IMII Inception Mining Inc (PK)

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Business

Inception Mining Inc. (“the Company”) is a precious metal mineral production, acquisition, exploration and development company. The Company was incorporated under the name “Golf Alliance Corporation” under the laws of the State of Nevada on July 2, 2007 and has focused on precious metal mineral acquisition and exploration since 2010.

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.

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 the Company purchased the U.P. and Burlington Gold Mine in consideration for 16,000,000 shares of common stock of the Company, 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 was deemed an asset purchase by entities under common control. The Asset Purchase Agreement closed on February 25, 2013. 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 the acquisition of the U.P and Burlington Gold Mine pursuant to the terms of the Asset Purchase Agreement, and such classification ceased upon the closing of the Asset Purchase Agreement.

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 (the “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 240,225,901 shares of its common stock and assumed promissory notes in the amount of $5,488,980 and accrued interest of $3,434,426. As a result of the Merger, 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. Clavo Rico’s operations and workings include several historical underground operations dating back to the early Mayan and Spanish occupation, as described further below.

The Company’s primary operating 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.A. de C.V. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%.

On January 11, 2016 the Board of Directors of Inception Mining Inc. (the “Company”) proposed, and its shareholders approved to effectuate a reverse split of the Company’s outstanding common stock, at a ratio of up to one post-split share per five and half pre-split shares (1:5.5) (the “Reverse Split”). The Company subsequently took steps to carry out the execution of the Reverse Split, including notifying the Financial Industry Regulatory Authority (“FINRA”). On May 25, 2016, FINRA approved the Reverse Split, with a market effective date of May 26, 2016.

Immediately before the Reverse Split, the Company had 265,083,479 shares of common stock outstanding. Immediately after the Reverse Split, the Company had 48,197,495 shares of common stock outstanding, pending fractional-share rounding-up calculations to adjust for the Reverse Split.

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 nine months ended September 30, 2016, the Company incurred net income of $8,656,767 and provided $593,250 in cash for operating activities, however the Company had a negative working capital of $23,530,269 and accumulated deficit of $21,697,296. 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 Compañía Minera Cerros del Río, S.A. de C.V., and its controlling interest subsidiaries, Compañía Minera Cerros del Sur, S.A. de C.V. and Compañía 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. All adjustments have been made consisting of normal recurring adjustments and consolidating entries, necessary to present fairly the consolidated financial position of the Company and subsidiaries as of September 30, 2016, the results of its consolidated statements of comprehensive income/(loss) for the three month and nine month periods ended September 30, 2016 and September 30, 2015, and its consolidated cash flows for the nine month periods ended September 30, 2016 and September 30, 2015. The results of consolidated operations for the interim periods are not necessarily indicative of the results for the full year.

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 September 30, 2016 and December 31, 2015, 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  (See Note 4). 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:

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.

Income per Common Share - Basic net income per common share is computed by dividing net income, less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income 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 a net loss for the period ended December 31, 2015, all equity-linked instruments are considered anti-dilutive. For the period ended September 30, 2016, the number of common stock equivalents is 39,932,491.

Comprehensive Income - Comprehensive income is made up of the exchange differences arising on translating foreign operations and the net income (loss) for the periods ended September 30, 2016 and 2015.

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.

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 September 30, 2016 and December 31, 2015 consisted of the following:

There were no stockpiles at September 30, 2016 and December 31, 2015.

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 September 30, 2016 or December 31, 2015, 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 September 30, 2016, in the amount of $13,747,916 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 September 30, 2016 and December 31, 2015:

Debt derivatives – As described above, 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 September 30, 2016, the Company marked to market the fair value of the debt derivatives and determined a fair value of $13,611,876. The Company recorded a gain from change in fair value of debt derivatives of $12,759,298 for the period ended September 30, 2016. 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 190.36%, (3) weighted average risk-free interest rate of 0.29% (4) expected life of 0.25 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 derivatives – The Company issued warrants in conjunction with the issuance with the Typenex, JMJ Financial and Firstfire Global Convertible Promissory Notes. On July 15, 2016, the Company issued 180,000 warrants in conjunction with the settlement of a convertible notes payable with Jonathan Shane. 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 September 30, 2016, the Company marked to market the fair value of the warrant liability and determined a fair value of $136,040. The Company recorded a gain from change in fair value of warrant liability of $77,574 for the period ended September 30, 2016. 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 208.41% to 222.53%, (3) weighted average risk-free interest rate of 0.87% to 0.88% (4) expected life of 2.79 to 3.75 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:

5. Properties, Plant and Equipment, Net

Properties, plant and equipment at September 30, 2016 and December 31, 2015 consisted of the following:

During the nine months ended September 30, 2016 and September 30, 2015, the Company recognized depreciation expense of $472,405 and $225,523, respectively.

6. 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 mine reclamation liability was $145,691 and $77,716 as of September 30, 2016 and December 31, 2015, 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 2016 and 2015 were related to the expansion of the heap leach facility and related infrastructure.

Changes to the reclamation liability were as follows:

7. Notes Payable

3-2-1 Partners, LLC – On September 23, 2016, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $100,000 (the “Note”) due on October 23, 2016 and bears a 5% interest rate. As of September 30, 2016, the outstanding balance of the Note was $100,000 and accrued interest was $5,000.

Jonathan Shane – On July 15, 2016, the Company negotiated a settlement for these convertible notes with the note holder. The balance of the notes of $55,000 is to be paid via a payment each month with the last payment due on November 15, 2016. As of September 30, 2016, the Company had made payments of $35,000 towards the outstanding balance. In addition to the principle payments, the Company issued 9,090 shares of common stock valued at $7,272 and 180,000 warrants for shares of common stock. The warrants have a three year life with 30,000 warrants are exercisable at $0.50 per share, 30,000 warrants are exercisable at $1.00 per share, 30,000 warrants are exercisable at $1.50 per share and 90,000 warrants are exercisable at $2.00 per share. The accrued interest of $5,867 was forgiven. The note was changed to a short term note payable instead of a convertible note payable.

LVD Investments – On August 8, 2016, the Company issued an unsecured Short-Term Promissory Note to LVD Investments in the principal amount of $100,000 (the “Note”) due on August 31, 2016 and bears a 7.5% interest rate. The Company made a payment of $107,500 towards the principal balance and accrued interest of $7,500 on August 31, 2016. As of September 30, 2016, the outstanding balance of the Note was $0.

LVD Investments – On September 7, 2016, the Company issued an unsecured Short-Term Promissory Note to LVD Investments in the principal amount of $100,000 (the “Note”) due on September 30, 2016 and bears a 7.5% interest rate. The Company made a payment of $107,500 towards the principal balance and accrued interest of $7,500 on September 19, 2016. As of September 30, 2016, the outstanding balance of the Note was $0.

8. Notes Payable – Related Parties

WOC Energy, LLC – On June 23, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on July 7, 2016 and bears a 8% interest rate. The Company made a payment of $107,500 towards the principal balance and accrued interest of $7,500 on July 22, 2016. As of September 30, 2016, the outstanding balance of the Note was $0.

WOC Energy, LLC – On July 29, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on August 31, 2016 and bears a 7.5% interest rate. The Company made a payment of $107,500 towards the principal balance and accrued interest of $7,500 on August 26, 2016. As of September 30, 2016, the outstanding balance of the Note was $0.

WOC Energy, LLC – On August 31, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on September 30, 2016 and bears a 7.0% interest rate. The Company made a payment of $107,000 towards the principal balance and accrued interest of $7,000 on September 21, 2016. As of September 30, 2016, the outstanding balance of the Note was $0.

WOC Energy, LLC – On September 29, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $75,000 (the “Note”) due on October 20, 2016 and bears a 3.5% interest rate. As of September 30, 2016, the outstanding balance of the Note was $75,000 and accrued interest was $2,625.

8. Convertible Notes Payable

Convertible notes payable were comprised of the following as of September 30, 2016 and December 31, 2015:

Brunson, Chandler & Jones, PLLC – On January 13, 2016, the Company issued an unsecured Convertible Promissory Note to Brunson, Chandler & Jones, PLLC (“BCJ”), in the principal amount of $27,578 (the “Note”) due on July 13, 2016 and bears 10% per annum interest, due at maturity as settlement of services rendered for the same amount. The Note is convertible into common stock, at holder’s option, at 10% discount of the lowest VWAP of the common stock during the 3 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 Note and to fair value as of each subsequent reporting date, which at March 31, 2016 was $3,627. At the inception of the Note, the Company determined the aggregate fair value of $25,104 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 288.75%, (3) weighted average risk-free interest rate of 0.46%, (4) expected life of 0.50 year, and (5) estimated fair value of the Company’s common stock from $0.74 (0.14 pre-split) per share based upon quoted market price. The initial fair value of the embedded debt derivatives of $25,104 were allocated as a debt discount. For the nine months ended September 30, 2016, the Company amortized $25,104 of debt discount to current period operations as interest expense. On July 13, 2016, the Note was settled with a payment of $22,000 in cash paid by an officer on behalf of the Company. The remaining balance of $5,758 and accrued interest of $2,758 were forgiven and have been recorded as a gain on extinguishment of debt during the nine months ended September 30, 2016. As of September 30, 2016, the gross balance of the Note was $0 and accrued interest was $0.

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 $2.48 (0.45 Pre-split) per share. A beneficial conversion feature on the new note was recorded for $100,000. For the nine months ended September 30, 2016, the Company amortized $0 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $0 and accrued interest was $4,500.

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 $0.83 (0.15 pre-split) 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. On February 9, 2016, the Company made a payment of $6,000 against the principal balance. In May 2016, the Company made payments of $71,000 to pay the note and accrued interest in full. For the nine months ended September 30, 2016, the Company amortized $42,716 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $0 and accrued interest was $0.

JMJ Financial Services – On December 9, 2015, the Company issued an unsecured Convertible Promissory 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 $1.34 (0.25 pre-split) or a 40% discount of the lowest trading price of the common stock during the 25 trading day period prior to conversion. On May 25, 2016, the Company made a payment of $84,000 against the balance of the note and accrued interest. For the nine months ended September 30, 2016, the Company amortized $53,345 of debt discount to current period operations as interest expense. As of September 30, 2016, the gross balance of the note was $0 and accrued interest was $0.

Jonathan Shane – On June 15, 2015, the Company issued an unsecured Convertible Promissory 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 $3.25 (0.59 pre-split) 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. On July 15, 2016, a settlement for this note was reached. See settlement below. As of September 30, 2016, the gross balance of the note was $0 and accrued interest was $0.

On July 7, 2015, the Company issued an unsecured Convertible Promissory 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 $3.25 (0.59 pre-split) 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. On July 15, 2016, a settlement for this note was reached. See settlement below. As of September 30, 2016, the gross balance of the note was $0 and accrued interest was $0.

On July 15, 2016, the Company negotiated a settlement for these notes with the note holder. The balance of the notes of $55,000 is to be paid via a payment each month with the last payment due on November 15, 2016. As of September 30, 2016, the Company had made payments of $35,000 towards the outstanding balance. In addition to the principle payments, the Company issued 9,090 shares of common stock valued at $7,272. The accrued interest of $5,867 was forgiven. The note was changed to a short term note payable instead of a convertible note payable. The Company also issued 180,000 warrants to the note holder. These warrants have a life of three years and are exercisable accordingly: 30,000 warrants at $0.50 per share, 30,000 warrants at $1.00 per share, 30,000 warrants at $1.50 per share and 90,000 warrants at $2.00 per share. These warrants were valued using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 214.85%, (3) weighted average risk-free interest rate of 0.87% (4) expected life of 3.00 years, and (5) the quoted market price of $0.80. These warrants were valued at $131,183. The Company recorded a loss on extinguishment of debt for these notes and warrants of $101,445 during the nine months ended September 30, 2016.

For the nine months ended September 30, 2016, the Company amortized $26,822 of debt discount to current period operations as interest expense. As of September 30, 2016, the gross balance of the note was $20,000 and accrued interest was $0.

Phil Zobrist – On January 11, 2013, the Company issued an unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $36,053 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $60,000 and accrued interest was $40,182.

Typenex – On July 7, 2015, the Company issued an unsecured Convertible Promissory 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 $3.30 (0.60 pre-split), 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). On January 7, 2016, the Company made a payment of $20,437 for principal of $12,625, accrued interest of $3,372, an extension fee of $2,500 and premium fee of $1,940. On February 3, 2016, the Company made a payment of $17,457 for principal of $15,125, accrued interest of $392 and premium fee of $1,940. On March 4, 2016, the Company made a payment of $17,291 for principal of $15,125, accrued interest of $226 and premium fee of $1,940. On April 8, 2016, the Company made a payment of $17,163 for principal of $15,125, accrued interest of $98 and premium fee of $1,940. For the nine months ended September 30, 2016, the Company amortized $10,251 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $0 and accrued interest was $0.

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 $2.48 (0.45 pre-split) 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 $2.48 (0.45 pre-split) 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 $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to forgive $148,750 of the principle balance of the note. As of September 30, 2016, the outstanding balance on this note was $10,000.

9. Convertible Notes Payable – Related Parties

Claymore Management – On March 18, 2011, the Company issued an unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $111,162 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $185,000 and accrued interest was $184,564.

GAIA Ltd. – Between December 2011 and October 2012, the Company issued seven unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $691,009 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $1,150,000 and accrued interest was $930,896.

Legends Capital Group – Between October 2011 and September 2012, the Company issued eleven unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $459,671 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $765,000 and accrued interest was $642,129.

LW Briggs Irrevocable Trust – Between December 2010 and January 2013, the Company issued eight unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $661,566 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $1,101,000 and accrued interest was $1,012,422.

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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $0 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $1,108,383 and accrued interest was $0.

Silverbrook Corporation – Between March 2011 and February 2015, the Company issued 23 unsecured Promissory 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 $0.99 (0.18 pre-split) 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. For the nine months ended September 30, 2016, the Company amortized $1,338,742 of debt discount to current period operations as interest expense. As of September 30, 2016 the gross balance of the note was $2,227,980 and accrued interest was $1,609,545.

10. Stockholders’ Deficit

Preferred Stock – Series A

On August 30, 2016, the board of directors designated 51 shares of preferred stock as Series A. These shares have preferential voting rights and no conversion rights. As of September 30, 2016, no shares of Series A preferred stock have been issued.

Common Stock

On January 1, 2016, 100,000 shares of common stock were issued to Whit Cluff as payment for consulting services performed for the Company. These shares were valued at $0.20 per share for a value of $20,000.

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 valued at $0.20 per share for a value of $20,000.

On January 11, 2016, the Company issued 5,194,537 shares of common stock to The Panamera Trust pursuant to the exercise of a cashless warrant.

On January 11, 2016, the Company issued 5,925,192 shares of common stock to Cornerstone Holdings LTD pursuant to the exercise of a cashless warrant.

On January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock. The reverse split was approved and announced by FINRA with an effective date of May 26, 2016. There were 265,083,479 shares of common stock issued and outstanding prior to the split which resulted in 48,197,495 post-split shares of common stock outstanding.

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 on January 15, 2016, 83,335 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, 2016, 83,333 shares of the Company were returned to the Company for cancellation, on April 26, 2016, 83,333 shares of the Company were returned to the Company for cancellation, and on May 18, 2016, the remaining 83,333 shares of the Company were returned to the Company for cancellation.

On May 19, 2016, 18,182 shares of common stock were issued to Rodney Sperry as payment for consulting services performed for the Company. These shares were valued at $0.99 (0.18 pre-split) per share for a value of $18,000.

On June 3, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at the amount of the debt converted of $725,853.

On June 30, 2016, 20,100 shares of common stock were issued to Bodell Construction as payment for equipment acquired by the Company. These shares were valued at $0.50 per share for a value of $10,050.

On July 15, 2016, the Company issued 9,090 shares of common stock per a negotiated debt settlement agreement. These shares were valued at $7,272.

On July 29, 2016, 881,057 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at the amount of the debt converted of $200,000.

On August 8, 2016, the Company entered into a 90 day consulting agreement with Red Rock Marketing Media, Inc. Per the agreement, the Company is required to make three $40,000 payments and three issuances of 150,000 shares of common stock each month starting in August 2016. On August 8, 2016, the Company made the required payment of $40,000 and issued 150,000 shares of common stock. The shares issued were valued at $0.80 per share for a value of $120,000.

On September 6, 2016, the Company issued 150,000 shares of common stock per the consulting agreement with Red Rock Marketing Media, Inc. These shares were valued at $0.57 per share for a value of $85,500.

On September 13, 2016, the Company entered into a Settlement Agreement with a consultant through which the consultant agreed to return 177,540 shares of common stock to the Company. The 177,540 shares were returned to the Company and were immediately cancelled.

Warrants

On July 15, 2016, the Company issued 180,000 warrants associated with the extinguishment of a convertible note payable. The warrants have a three year life, 30,000 warrants are exercisable at $0.50 per share, 30, 000 warrants are exercisable at $1.00 per share, 30, 000 warrants are exercisable at $1.50 per share and 90, 000 warrants are exercisable at $2.00 per share.

On August 5, 2016, 20,409 three year warrants expired without being exercised. These warrants had an exercise price of $4.95.

The following tables summarize the warrant activity during the nine months ended September 30, 2016 and the year ended December 31, 2015:

11. Related Party Transactions

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.

Lease – The Company leases office space from Terramerica Corporation. The lease term is 12 months and expires January 31, 2017. Rent expense for the nine months ended September 30, 2016 amounted to $7,823.

12. 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 September 30, 2016, 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. During the period covered by this report, we were served with a lawsuit from one of our creditors. On July 8, 2016, a judgment was entered against us in the amount of $10,000 in favor of a creditor and we paid the amount due under this judgment of $10,207 on August 2, 2016 in full settlement of this dispute.

13. Subsequent Events

In Accordance with ASC 855-10, Company management has evaluated all events that have occurred subsequent to September 30, 2016 and determined that the following item is material to be reported in this quarterly report:

Effective October 2, 2016, the Company renegotiated various convertible notes payable containing conversion features that were assumed in the Merger with Clavo Rico Ltd that closed October 2, 2016. The amended notes remove the conversion feature and the due dates were extended until December 31, 2017. All remaining characteristics of the notes remained the same. The Company will recognize a gain on extinguishment of debt of approximately $13,611,876 and a gain in the change in derivative liability of approximately $136,840 on this transaction during the last quarter of the year ending December 31, 2016.