Notes to Consolidated Financial Statements (Unaudited)
1.
The Company and Significant Accounting Policies:
These unaudited interim consolidated financial statements have been prepared by the management of New Jersey Mining Company (the Company) in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of the Companys management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim consolidated financial statements have been included.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's financial position and results of operations. Operating results for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.
For further information refer to the financial statements and footnotes thereto in the Companys audited financial statements for the year ended December 31, 2016 as filed with the Securities and Exchange Commission.
Principles of Consolidation
At June 30, 2017 and December 31, 2016, the consolidated balance sheet includes the accounts of the Company and its majority-owned subsidiary, the New Jersey Mill Joint Venture (NJMJV). The consolidated statements of operations and cash flows for the period ended June 30, 2017 includes the same companies. The consolidated statements of operations and cash flows for the period ended June 30, 2016 also includes the Companys majority-owned subsidiary, GF&H Company. The Company acquired the remaining outstanding shares of GF&H Company in the third quarter 2016 and subsequently dissolved the company.
Intercompany accounts and transactions are eliminated. The portion of entities owned by other investors is presented as non-controlling interests on the consolidated balance sheets and statements of operations.
Revenue Recognition
Revenue is recognized when title and risk of ownership of metals or metal bearing concentrate have passed and collection is reasonably assured. Revenue from the sale of metals may be subject to adjustment upon final settlement of estimated metal prices, weights and assays, and are recorded as adjustments to revenue in the period of final settlement of prices, weights and assays; such adjustments are typically not material in relation to the initial invoice amounts. Revenues from mill operations and custom milling are recognized in the period in which the milling is completed, concentrates are shipped, and collection of payment is deemed probable.
Pre-Development Activities
Pre-development activities involve cost incurred that may ultimately benefit production, such as underground ramp development, pumping, and open pit development, which are expensed due to the lack of evidence of economic development, which is necessary to demonstrate future recoverability of these expenses. These cost are charged to operations as incurred.
Inventory
Inventory is stated at the lower of full cost of production or estimated net realizable value based on current metal prices. Costs consist of mining, transportation, and milling costs including applicable overhead, depreciation, depletion and amortization relating to the operations. Costs are allocated based on the stage at which the ore is in the production process.
Fair Value Measurements
When required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date.
At June 30, 2017 and December 31, 2016, the Company determined fair value on a recurring basis as follows:
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|
|
|
|
|
|
June 30, 2017
|
December 31, 2016
|
Fair Value Hierarchy
|
Forward gold contracts-liability (Note 11)
|
$ 1,194,109
|
$ 1,386,228
|
2
|
Concentration
During the fourth quarter 2016 and through the six months ended June 30, 2017, the Company has sold all of its gold production to a concentrate broker, H&H Metal.
Reclassifications
Certain prior period amounts have been reclassified to conform to the 2017 financial statement presentation. Reclassifications had no effect on net loss, stockholders equity, or cash flows as previously reported.
6
New Jersey Mining Company
Notes to Consolidated Financial Statements (Unaudited)
2.
Going Concern
The Companys cash flow is directly related to revenues generated from production and milling activities. The Company has experienced operating losses and negative operating cash flows prior to and during the ramp up of production activities at the Golden Chest Mine. In addition to cash flow from operations, ongoing operations are dependent on the Companys ability to obtain public equity financing by the issuance of capital and to generate profitable operations in the future.
The Company is currently producing from the open-pit at the Golden Chest Mine and preparing to begin production underground, which is expected in the second half of 2017. In addition, during the first half of 2017, production has generated positive cash flow of $10,623 and planned production for the next 18 months indicates the trend to improve. The Company has also been successful in raising required capital to commence production and fund ongoing operations, completing a forward gold sale of $1.2 million in 2016 and closing private placements of $1.4 million in the first quarter of 2017. A debt restructuring to longer term is also being considered for the mineral property note payable on which $375,000 in payable in the next twelve months.
As a result of its planned production, equity sales and ability to restructure debt, management believes cash flows from operations and existing cash are sufficient to conduct planned operations and meet contractual obligations for the next 12 months.
3.
Related Party Notes Payable
At June 30, 2017 and December 31, 2016, the Company had the following notes and interest payable to related parties:
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Mine Systems Design (MSD), a company in which our Companys Vice President owns 10.4%, 12% interest, monthly payments of $4,910 through October 2018
|
$
|
92,793
|
$
|
115,868
|
John Swallow, Company president, 5% interest, monthly payments of $5,834 with balloon payment of $416,295 in February 2019
|
|
489,428
|
|
520,010
|
John Swallow, Company president, 5% interest, principal and interest due February 2019
|
|
245,516
|
|
341,250
|
Margaret Bathgate, shareholder, 5% interest, principal and interest due January 2018
|
|
100,000
|
|
100,000
|
|
|
927,737
|
|
1,077,128
|
Accrued interest payable
|
|
9,736
|
|
4,167
|
Total
|
|
937,473
|
|
1,081,295
|
Current portion
|
|
203,753
|
|
567,580
|
Long term portion
|
$
|
733,720
|
$
|
513,715
|
Related Party interest expense for the three and six month periods ending June 30, 2017 and 2016 is as follows:
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|
|
|
|
|
|
|
June 30, 2017
|
June 30, 2016
|
3 months
|
6 months
|
3 months
|
6 months
|
$
|
13,636
|
$
|
28,969
|
$
|
16,791
|
$
|
30,682
|
During the quarter ended March 31, 2017 in conjunction with a private placement (Note 9), the Company issued 1,000,000 units of its common stock and warrants with a value of $100,000 in exchange for $95,734 in principal and $4,266 in accrued interest on a note payable due to John Swallow, the Companys president.
Subsequent to June 30, 2017, notes with Mr. Swallow were amended to extend the balloon payments on both notes to February 2019.
4.
Joint Ventures
For joint ventures in which the Company holds more than 50% of the voting interest and has significant influence, the joint venture is consolidated with the presentation of non-controlling interest. For joint ventures in which the Company does not have joint control or significant influence, the cost method is used. For those joint ventures in which there is joint control between the parties, and the Company has significant influence, the equity method is utilized.
At June 30, 2017 and December 31, 2016, the Companys percentage ownership and method of accounting for each joint venture is as follows:
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|
June 30, 2017
|
December 31, 2016
|
Joint Venture
|
% Ownership
|
Significant Influence?
|
Accounting Method
|
% Ownership
|
Significant Influence?
|
Accounting Method
|
New Jersey Mill Joint Venture(NJMJV)
|
65%
|
Yes
|
Consolidated
|
65%
|
Yes
|
Consolidated
|
Butte Highlands Joint Venture (BHJV)
|
50%
|
No
|
Cost
|
50%
|
No
|
Cost
|
7
New Jersey Mining Company
Notes to Consolidated Financial Statements (Unaudited)
New Jersey Mill Joint Venture Agreement
At June 30, 2017 and December 31, 2016, an account receivable existed with Crescent for $7,606 and $2,888, respectively, for shared operating costs as defined in the JV agreement.
Crescents non-controlling interest in the JV changed from December 31, 2016 to June 30, 2017 as follows:
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|
|
Balance December 31, 2016
|
$
|
3,142,312
|
Contribution from non-controlling interest
|
|
14,903
|
Net loss attributable to non-controlling interest
|
|
(27,307)
|
Balance June 30, 2017
|
$
|
3,129,908
|
Butte Highlands JV, LLC (BHJV)
On January 29, 2016, the Company purchased a 50% interest in Butte Highlands JV, LLC (BHJV) from Timberline Resources Corporation for $225,000 in cash and 3,000,000 restricted shares of the Companys common stock valued at $210,000 for a total consideration of $435,000. Highland Mining, LLC (Highland) is the other 50% owner and manager of the joint venture. Under the agreement, Highland will fund all future project exploration and mine development costs. The agreement stipulates that Highland is manager of BHJV and will manage BHJV until such time as all mine development costs, less $2 million are distributed to Highland out of the proceeds from future mine production. The Company has determined that because it does not currently have significant influence over the joint ventures activities, it accounts for its investment on a cost basis. The Company purchased the interest in the BHJV to provide additional opportunities for exploration and development and expand the Companys mineral property portfolio.
5.
Earnings per Share
For the six month period ending June 30, 2017 and the three month and six month periods ending June 30, 2016, all outstanding options and warrants were excluded from the computation of diluted loss per share, as net losses for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share. For the three month period ended June 30, 2017, 3,250,000 options and 1,200,000 warrants are included in the calculation of diluted income per share.
6.
Property, Plant, and Equipment
Property, plant and equipment at June 30, 2017 and December 31, 2016 consisted of the following:
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|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
Mill
|
|
|
|
|
Land
|
$
|
225,289
|
$
|
225,289
|
Building
|
|
536,193
|
|
536,193
|
Equipment
|
|
4,192,940
|
|
4,192,940
|
|
|
4,954,422
|
|
4,954,422
|
Less accumulated depreciation
|
|
(359,699)
|
|
(307,302)
|
Total mill
|
|
4,594,723
|
|
4,647,120
|
|
|
|
|
|
Building and equipment at cost
|
|
477,472
|
|
434,897
|
Less accumulated depreciation
|
|
(227,889)
|
|
(223,264)
|
Total building and equipment
|
|
249,583
|
|
211,633
|
|
|
|
|
|
Land
|
|
|
|
|
Bear Creek
|
|
266,934
|
|
266,934
|
Little Baldy
|
|
62,139
|
|
62,139
|
BOW
|
|
230,449
|
|
230,449
|
Eastern Star
|
|
250,817
|
|
250,817
|
Gillig
|
|
79,137
|
|
79,137
|
Highwater
|
|
40,133
|
|
40,133
|
Total land
|
|
929,609
|
|
929,609
|
Total
|
$
|
5,773,915
|
$
|
5,788,362
|
7.
Mineral Properties
Mineral properties at June 30, 2017 and December 31, 2016 consisted of the following:
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|
|
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|
|
June 30,
2017
|
|
December 31, 2016
|
New Jersey
|
$
|
215,127
|
$
|
215,127
|
McKinley
|
|
250,000
|
|
250,000
|
Golden Chest
|
|
1,631,031
|
|
1,586,324
|
Toboggan
|
|
5,000
|
|
5,000
|
Less accumulated amortization
|
|
(12,520)
|
|
(9,551)
|
Total
|
$
|
2,088,638
|
$
|
2,046,900
|
8
New Jersey Mining Company
Notes to Consolidated Financial Statements (Unaudited)
8.
Notes Payable
At June 30, 2017 and December 31, 2016, notes payable are as follows:
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|
|
|
|
|
June 30, 2017
|
December 31, 2016
|
Property with shop 36 month note payable, 4.91% interest rate payable monthly, remaining principal of note due in one payment at end of term in June 2019, monthly payments of $474
|
$
|
37,399
|
$
|
39,021
|
Property 120 month note payable, 11.0% interest rate payable monthly, remaining principal of note due in one payment at end of term in March 2021, collateralized by property, monthly payments of $1,122
|
|
94,959
|
|
98,559
|
Tailings pump, 35 month note payable, 17.5% interest rate payable monthly through May of 2018, monthly payments of $3,268, collateralized by equipment
|
|
32,064
|
|
48,035
|
Mineral property, 10 quarterly payments, 0.0% interest rate discounted at 10%, collateralized by property, quarterly payments of $125,000 through May of 2018
|
|
375,000
|
|
750,000
|
Total notes payable
|
|
539,422
|
|
935,615
|
Due within one year
|
|
414,279
|
|
664,787
|
Due after one year
|
$
|
125,143
|
$
|
270,828
|
Future principal payments of debt and related discount amortization at June 30, 2017 are as follows:
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|
|
|
|
|
|
|
|
Note
|
|
Discount
|
|
Net
|
1 year
|
$
|
414,279
|
$
|
(17,997)
|
$
|
396,282
|
2 years
|
|
36,965
|
|
|
|
36,965
|
3 years
|
|
3,990
|
|
|
|
3,990
|
4 years
|
|
84,188
|
|
|
|
84,188
|
Total
|
$
|
539,422
|
$
|
(17,997)
|
$
|
521,425
|
9.
Stockholders Equity
The Company began a private placement in the fourth quarter 2016 which ran through the first quarter of 2017. Each unit consisted of two shares of the Companys common stock and one stock purchase warrant with each warrant exercisable for one share of the Companys stock at $0.20 through February 2020. As of December 31, 2016, 537,500 units were sold consisting of 1,075,000 shares and 537,500 warrants for net proceeds of $92,500 after deducting the 10% commission and other related placement fees. In the first quarter of 2017 an additional 3,200,000 shares and 1,600,000 warrants were sold for net proceeds in 2017 of $291,000 after deducting the 10% commission. At closing of the private placement in March 2017, the total units for the private placement were 2,137,500 units consisting of 4,275,000 shares and 2,137,500 warrants, net proceeds of the private placement in total were $383,500.
The Company offered an additional private placement in March of 2017. The private placement was for 4,250,000 units, each unit consisting of two shares of the Companys stock and one stock purchase warrant with each warrant exercisable for one share of the Companys stock at $0.20 through April 2020. No commission was paid with this private placement. Proceeds were $850,000 which included an exchange of $100,000 in private placement participation in exchange for $100,000 payment on a note and interest payable to the Companys president, John Swallow. The Companys concentrate broker, H&H Metals Corp., who purchases all of the Companys gold production, participated in this private placement purchasing 1,250,000 units for $250,000.
Stock Purchase Warrants Outstanding
The activity in stock purchase warrants is as follows:
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|
|
|
|
|
|
Number of Warrants
|
|
Exercise Prices
|
Balance December 31, 2015
|
|
10,200,000
|
$
|
0.10-0.20
|
Issued in connection with private placement
|
|
537,500
|
|
0.20
|
Balance December 31, 2016
|
|
10,737,500
|
|
|
Expired
|
|
(3,000,000)
|
|
(0.15)
|
Issued in connection with private placement
|
|
5,850,000
|
|
0.20
|
Balance June 30, 2017
|
|
13,587,500
|
|
0.10-0.20
|
These warrants expire as follows:
|
|
|
Shares
|
Exercise Price
|
Expiration Date
|
6,000,000
|
$0.20
|
August 11, 2017
|
1,200,000
|
$0.10
|
August 11, 2019
|
2,137,500
|
$0.20
|
February 28, 2020
|
4,250,000
|
$0.20
|
April 30, 2020
|
9
New Jersey Mining Company
Notes to Consolidated Financial Statements (Unaudited)
10.
Stock Options
In the fourth quarter of 2016, the Company granted 2,750,000 options to management, directors, consultants, and employees of the Company. Of these options 1,225,000 vested in the fourth quarter of 2016 and the remaining 1,525,000 vest in 2017. The options had a fair value of $268,032 which is being recognized ratable over the vesting period. Compensation costs of $151,143 was recognized as a general and administrative expense in the fourth quarter of 2016 and $33,504 was recognized in each of the first two quarters of 2017. The remaining unrecognized compensation cost of $49,881 is expected to be recognized in the remainder of 2017.
In the second quarter of 2017, the Company granted 400,000 options to consultants and employees of the Company. These options vest in the second quarter of 2018. The options had a fair value of $36,777 which is being recognized ratable over the vesting period. Compensation cost of $6,129 was recognized as a production cost in the second quarter of 2017 and the remaining unrecognized compensation cost of $30,648 is expected to be recognized in the remainder of 2017 and the first half of 2018.
|
|
|
|
|
|
|
Number of Options
|
|
Exercise Prices
|
Balance January 1, 2016
|
|
5,750,000
|
$
|
0.10-0.15
|
Exercised
|
|
(500,000)
|
|
0.10
|
Issued
|
|
2,750,000
|
|
0.15
|
Expired
|
|
(500,000)
|
|
0.11
|
Balance December 31, 2016
|
|
7,500,000
|
$
|
0.10-0.15
|
Expired
|
|
(500,000)
|
|
0.10
|
Issued
|
|
400,000
|
|
0.15
|
Balance June 30, 2017
|
|
7,400,000
|
$
|
0.10-0.15
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
5,475,000
|
$
|
0.10-0.15
|
At June 30, 2017, the stock options have an intrinsic value of approximately $82,500 and have a weighted average remaining term of 2.7 years.
11.
Forward Gold Contracts
On July 13, 2016, the Company entered into a forward gold contract with Ophir Holdings LLC ("Ophir"), a company owned by three of the Companys officers, for net proceeds of $467,500 to fund startup costs at the Golden Chest. The contract calls for the Company to deliver a total of 500 ounces of gold to the purchasers with quarterly payments equivalent to $25,000 in ounces starting February 1, 2017 until all other investors in forward gold contracts are paid in full at which time the quarterly payments will increase to the equivalent of $75,000 in ounces until the remaining balance is paid in full as gold is produced from the Golden Chest Mine and New Jersey Mill. During the first two quarters of 2017, the Company paid the equivalent of 40.5 gold ounces to Ophir. At June 30, 2017, future gold deliveries are 459.5 ounces due.
On July 29, 2016, the Company entered into forward gold contracts through GVC Capital LLC (GVC) for net proceeds of $772,806 to fund startup costs at the Golden Chest. The agreement calls for the Company to deliver a total of 904 ounces of gold to the purchasers in quarterly payments starting December 1, 2016 for a period of two years as gold is produced from the Golden Chest Mine and New Jersey Mill. During the first two quarters of 2017, the Company paid the equivalent of 227.5 gold ounces to GVC. At June 30, 2017, future gold deliveries are 224.5 ounces due in the remainder of 2017 and 339 ounces due in 2018.
The gold to be delivered does not need to be produced from the Golden Chest property. In addition, the counterparties can request cash payment instead of gold ounces for each quarterly payment. The cash payments are based on average gold prices for the applicable quarter. The contracts are accounted for as derivatives requiring their value to be adjusted to fair value each period end. The change in balance for the forward gold contracts for the quarter ended June 30, 2017 is as follows:
|
|
|
Balance January 1, 2017
|
$
|
1,386,228
|
Payments:
|
|
|
In cash
|
|
(175,828)
|
In gold purchased by the Company
|
|
(157,887)
|
|
|
|
Change in fair value
|
|
141,596
|
Balance June 30, 2017
|
|
1,194,109
|
Current
|
|
629,035
|
Long term
|
$
|
565,074
|
The fair value was calculated using the market approach with Level 2 inputs for forward gold contract rates and a discount rate of 10%.
10
New Jersey Mining Company
Notes to Consolidated Financial Statements (Unaudited)
12.
Asset Retirement Obligation
The Company has established asset retirement obligations associated with the ultimate closing of its mineral properties where there has been or currently is operations. Activity for the six month ended June 30, 2017 and the year ended December 31, 2016 is as follows:
|
|
|
|
|
|
Six Months Ended
|
Year Ended
|
|
June 30, 2017
|
December 31, 2016
|
|
|
|
|
|
Balance at beginning of period
|
$
|
72,218
|
$
|
28,656
|
Accretion expense
|
|
3,988
|
|
5,291
|
Incurred on Golden Chest mining operations
|
|
14,882
|
|
38,271
|
Balance at end of period
|
$
|
91,088
|
$
|
72,218
|
During 2017 and 2016, the Company established an asset requirement obligation for its Golden Chest mine. At June 30, 2017, management estimated that the cost to reclaim the property based upon disturbance to be $60,215. The estimated reclamation costs were discounted using credit adjusted, risk-free interest rate of 5.0% from the time the obligation was incurred to the time management expects to pay the retirement obligation.
11