379
|
|
|
|
20,897,429
|
|
Total
liabilities
|
|
|
14,201,006
|
|
|
|
6,800,379
|
|
|
|
21,001,385
|
|
Accumulated
deficit
|
|
|
(9,560,633
|
)
|
|
|
(6,800,379
|
)
|
|
|
(16,361,012
|
)
|
Total
controlling interest
|
|
|
(10,717,032
|
)
|
|
|
(6,800,379
|
)
|
|
|
(17,517,411
|
)
|
Total
stockholders’ Equity (Deficit)
|
|
$
|
(10,724,695
|
)
|
|
$
|
(6,800,379
|
)
|
|
$
|
(17,525,074
|
)
|
Condensed
consolidated Statement of Operations and Comprehensive Loss for the six month period ended June 30, 2016:
|
|
Originally
Reported
|
|
Restatement
Adjustment
|
|
As
Restated
|
Change
in derivative liability
|
|
$
|
6,268,831
|
|
|
$
|
10,161,242
|
|
|
$
|
16,430,073
|
|
Interest
expense
|
|
|
(3,094,588
|
)
|
|
|
(35,855
|
)
|
|
|
(3,130,443
|
)
|
Total
other income (expense)
|
|
|
3,162,156
|
|
|
|
10,125,387
|
|
|
|
13,287,543
|
|
Loss
from operations before income taxes
|
|
|
3,867,358
|
|
|
|
10,125,387
|
|
|
|
13,992,745
|
|
Net
income
|
|
|
3,867,358
|
|
|
|
10,125,387
|
|
|
|
13,992,745
|
|
Net
income - controlling interest
|
|
|
3,866,871
|
|
|
|
10,125,387
|
|
|
|
13,992,258
|
|
Net
income per share - basic
|
|
|
0.08
|
|
|
|
0.21
|
|
|
|
0.29
|
|
Net
income per share - diluted
|
|
|
0.08
|
|
|
|
0.09
|
|
|
|
0.17
|
|
Total
comprehensive loss
|
|
|
3,654,870
|
|
|
|
10,125,387
|
|
|
|
13,780,257
|
|
Total
comprehensive loss - controlling interest
|
|
$
|
3,654,499
|
|
|
$
|
10,125,387
|
|
|
$
|
13,779,886
|
|