UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 1

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. – 000-55219

 

INCEPTION MINING INC.

(Name of registrant as specified in its Charter)

 

Nevada   35-2302128
(State or other Jurisdiction of
Incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

5530 South 900 East, Suite 280

Murray, UT 84117

(Address of Principal Executive Offices)

 

(801) 312 - 8113

(Registrant’s Telephone Number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act: None

 

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par value

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [  ] No [X]

 

Indicate by check mark if the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

(1) Yes [X] No [  ] (2) Yes [X] No [  ]

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

 

Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [X]   Smaller reporting company [X]
      Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes No [X]

 

State the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant’s most recently completed second quarter: $5,348,842.

 

Outstanding Shares

 

As of March 27, 2020, the Registrant had 64,695,602 shares of common stock and 51 shares of preferred stock outstanding.

 

Documents Incorporated by Reference

 

See Part IV, Item 15.

 

 

 

 

 

 

EXPLANATORY NOTE

 

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, 2019, which was filed with the Securities and Exchange Commission on March 30, 2020 (the “Original Filing”).

 

This Form 10-K/A is being filed to:

 

  (a) Restate the consolidated financial statements for the year ended December 31, 2019 to reflect revised valuations of derivative liabilities on a convertible note and the warrants issued with the convertible note;
     
  (b) Restate results disclosed for the above noted changes to the consolidated financial statements.

 

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 2019 consolidated financial statement affect the derivative liabilities account, the change in derivative liabilities account and the interest expense account. For more details on this adjustment, please refer to the restatement footnote (Note 19) in the consolidated financial statements.

 

The adjustments mentioned above reflect restatements due to revised valuations of derivative liabilities on convertible notes payable and warrants being recognized during the year, together with the change in the derivative liability. The adjustments to the derivative liabilities were caused by an error in the valuation method 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 March 30, 2020.

 

 

 

 

TABLE OF CONTENTS

 

  GLOSSARY OF MINING TERMS 3
PART I    
     
ITEM 1. BUSINESS 5
ITEM 1A. RISK FACTORS 9
ITEM 2. PROPERTIES 19
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. MINE SAFETY DISCLOSURES 21
     
PART II    
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 21
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS (RESTATED) 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 29
ITEM 9A(T). CONTROLS AND PROCEDURES 29
ITEM 9B. OTHER INFORMATION 30
     
PART III    
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 30
ITEM 11. EXECUTIVE COMPENSATION 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 35
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 36
     
PART IV    
     
ITEM 15. EXHIBITS 37
  SIGNATURES 39

 

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GLOSSARY OF MINING TERMS

 

Exploration Stage

 

An “exploration stage” prospect is one which is not in either the development or production stage.

 

Development Stage

 

A “development stage” project is one which is undergoing preparation of an established commercially mineable deposit for its extraction but which is not yet in production. This stage occurs after completion of a feasibility study.

 

Mineralized

 

The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.

 

Probable Reserve

 

The term “probable reserve” refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

 

Production Stage

 

A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product.

 

Proven Reserve

 

The term “proven reserve” refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

 

The term “reserve” refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility study done to bankable standards that demonstrates the economic extraction. (“Bankable standards” implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in-situ tons and grade to include diluting materials and allowances for losses that might occur when the material is mined.

 

Additional definitions for terms currently or previously used in the Company’s Annual Reports filed on Form 10-K:

 

Assay – a measure of the valuable mineral content.

 

Block model – The representation of geologic units using three-dimensional blocks of pre-determined sizes.

 

Cut-off grade – When determining economically viable mineral reserves, the lowest grade of mineralized material that qualifies as ore, i.e. that can be mined at a profit.

 

Diamond drill – A type of rotary drill in which the cutting is done by abrasion rather than by percussion. The drill cuts a core of rock which is recovered in long cylindrical sections.

 

Fault - A fracture in the earth’s crust caused by tectonic forces with displacement along the fracture.

 

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Feasibility study – A study or group of studies that determine the economic viability of a given mineral occurrence.

 

g/t or gpt – Grams per metric ton.

 

Grade – A term used to assign metal value to resources and reserves, such as gram per ton (g/t) or troy ounces per ton (oz/ton).

 

Gravity – A methodology using instrumentation allowing the accurate measuring of the difference between densities of various geological units in situ.

 

Heap leaching – A process which uses dilute sodium-cyanide solutions to percolate through run-of-mine or crushed ore heaped on lined pad to dissolve gold and/or silver.

 

in-situ – in its natural position.

 

Mineral – A naturally formed chemical element or compound having a definite chemical composition and, usually, a characteristic crystal form.

 

Mineralization – A natural occurrence in rocks or soil of one or more metal yielding minerals.

 

Mineral deposit – A mineralized body, which has been intersected by a sufficient number of drill holes or by underground workings to give an estimate of grade(s) of metal(s) and thus to warrant further exploration or development. A mineral deposit does not qualify as a commercially viable mineral deposit with reserves under standards set by the U.S. Securities and Exchange Commission until a final, comprehensive, economic, technical and legal feasibility study has been completed.

 

Mining – The process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized.

 

NSR – A net smelter returns royalty, which is customarily calculated by subtracting from gross revenues a deduction for calculated mill recoveries, transport costs of any concentrates to a smelter, treatment and refining charges, and other deductions at the smelter and multiplying that result by the prescribed rate.

 

Open pit – Surface mining in which the ore is extracted from a pit or quarry, the geometry of the pit may vary with the characteristics of the ore body.

 

Ore - A natural aggregate of one or more minerals which, at a specified time and place, may be mined and processed and the product(s) sold at a profit or from which some part may be profitably separated.

 

Ore body – a mostly solid and fairly continuous mass of mineralization estimated to be economically mineable.

 

Ore grade – the average weight of the valuable metal or mineral contained in a specific weight of ore i.e. grams per ton of ore.

 

Oxide – gold bearing ore which results from the oxidation of near surface sulfide ore.

 

Quartz – a mineral composed of silicon dioxide, SiO2 (silica).

 

Reclamation – The process by which lands disturbed as a result of mining activity are modified to support beneficial land use. Reclamation activity may include the removal of buildings, equipment, machinery and other physical remnants of mining, closure of tailings storage facilities, leach pads and other mine features, and contouring, covering and re-vegetation of waste rock and other disturbed areas.

 

Rock – indurated naturally occurring mineral matter of various compositions.

 

Sampling and analytical variance/precision – an estimate of the total error induced by sampling, sample preparation and analysis.

 

SEC Industry Guide 7 – U.S. reporting guidelines that apply to registrants engaged or to be engaged in significant mining operations.

 

Sediment – particles transported by water, wind, gravity or ice.

 

Sedimentary rock – rock formed at the earth’s surface from solid particles, whether mineral or organic, which have been moved from their position of origin and re-deposited.

 

Strike – the direction or trend that a structural surface, e.g. a bedding or fault plane, takes as it intersects the horizontal

 

Strip – to remove barren rock or overburden in order to expose ore.

 

Vein – a thin, sheet like crosscutting body of hydrothermal mineralization, principally quartz.

 

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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 precious metals. Our activities are not limited to production and they also include production, acquisition, exploration, and development of mineral properties, primarily for gold, from an owned mining property in Honduras. During 2019, Inception Mining had two projects, the UP and Burlington mine and the Clavo Rico mine, as further described below. Our target properties are those that have been the subject of historical exploration. We have generated revenue and are generating revenue from mining operations.

 

Clavo Rico Mine

 

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 99.9%. This company has since invested over five million dollars in the expansion and development of the mine and surrounding properties. Today, the Company operates this mine through exploration of surface-level material.

 

Mining operations begin by crushing extracted material to approximately 3/8-inch size pebbles, which is then mixed with additional material and loaded on the recovery pad for processing. The pebble material is sprinkled with a solution that leaches the gold from the rock, and the solution is collected and processed on-site at Clavo Rico’s own ADR plant. The doré bars that result from this process are shipped to the USA for refining.

 

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Prior to the expansion, the mine had only been processing approximately less than 500 tons of extracted material per day. The current recovery operational increase has been sized to handle from 500 to 750 tons of extracted material per day on a recovery bed that has the capacity to receive up to 750,000 tons of material. The Company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the leach pad to capacity by the end of September 30, 2020.

 

The Company has engaged in preliminary drilling of this area and the resulting assays of samples indicate that the material should have grades in the range of 0-5 grams of gold per ton.

 

UP and Burlington Gold Mine

 

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 and Burlington”). Discovered in 1892, UP and Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP and Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 7,994 feet. UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres.

 

On February 21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc. in exchange for $250,000 in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian company.

 

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

 

Wholesale purchasers for the gold we mine are 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:

 

  fluctuation in the supply of, demand, and market price for gold;

 

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  mining activities of our competitors;
  sale or purchase of gold by central banks and for investment purposes by individuals and financial institutions;
  interest rates;
  currency exchange rates;
  inflation or deflation;
  fluctuation in the value of the United States dollar and other currencies; and
  political and economic conditions of major gold or other mineral-producing countries.

 

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.

 

Compliance with Government Regulation

 

Mining Operations

 

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.

 

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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, 2019, 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.

 

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Employees

 

As of the date of this filing, we currently employ ninety-nine (99) full-time employees and generally around twelve (12) 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, or labor contracts arising from any patents or trademarks, or any royalty agreements.

 

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.

 

Reports to Security Holders

 

You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all the reports that we have filed electronically with the SEC at their Internet site www.sec.gov.

 

ITEM 1A. 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 RELATED 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 and until the Merger in 2015, we had nominal operations and incurred operating losses. As of December 31, 2019, our accumulated deficit since inception was $37,011,083. We have substantial current obligations and at December 31, 2019, we had $31,570,781 of current liabilities compared to only $935,467 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.

 

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, 2019. If we are unable to continue as a going concern, investors will likely lose all of their investment in our company.

 

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We have a limited operating history.

 

As an early stage company that has made acquisitions in only the past several years, 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 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 operating entity into Inception Mining Inc.

 

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. 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. At our Clavo Rico mine, the resources may become scarce or more difficult to obtain.

 

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 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 and 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.

 

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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. 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 will 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.

 

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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 weeks 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.

 

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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 and 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.

 

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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 and 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.

 

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 Trent D’ Ambrosio, our Chief Executive Officer and Chief Financial Officer. Mr. D’ Ambrosio is also a member of our Board of Directors. The loss of Mr. D’ Ambrosio could significantly and adversely affect our business and could even result in a complete failure of the Company. We do not carry any life insurance on the life of Mr. 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:

 

  economically insufficient mineralized material;

 

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  fluctuations in production costs that may make mining uneconomical;
  labor disputes;
  unanticipated variations in grade and other geologic problems;
  environmental hazards;
  water conditions;
  difficult surface or underground conditions;
  industrial accidents, such as personal injury, fire, flooding, cave-ins, and landslides;
  metallurgical and other processing problems;
  mechanical and equipment performance problems; and
  decreases in revenues and reserves due to lower gold and mineral prices.

 

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.

 

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 and 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 Clavo Rico may not be indicative of the potential for future development or revenue.

 

Historical production of gold and minerals from 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 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, 2019 and our related consolidated statements of operations, deficiency in stockholders’ deficit, and cash flows for the year ended December 31, 2019, 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.

 

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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 OTCQB 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.

 

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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. As 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:

 

  changes in our industry;
  competitive pricing pressures;
  our ability to obtain working capital financing;
  additions or departures of key personnel;
  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;
  sales of our common stock;
  our ability to execute our business plan;
  operating results that fall below expectations;
  loss of any strategic relationship;
  regulatory developments;
  economic and other external factors; and
  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 and the Jumpstart our Business Startups Act of 2012, among others, 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:

 

  improve existing, and implement new, operational, financial and management controls, reporting systems and procedures;
  install enhanced management information systems; and
  train, motivate, and manage our employees.

 

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.

 

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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, primarily Mr. D’ Ambrosio, our Chief Executive Officer and Chief Financial Officer. 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 2: PROPERTIES

 

UP and 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 and Burlington”). Discovered in 1892, UP and Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP and Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 7,994 feet. UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres.

 

On February 21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc. in exchange for $250.000 in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian company.

 

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 subsidiary Compañía Minera Cerros del Sur, S.A de C.V. Its workings include several historical underground mining operations dating back to the early Mayan and Spanish occupation.

 

The Company’s primary mine is a surface operation, 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 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. Today, the Company operates this mine through exploration of surface-level material.

 

Prior to the expansion of the Mine, the mine had only been processing approximately less than 500 tons of extracted material per day. The current recovery operational increase has been sized to handle from 500 to 750 tons of extracted material per day on a recovery bed that has the capacity to receive up to 750,000 tons of material. The Company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the leach pad to capacity by the end of June 30, 2020.

 

At this property and during the period covered under this Annual Report, the Company extracted 103,787 tons of material through surface operations, with an average grade of 2.17 grams of gold per ton. After processing this material using the on-site leach pad, the Company produced 3,697 ounces of gold for a gold recovery percentage of 54.75% and 79 ounces of silver for refining, for a silver recovery percentage of 37.86%.

 

The Company utilizes four distinct properties located at the Clavo Rico Concession: the main Clavo Rico property, where extraction, leaching, and processing occurs, and the Modesto, Loli, and Juan Carlos Williams properties, which are used as extraction sites. The Modesto location was acquired by the Company pursuant to a real estate purchase agreement in March 2016. The Company is permitted access to the Loli and Juan Carlos Williams properties pursuant to informal oral agreements.

 

 

Clavo Rico as located in Honduras.

 

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The Clavo Rico Concession in relation to the town of El Corpus.

 

 

Parcels of the Clavo Rico Concession that are currently explored or otherwise used by the Company.

 

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The current water supply utilized at the mine is from rain water. During the rainy season (October through February), the Company captures and stores water in on-site collection ponds. The power supply is from the Honduran power grid, although the Company maintains generators on site in the event of loss of power supply or inconsistent power supply.

 

Other Projects

 

The Company had previously disclosed exploration in the Northern Nevada Rift through a partner. Any exploration in these areas has ceased and the Company has no plans to pursue exploration in this area at this time.

 

Corporate Headquarters

 

We currently maintain our corporate offices at 5330 South 900 East, Suite 280, Murray, Utah 84117. During the year ended December 31, 2019, we paid monthly rent of approximately $1,000 for use of a corporate office.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such pending or threatened legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

One of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., has been served with notice of a labor dispute brought in Honduras by one of the Company’s former employees. The complaint alleges that the former employee was terminated from his position with the Company’s subsidiary and is entitled to certain statutory compensation. The Company has responded with its assertion that the employee voluntarily resigned and was not involuntarily terminated. The case was heard in Honduras by a labor judge and the Company has appealed the ruling in this case.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable as the Company conducts no active mining operations in the U.S. or its territories.

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is not traded on any exchange. Our common stock is quoted on the OTCQB tier of the over-the-counter markets administered by OTC Markets Group, Inc. under the trading symbol “IMII.” We cannot assure you that there will be a market in the future for our common stock.

 

OTC securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC securities transactions are conducted through a telephone and computer network connecting dealers. OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a national or regional stock exchange.

 

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Classes of Stock

 

We have two classes of stock: common stock and Series A Preferred Stock. On August 30, 2016, the Board of Directors of the Company, pursuant to Article II of the Company’s Articles of Incorporation, approved the designation of fifty-one (51) shares of its authorized capital stock as “Series A Preferred Stock”. The Certificate of Designation for the Series A Preferred Stock was filed on August 31, 2016. These shares have preferential voting rights and no conversion rights.

 

Holders

 

As of March 17, 2020, there were 1,468 holders of record of our common stock and one holder of record for our preferred stock.

 

Dividends

 

To date, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our Board of Directors.

 

Equity Compensation Plans

 

As of the date of this Annual Report, we have an equity compensation plan: the 2013 Incentive Stock Plan.

 

Recent Sales of Unregistered Securities

 

On January 16, 2020, the Company issued 1,645,000 shares of common stock to the Investor pursuant to the term of the original secured Convertible Promissory Note entered into on May 20, 2010. The issuance was made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(2) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by the Investor, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, there was no general solicitation, and the transactions did not involve a public offering.

 

On February 11, 2020, the Company issued 1,000,000 shares of common stock to the Investor pursuant to the term of the original secured Convertible Promissory Note entered into on May 20, 2010. The issuance was made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(2) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by the Investor, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, there was no general solicitation, and the transactions did not involve a public offering.

 

On February 27, 2020, the Company issued 1,415,500 shares of common stock to the Investor pursuant to the term of the original secured Convertible Promissory Note entered into on May 20, 2010. The issuance was made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(2) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by the Investor, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, there was no general solicitation, and the transactions did not involve a public offering.

 

ITEM 6: SELECTED FINANCIAL DATA

 

Not required for smaller reporting companies.

 

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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) discussions about mineral resources and mineralized material, (b) our projected sales and profitability, (c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) 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. 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” and “Description of Business,” as well as in this Report 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 “Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

 

Overview

 

On February 25, 2013, Inception Mining, Inc. (“Inception” or the “Company”) 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 UP 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 smelter royalty, which may increase or decrease depending on the amount of gold produced. Inception Resources was an entity owned by and under the control of a shareholder. This transaction is deemed an asset purchase by entities under common control. The Asset Purchase Agreement closed on February 25, 2013 (the “Closing”). We were 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 Assert Purchase Agreement. As a result of such acquisition, our operations are now focused on the ownership and operation of the mine acquired from Inception Resources. Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

 

We are a mining company engaged in the production, acquisition, exploration, and development of mineral properties, primarily for gold, from owned mining properties. Inception Resources has acquired two projects, as described below. Our target properties are those that have been the subject of historical exploration.

 

UP and Burlington Gold Mine

 

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 and Burlington”). Discovered in 1892, UP and Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP and Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 7,994 feet. UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres.

 

On February 21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc. in exchange for $250,000 in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian company.

 

Clavo Rico Mine

 

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.

 

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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 99.9%. This company has since invested over five million dollars in the expansion and development of the mine and surrounding properties. Today, the Company operates this mine through exploration of surface-level material.

 

Mining operations begin by crushing extracted material to approximately 3/8-inch size pebbles, which is then mixed with additional material and loaded on the recovery pad for processing. The pebble material is sprinkled with a solution that leaches the gold from the rock, and the solution is collected and processed on-site at Clavo Rico’s own ADR plant. The doré bars that result from this process are shipped to the USA for refining.

 

Prior to the expansion, the mine had only been processing approximately less than 500 tons of extracted material per day. The current recovery operational increase has been sized to handle from 500 to 750 tons of extracted material per day on a recovery bed that has the capacity to receive up to 750,000 tons of material. The Company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the leach pad to capacity by the end of September 30, 2020.

 

The Company has engaged in preliminary drilling of this area and the resulting assays of samples indicate that the material should have grades in the range of 0-5 grams of gold per ton.

 

Results of Operations

 

Year ended December 31, 2019 compared to the year ended December 31, 2018

 

We had a net loss of $15,000,834 for the year ended December 31, 2019, which was $9,373,784 more than the net loss of $5,627,050 for the year ended December 31, 2018. This change in our results over the two periods is primarily the result of an increase in in interest expense from the debt discounts from convertible notes of $19,902,252, offset with the increase of $10,674,613 in the change of derivative liabilities and in increase in revenue of $987,158. The following table summarizes key items of comparison and their related increase (decrease) for the years ended December 31, 2019 and 2018.

 

    Year Ended December 31,     Increase/  
    2019     2018     (Decrease)  
    (Restated)              
Revenues   $ 4,955,027     $ 3,967,869     $ 987,158  
Cost of Sales     3,656,127       3,740,708       (84,581 )
General and Administrative     2,066,886       2,035,203       31,683  
Depreciation and Amortization Expenses     35,718       38,237       (2,519 )
Total Operating Expenses     5,758,731       5,814,148       (55,417 )
Income (Loss) from Operations     (803,704 )     (1,846,279 )     (1,042,575 )
Other Income (expense)     67,988       4,942       (63,046 )
Change in Derivative Liabilities     11,654,174       979,561       (10,674,613 )
Loss on Extinguishment of Debt     (410,120 )     (8,510 )     401,610  
Interest Expense     (25,509,172 )     (4,756,764 )     20,752,408  
Income (Loss) from Operations Before Taxes     (15,000,834 )     (5,627,050 )     9,373,784  
Net Income (Loss)   $ (15,000,834 )   $ (5,627,050 )   $ 9,373,784  

 

Liquidity and Capital Resources

 

Our balance sheet as of December 31, 2019, reflects assets of $1,415,617. As we had cash in the amount of $47,996 and a working capital deficit in the amount of $30,635,314 as of December 31, 2019, we do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.

 

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Working Capital

 

    December 31, 2019     December 31, 2018  
    (Restated)        
Current assets   $ 935,467     $ 653,395  
Current liabilities     31,570,781       19,096,378  
Working capital deficit   $ (30,635,314 )   $ (18,442,983 )

 

We anticipate generating losses and, therefore, may be unable to continue operations in the future. If we require additional capital, we would have to issue debt or equity or enter into a strategic arrangement with a third party.

 

Going Concern Consideration

 

As reflected in the accompanying financial statements, the Company has a net loss since inception of $37,011,083. In addition, there is a working capital deficiency of $30,635,314 and a stockholder’s deficiency of $32,234,842 as of December 31, 2019. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

On March 5, 2010, the Company changed its intended business purpose to that of precious metals mineral exploration, development and production. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.

 

Cash Flows

 

    Year Ended December 31,  
    2019     2018  
    (Restated)        
Net Cash Provided by (Used in) Operating Activities   $ (429,845 )   $ (175,029 )
Net Cash Used in Investing Activities     (1,723 )     (30,499 )
Net Cash Provided by (Used in) Financing Activities     428,982       199,650  
Effects of Exchange Rate Changes on Cash     (275 )     4,933  
Net Increase (Decrease) in Cash   $ (2,861 )   $ (945 )

 

Operating Activities

 

Net cash flow used in operating activities during the year ended December 31, 2019 was $429,845, an increase of $254,816 from the $175,029 net cash used in operating activities during the year ended December 31, 2018. This increase is mostly due to the change in inventory.

 

Investing Activities

 

Cash used in investing activities during the year ended December 31, 2019 was $1,723, a decrease of $28,776 from the $30,499 net cash outflow during the year ended December 31, 2018. This decrease was due to fewer purchases of fixed assets.

 

Financing Activities

 

Financing activities during the year ended December 31, 2019, provided $428,982 to us, an increase of $229,332 from the $199,650 provided by financing activities during the year ended December 31, 2018. During the year ended December 31, 2019, the company received $1,688,000 in notes payable from related parties, $4,075,975 in convertible notes payable, made payments of $2,249,186 in cash on notes payable – related parties and $3,089,414 in cash on convertible notes.

 

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Critical 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, 2019, the Company recorded a net loss of $15,000,834 and used $429,845 in cash from operating activities. The Company has a net loss since inception of $37,011,083. In addition, there is a working capital deficiency of $30,635,314 and a stockholder’s deficiency of $32,234,842 as of December 31, 2019. These factors among others indicate that the Company may be unable to continue as a going concern for one year from the issuance of these financial statements.

 

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.

 

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.

 

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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 - Effective January 1, 2018 we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 606-10, Revenue from Contracts with Customers (“ASC 606-10”). The adoption of ASC 606-10 had no impact on prior year or previously disclosed amounts. In accordance with ASC 606-10, revenue is measured based on a consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

 

The Company generates revenue by selling gold and silver produced from its mining operations. The majority of the Company’s sales come from the sale of refined gold; however, the end product at the Company’s gold operations is generally doré bars. Doré is an alloy consisting primarily of gold but also containing silver and other metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% gold. Under the terms of the Company’s refining agreements, the doré bars are refined for a fee, and the Company’s share of the refined gold and silver is credited to its bullion account.

 

The Company recognizes revenue for gold and silver from doré production when it satisfies the performance obligation of transferring gold and silver inventory to the customer, which generally occurs upon transfer of gold and silver bullion credits as this is the point at which the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits of ownership of the asset.

 

The Company generally recognizes the sale of gold bullion credits at the prevailing market price when gold bullion credits are delivered to the customer. The transaction price is determined based on the agreed upon market price and the number of ounces delivered. Payment is due upon delivery of gold bullion credits to the customer’s account

 

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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.

 

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.

 

Operating Lease – The Company leases its corporate headquarters and administrative offices in Salt Lake City, Utah on a month-to-month basis.

 

The Company incurred rent expense of $13,637 and $13,891 for the year ended December 31, 2019 and 2018.

 

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.

 

Recent Accounting Pronouncements

 

For recent accounting pronouncements, please refer to the notes to the financial statements section of this Annual Report.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements of the Company required by Article 8 of Regulation S-X are attached to this report, beginning at page F-1.

 

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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A: CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were not effective as of December 31, 2019.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

 

With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation and the material weaknesses described below, management concluded that the Company’s internal controls were not effective based on financial reporting as of December 31, 2019 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties. Management of the Company believes that these material weaknesses are due to the small size of the Company’s management and accounting staff and reliance on outside consultants for external reporting. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.

 

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and outside accounting consultants. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

 

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.

 

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2019 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2019 are fairly stated, in all material respects, in accordance with US GAAP.

 

29

 

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

Limitations on Effectiveness of Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Controls

 

During the year ended December 31, 2019, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

ITEM 9B: OTHER INFORMATION

 

None.

PART III

 

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Identification of Directors and Executive Officers

 

Our Bylaws state that our authorized number of directors shall be one or more and shall be set by resolution of our Board of Directors. We currently have two directors.

 

Our current directors and officers are as follows:

 

Name and Business Address   Age   Position
         
Trent D/Ambrosio   55   CEO, CFO and Director
         
Whit Cluff   69   Director

 

Our directors will serve in that capacity until our next annual shareholder meeting or until a successor is elected and qualified. Officers hold their positions at the will of our Board of Directors. There are no arrangements, agreements or understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the management of our affairs.

 

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Trent D’Ambrosio, Chief Executive Officer, Chief Financial Officer, and Director

 

Mr. D’Ambrosio has been a Director of Inception Mining Inc. since February 28, 2013. From October 2011 through March 2013, Mr. D’Ambrosio held the positions of Interim Chief Executive Officer and Chief Financial Officer of Inception Holdings LLC, a resource exploration company, and was the responsible for the overall strategic direction for the organization. His professional record includes 25 years of management and financial services experience with companies ranging from Fortune 500 companies to start ups.

 

Whit Cluff, Director

 

Mr. Cluff has over 35 years of experience in the commercial real estate industry. Mr. Cluff has been involved in all disciplines of real estate land development, mixed-use development, retail tenant representation, developer representation, industrial property procurement and asset management. Mr. Cluff has an extensive background in public and private businesses giving him strong analytical, planning, and organization ability with effective negotiation skills. From 2003 through the present, Mr. Cluff has served as Vice President and Associate Broker at Coldwell Banker Commercial, NRT in Salt Lake City, Utah. Mr. Cluff attended the University of Utah and served in the United States Army.

 

Other Directorships

 

Other than as set forth above, none of our directors hold any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

 

Board of Directors and Director Nominees

 

Since our Board of Directors does not include a majority of independent directors, the decisions of the Board regarding director nominees are made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, at any time not less than 90 days prior to the next annual Board meeting at which a slate of director nominees is adopted, the Board will accept written submissions from proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the security holder submitting the proposed nominee believes that the nomination would be in the best interests of our security holders. If the proposed nominee is not the same person as the security holder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee’s qualifications to serve on the Board, as well as a list of references.

 

The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual’s experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of the slate of director nominees submitted to security holders for election to the Board.

 

Some of the factors, which the Board considers when evaluating proposed nominees, include their knowledge of and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from each candidate prior to reaching a determination, and it is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.

 

Conflicts of Interest

 

Our directors are not obligated to commit their full time and attention to our business and, accordingly, they may encounter a conflict of interest in allocating their time between our operations and those of other businesses. In the course of their other business activities, they may become aware of investment and business opportunities which may be appropriate for presentation to us as well as other entities to which they owe a fiduciary duty. As a result, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. They may also in the future become affiliated with entities that are engaged in business activities similar to those we intend to conduct.

 

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In general, officers and directors of a corporation are required to present business opportunities to the corporation if:

 

  the corporation could financially undertake the opportunity;
  the opportunity is within the corporation’s line of business; and
  it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation.

 

We plan to adopt a code of ethics that obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in such transactions without our consent.

 

Significant Employees

 

Other than as described herein, we do not expect any other individuals to make a significant contribution to our business.

 

Legal Proceedings

 

None of our directors, executive officers or control persons has been involved in any of the following events during the past five years:

 

  any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
  any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
  being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
  being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, where the judgment has not been reversed, suspended, or vacated.

 

No Audit Committee or Financial Expert

 

The Company does not have an audit committee or a financial expert serving on the Board of Directors. The Company plans to form and implement an audit committee as soon as practicable.

 

Family Relationships

 

There are no family relationships among our officers, directors, or persons nominated for such positions.

 

Code of Ethics

 

We have not yet adopted a code of ethics that applies to our principal executive officer and principal accounting officer, but intend to do so this year.

 

32

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act of 1934, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash only rights) and any changes in that ownership with the Securities and Exchange Commission. The Company has evaluated all relevant Section 16(a) filings and has determined that the company is compliant with this section to the best of its knowledge.

 

ITEM 11: EXECUTIVE COMPENSATION

 

Our Board of Directors has not established a separate compensation committee. Instead, the Board of Directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for our officer(s), decides on benefit plans, and considers other matters as may, from time to time, be referred to it. We do not currently have a Compensation Committee Charter. Our Board continues to emphasize the important link between our performance, which ultimately benefits all shareholders, and the compensation of our executives. Therefore, the primary goal of our executive compensation policy is to closely align the interests of the shareholders with the interests of the executive officer(s). In order to achieve this goal, we attempt to (i) offer compensation opportunities that attract and retain executives whose abilities and skills are critical to our long-term success and reward them for their efforts in ensuring our success and (ii) encourage executives to manage from the perspective of owners with an equity stake in us.

 

Compensation Table for Executives

 

Name and Principal         Salary     Bonus     Stock Awards     Option Awards     Non-equity Incentive Plan Compensation     Non-qualified Deferred Compensation Earnings     All Other Compensation     Total  
Position   Year     ($)     ($)     ($)     ($)     ($)     ($)     ($)     ($)  
Trent D’Ambrosio,
Chief Executive Officer,
    2019         198,638       -       94,500       -       -       -       -       293,138  
Chief Financial Officer, President, Secretary, and Director     2018       -       -       265,304       -       -       -       -       265,304  
                                                                         
Whit Cluff,     2019       -       -       14,175       -       -       -       44,500       58,675  
Director     2018       -       -       18,958       -       -       -       8,000       26,958  

 

Employment Agreements

 

The Company has an employment agreement with its chief executive officer, Trent D’Ambrosio. The employment agreement was effective as of April 1, 2019 and provides for compensation of $300,000 annually. Additionally, the employment agreement provides for benefits and an optional annual bonus to be determined by the Board of Directors.

 

Outstanding Equity Awards at Fiscal Year-End

 

None.

 

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Compensation of Directors

 

We have no formal plan for compensating our directors for their services. We have no formal plan to compensating our directors in the future in their capacity as directors, although such directors are expected in the future to receive options to purchase shares of our common stock as awarded by our Board of Directors or by any compensation committee that may be established.

 

Pension, Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit-sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.

 

Compensation Committee

 

We do not currently have a compensation committee of the Board of Directors or a committee performing similar functions. All members of the Board of Directors participate in the consideration of executive officer and director compensation.

 

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Security Ownership of Certain Beneficial Owners

 

The following table lists, as of March 29, 2019, the number of shares of common stock of our Company that are beneficially owned by (i) each person or entity known to our Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each officer and director of our Company; and (iii) all officers and directors as a group. Information relating to beneficial ownership of common stock by our principal shareholders and management is based upon information furnished by each person using beneficial ownership‚ concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.

 

The percentages below are calculated based on 64,695,602 shares of our common stock issued and outstanding as of March 17, 2020. Unless otherwise indicated, the address of each person listed is c/o Inception Mining, Inc., 5330 South 900 East, Suite 280, Murray, UT 84117.

 

Title of Class   Name and Address of
Beneficial Owner
  Amount and
Nature of
Beneficial
Ownership
    Percent of Class  
                 
Common Stock   Legends Capital Group, LLC (1)     11,685,874       18.06 %
    4049 S. Highland Drive                
    Salt Lake City, Utah 84124                
                     
Common Stock   Madison, LLC (1)     2,495,855       3.86 %
    4049 S. Highland Drive                
    Salt Lake City, Utah 84124                
                     
Common Stock   Jason Briggs (2)
4049 S. Highland Drive
Salt Lake City, Utah 84124
    1,341,523       2.07 %
                     
All 5% beneficial owners as a group         15,523,252       23.99 %

 

  (1) Beneficially controlled by Jason Briggs.
  (2) Includes additional shares beneficially owned by Jason Briggs including 311,982 shares owned personally and 1,029,541 shares owned by two separate irrevocable trust for which Jason Briggs serves as trustee.

 

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Title of Class   Name and Address of
Beneficial Owner
  Amount and
Nature of
Beneficial
Ownership
    Percent of Class  
                 
Common Stock   Trent D’Ambrosio (1)     3,902,101       6.03 %
    c/o Inception Mining, Inc.                
    5330 South 900 East, Suite 280                
    Murray, UT 84107                
                     
Common Stock   Whit Cluff (1)     1,232,597       1.91 %
    c/o Inception Mining, Inc.                
    5330 South 900 East, Suite 280                
    Murray, UT 84107                
                     
All Officers and Directors as a Group         5,134,698       7.97 %

 

  (1) Executive officer and/or director of the Company.

 

SEC Rule 13d-3 generally provides that beneficial owners of securities include any person who, directly or indirectly, has or shares voting power and/or investment power with respect to such securities, and any person who has the right to acquire beneficial ownership of such security within 60 days. Any securities not outstanding which are subject to such options, warrants or conversion privileges exercisable within 60 days are treated as outstanding for the purpose of computing the percentage of outstanding securities owned by that person. Such securities are not treated as outstanding for the purpose of computing the percentage of the class owned by any other person. At the present time there are no outstanding options or warrants held by directors or officers of the Company.

 

Changes in Control

 

Not applicable.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of December 31, 2019, we have one equity compensation plan: the 2013 Incentive Stock Plan.

 

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

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. This agreement was renegotiated in October 2017 and the Company agreed to pay the stockholder/director $25,000 per month starting in October 2017. This agreement was superseded by an Employment Agreement as of July 1, 2018 (see Employment Agreements below). As of December 31, 2019, the Company owed $1,035,000 to the stockholder/director in accrued consulting fees.

 

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The Company took several short-term notes payable from related parties during 2019. The Company received $1,688,000 in cash from related parties and paid out $2,478,775 in cash to related parties on notes payable.

 

Mr. Cluff currently serves as a director of the Company and has a separate agreement as a consultant of the Company effective as of October 2, 2015.

 

The Company has an employment agreement with its chief executive officer, Trent D’Ambrosio. The employment agreement was effective as of April 1, 2019 and provides for compensation of $300,000 annually. Additionally, the employment agreement provides for benefits and an optional annual bonus to be determined by the Board of Directors.

 

Director Independence

 

Our securities are quoted on the OTC Markets, which does not have any director independence requirements. Once we engage further directors and officers, we plan to develop a definition of independence and scrutinize our Board of Directors with regard to this definition.

 

Parents of the Smaller Reporting Company

 

We have no parents.

 

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended December 31, 2019, and 2016:

 

Fee Category   2019     2018  
Audit Fees   $ 68,000     $ 77,000  
Audit-related Fees     -       -  
Tax Fees     -       -  
All Other Fees     -       -  
Total Fees   $ 68,000     $ 77,000  

 

Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q and Form 10-K or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.

 

Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”

 

Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.

 

All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.

 

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PART IV

 

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)(2)   Financial Statements. See the audited financial statements for the year ended December 31, 2019 contained in Item 8 above which are incorporated herein by this reference.
     
(a)(3)   Exhibits. The following exhibits are filed as part of this Annual Report:

 

Exhibit Number   Exhibit Description
     
3.1   Articles of Incorporation (1)
     
3.2   Certificate of Amendment, effective March 5, 2010(2)
     
3.3   Certificate of Amendment, effective June 23, 2010(3)
     
3.4   Articles of Merger, effective May 17, 2013 (4)
     
3.5   Bylaws (1)
     
4.1   Form of Subscription Agreement entered by and between Inception Mining Inc. and Accredited Investors (5)
     
4.2   Letter Amendment dated November 1, 2013 to Promissory Note dated January 17, 2013 between Inception Resources, LLC and U.P and Burlington Development, LLC (8)
     
4.3   Securities Purchase Agreement with Typenex Co-Investment, LLC dated February 27, 2017(13)
     
4.4   Convertible Promissory Note issued to Typenex Co-Investment, LLC dated February 27, 2017(13)
     
4.5   Warrant to Purchase Shares of Common Stock issued to Labrys Fund LP dated March 7, 2017(13)
     
4.6   Convertible Promissory Note issued to Labrys Fund LP dated March 7, 2017(13)
     
4.7   Securities Purchase Agreement with Labrys Fund LP dated March 7, 2017 (13)
     
4.8   Convertible Promissory Note issued to Power Up Lending Group Ltd. on April 21, 2017(14)
     
4.9   Securities Purchase Agreement with Power Up Lending Group Ltd. dated April 21, 2017 (14)
     
10.1   Asset Purchase Agreement dated February 25, 2013, by and between Gold American, its majority shareholder Brett Bertolami, and its wholly-owned subsidiary, Inception Development Inc. on one hand, and Inception Resources, LLC on the other hand (6)
     
10.2   Employment Agreement by and between the Company and Michael Ahlin dated February 25, 2013 (6)
     
10.3   Employment Agreement by and between the Company and Whit Cluff dated February 25, 2013 (6)
     
10.4   Employment Agreement by and between the Company and Brian Brewer dated February 25, 2013 (6)
     
10.5   Employment Agreement with Michael Ahlin dated August 1, 2015 (11)
     
10.6   Consulting Agreement by and between the Company and Michael Ahlin dated January 1, 2017 (13)

 

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10.8   Debt Exchange Agreement by and between Gold American Mining Corp. and Brett Bertolami dated February 25, 2013 (6)
     
10.9   Agreement by and between Crawford Cattle Company LLC, as seller, and, Inception Mining Inc., as Buyer dated as of August 30, 2013 (7)
     
10.10   Agreement and Plan of Merger dated August 4, 2015 (11)
     
10.11   Addendum to Agreement and Plan of Merger (11)
     
10.12   List of Subsidiaries (12)
     
10.13   Joint Venture Agreement with Corpus Mining and Exploration, LTD dated as of October 1, 2017. (15)
     
10.14   Employment Agreement with Trent D’Ambrosio (16)
     
10.15   Note Purchase Agreement (16)
     
10.16   Senior Secured Redeemable Convertible Note (16)
     
10.17   Warrant (16)
     
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*   Filed herewith.
     
(1)   Incorporated by reference from Form SB-2 filed with the SEC on October 31, 2007.
     
(2)   Incorporated by reference from Form 8-K filed with the SEC on March 10, 2010.
     
(3)   Incorporated by reference from Form 8-K filed with the SEC on June 28, 2010.
     
(4)   Incorporated by reference from Form 10-Q filed with the SEC on May 20, 2013.
     
(5)   Incorporated by reference from Form 8-K filed with the SEC on August 5, 2013.
     
(6)   Incorporated by reference from Form 8-K filed with the SEC on March 1, 2013.
     
(7)   Incorporated by reference from Form 8-K filed with the SEC on September 6, 2013.
     
(8)   Incorporated by reference from Form 10-Q filed with the SEC on June 20, 2014.
     
(9)   Incorporated by reference from Form 8-K filed with the SEC on March 12, 2014.
     
(10)   Incorporated by reference from Form 8-K filed with the SEC on October 7, 2014.
     
(11)   Incorporated by reference from Form 8-K filed with the SEC on October 7, 2015.
     
(12)   Incorporated by reference from the Form 10-K filed with the SEC on May 3, 2016.
     
(13)   Incorporated by reference from the Form 10-K filed with the SEC on April 17, 2017.
     
(14)   Incorporated by reference from the Form 10-Q filed with the SEC on May 16, 2017.
     
(15)   Incorporated by reference from the Form 8-K filed with the SEC on October 19, 2017.
     
(16)   Incorporated by reference from the Form S-1 filed with the SEC on June 2, 2019.l

 

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SIGNATURES

 

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  INCEPTION MINING, INC.
     
Date: May 22, 2020 By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
Date: May 22, 2020 By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/ Trent D’Ambrosio        
Trent D’Ambrosio   Director   May 22, 2020
         
/s/ Whit Cluff        
Whit Cluff   Director   May 22, 2020

 

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INCEPTION MINING, INC.

 

CONTENTS

 

PAGE F-1 REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
     
PAGE F-2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 (RESTATED) AND DECEMBER 31, 2018
     
PAGE F-3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2019 (RESTATED) AND 2018
     
PAGE F-4 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT (RESTATED)
     
PAGE F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019 (RESTATED) AND 2018
     
PAGES F-6 - F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

40

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Inception Mining, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Inception Mining, Inc. (“the Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 19 to the consolidated financial statements, the consolidated financial statements for the year ended December 31, 2019 have been restated.

 

Explanatory Paragraph Regarding Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2015.

 

Salt Lake City, UT

March 27, 2020, except for Notes 4 and 19 as to which the date is May 22, 2020

 

 

 

  F-1  

 

 

Inception Mining, Inc.

Consolidated Balance Sheets

 

    December 31, 2019     December 31, 2018  
      (Restated)          
ASSETS                
Current Assets                
Cash and cash equivalents   $ 47,996     $ 50,857  
Accounts receivable     20,538       5,548  
Inventories     855,069       570,614  
Prepaid expenses and other current assets     11,864       26,376  
Total Current Assets     935,467       653,395  
                 
Property, plant and equipment, net     443,348       664,041  
Other assets     36,802       36,859  
Total Assets   $ 1,415,617     $ 1,354,295  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued liabilities   $ 2,192,346     $ 1,631,997  
Accrued interest - related parties     7,608,238       6,647,300  
Secured borrowings, net     211,066       217,223  
Notes payable, net of debt discounts     60,000       60,000  
Notes payable - related parties     6,921,216       6,822,657  
Convertible notes payable, net of debt discounts     355,980       1,169,395  
Derivative liabilities     14,221,935       2,547,806  
Total Current Liabilities     31,570,781       19,096,378  
                 
Long-term convertible notes payable, net of debt discounts     1,566,627       -  
Mine reclamation obligation     513,051       341,845  
Total Liabilities     33,650,459       19,438,223  
                 
Commitments and Contingencies     -       -  
                 
Stockholders’ Deficit                
Preferred stock, $0.00001 par value; 10,000,000 shares authorized, 51 shares issued and outstanding     1       1  
Common stock, $0.00001 par value; 500,000,000 shares authorized, 60,035,102 and 54,093,505 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively     600       541  
Additional paid-in capital     5,309,544       4,490,866  
Accumulated deficit     (37,011,083 )     (22,009,285 )
Accumulated other comprehensive income     (525,951 )     (557,134 )
Total Controlling Interest     (32,226,889 )     (18,075,011 )
Non-Controlling Interest     (7,953 )     (8,917 )
Total Stockholders’ Deficit     (32,234,842 )     (18,083,928 )
Total Liabilities and Stockholders’ Deficit   $ 1,415,617     $ 1,354,295  

 

See accompanying notes to the consolidated financial statements.

 

  F-2  

 

 

Inception Mining, Inc.

Consolidated Statements of Operations and Comprehensive Loss

 

    For the Years Ended  
    December 31, 2019     December 31, 2018  
    (Restated)        
Precious Metals Income   $ 4,955,027     $ 3,967,869  
                 
Operating Expenses                
Cost of sales     3,656,127       3,740,708  
General and administrative     2,066,886       2,035,203  
Depreciation and amortization     35,718       38,237  
Total Operating Expenses     5,758,731       5,814,148  
Loss from Operations     (803,704 )     (1,846,279 )
                 
Other Income/(Expenses)                
Other income (expense)     67,988       4,942  
Change in derivative liability     11,654,174       979,561  
Loss on extinguishment of debt     (410,120 )     (8,510 )
Interest expense     (25,509,172 )     (4,756,764 )
Total Other Income/(Expenses)     (14,197,130 )     (3,780,771 )
                 
Loss from Operations before Income Taxes     (15,000,834 )     (5,627,050 )
Provision for Income Taxes     -       -  
NET LOSS     (15,000,834 )     (5,627,050 )
NET LOSS - Non-Controlling Interest     (964 )     1,036  
NET LOSS - Controlling Interest   $ (15,001,798 )   $ (5,626,014 )
                 
Loss per share – Basic and Diluted   $ (0.26 )   $ (0.11 )
Weighted average number of shares outstanding during the period – Basic and Diluted     57,056,526       53,501,213  
                 
Other Comprehensive Loss                
Exchange differences arising on translating foreign operations     31,183       1,499  
Total Comprehensive Loss     (14,969,651 )     (5,625,551 )
Total Comprehensive Loss - Non-Controlling Interest     (388 )     (378 )
Total Comprehensive Loss - Controlling Interest   $ (14,970,039 )   $ (5,625,929 )

 

See accompanying notes to the consolidated financial statements.

 

  F-3  

 

 

Inception Mining, Inc.

Consolidated Statement of Changes in Stockholders’ Deficit

 

   

Preferred stock

   

Common stock

   

Additional

         

Other

   

Non-

   

Total

 
   

($0.00001Par)

   

($0.00001Par)

   

Paid-in

   

Accumulated

   

Comprehensive

   

Controlling

   

Stockholders’

 
    Shares     Amount     Shares     Amount     Capital     Deficit     Income     Interest     Deficiency  
Balance, December 31, 2017     51     $ 1       52,183,761     $ 522     $ 3,992,407     $ (16,383,271 )   $ (555,635 )   $ (7,881 )   $ (12,953,857 )
Shares issued for services     -       -       1,516,385       16       351,442       -       -       -       351,458  
Shares issued for cash     -       -       450,000       4       41,996       -       -       -       42,000  
Shares issued with note payable     -       -       329,723       3       89,007       -       -       -       89,010  
Shares issued with settlement of A/P     -       -       100,000       1       16,009       -       -       -       16,010  
Share cancellation     -       -       (486,364 )     (5 )     5       -       -       -       -  
Foreign currency translation adjustment     -       -       -       -       -       -       (1,499 )     -       (1,499 )
Net loss for the year     -       -       -       -       -       (5,626,014 )     -       (1,036 )     (5,627,050 )
Balance, December 31, 2018     51       1       54,093,505       541       4,490,866       (22,009,285 )     (557,134 )     (8,917 )     (18,083,928 )
Shares issued for services     -       -       2,050,000       20       245,830       -       -       -       245,850  
Shares issued for cash     -       -       375,000       4       48,746       -       -       -       48,750  
Shares issued with notes payable - restated     -       -       3,416,597       34       512,103       -       -       -       512,137  
Shares issued with settlement of A/P     -       -       100,000       1       11,999       -       -       -       12,000  
Foreign currency translation adjustment     -       -       -       -       -       -       31,183       -       31,183  
Net loss for the year - restated     -       -       -       -       -       (15,001,798 )     -       964       (15,000,834 )
Balance, December 31, 2019 - restated     51     $ 1       60,035,102     $ 600     $ 5,309,544     $ (37,011,083 )   $ (525,951 )   $ (7,953 )   $ (32,234,842 )

 

See accompanying notes to the consolidated financial statements.

 

  F-4  

 

 

Inception Mining, Inc.

Consolidated Statements of Cash Flows

 

    For the Year Ended  
    December 31, 2019     December 31, 2018  
    (Restated)        
Cash Flows From Operating Activities:                
Net Loss   $ (15,000,834 )   $ (5,627,050 )
Adjustments to reconcile net loss to net cash used in operations                
Depreciation and amortization expense     212,006       225,395  
Common stock issued for services     245,850       351,458  
Warrants issued for services     -       -  
Loss on extinguishment of debt     410,120       8,510  
Change in derivative liability     (11,654,174 )     (979,561 )
Amortization of debt discount     22,801,971       2,438,886  
Changes in operating assets and liabilities:                
Decr (incr) in trade receivables     (14,990 )     16,640  
Decr (incr) inventories     (284,455 )     839,691  
Decr (incr) prepaid expenses and other current assets     14,512       (14,601 )
Incr (decr) accounts payable and accrued liabilities     560,349       1,529,985  
Incr (decr) accounts payable and accrued liabilities - related parties     2,240,814       1,035,618  
Incr (decr) secured borrowings     38,986       -  
Net Cash Used In Operating Activities     (429,845 )     (175,029 )
                 
Cash Flows From Investing Activities:                
Purchase of property, plant and equipment     (1,723 )     (30,499 )
Net Cash Used In Investing Activities     (1,723 )     (30,499 )
                 
Cash Flows From Financing Activities:                
Repayment of notes payable     -       (120,000 )
Repayment of notes payable-related parties     (2,249,186 )     (2,550,006 )
Repayment of convertible notes payable     (3,089,414 )     (1,688,500 )
Repayment of secured borrowings     (45,143 )     (40,647 )
Proceeds from notes payable-related parties     1,688,000       1,813,200  
Proceeds from convertible notes payable     4,075,975       2,637,500  
Proceeds from secured borrowings     -       17,093  
Common stock issued with convertible note payable     -       89,010  
Proceeds from issuance of common stock     48,750       42,000  
Net Cash Provided by Financing Activities     428,982       199,650  
Effects of exchange rate changes on cash     (275 )     4,933  
Net Change in Cash     (2,861 )     (945 )
Cash at Beginning of Period     50,857       51,802  
Cash at End of Period   $ 47,996     $ 50,857  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 1,387,474     $ 1,057,500  
Cash paid for taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Common stock issued for extinguishment of debt and accounts payable   $ 12,000     $ 16,010  
Common stock issued for note commitment fee   $ 17,550     $ 46,193  
Assets held to satisfy secured borrowings   $ 49,257     $ 19,401  
Recognition of debt discounts on convertible notes payable   $ 5,127,699     $ 1,031,741  
Note payable issued for conversion of accounts payable   $ 40,000     $ -  
Warrants issued with convertible note payable   $ 1,711,394     $ -  

 

See accompanying notes to the consolidated financial statements.

 

  F-5  

 

 

Inception Mining, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2019 and 2018

 

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.

 

  F-6  

 

 

On January 11, 2016, the Company implemented a 5.5 to 1 reverse stock split. This reverse stock split was effective on May 26, 2016. All share and per share references have been retroactively adjusted to reflect this 5.5 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. Immediately before the Reverse Split, the Company had 266,669,980 shares of common stock outstanding. Immediately after the Reverse Split, the Company had 48,485,451 shares of common stock outstanding, pending fractional-share rounding-up calculations to adjust for the Reverse Split.

 

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.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, 2019, the Company recorded net loss of $15,000,834 and used $429,845 in cash for operating activities. These factors among others indicate that the Company may be unable to continue as a going concern for one year from the issuance of these financial statements.

 

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.

 

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, 2019 and December 31, 2018, the Company had no cash equivalents. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has never experienced any losses in such accounts.

 

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 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.

 

  F-7  

 

 

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.

 

  F-8  

 

 

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.

 

Settlement of Contracts in Company’s Equity – In accordance with ASC 815-40-25, the Company must meet certain requirements in order to report contracts as equity versus liabilities. These requirements must be met by the Company or the contracts need to be reported as liabilities. The Company has adopted the sequencing approach as guidance on contracts that permit partial net share settlement. The Company evaluates the contracts based on the earliest issuance date. Currently, using the sequencing approach, the Company has one convertible note and two warrant issuances that are reported as equity instead of liabilities.

 

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.

 

  F-9  

 

 

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 - Effective January 1, 2018 we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 606-10, Revenue from Contracts with Customers (“ASC 606-10”). The adoption of ASC 606-10 had no impact on prior year or previously disclosed amounts. In accordance with ASC 606-10, revenue is measured based on a consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

 

The Company generates revenue by selling gold and silver produced from its mining operations. The majority of the Company’s sales come from the sale of refined gold; however, the end product at the Company’s gold operations is generally doré bars. Doré is an alloy consisting primarily of gold but also containing silver and other metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% gold. Under the terms of the Company’s refining agreements, the doré bars are refined for a fee, and the Company’s share of the refined gold and silver is credited to its bullion account.

 

The Company recognizes revenue for gold and silver from doré production when it satisfies the performance obligation of transferring gold and silver inventory to the customer, which generally occurs upon transfer of gold and silver bullion credits as this is the point at which the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits of ownership of the asset.

 

The Company generally recognizes the sale of gold bullion credits at the prevailing market price when gold bullion credits are delivered to the customer. The transaction price is determined based on the agreed upon market price and the number of ounces delivered. Payment is due upon delivery of gold bullion credits to the customer’s account.

 

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. Common share equivalents of 122,123,227 have been excluded in the diluted income per share calculation for 2019 because they would be anti-dilutive. Common share equivalents of 28,206,471 have been excluded in the diluted income per share calculation for 2018 because they would be anti-dilutive.

 

  F-10  

 

 

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, 2019 and 2018.

 

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.

 

Operating Lease – The Company leases its corporate headquarters and administrative offices in Salt Lake City, Utah on a month-to-month basis.

 

The Company incurred rent expense of $13,637 and $13,891 for the year ended December 31, 2019 and 2018.

 

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 – From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

 

In March 2019, FASB issued Accounting Standards Update 2019-01, Topic 842 – Leases. The Company has adopted this standard and determined that it does not have a material impact on the Company’s financial statements.

 

  F-11  

 

 

3. Inventories, Stockpiles and Mineralized Materials on Leach Pads

 

Inventories, stockpiles and mineralized materials on leach pads at December 31, 2019 and 2018 consisted of the following:

 

    December 31, 2019     December 31, 2018  
Supplies   $ 62,912     $ 87,231  
Mineralized Material on Leach Pads     201,407       247,213  
ADR Plant     92,404       40,642  
Finished Ore     498,346       195,528  
Total Inventories   $ 855,069     $ 570,614  

 

There were no stockpiles at December 31, 2019 and 2018. During 2018, management decided to write down the inventory on one of its leach pads. The Company recorded a write down of $1,058,812 for the inventory in process on the leach pad as of December 31, 2018.

 

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.

 

The derivative liability as of December 31, 2019, in the amount of $4,983,107 has a level 3 classification under ASC 825-10.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2019 and 2018:

 

   

Debt

Derivative Liabilities

 
Balance, December 31, 2017   $ 647,807  
Transfers in upon initial fair value of derivative liabilities     2,879,560  
Change in fair value of derivative liabilities and warrant liability     (979,561 )
Balance, December 31, 2018   $ 2,547,806  
Transfers in upon initial fair value of derivative liabilities     23,328,303  
Change in fair value of derivative liabilities and warrant liability     (11,654,174 )
Transfers to permanent equity upon conversion of note payable     -  
Balance, December 31, 2019   $ 14,221,935  
Net gain for the period included in earnings relating to the liabilities held at December 31, 2019   $ 11,654,174  
Net gain for the period included in earnings relating to the liabilities held at December 31, 2018   $ 979,561  

 

  F-12  

 

 

Debt derivatives – 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, 2019, the Company marked to market the fair value of the debt derivatives and determined a fair value of $13,967,303. The Company recorded a gain from change in fair value of debt derivatives of $10,160,832 for the year ended December 31, 2019. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model and the Monte Carlo Valuation Model. The Binomial Option Pricing Model was based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 225.30% to 256.89%, (3) weighted average risk-free interest rate of 1.58% to 1.59% (4) expected life of 1.39 to 2.03 years, and (5) the quoted market price of the Company’s common stock at each valuation date. The Monte Carlo Valuation Model was based on the following assumptions: (1) expected volatility of 260.9%, (2) weighted average risk-free interest rate of 1.59% and (3) expected life of 1.39 years.

 

At December 31, 2018, the Company marked to market the fair value of the debt derivatives and determined a fair value of $2,511,226. The Company recorded a gain from change in fair value of debt derivatives of $953,390 for the year ended December 31, 2018. 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 203.03% to 306.25%, (3) weighted average risk-free interest rate of 2.45% to 2.63% (4) expected life of 0.27 to 1.59 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 – During the year ended December 31, 2018, the Company issued warrants in conjunction with the issuance of three Crown Bridge Convertible Notes. These warrants contained certain reset provisions. The accounting treatment of derivative financial instruments required 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, 2019, the Company had a warrant liability of $254,632. The Company recorded a gain from change in fair value of warrant liability of $1,493,342 for the year ended December 31, 2019. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model and the Monte Carlo Valuation Model. The Binomial Option Pricing Model was based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 210.75% to 226.32%, (3) weighted average risk-free interest rate of 1.55% to 1.56% (4) expected life of 2.86 to 4.07 years, and (5) the quoted market price of the Company’s common stock at each valuation date. The Monte Carlo Valuation Model was based on the following assumptions: (1) expected volatility of 222.6%, (2) weighted average risk-free interest rate of 1.60% and (3) expected life of 2.39 years.

 

At December 31, 2018, the Company had a warrant liability of $36,580. The Company recorded a gain from change in fair value of warrant liability of $26,171 for the year ended December 31, 2018.

 

5. Properties, Plant and Equipment, Net

 

Properties, plant and equipment at December 31, 2019 and 2018 consisted of the following:

 

    December 31, 2019     December 31, 2018  
Land   $ 267,471     $ 270,736  
Buildings     2,337,775       2,366,323  
Machinery and Equipment     946,777       956,669  
Office Equipment and Furniture     42,191       42,311  
Vehicles     84,105       85,132  
Construction in Process     7,487       11,277  
      3,685,806       3,732,448  
Less Accumulated Depreciation     (3,242,458 )     (3,068,407 )
Total Property, Plant and Equipment   $ 443,348     $ 664,041  

 

  F-13  

 

 

During the years ended December 31, 2019 and 2018, the Company recognized depreciation expense of $212,006 and $225,395, respectively. The following table summarizes the allocation of depreciation expense between cost of goods sold and general and administrative expenses.

 

Depreciation Allocation   December 31, 2019     December 31, 2018  
Cost of Goods Sold   $ 176,288     $ 187,158  
General and Administrative     35,718       38,237  
Total   $ 212,006     $ 225,395  

 

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 fair value of the long-term liability of $513,051 and $341,845 as of December 31, 2019 and 2018, 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 credit adjusted risk free rate of 18.00% and an inflation rate of 5.3%. 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 increase in the reclamation liability in 2019 was related to the expansion of the heap leach facility and related infrastructure and accretion. The decrease in 2018 was due to the foreign currency translation rate.

 

Changes to the asset retirement obligation were as follows:

 

    December 31, 2019     December 31, 2018  
Balance, Beginning of Year   $ 341,845     $ 352,713  
Liabilities incurred     171,206       (10,868 )
Disposal     -       -  
Balance, End of Year   $ 513,051     $ 341,845  

 

7. Accounts Payable and Accrued Liabilities

 

Accounts Payable and accrued liabilities at December 31, 2019 and 2018 consisted of the following:

 

    December 31, 2019     December 31, 2018  
Accounts Payable   $ 750,529     $ 558,749  
Accrued Liabilities     530,779       394,017  
Accrued Salaries and Benefits     507,043       410,930  
Advances Payable     403,995       268,301  
Total Accrued Liabilities   $ 2,192,346     $ 1,631,997  

 

  F-14  

 

 

8. Secured Borrowings

 

On June 25, 2018, the Company entered into four new financing arrangements with third parties for a combined principal amount of $225,000. The terms of the arrangements require the Company to pay the combined principal balance plus a guaranteed return of no less than 10 percent, or $22,500, for a total expected remittance of $247,500. The maturity date of the notes is June 26, 2019. The terms of repayment allow the Company to remit to the lender a certain quantity of gold to satisfy the liability though the Company expects to liquidate gold held and satisfy the liability in cash. As of December 31, 2018, the Company held 17 ounces of gold, valued at a cost of $19,401, to satisfy the liabilities upon maturity leaving a net obligation of $217,223, which is recorded on the Company’s balance sheet as secured borrowings.

 

On June 26, 2019, the Company entered into four new financing arrangements with third parties for a combined principal amount of $247,571. The terms of the arrangements require the Company to pay the combined principal balance plus a guaranteed return of no less than 10 percent, or $24,757, for a total expected remittance of $272,328. The maturity date of the notes is June 25, 2020. The terms of repayment allow the Company to remit to the lender a certain quantity of gold to satisfy the liability though the Company expects to liquidate gold held and satisfy the liability in cash. As of December 31, 2019, the Company held 35 ounces of gold, valued at a cost of $49,257, to satisfy the liabilities upon maturity leaving a net obligation of $211,066, which is recorded on the Company’s balance sheet as secured borrowings.

 

Secured Borrowings   December 31, 2019     December 31, 2018  
Secured obligations   $ 247,571     $ 225,005  
Guaranteed interest     24,757       22,500  
Deferred interest     (12,005 )     (10,881 )
      260,323       236,624  
Gold held as security     (49,257 )     (19,401 )
Secured Borrowings, net   $ 211,066     $ 217,223  

 

9. Notes Payable

 

Notes payable were comprised of the following as of December 31, 2019 and December 31, 2018:

 

Notes Payable   December 31, 2019     December 31, 2018  
Phil Zobrist   $ 60,000     $ 60,000  
Total Notes Payable   $ 60,000     $ 60,000  

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $121,337 for the remaining derivative liability and of $11,842 for the remaining debt discount. As of December 31, 2019, the gross balance of the note was $60,000 and accrued interest was $75,304.

 

  F-15  

 

 

10. Notes Payable – Related Parties

 

Notes payable – related parties were comprised of the following as of December 31, 2019 and December 31, 2018:

 

Notes Payable - Related Parties   Relationship   December 31, 2019     December 31, 2018  
Clavo Rico Incorporatedt   Affiliate - Controlled by Director   $ 3,377,980     $ -  
Claymore Management   Affiliate - Controlled by Director     185,000       185,000  
Debra D’ambrosio   Immediate Family Member     57,000       -  
Diamond 80, LLC   Immediate Family Member     -       49,000  
Francis E. Rich IRA   Immediate Family Member     100,000       100,000  
GAIA Ltd   Affiliate - Controlled by Director     -       1,150,000  
Legends Capital   Affiliate - Controlled by Director     755,000       765,000  
LWB Irrev Trust   Affiliate - Controlled by Director     1,101,000       1,101,000  
MDL Ventures   Affiliate - Controlled by Director     1,305,236       1,204,677  
Silverbrook Corporation   Affiliate - Controlled by Director     -       2,227,980  
WOC Energy LLC   Affiliate - Controlled by Director     40,000       40,000  
Total Notes Payable - Related Parties       $ 6,921,216     $ 6,822,657  

 

Clavo Rico, Incorporated – On April 5, 2019, GAIA Ltd and Silverbrook Corporation assigned 100% of the outstanding principal balance of their notes and all accrued interest to Clavo Rico, Incorporated. The GAIA Ltd and Silverbrook Corporation notes had been extended until December 31, 2019 and bear 18% per annum interest. As of December 31, 2019, the gross balance of the notes were $3,377,980 and accrued interest was $4,517,807.

 

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 bore 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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $448,369 for the remaining derivative liability and of $36,513 for the remaining debt discount. As of December 31, 2019, the gross balance of the note was $185,000 and accrued interest was $292,858.

 

D. D’Ambrosio – On January 4, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $125,000 (the “Note”) due on February 5, 2019 and bears a 5.00% interest rate. The Company made a payment of $131,250 towards the principal balance and accrued interest of $6,250 on February 13, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On February 19, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $100,000 (the “Note”) due on March 19, 2019 and bears a 5.00% interest rate. The Company made a payment of $105,000 towards the principal balance and accrued interest of $5,000 on March 8, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On March 14, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $100,000 (the “Note”) due on April 30, 2019 and bears a 5.00% interest rate. The Company made a payment of $105,000 towards the principal balance and accrued interest of $5,000 on April 5, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On April 9, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $122,000 (the “Note”) due on May 30, 2019 and bears a 5.00% interest rate. The Company made a payment of $128,100 towards the principal balance and accrued interest of $6,100 on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On June 14, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $182,000 (the “Note”) due on July 5, 2019 and bears a 5.00% interest rate. The Company made a payment of $191,100 towards the principal balance and accrued interest of $9,100 on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

  F-16  

 

 

D. D’Ambrosio – On July 12, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $150,000 (the “Note”) due on August 12, 2019 and bears a 5.00% interest rate. The Company made a payment of $157,500 towards the principal balance and accrued interest of $7,500 on July 25, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On November 7, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $160,000 (the “Note”) due on December 5, 2019 and bears a 5.00% interest rate. The Company made a payment of $168,000 towards the principal balance and accrued interest of $8,000 on November 27, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On November 29, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $152,000 (the “Note”) due on December 15, 2019 and bears a 5.00% interest rate. The Company made a payment of $159,600 towards the principal balance and accrued interest of $7,600 on December 12, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On December 12, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $150,000 (the “Note”) due on December 31, 2019 and bears a 5.00% interest rate. The Company made a payment of $157,500 towards the principal balance and accrued interest of $7,500 on December 27, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

D. D’Ambrosio – On December 30, 2019, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the principal amount of $57,000 (the “Note”) due on January 30, 2020 and bears a 5.00% interest rate. As of December 31, 2019, the outstanding balance of the Note was $57,000 and accrued interest was $2,850.

 

Diamond 80, LLC – On April 3, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $50,000 (the “Note”) due on December 31, 2018 and bears a 7.0% interest rate. The Company made a payment of $1,075 towards the principal balance of $1,000 and accrued interest of $75 on September 30, 2018. The Company made a payment of $49,000 towards the principal balance on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $36,700.

 

Francis E. Rich IRA – On February 14, 2013, the Company issued an unsecured Short-Term Promissory Note to Francis E. Rich IRA in the principal amount of $100,000 (the “Note”) due on February 14, 2020 and bears a 15.0% semi-annual interest rate. As of December 31, 2019, the outstanding balance of the Note was $100,000 and accrued interest was $11,425.

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $2,524,747 for the remaining derivative liability and of $226,974 for the remaining debt discount. On April 5, 2019, the entire outstanding balance of $1,150,000 and accrued interest was assigned to Clavo Rico, Incorporated. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-17  

 

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $2,564,130 for the remaining derivative liability and of $150,987 for the remaining debt discount. On November 29, 2019, the Company made a payment of $10,000 towards the outstanding principal balance. As of December 31, 2019, the gross balance of the note was $755,000 and accrued interest was $1,089,685.

 

Legends Capital Group – On May 16, 2017, the Company issued an unsecured Short-Term Promissory Note to Legends Capital Group in the principal amount of $100,000 (the “Note”) due on September 15, 2018 and bears a 7.0% interest rate. The Company made a payment of $50,000 towards the principal balance and accrued interest of $0 on June 27, 2018. The Company made a payment of $40,000 towards the principal balance on February 28, 2019. On May 21, 2019, the Company paid the remaining interest balance of $7,000. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $2,564,130 for the remaining derivative liability and of $217,303 for the remaining debt discount. As of December 31, 2019, the gross balance of the note was $1,101,000 and accrued interest was $1,656,913.

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $1,487,158 for the remaining derivative liability. As of December 31, 2019, the gross balance of the note was $1,305,236 and accrued interest was $0.

 

Pine Valley Investments, LLC – On May 7, 2019, the Company issued an unsecured Short-Term Promissory Note to Pine Valley Investments, LLC in the principal amount of $100,000 (the “Note”) due on May 21, 2019 and bears a 5.0% interest rate. The Company made a payment of $105,000 towards the principal balance and accrued interest of $5,000 on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

  F-18  

 

 

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. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $4,656,189 for the remaining derivative liability and of $439,733 for the remaining debt discount. On April 5, 2019, the entire outstanding balance of $2,227,980 and accrued interest was assigned to Clavo Rico, Incorporated. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On November 6, 2017, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $40,000 (the “Note”) due on September 30, 2019 and bears a 4.0% interest rate. As of December 31, 2019, the outstanding balance of the Note was $40,000 and accrued interest was $0.

 

WOC Energy, LLC – On January 8, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $75,000 (the “Note”) due on January 11, 2019 and bears a 5.0% interest rate. The Company made a payment of $78,750 towards the principal balance and accrued interest of $3,750 on February 19, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On February 22, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on March 31, 2019 and bears a 5.0% interest rate. The Company made a payment of $52,500 towards the principal balance and accrued interest of $2,500 on March 26, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On April 3, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $60,000 (the “Note”) due on May 10, 2019 and bears a 5.0% interest rate. The Company made a payment of $63,000 towards the principal balance and accrued interest of $3,000 on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On April 16, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $55,000 (the “Note”) due on May 31, 2019 and bears a 5.0% interest rate. The Company made a payment of $57,750 towards the principal balance and accrued interest of $2,750 on May 21, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On May 1, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $40,000 (the “Note”) due on May 31, 2019 and bears a 5.0% interest rate. This note was a conversion of accounts payable due to the lender of $40,000. The Company made a payment of $12,000 towards the principal balance and accrued interest of $2,000 on July 10, 2019. The Company made a payment of $10,000 towards the principal balance on July 15, 2019. The Company made a payment of $11,000 towards the principal balance and accrued interest of $1,000 on August 28, 2019. The Company made a payment of $10,000 towards the principal balance on September 5, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On November 13, 2019, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on December 15, 2019 and bears a 5.0% interest rate. The Company made a payment of $52,500 towards the principal balance and accrued interest of $2,500 on December 12, 2019. As of December 31, 2019, the outstanding balance of the Note was $0 and accrued interest was $0.

 

  F-19  

 

 

11. Convertible Notes Payable

 

Convertible notes payable were comprised of the following as of December 31, 2019 and December 31, 2018:

 

Convertible Notes Payable   December 31, 2019     December 31, 2018  
Adar Alef LLC   $ -     $ 105,000  
Antczak Polich Law LLC     355,980       430,000  
Auctus Fund     -       125,000  
Coolidge Capital     -       75,000  
Crossover Capital     -       82,894  
Crown Bridge Partners     -       55,000  
Investor     3,985,000       150,000  
Eagle Equities     -       103,000  
Ema Financial     -       75,000  
GS Capital Partners     -       300,000  
JS Investments     -       100,000  
Labrys Funding     -       300,000  
LG Capital Funding     -       100,000  
Morningview Financial     -       55,000  
Power Up Lending     -       116,000  
SBI Investments     -       110,000  
Scotia International     400,000       -  
Total Convertible Notes Payable     4,740,980       2,281,894  
Less Unamortized Discount     (2,818,373 )     (1,112,499 )
Total Convertible Notes Payable, Net of Unamortized Debt Discount     1,922,607       1,169,395  
Less Short-Term Convertible Notes Payable     (355,980 )     (1,169,395 )
Total Long-Term Convertible Notes Payable, Net of Unamortized Debt Discount   $ 1,566,627     $ -  

 

Adar Alef, LLC – On November 19, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Adar Alef, LLC (“Adar Alef”), in the principal amount of $105,000 (the “Note”) due on November 19, 2019 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $100,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On May 22, 2019, the Company paid $146,137 to pay off the principal balance of $105,000 and $41,137 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $92,918 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Antczak Polich Law, LLC – On August 1, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Antczak Polich Law, LLC (“Antczak”), in the principal amount of $300,000 (the “Note”) due on August 1, 2019 and bears 8% per annum interest, due at maturity. This Note was issued for $300,000 in legal fees due to Antczak for its services related to several legal issues handled for the Company. The Note is convertible into common stock, at holder’s option, at a fixed conversion price of $0.75 per share. As of December 31, 2019, the gross balance of the note was $300,000 and accrued interest was $36,033.

 

Antczak Polich Law, LLC – On December 1, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Antczak Polich Law, LLC (“Antczak”), in the principal amount of $130,000 (the “Note”) due on December 1, 2019 and bears 8% per annum interest, due at maturity. This Note was issued for $130,000 in legal fees due to Antczak for its services related to several legal issues handled for the Company. The Note is convertible into common stock, at holder’s option, at a fixed conversion price of $0.75 per share. During the year ended December 31, 2019, the Company made several payments amounting to $74,020. As of December 31, 2019, the gross balance of the note was $55,980 and accrued interest was $10,062.

 

  F-20  

 

 

Auctus Fund – On December 4, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Auctus Fund (“Auctus”), in the principal amount of $125,000 (the “Note”) due on September 4, 2019 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $112,250 (less an original issue discount (“OID”) of $12,750). The Note is convertible into common stock, at holder’s option, at a 50% discount of the lowest trading price of the common stock during the 25 trading day period prior to conversion. At any time after the closing date, if the Company’s common stock is not deliverable by DWAC, then an additional 10% discount will apply to all future conversions on this note. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 15% discount while the “Chill” is in effect. On May 23, 2019, the Company paid $171,475 to pay off the principal balance of $125,000 and $46,475 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $111,240 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Coolidge Capital, LLC – On November 7, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Coolidge Capital, LLC. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $75,000. The total net proceeds the Company received was $70,500 (less an original issue discount (“OID”) of $4,500). The Note has a maturity date of August 7, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $4,500 which will be amortized over the life of the note. On May 3, 2019, the Company paid $105,000 to pay off the principal balance of $75,000 and $30,000 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $3,610 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Coolidge Capital, LLC – On May 10, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Coolidge Capital, LLC. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $100,000. The total net proceeds the Company received was $95,000 (less an original issue discount (“OID”) of $5,000). The Note has a maturity date of February 10, 2020 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $5,000 which will be amortized over the life of the note. On November 13, 2019, the Company paid $145,934 to pay off the principal balance of $100,000 and $45,934 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $5,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Coventry Enterprises, LLC – On February 12, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to Coventry Enterprises, LLC (“Coventry”), in the principal amount of $50,000 (the “Note”) due on February 12, 2020 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $47,500 (less an original issue discount (“OID”) of $2,500). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On May 23, 2019, the Company paid $68,750 to pay off the principal balance of $50,000 and $18,750 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $50,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-21  

 

 

Crossover Capital Fund II, LLC – On July 10, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Crossover Capital Fund II, LLC (“Crossover Capital”), in the principal amount of $82,894 (the “Note”) due on April 10, 2019 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $75,000 (less an original issue discount (“OID”) of $7,894). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On January 4, 2019, the Company paid $118,750 to pay off the principal balance of $82,894 and $35,856 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $30,253 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Crossover Capital Fund II, LLC – On May 3, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to Crossover Capital Fund II, LLC (“Crossover Capital”), in the principal amount of $80,500 (the “Note”) due on February 3, 2020 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $70,975 (less an original issue discount (“OID”) of $9,525). The Note is convertible into common stock, at holder’s option, at a 50% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On May 22, 2019, the Company paid $93,161 to pay off the principal balance of $80,500 and $12,661 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $80,500 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Crown Bridge Partners – On October 25, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Crown Bridge Partners (“Crown Bridge”), in the principal amount of $55,000 (the “Note”) due on May 11, 2019 and bears 5% per annum interest, due at maturity. The total net proceeds the Company received was $47,000 (less an original issue discount (“OID”) of $8,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. If the conversion price drops below $0.15 per share, then the conversion price will be 50% of the trading price. The Company issued 100,000 warrants to purchase shares of common stock.in connection with this note. The warrants have a five year life and an exercise price of $0.75 per share. On April 18, 2019, the Company paid $83,738 to pay off the principal balance of $55,000 and $28,738 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $44,904 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Crown Bridge Partners – On April 18, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to Crown Bridge Partners (“Crown Bridge”), in the principal amount of $55,000 (the “Note”) due on April 18, 2020 and bears 5% per annum interest, due at maturity. The total net proceeds the Company received was $47,000 (less an original issue discount (“OID”) of $8,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. If the conversion price drops below $0.15 per share, then the conversion price will be 50% of the trading price. On October 7, 2019, the Company paid $83,738 to pay off the principal balance of $55,000 and $28,738 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $55,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Investor – On August 2, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Investor, in the principal amount of $150,000 (the “Note”) due on August 2, 2020 and bears 10% (24% default) per annum interest, due at maturity. The total net proceeds the Company received was $150,000. The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. If at any time while the note is outstanding, an event of default occurs, then an additional discount of 10% shall be factored into the variable conversion price until the note is no longer outstanding. On January 23, 2019, the Company paid $210,000 to pay off the principal balance of $150,000 and $60,000 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $119,015 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-22  

 

 

Investor – On May 20, 2019, the Company issued a secured Convertible Promissory Note (“Note”) to Investor, in the principal amount of $4,250,000 (the “Note”) due on May 20, 2021 and bears 10% (24% default) per annum interest, due at maturity. The total net proceeds the Company received was $3,000,000. The Note is convertible into common stock, at holder’s option, at 100% of market price less $0.01 per share. Market price means the mathematical average of the five lowest individually daily volume weighted average prices of the common stock from the period beginning on the issuance date and ending on the maturity date. The conversion price has a floor price of $0.01 per share of common stock, provided there has not been an event of default. The Company issued 9,250,000 warrants to purchase shares of common stock in connection with this note. The warrants have a three-year life and an exercise price as follows: 3,750,000 at an exercise price of $0.40 per share, 3,000,000 at an exercise price of $0.50 per share and 2,500,000 at an exercise price of $0.60 per share. These warrants were valued at $1,711,394 and recorded by the Company as debt discount interest expense. The note has an early payoff penalty of 140% of the then outstanding face value. On July 29,2019, the investor converted $265,000 of the principal balance into 2,986,597 shares of common stock valued at $0.11 per share. The Company recognized a loss on the extinguishment of debt of $303,149. For the year ended December 31, 2019, the Company amortized $1,253,230 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $3,985,000 and accrued interest was $249,641.

 

Eagle Equities, LLC – On December 12, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Eagle Equities, LLC (“Eagle Equities”), in the principal amount of $103,000 (the “Note”) due on December 12, 2019 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $100,000 (less an original issue discount (“OID”) of $3,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On May 22, 2019, the Company paid $147,812 to pay off the principal balance of $103,000 and $44,812 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $97,638 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

EMA Financial – On October 23, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to EMA Financial, in the principal amount of $75,000 (the “Note”) due on July 23, 2019 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $67,500 (less an original issue discount (“OID”) of $7,500). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. However, if the Company’s share price at any time loses the bid, then the conversion price may, in the Holder’s sole and absolute discretion, be reduced to a fixed conversion price of $0.00001 (if lower than the conversion price otherwise), and provided, that if on the date of delivery of the conversion shares to the Holder, or any date thereafter while conversion shares are held by the Holder, the closing bid price per share of common stock on the principal market on the trading day on which the common shares are traded is less than the sale price used to calculate the conversion price, then such conversion price shall be automatically reduced using the new low closing bid price and additional shares issued to the Holder. In the event the Company experiences a DTC “Chill” on its shares, or if the closing sale price at any time falls below $0.047, then the conversion price shall be decreased an additional 15% discount. At any time after the closing date, if the Company’s common stock is not deliverable by DWAC, then an additional 15% discount will apply to all future conversions on this note. On April 25, 2019, the Company paid $107,308 to pay off the principal balance of $75,000 and $32,308 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $56,044 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

EMA Financial – On May 1, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to EMA Financial, in the principal amount of $75,000 (the “Note”) due on February 1, 2020 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $67,500 (less an original issue discount (“OID”) of $7,500). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, or if the closing sale price at any time falls below $0.15, then the conversion price shall be decreased an additional 15% discount. At any time after the closing date, if the Company’s common stock is not deliverable by DWAC, then an additional 15% discount will apply to all future conversions on this note. On October 21, 2019, the Company paid $107,009 to pay off the principal balance of $75,000 and $32,009 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $75,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-23  

 

 

GS Capital Partners – On August 1, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to GS Capital Partners (“GS Capital”), in the principal amount of $100,000 (the “Note”) due on August 1, 2019 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $95,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at a 42% discount of the lowest closing price of the common stock during the 12 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On January 22, 2019, the Company paid $133,814 to pay off the principal balance of $100,000 and $33,814 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $57,515 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

GS Capital Partners – On November 28, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to GS Capital Partners (“GS Capital”), in the principal amount of $200,000 (the “Note”) due on November 28, 2019 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $190,000 (less an original issue discount (“OID”) of $10,000). The Note is convertible into common stock, at holder’s option, at a 42% discount of the lowest closing price of the common stock during the 12 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On May 23, 2019, the Company paid $267,890 to pay off the principal balance of $200,000 and $67,890 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $181,918 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

GS Capital Partners – On January 23, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to GS Capital Partners (“GS Capital”), in the principal amount of $100,000 (the “Note”) due on February 23, 2020 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $95,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at a 42% discount of the lowest closing price of the common stock during the 12 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On July 12, 2019, the Company paid $133,726 to pay off the principal balance of $100,000 and $33,726 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $100,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

JSJ Investments – On November 9, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to JSJ Investments (“JSJ”), in the principal amount of $100,000 (the “Note”) due on November 9, 2019 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $98,000 (less an original issue discount (“OID”) of $2,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. On May 10, 2019, the Company paid $145,961 to pay off the principal balance of $100,000 and $45,961 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $85,753 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

JSJ Investments – On February 5, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to JSJ Investments (“JSJ”), in the principal amount of $100,000 (the “Note”) due on February 5, 2020 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $98,000 (less an original issue discount (“OID”) of $2,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. On May 23, 2019, the Company paid $138,452 to pay off the principal balance of $100,000 and $38,452 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $100,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-24  

 

 

Labrys Fund LP – On October 26, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LABRYS FUND, LP (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate principal amount of $300,000. The Note has a maturity date of April 26, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The total net proceeds the Company received was $270,000 (less an original issue discount (“OID”) of $30,000). The Company has the right to prepay the Note, provided it makes a payment to the Purchaser as set forth in the Note within 180 days of its Issue Date. The transactions described above closed on October 26, 2018. In connection with the issuance of the Note, the Company issued to the Purchaser 1,362,398 shares of its common stock (the “Returnable Shares”) that shall be returned to the Company’s treasury if the Note is fully repaid and satisfied. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of $0.11 as set forth in the Note, subject to adjustment as set forth in the Note if the Note is in Default. The Default Note Conversion Price is a 45% discount of the lowest trading price of the common stock during the 30 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 15% discount on all future conversions. The Company issued 235,000 shares of common stock in connection with this note, which were valued at $28,200 and recorded as part of the debt discount. The Company recognized a debt discount on this note of $85,473 which will be amortized over the life of the note. On May 22, 2019, the Company paid $319,510 to pay off the principal balance of $300,000 and $19,510 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $54,477 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Labrys Fund LP – On January 14, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LABRYS FUND, LP (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate principal amount of $282,000. The Note has a maturity date of July 14, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The total net proceeds the Company received was $250,000 (less an original issue discount (“OID”) of $32,000). The Company has the right to prepay the Note, provided it makes a payment to the Purchaser as set forth in the Note within 180 days of its Issue Date. The transactions described above closed on January 14, 2019. In connection with the issuance of the Note, the Company issued to the Purchaser 1,000,000 shares of its common stock (the “Returnable Shares”) that shall be returned to the Company’s treasury if the Note is fully repaid and satisfied. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of $0.11 as set forth in the Note, subject to adjustment as set forth in the Note if the Note is in Default. The Default Note Conversion Price is a 45% discount of the lowest trading price of the common stock during the 30 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 15% discount on all future conversions. The Company issued 130,000 shares of common stock in connection with this note, which were valued at $17,550 and recorded as part of the debt discount. The Company recognized a debt discount on this note of $113,641 which will be amortized over the life of the note. On May 22, 2019, the Company paid $293,867 to pay off the principal balance of $282,000 and $11,867 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $113,641 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

LG Capital Funding – On December 7, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to LG Capital Funding (“LG Cap”), in the principal amount of $100,000 (the “Note”) due on December 7, 2019 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $85,000 (less an original issue discount (“OID”) of $15,000). The Note is convertible into common stock, at holder’s option, for the first 6 months at a fixed price of $0.18 per share and after that date at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount on all future conversions. The Company issued 39,473 shares of common stock in connection with this note, which were valued at $7,500 and recorded as part of the debt discount. The Company recognized a debt discount on this note of $22,500 which will be amortized over the life of the note. On May 23, 2019, the Company paid $146,252 to pay off the principal balance of $100,000 and $46,252 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $21,020 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-25  

 

 

Morningview Financial – On November 26, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Morningview Financial (“Morningview”), in the principal amount of $55,000 (the “Note”) due on November 26, 2019 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $47,500 (less an original issue discount (“OID”) of $7,500). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. On May 23, 2019, the Company paid $78,546 to pay off the principal balance of $55,000 and $23,546 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $49,726 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Odyssey Capital Funding, LLC – On May 15, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to Odyssey Capital Funding, LLC (“Odyssey Capital”), in the principal amount of $105,000 (the “Note”) due on May 15, 2020 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $100,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On November 8, 2019, the Company paid $154,128 to pay off the principal balance of $105,000 and $49,128 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $105,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

One 44 Capital, LLC – On January 28, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to One 44 Capital, LLC (“One 44”), in the principal amount of $100,000 (the “Note”) due on December 12, 2019 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $95,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at a 40% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be decreased an additional 10% discount while the “Chill” is in effect. On July 25, 2019, the Company paid $146,866 to pay off the principal balance of $100,000 and $46,866 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $100,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Power Up Lending Group – On July 12, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with POWER UP LENDING GROUP LTD. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $53,000. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $3,000). The Note has a maturity date of April 30, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12% - 22% default interest per annum) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The fixed conversion price is $0.00009. The variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. On January 14, 2019, the Company paid $75,855 to pay off the principal balance of $53,000 and $22,855 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $1,233 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-26  

 

 

Power Up Lending Group – On October 22, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with POWER UP LENDING GROUP LTD. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $63,000. The total net proceeds the Company received was $60,000 (less an original issue discount (“OID”) of $3,000). The Note has a maturity date of July 30, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12% - 22% default interest per annum) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The fixed conversion price is $0.00009. The variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. On April 16, 2019, the Company paid $90,083 to pay off the principal balance of $63,000 and $27,083 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $2,253 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Power Up Lending Group – On January 11, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with POWER UP LENDING GROUP LTD. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $53,000. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $3,000). The Note has a maturity date of October 30, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12% - 22% default interest per annum) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The fixed conversion price is $0.00009. The variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. On May 22, 2019, the Company paid $67,353 to pay off the principal balance of $53,000 and $14,353 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $3,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Power Up Lending Group – On April 16, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with POWER UP LENDING GROUP LTD. (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $63,000. The total net proceeds the Company received was $60,000 (less an original issue discount (“OID”) of $3,000). The Note has a maturity date of February 28, 2020 and the Company has agreed to pay interest on the unpaid principal balance of the Note at the rate of twelve percent (12% - 22% default interest per annum) per annum from the date on which the Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company may prepay the Note in whole provided that the Purchaser be given written notice not more than three (3) Trading Days. The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price of the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The fixed conversion price is $0.00009. The variable conversion price is 61% (39% discount) of the market price. Market price is the average of the lowest two trading prices in a ten trading day look back period. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. On May 22, 2019, the Company paid $80,062 to pay off the principal balance of $63,000 and $17,062 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $3,000 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

  F-27  

 

 

SBI Investments – On December 17, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to SBI Investments, LLC (“SBI”), in the principal amount of $110,000 (the “Note”) due on June 17, 2019 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $100,000 (less an original issue discount (“OID”) of $10,000). The Note is convertible into common stock, at holder’s option, at a 50% discount of the lowest trading price of the common stock during the 20 trading day period prior to conversion. At any time after the closing date, if the Company’s common stock is not deliverable by DWAC, then an additional 10% discount will apply to all future conversions on this note. If at any time while the note is outstanding, an event of default occurs, then an additional discount of 15% shall be factored into the variable conversion price until the note is no longer outstanding. On May 23, 2019, the Company paid $147,827 to pay off the principal balance of $110,000 and $37,827 in accrued interest and prepayment penalty. For the year ended December 31, 2019, the Company amortized $101,538 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $0 and accrued interest was $0.

 

Scotia International of Nevada, Inc. – On January 10, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”) to Scotia International of Nevada, Inc. (“Scotia”), in the principal amount of $400,000 (the “Note”) due on January 10, 2022 and bears 6% per annum interest, due at maturity. The Note was issued as part of a buyout agreement on the net smelter royalty due Scotia on the precious metals mined from the Company’s mining operation in Honduras. The Note is convertible into common stock, at holder’s option, at $0.50 per share as long as the Company’s common stock’s bid price is less than $0.75 per share. If the bid price is more than $0.75 per share, then Scotia may elect to convert at the average bid price of the common stock during the 10 trading day period prior to conversion. For the year ended December 31, 2019, the Company amortized $29,332 of debt discount to current period operations as interest expense. As of December 31, 2019, the gross balance of the note was $400,000 and accrued interest was $23,342.

 

12. Stockholders’ Deficit

 

Common Stock

 

On January 1, 2018, 760,000 shares of common stock were issued to officers, former officers and members of the board of directors of the Company as payment for consulting services performed. These shares were valued at $0.2846 per share for a value of $216,296.

 

On January 30, 2018, the Company issued 250,000 shares of common stock for $27,500 in cash. These shares were valued at $0.11 per share.

 

On March 30, 2018, 20,000 shares of common stock were issued to a former officers and members of the board of directors of the Company as part of a settlement agreement. These shares were valued at $0.2846 per share for a value of $5,692.

 

On March 30, 2018, the Company issued 36,385 shares for services performed per a consulting agreement in 2015. These shares were valued and expensed based on quoted market prices at that time. These shares had never been issued.

 

On May 25, 2018, in connection with the issuance of the Note to Labrys Fund LP, the Company issued to the Note Purchaser 55,250 shares of its common stock as commitment shares for the issuance of the note. These shares were valued at $0.19 per share for a total value of $10,498.

 

  F-28  

 

 

On May 27, 2018, the Company entered into a Settlement Agreement with a consultant through which the consultant agreed to return 36,364 shares of common stock to the Company. The 36,364 shares were returned to the Company and were immediately cancelled.

 

On June 28, 2018, the Company issued 100,000 shares of common stock to Justin Wilson per a consulting agreement. These shares were payment for services and were valued at $0.1601 per share for a total value of $16,010.

 

On July 3, 2018, 100,000 shares of common stock were issued to a member of the board of directors of the Company as part of a settlement agreement for consulting services. These shares were valued at $0.1601 per share for a value of $16,010. The Company recognized a loss on this settlement of $8,510 and reduced payables by $7,500.

 

On July 18, 2018, the Company issued 200,000 shares of common stock for $14,500 in cash. These shares were valued at $0.725 per share.

 

On September 24, 2018, the Company entered into a Settlement Agreement with a consultant through which the consultant agreed to return 450,000 shares of common stock to the Company. The 450,000 shares were returned to the Company and were immediately cancelled.

 

On September 28, 2018, 600,000 shares of common stock were issued to officers, former officers and members of the board of directors of the Company as payment for consulting services performed. These shares were valued at $0.1891 per share for a value of $113,460.

 

On October 26, 2018, in connection with the issuance of the Note to Labrys Fund LP, the Company issued to the Note Purchaser 235,000 shares of its common stock as commitment shares for the issuance of the note. These shares were valued at $0.12 per share for a total value of $28,200.

 

On December 7, 2018, in connection with the issuance of the Note to LG Capital Funding, LLC, the Company issued to the Note Purchaser 39,473 shares of its common stock as commitment shares for the issuance of the note. These shares were valued at $0.19 per share for a total value of $7,499.

 

On January 14, 2019, in connection with the issuance of the Note to Labrys Fund LP, the Company issued to the Note Purchaser 130,000 shares of its common stock as commitment shares for the issuance of the note. These shares were valued at $0.135 per share for a total value of $17,550.

 

On February 5, 2019, 100,000 shares of common stock were issued to a member of the board of directors of the Company as part of a conversion agreement for consulting services. These shares were valued at $0.12 per share for a value of $12,000. The Company recognized a loss on this settlement of $5,000 and reduced payables by $7,000.

 

On March 12, 2019, 650,000 shares of common stock were issued to officers, former officers and members of the board of directors of the Company as payment for consulting services performed. These shares were valued at $0.189 per share for a value of $122,850.

 

On March 28, 2019, the Company issued 375,000 shares of common stock to Richard Bass Jr. for $48,750 in cash. These shares were valued at $0.13 per share.

 

On April 26, 2019, in connection with an extension of a Note to Labrys Fund LP, the Company issued to the Note Purchaser 300,000 shares of its common stock as an extension fee for the extension of the note. These shares were valued at $0.3399 per share for a total value of $101,970.

 

On June 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. Per this agreement, the Company will issue 200,000 shares of common stock each month for 11 months. This stock was valued at $0.11 per share for a value of $22,000.

 

On July 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.15 per share for a value of $30,000.

 

  F-29  

 

 

On July 29, 2019, the Company issued to a Note Holder 2,986,597 shares of its common stock under a conversion notice. The conversion was for $265,000 in principle. The shares were valued at $0.11 per share for a total value of $328,526. The Company recognized a loss of extinguishment of debt of $303,149 on this conversion.

 

On August 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.08 per share for a value of $16,000.

 

On September 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.08 per share for a value of $16,000.

 

On October 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.08 per share for a value of $16,000.

 

On November 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.065 per share for a value of $13,000.

 

On December 1, 2019, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. This stock was valued at $0.05 per share for a value of $10,000.

 

Warrants

 

On January 1, 2018, the Company issued 100,000 warrants associated with the issuance of a convertible note payable to Crown Bridge Partners, LLC. The warrants have a five-year life and are exercisable at $0.75 per share.

 

On May 11, 2018, the Company issued 100,000 warrants associated with the issuance of a convertible note payable to Crown Bridge Partners, LLC. The warrants have a five-year life and are exercisable at $0.75 per share.

 

On October 25, 2018, the Company issued 100,000 warrants associated with the issuance of a convertible note payable to Crown Bridge Partners, LLC. The warrants have a five-year life and are exercisable at $0.75 per share.

 

On May 20, 2019, the Company entered into a Note Purchase Agreement (the “Agreement”) with an investor (the “Investor”) through which the Investor purchased (i) a Senior Secured Redeemable Convertible Note (“Note”) with a face value of $4,250,000 that is convertible into shares of common stock of the Company and (ii) a warrant (“Warrant”) to purchase 9,250,000 shares of common stock of the Company. The warrant has a life of three years. The warrant is exercisable at the following prices – 3,750,000 shares of common stock at $0.40 per share, 3,000,000 shares of common stock at $0.50 per share and 2,500,000 shares of common stock at $0.60 per share. These warrants’ relative fair value, based on cash proceeds allocation, was $1,711,394, which has been recorded as a warrant derivative liability. The Company re-valued the warrants at 12/31/19 for $242,903 and recorded a gain on the change in derivative liabilities of $1,468,491.

 

The following tables summarize the warrant activity during the years ended December 31, 2019 and 2017:

 

Stock Warrants   Number of Warrants    

Weighted Average

Exercise Price

 
Balance at December 31, 2017     743,637     $ 1.28  
Granted     300,000       0.75  
Exercised     -       -  
Forfeited     -       -  
Balance at December 31, 2018     1,043,637       1.12  
Granted     9,250,000       0.49  
Exercised     -       -  
Forfeited     (680,000 )     0.90  
Balance at December 31, 2019     9,613,637     $ 0.53  

 

2019 Outstanding Warrants   Warrants Exercisable  

Range of

Exercise Price

  Number Outstanding at December 31, 2019     Weighted
Average
Remaining
Contractual Life
  Weighted Average Exercise Price     Number Exercisable at December 31, 2019     Weighted Average Exercise Price  
$ 0.40 - 6.88     9,613,637     2.40 years   $ 0.53       9,613,637     $ 0.53  

 

  F-30  

 

 

13. Net Loss Per Common Share

 

Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (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, if not anti-dilutive. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net income per share:

 

    Year Ended December 31,  
    2019     2018  
Numerator:                
Net Loss   $ (15,000,834 )   $ (5,627,050 )
Non-Controlling Interest     (964 )     1,036  
Loss available to Controlling Shareholders   $ (15,001,798 )   $ (5,626,014 )
                 
Denominator:                
Basic Weighted Average Shares Outstanding     57,056,526       53,501,213  
Effect of Dilutive Securities     -       -  
Diluted Weighted Average Shares Outstanding     57,056,526       53,501,213  
                 
Net Loss per Common Share:                
Basic   $ (0.26 )   $ (0.11 )
Diluted   $ (0.26 )   $ (0.11 )

 

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.

 

  F-31  

 

 

The provision for income tax expense (recovery) is comprised the following amounts:

 

    2019     2018  
Expected income tax (recovery) expense at the statutory rate of 26%   $ (3,900,217 )   $ (1,913,197 )
Tax effect of expenses that are not deductible for tax purposes (net of other amounts deductible for tax purposes)     3,079       1,971  
Change in valuation allowance     3,897,138       1,911,226  
Provision for income taxes   $ -     $ -  

 

The components of deferred income tax in the accompanying balance sheets are as follows:

 

Deferred income tax asset:   2019     2018  
Net operating loss carry-forwards   $ 18,940,696     $ 7,277,496  
Section 195 startup costs     1,393,346       1,393,346  
Debt discount     (5,928,512 )     (859,485 )
Derivative liability     (3,030,085 )     (333,051 )
Valuation allowance     (11,375,444 )     (7,478,306 )
Deferred income taxes   $ -     $ -  

 

As of December 31, 2019 and December 31, 2018, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $18,940,500 and $7,277,500, 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 2039.

 

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 2039.

 

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, 2012 through December 31, 2019 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

 

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. This agreement was renegotiated in October 2017 and the Company agreed to pay the stockholder/director $25,000 per month starting in October 2017. This agreement was superseded by an Employment Agreement as of July 1, 2018 (see Employment Agreements below). As of December 31, 2019, the Company owed $1,035,000 to the stockholder/director in accrued consulting fees.

 

Employment Agreements – Effective as of December 31, 2018, the Company entered into a Settlement Agreement with Michael Ahlin through which he agreed to receive 20,000 shares of common stock in exchange for waiving all amounts owed by the Company.

 

Mr. Cluff currently serves as a director of the Company and has a separate agreement as a consultant of the Company effective as of October 2, 2015.

 

  F-32  

 

 

The Company has an employment agreement with its chief executive officer, Trent D’Ambrosio. The employment agreement was effective as of April 1, 2019 and provides for compensation of $300,000 annually. Additionally, the employment agreement provides for benefits and an optional annual bonus to be determined by the Board of Directors.

 

Notes Payable – The Company took several short-term notes payable from related parties during 2019. The Company received $1,688,000 in cash from related parties and paid out $2,249,186 in cash to related parties on notes payable (see Note 10).

 

16. Commitments and Contingencies

 

Litigation

 

The Company at times is subject to other legal proceedings that arise in the ordinary course of business. The following is a summary of pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of operations of the Company.

 

One of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., has been served with notice of a labor dispute brought in Honduras by one of the Company’s former employees. The complaint alleges that the former employee was terminated from his position with the Company’s subsidiary and is entitled to certain statutory compensation. The Company has responded with its assertion that the employee voluntarily resigned and was not involuntarily terminated. The case was heard in Honduras by a labor judge and the Company has appealed the ruling in this case.

 

In the opinion of management, as of December 31, 2019, 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. Concentrations

 

We generally sell a significant portion of our mineral production to a relatively small number of customers. For the year ended December 31, 2019, most of our consolidated product revenues were attributable to A-Mark Precious Metals and to Asahi Refining, Inc., our current and only two customers as of December 31, 2019. We are not dependent upon any one purchaser and have alternative purchasers readily available at competitive market prices if there is a disruption in services or other events that cause us to search for other ways to sell our production.

 

The Company currently is producing all of its precious metals from one mine located in Honduras. This location has most of the Company’s fixed assets and inventories. It would cause considerable disruption to the Company’s operations and revenue if this mine was disrupted or closed.

 

18. Subsequent Events

 

Management has evaluated subsequent events, in accordance with FASB ASC Topic 855, “Subsequent Events,” through March 27, 2020, the date which the consolidated financial statements were available to be issued and there are no material subsequent events, except as noted below.

 

On February 21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc. in exchange for $250,000 in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian company.

 

On January 16, 2020, the Company issued 1,645,000 shares of common stock related to a conversion notice received from an investor. On February 11, 2020, the Company issued 1,000,000 shares of common stock related to a conversion notice received from an investor. On February 27, 2020, the Company issued 1,415,500 shares of common stock related to a conversion notice received from an investor. The Company is still evaluating the accounting for these conversion notices.

 

  F-33  

 

 

19. Restatement

 

The Company has restated the 2019 financial statements as originally presented in its 10K filed on March 30, 2020.

 

This Form 10-K/A is being filed to:

 

  (a) Restate the consolidated financial statements for the year ended December 30, 2019 to reflect revised valuations of derivative liabilities on convertible notes and the warrants issued with the convertible note;
     
  (b) Restate results disclosed for the above noted changes to the consolidated financial statements;

 

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 changes and explanation of such are as follows:

 

Consolidated balance sheet as of December 31, 2019: