UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2017

 

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

 

Commission File No. 000-55219

 

Inception Mining Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   35-2302128
(State or Other Jurisdiction of
Incorporation or Organization)t
  (IRS Employer
Identification Number)

 

5330 South 900 East, Suite 280

Murray, Utah

  84117
(Address of Principal Executive Offices)   (Zip Code)

 

801-312-8113

(Registrant’s telephone number, including area code)

 

Copies to:

Brunson Chandler & Jones, PLLC

175 South Main Street

Suite 1410

Salt Lake City, Utah 84111

(801) 303-5721

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files). Yes [X] No [  ]

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if smaller reporting company)      
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]

 

As of November 14, 2017, there were 52,783,761 shares of the registrant’s common stock issued and outstanding and 51 shares of the registrant’s preferred stock issued and outstanding.

 

 

 

     
 

 

INCEPTION MINING INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements F-1
     
  Condensed Consolidated Balance Sheets as of March 31, 2017 F-1
     
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months ended March 31, 2017 and 2016 F-2
     
  Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2017 and 2016 F-3
     
  Notes to Condensed Consolidated Financial Statements F-4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
     
Item 4. Controls and Procedures 8
     
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 9
     
Item 1A. Risk Factors 10
     
Item 2. Unregistered Sales of Equity Securities and use of Proceeds 11
     
Item 3. Defaults Upon Senior Securities 11
     
Item 4. Mine Safety Disclosures 11
     
Item 5. Other Information 11
     
Item 6. Exhibits 12
     
Signature Page 14

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Inception Mining, Inc.

Consolidated Balance Sheets

 

    September 30, 2017     December 31, 2016  
    (Unaudited)        
ASSETS                
Current Assets                
Cash and cash equivalents   $ 105,963     $ 194,652  
Accounts receivable     1,985       4,712  
Accounts receivable - related parties     -       6,382  
Inventories     1,900,650       1,483,830  
Prepaid expenses and other current assets     19,063       24,745  
Total Current Assets     2,027,661       1,714,321  
                 
Property, plant and equipment, net     909,932       1,236,534  
Other assets     25,800       26,036  
Total Assets   $ 2,963,393     $ 2,976,891  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued liabilities   $ 1,560,458     $ 1,077,715  
Accrued interest - related parties     5,368,695       4,681,895  
Secured borrowings, net     133,071       135,739  
Notes payable, net of debt discounts     137,163       160,000  
Notes payable - related parties     6,683,680       6,603,868  
Convertible notes payable, net of debt discounts     142,118       10,000  
Derivative liabilities     668,623       -  
Total Current Liabilities     14,693,808       12,669,217  
                 
Mine reclamation obligation     283,969       256,070  
Total Liabilities     14,977,777       12,925,287  
                 
Commitments and Contingencies     -       -  
                 
Stockholders’ Deficit                
Preferred stock, $0.00001 par value; 10,000,000 shares authorized, 51 shares issued and outstanding as of September 30, 2017 and December 31, 2016     1       1  
Common stock, $0.00001 par value; 500,000,000 shares authorized, 52,183,761 and 51,229,590 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively     522       512  
Additional paid-in capital     3,992,407       3,607,391  
Accumulated deficit     (15,469,683 )     (12,999,113 )
Accumulated other comprehensive loss     (529,717 )     (549,675 )
Total Controlling Interest     (12,006,470 )     (9,940,884 )
Non-Controlling Interest     (7,914 )     (7,512 )
Total Stockholders’ Deficit     (12,014,384 )     (9,948,396 )
Total Liabilities and Stockholders’ Deficit   $ 2,963,393     $ 2,976,891  

 

See accompanying notes to the consolidated financial statements.

 

F- 1

 

 

Inception Mining, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited )

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2017     September 30, 2016     September 30, 2017     September 30, 2016  
Precious Metals Income   $ 1,145,591     $ 1,643,295     $ 2,940,961     $ 4,800,247  
                                 
Operating Expenses                                
Cost of sales     936,392       1,297,736       2,633,406       2,926,680  
General and administrative     410,364       595,616       1,173,509       1,371,653  
Depreciation and amortization     4,807       34,972       111,232       81,741  
Total Operating Expenses     1,351,563       1,928,324       3,918,147       4,380,074  
Income (Loss) from Operations     (205,972 )     (285,029 )     (977,186 )     420,173  
                                 
Other Income/(Expenses)                                
Other income (expense)     4,474       5,078       8,578       7,516  
Change in derivative liability     (193,583 )     (3,593,201 )     (193,583 )     12,836,872  
Change in gold purchase fund     -       (2,127 )     16,338       (2,127 )
Loss on extinguishment of debt     -       (5,654 )     (3,325 )     (20,179 )
Interest expense     (586,156 )     (1,455,045 )     (1,321,794 )     (4,585,488 )
Total Other Income/(Expenses)     (775,265 )     (5,050,949 )     (1,493,786 )     8,236,594  
                                 
Net Income (Loss) from Operations before Income Taxes     (981,237 )     (5,335,978 )     (2,470,972 )     8,656,767  
Provision for Income Taxes     -       -       -       -  
NET INCOME (LOSS)     (981,237 )     (5,335,978 )     (2,470,972 )     8,656,767  
NET INCOME (LOSS) - Non-Controlling Interest     22       (306 )     402       (793 )
NET INCOME (LOSS) - Controlling Interest   $ (981,215 )   $ (5,336,284 )   $ (2,470,570 )   $ 8,655,974  
                                 
Net income (loss) per share - Basic   $ (0.02 )   $ (0.11 )   $ (0.05 )   $ 0.18  
Net income (loss) per share - Diluted   $ (0.02 )   $ (0.11 )   $ (0.05 )   $ 0.10  
Weighted average number of shares outstanding during the period - Basic     51,861,287       49,470,940       51,450,612       48,761,425  
Weighted average number of shares outstanding during the period - Diluted     51,861,287       49,470,940       51,450,612       88,693,916  
                                 
Other Comprehensive Income (Loss)                                
Exchange differences arising on translating foreign operations     6,427       129,800       19,958       (178,121 )
Total Comprehensive Income (Loss)     (974,810 )     (5,206,178 )     (2,451,014 )     8,478,646  
Total Comprehensive Income (Loss) - Non-Controlling Interest     (31 )     1,128       (402 )     757  
Total Comprehensive Income(Loss) - Controlling Interest   $ (974,841 )   $ (5,205,050 )   $ (2,451,416 )   $ 8,479,403  

 

See accompanying notes to the unaudited consolidated financial statements.

 

F- 2

 

 

Inception Mining, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

    For the Nine Months Ended  
    September 30, 2017     September 30, 2016  
Cash Flows From Operating Activities:                
Net Income (Loss)   $ (2,470,972 )   $ 8,656,767  
Adjustments to reconcile net income (loss) to net cash used in operations:                
Depreciation and amortization expense     616,398       472,404  
Common stock and warrants issued for services     151,448       263,500  
Loss on extinguishment of debt     3,325       20,179  
Change in derivative liability     193,583       (12,836,872 )
Amortization of debt discount     113,533       3,456,440  
Initial value of derivative liabilities     179,290       -  
Change in consignment gold     (16,338 )     2,127  
Consulting expense     -       183,121  
Changes in operating assets and liabilities:                
Decr (incr) in trade receivables     2,949       4,392  
Decr (incr) inventories     (471,347 )     92,202  
Decr (incr) prepaid expenses and other current assets     12,266       (6,516 )
Incr (decr) accounts payable and accrued liabilities     443,366       519,730  
Incr (decr) accounts payable and accrued liabilities - related parties     1,380,453       (234,224 )
Net Cash Provided By Operating Activities     137,954       593,250  
                 
Cash Flows From Investing Activities:                
Purchase of property, plant and equipment     (285,228 )     (133,070 )
Net Cash Used In Investing Activities     (285,228 )     (133,070 )
                 
Cash Flows From Financing Activities:                
Repayment of notes payable     (556,000 )     (850,000 )
Repayment of notes payable-related parties     (1,149,164 )     (790,000 )
Repayment of convertible notes payable     (250,000 )     (194,498 )
Proceeds from notes payable     532,000       845,000  
Proceeds from notes payable-related parties     813,700       865,000  
Proceeds from convertible notes payable     591,750       -  
Proceeds from secured borrowings     27,239       -  
Proceeds from issuance of common stock     49,000       -  
Net Cash Provided by (Used in) Financing Activities     58,525       (124,498 )
Effects of exchange rate changes on cash     59       (6,704 )
Net Change in Cash     (88,690 )     328,978  
Cash at Beginning of Period     194,653       137,639  
Cash at End of Period   $ 105,963     $ 466,617  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 265,972     $ 438,845  
Cash paid for taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Land purchased with accounts payable   $ -     $ 225,000  
Convertible note payable issued for accounts payable   $ -     $ 27,578  
Convertible note payable - related party issued for accrued liabilities   $ -     $ 375,343  
Common stock issued for conversion of note payable - related party   $ -     $ 925,156  
Common stock issued for purchase of equipment   $ -     $ 10,050  
Common stock issued for extinguishment of debt   $ 8,325     $ -  
Debt discounts on convertible notes payable   $ 390,753     $ -  

 

See accompanying notes to the unaudited consolidated financial statements.

 

F- 3

 

 

Inception Mining, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2017

 

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.

 

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.

 

F- 4

 

 

The Company’s primary mine is located on the 200 hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compa ñí a Minera Cerros del Sur, S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%.

 

2. Summary of Significant Accounting Policies

 

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $2,470,972 during the period ended September 30, 2017, and had a working capital deficit of $12,666,147 as of September 30, 2017. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

Management is currently working to make changes that will result in profitable operations and to obtain additional funding sources to meet the Company’s need for cash during the next twelve months and beyond.

 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Inception Mining, Inc. and its wholly owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compa ñí a Minera Cerros del R í o, S.A. de C.V., and its controlling interest subsidiaries, Compa ñí a Minera Cerros del Sur, S.A. de C.V. and Compa ñía Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been eliminated upon consolidation.

 

Basis of Presentation - The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

 

Cash and Cash Equivalents - The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At September 30, 2017 and December 31, 2016, the Company had no cash equivalents. The aggregate cash balance on deposit in these accounts is 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- 5

 

 

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- 6

 

 

We review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties and possibly require future asset impairment write-downs.

 

Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and properties.

 

Fair Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

 

Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.

 

Long-Lived Assets - We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.

 

F- 7

 

 

Properties, Plant and Equipment - We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Building   7 to 15 years
Vehicles and equipment   3 to 7 years
Processing and laboratory   5 to 15 years
Furniture and fixtures   2 to 3 years

 

Reclamation Liabilities and Asset Retirement Obligations - Minimum standards for site reclamation and closure have been established for us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site.

 

Revenue Recognition - Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are credited to costs applicable to mining revenue.

 

All accounts receivable amounts are due from a single customer. Substantially all mining revenues recorded in the current period also related to the same customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product.

 

Stock Issued For Goods and Services - Common and preferred shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.

 

Stock-Based Compensation - For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.

 

Income (Loss) per Common Share - Basic net income (loss) per common share is computed by dividing net income (loss), less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income (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. 4,039,011 common share equivalents have been excluded from the diluted loss per share calculation for the period ended September 30, 2017 because it would be anti-dilutive.

 

Comprehensive Loss - Comprehensive loss is made up of the exchange differences arising on translating foreign operations and the net loss for the six months ending September 30, 2017 and the year ended December 31, 2016.

 

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.

 

F- 8

 

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets for which the Company does not consider realization of such deferred tax assets to be more likely than not.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

 

Business Segments – The Company operates in one segment and therefore segment information is not presented.

 

Use of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized material on leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.

 

Non-Controlling Interest Policy – Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest and consolidates the subsidiary’s financial results with its own. The amount of equity relating to the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of the net income (loss) relating to the non-controlling interest is separately identified on the statement of operations.

 

Reclassifications - Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

 

Recently Issued Accounting Pronouncements – In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity about which changes to terms or conditions of a share-based payment award require modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in ASU 2017-09 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium to the earliest call date in order to reduce diversity in practice and provide more decision-useful information. The amendments in ASU 2017-08 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, and is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

 

F- 9

 

 

 

 

3. Inventories, Stockpiles and Mineralized Materials on Leach Pads

 

Inventories, stockpiles and mineralized materials on leach pads at September 30, 2017 and December 31, 2016 consisted of the following:

 

    September 30, 2017     December 31, 2016  
Supplies   $ 120,576     $ 95,860  
Mineralized Material on Leach Pads     1,512,452       891,198  
ADR Plant     18,365       330,592  
Finished Ore     249,257       166,180  
Total Inventories   $ 1,900,650     $ 1,483,830  

 

There were no stockpiles at September 30, 2017 and December 31, 2016.

 

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 following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2017 and December 31, 2016:

 

    Debt Derivative Liabilities  
Balance, December 31, 2016   $ -  
Transfers in upon initial fair value of derivative liabilities     475,040  
Change in fair value of derivative liabilities and warrant liability     193,583  
Change attributed to loss on extinguishment of debt     -  
Transfers to permanent equity upon exercise of warrants     -  
Balance, September 30, 2017   $ 668,623  
Net loss for the period included in earnings relating to the liabilities held at September 30, 2017   $ 193,583  

 

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 September 30, 2017, the Company marked to market the fair value of the debt derivatives and determined a fair value of $668,623. The Company recorded a loss from change in fair value of debt derivatives of $193,583 for the period ended September 30, 2017. 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 121.33% through 157.63%, (3) weighted average risk-free interest rate of 1.31% (4) expected life of 0.25 through .94 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

F- 10

 

 

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.

 

5. Properties, Plant and Equipment, Net

 

Properties, plant and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

 

    September 30, 2017     December 31, 2016  
Land   $ 271,598     $ 253,313  
Buildings     2,189,454       2,179,254  
Machinery and Equipment     991,948       985,535  
Office Equipment and Furniture     43,954       43,757  
Vehicles     86,431       83,901  
Construction in Process     265,035       -  
Total Property, Plant and Equipment     3,848,420       3,545,760  
Less Accumulated Depreciation     (2,938,488 )     (2,309,226 )
Property, Plant and Equipment, net   $ 909,932     $ 1,236,534  

 

In December 2016, the Company determined that the leach pad at the Clavo Rico mine was reaching its capacity. It was determined that the depreciation of the leach pad should be accelerated to fully depreciate the leach pad by March 31, 2017. This constitutes a change in management estimates. During the nine months ended September 30, 2017 and 2016, the Company recognized depreciation expense of $616,398 and $472,404, respectively. The following table summarizes the allocation of depreciation expense between cost of goods sold and general and administrative expenses.

 

Depreciation Allocation   September 30, 2017     September 30, 2016  
Cost of Goods Sold   $ 505,166     $ 390,663  
General and Administrative     111,232       81,741  
Total   $ 616,398     $ 472,404  

 

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 $283,969 and $256,070 as of September 30, 2017 and December 31, 2016, 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.

 

F- 11

 

 

The increases in the reclamation liability in 2017 and 2016 were related to the expansion of the heap leach facility and related infrastructure.

 

Changes to the asset retirement obligation were as follows:

 

    September 30, 2017     December 31, 2016  
Balance, Beginning of Year   $ 256,070     $ 77,716  
Liabilities incurred     27,899       178,354  
Disposals     -       -  
Balance, End of Year   $ 283,969     $ 256,070  

 

7. Accounts Payable and Accrued Liabilities

 

Accounts Payable and accrued liabilities at September 30, 2017 and December 31, 2016 consisted of the following:

 

    September 30, 2017     December 31, 2016  
Accounts Payable   $ 783,396     $ 428,751  
Accrued Liabilities     341,785       296,069  
Accrued Salaries and Benefits     261,886       175,811  
Advances Payable     173,391       175,864  
Smelter Royalties Payable     -       1,220  
Total Accrued Liabilities   $ 1,560,458     $ 1,077,715  

 

8. Secured Borrowings

 

During the year ended December 31, 2016, the Company entered into five financing arrangements with third parties for a combined principal amount of $251,980. 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 $25,198, for a total expected remittance of $277,178. The maturity dates of the notes range between June 22, 2017 and June 23, 2017. 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, 2016, the Company held 101 ounces of gold, valued at cost of $116,241, to satisfy the liabilities upon maturity leaving a net obligation of $135,739, which is recorded on the Company’s balance sheet as secured borrowings. The Company reached agreements with the third parties to settle the financing arrangements as of June 12, 2017. The Company liquidated the gold held to satisfy the debt obligations. Four of the five debt holders agreed to rollover their funds into new financing agreements. The remaining debt obligation of $122,107 was paid in full on July 10, 2017.

 

On June 20, 2017, the Company entered into four new financing arrangements with third parties for a combined principal amount of $195,720. 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 $19,572, for a total expected remittance of $215,292. The maturity date of the notes is June 21, 2018. 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 September 30, 2017, the Company held 53 ounces of gold, valued at a cost of $68,104, to satisfy the liabilities upon maturity leaving a net obligation of $133,071, which is recorded on the Company’s balance sheet as secured borrowings.

 

Secured Borrowings   September 30, 2017     December 31, 2016  
Secured obligations   $ 195,720     $ 251,980  
Guaranteed interest     19,572       -  
Deferred interest     (14,117 )     -  
      201,175       251,980  
Gold held as security     (68,104 )     (116,241 )
Secured Borrowings, net   $ 133,071     $ 135,739  

 

F- 12

 

 

9. Notes Payable

 

Notes payable were comprised of the following as of September 30, 2017 and December 31, 2016:

 

Notes Payable   September 30, 2017     December 31, 2016  
3-2-1 Partners, Inc.   $ -     $ 100,000  
GS Capital Partners     80,000       -  
Phil Zobrist     60,000       60,000  
Total Notes Payable     140,000       160,000  
Less Unamortized Discount     (2,837 )     -  
Total Notes Payable, Net of Unamortized Debt Discount   $ 137,163     $ 160,000  

 

3-2-1 Partners, LLC – On December 30, 2016, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $100,000 (the “Note”) due on January 20, 2017 and bears a 5% interest rate. The Company made a payment of $105,000 towards the principal balance and accrued interest of $5,000 on January 18, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

3-2-1 Partners, LLC – On February 28, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $50,000 (the “Note”) due on March 21, 2017 and bears a 5% interest rate. The Company made a payment of $52,500 towards the principal balance and accrued interest of $2,500 on March 17, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

3-2-1 Partners, LLC – On March 24, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $75,000 (the “Note”) due on April 14, 2017 and bears a 7% interest rate. The Company made a payment of $80,250 towards the principal balance and accrued interest of $5,250 on April 28, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

3-2-1 Partners, LLC – On April 12, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $30,000 (the “Note”) due on May 3, 2017 and bears a 7% interest rate. The Company made a payment of $32,100 towards the principal balance and accrued interest of $2,100 on April 28, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

3-2-1 Partners, LLC – On May 2, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $50,000 (the “Note”) due on May 23, 2017 and bears a 7% interest rate. The Company made a payment of $53,500 towards the principal balance and accrued interest of $3,500 on May 19, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

3-2-1 Partners, LLC – On May 23, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $75,000 (the “Note”) due on June 14, 2017 and bears a 4% interest rate. The Company made a payment of $78,000 towards the principal balance and accrued interest of $3,000 on July 3, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

3-2-1 Partners, LLC – On July 6, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $50,000 (the “Note”) due on July 30, 2017 and bears a 5% interest rate. The Company made a payment of $52,500 towards the principal balance and accrued interest of $2,500 on August 8, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

3-2-1 Partners, LLC – On July 13, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $25,000 (the “Note”) due on July 24, 2017 and bears a 5% interest rate. The Company made a payment of $26,250 towards the principal balance and accrued interest of $1,250 on July 21, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

F- 13

 

 

3-2-1 Partners, LLC – On July 31, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $25,000 (the “Note”) due on August 21, 2017 and bears a 5% interest rate. The Company made a payment of $26,250 towards the principal balance and accrued interest of $1,250 on August 11, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

3-2-1 Partners, LLC – On August 14, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $26,000 (the “Note”) due on August 31, 2017 and bears a 5% interest rate. The Company made a payment of $27,300 towards the principal balance and accrued interest of $1,300 on August 25, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

3-2-1 Partners, LLC – On August 25, 2017, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $50,000 (the “Note”) due on September 22, 2017 and bears a 5% interest rate. The Company made a payment of $52,500 towards the principal balance and accrued interest of $2,500 on September 25, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

GS Capital Partners – On August 11, 2017, the Company issued an unsecured Promissory Note (“Note”) to GS Capital Partners (“GS Capital”), in the principal amount of $80,000 (the “Note”) due on April 11, 2018 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $76,000 (less an original issue discount (“OID”) of $4,000). For the nine months ended September 30, 2017, the Company amortized $1,163 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $80,000 and accrued interest was $877.

 

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, 2017. 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 September 30, 2017, the gross balance of the note was $60,000 and accrued interest was $50,892.

 

10. Notes Payable – Related Parties

 

Notes payable – related parties were comprised of the following as of September 30, 2017 and December 31, 2016:

 

Notes Payable - Related Parties   September 30, 2017     December 31, 2016  
Claymore Management   $ 185,000     $ 185,000  
Diamond 80, LLC     49,000       -  
GAIA Ltd     1,150,000       1,150,000  
Legends Capital     815,000       765,000  
LVD Investments     -       75,000  
LWB Irrev Trust     1,101,000       1,101,000  
MDL Ventures     1,105,700       1,049,888  
Silverbrook Corporation     2,227,980       2,227,980  
WOC Energy LLC     50,000       50,000  
Total Notes Payable - Related Parties   $ 6,683,680     $ 6,603,868  

 

F- 14

 

 

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, 2017. 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 September 30, 2017, the gross balance of the note was $185,000 and accrued interest was $217,684.

 

Diamond 80, LLC – On January 6, 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 January 28, 2017 and bears a 7.0% interest rate. The Company made a payment of $53,500 towards the principal balance and accrued interest of $3,500 on January 27, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

Diamond 80, LLC – On January 19, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $34,000 (the “Note”) due on February 9, 2017 and bears a 7.5% interest rate. The Company made a payment of $36,550 towards the principal balance and accrued interest of $2,550 on March 17, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

Diamond 80, LLC – On January 20, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $9,000 (the “Note”) due on February 10, 2017 and bears a 7.5% interest rate. The Company made a payment of $9,675 towards the principal balance and accrued interest of $675 on March 17, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

Diamond 80, LLC – On January 31, 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 February 21, 2017 and bears a 7.5% interest rate. The Company made a payment of $53,750 towards the principal balance and accrued interest of $3,750 on February 28, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

Diamond 80, LLC – On March 6, 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 March 27, 2017 and bears a 7.0% interest rate. The Company made a payment of $53,500 towards the principal balance and accrued interest of $3,500 on March 30, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

Diamond 80, LLC – On March 24, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $40,000 (the “Note”) due on April 14, 2017 and bears a 7.0% interest rate. The Company made a payment of $43,000 towards the principal balance and accrued interest of $3,000 on May 2, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

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 May 3, 2017 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 June 30, 2017. As of September 30, 2017, the outstanding balance of the Note was $49,000 and accrued interest was $2,925.

 

Diamond 80, LLC – On May 4, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $40,000 (the “Note”) due on July 4, 2017 and bears a 7.0% interest rate. The Company made a payment of $42,800 towards the principal balance and accrued interest of $2,800 on September 27, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

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, 2017. 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. As of September 30, 2017, the gross balance of the note was $1,150,000 and accrued interest was $1,137,896.

 

F- 15

 

 

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, 2017. 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. As of September 30, 2017, the gross balance of the note was $765,000 and accrued interest was $779,829.

 

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, 2017 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, 2017. As of September 30, 2017, the outstanding balance of the Note was $50,000 and accrued interest was $7,000.

 

LVD Investments – On November 29, 2016, the Company issued an unsecured Short-Term Promissory Note to LVD Investments in the principal amount of $75,000 (the “Note”) due on January 13, 2017 and bears a 7.5% interest rate. The Company made a payment of $80,250 towards the principal balance and accrued interest of $5,250 on February 10, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

LVD Investments – On May 1, 2017, the Company issued an unsecured Short-Term Promissory Note to LVD Investments in the principal amount of $75,000 (the “Note”) due on June 1, 2017 and bears a 7.5% interest rate. The Company made a payment of $78,750 towards the principal balance and accrued interest of $3,750 on July 21, 2017.As of September 30, 2017, 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, 2017. 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 September 30, 2017, the gross balance of the note was $1,101,000 and accrued interest was $1,210,601.

 

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, 2017. The Company recognized a gain on the extinguishment of debt of $1,487,158 for the remaining derivative liability. As of September 30, 2017, the gross balance of the note was $1,105,700 and accrued interest was $0.

 

F- 16

 

 

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, 2017. 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. As of September 30, 2017, the gross balance of the note was $2,227,980 and accrued interest was $2,010,580.

 

WOC Energy, LLC – On December 20, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on January 12, 2017 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 January 12, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

WOC Energy, LLC – On January 27, 2017, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $70,000 (the “Note”) due on February 17, 2017 and bears a 5.0% interest rate. The Company made a payment of $73,500 towards the principal balance and accrued interest of $3,500 on March 1, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

WOC Energy, LLC – On March 13, 2017, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on April 3, 2017 and bears a 5.0% interest rate. The Company made a payment of $52,000 towards the principal balance and accrued interest of $2,000 on September 13, 2017. As of September 30, 2017, the outstanding balance of the Note was $0 and accrued interest was $0.

 

WOC Energy, LLC – On July 13, 2017, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $12,000 (the “Note”) due on August 3, 2017 and bears a 2.0% interest rate. The Company made a payment of $12,200 towards the principal balance and accrued interest of $200 on July 20, 2017. As of September 30, 2017, the outstanding balance of the Note was $0.

 

WOC Energy, LLC – On September 22, 2017, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on October 31, 2017 and bears a 4.0% interest rate. As of September 30, 2017, the outstanding balance of the Note was $50,000 and accrued interest was $2,000.

 

11. Convertible Notes Payable

 

Convertible notes payable were comprised of the following as of September 30, 2017 and December 31, 2016:

 

Convertible Notes Payable   September 30, 2017     December 31, 2016  
Auctus Fund   $ 110,000     $ -  
Crown Bridge Partners     50,000       -  
JSJ Investments     55,000       -  
Labrys Fund LP     -       -  
LG Capital Funding     52,500       -  
Power Up Lending     103,000       -  
Silo Equity Partners     53,000       -  
Typenex     -       -  
UP and Burlington   $ -     $ 10,000  
Total Convertible Notes Payable     423,500       10,000  
Less Unamortized Discount     (281,382 )     -  
Total Convertible Notes Payable, Net of Unamortized Debt Discount   $ 142,118     $ 10,000  

 

F- 17

 

 

Auctus Fund – On August 17, 2017, the Company issued an unsecured Convertible Promissory Note (“Note”) to Auctus Fund (“Auctus”), in the principal amount of $110,000 (the “Note”) due on May 17, 2018 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $99,750 (less an original issue discount (“OID”) of $10,250). The Note is convertible into common stock, at holder’s option, at the lesser of: (i) the lowest trading price during the previous fifteen trading day prior to the date of this Note, and (ii) a 40% discount of the lowest trading price of the common stock during the 15 trading day period prior to conversion. For the nine months ended September 30, 2017, the Company amortized $17,729 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $110,000 and accrued interest was $1,591.

 

Crown Bridge Partners – On August 10, 2017, the Company issued an unsecured Convertible Promissory Note (“Note”) to Crown Bridge Partners (“Crown Bridge”), in the principal amount of $50,000 (the “Note”) due on August 10, 2018 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $43,000 (less an original issue discount (“OID”) of $7,000). 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. For the nine months ended September 30, 2017, the Company amortized $6,986 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $50,000 and accrued interest was $699.

 

JSJ Investments – On August 15, 2017, the Company issued an unsecured Convertible Promissory Note (“Note”) to JSJ Investments (“JSJ”), in the principal amount of $55,000 (the “Note”) due on May 15, 2018 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $53,000 (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. For the nine months ended September 30, 2017, the Company amortized $9,267 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $55,000 and accrued interest was $832.

 

Labrys Fund LP – On March 8, 2017, 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 $110,000. The Note has a maturity date of September 8, 2017 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 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 March 8, 2017. In connection with the issuance of the Note, the Company issued to the Purchaser 127,910 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 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 $0.30 as set forth in the Note, subject to adjustment as set forth in the Note if the Note is in Default. Subject to limited exceptions, the Purchaser will not have the right to convert any portion of the Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The Company issued 100,000 warrants to purchase shares of common stock.in connection with this note. The warrants have a two year life and an exercise price of $0.75 per share. On August 15, 2017, the Company paid $115,931 to pay off the principal balance of $110,000 and $5,931 in accrued interest. The Company recognized a debt discount on this note of $37,253 which will be amortized over the life of the note. For the nine months ended September 30, 2017, the Company amortized $37,253 of debt discount to current period operations as interest expense. As of September 30, 2017 the gross balance of the note was $0 and accrued interest was $0.

 

F- 18

 

 

LG Capital Funding – On September 9, 2017, the Company issued an unsecured Convertible Promissory Note (“Note”) to LG Capital Funding (“LG Cap”), in the principal amount of $52,500 (the “Note”) due on September 7, 2018 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (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. For the nine months ended September 30, 2017, the Company amortized $3,308 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $52,500 and accrued interest was $265.

 

Power Up Lending Group – On April 21, 2017, 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 $68,000. The Note has a maturity date of January 30, 2018 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 the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The Purchaser will not have the right to convert any portion of the Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. For the nine months ended September 30, 2017, the Company amortized $1,711.27 of debt discount to current period operations as interest expense. As of September 30, 2017 the gross balance of the note was $68,000 and accrued interest was $3,622.

 

On August 18, 2017, 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 $35,000. The Note has a maturity date of May 30, 2018 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 the greater of the fixed conversion price of or a variable conversion price as set forth in the Note. The Purchaser will not have the right to convert any portion of the Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The company recognized a debt discount on this note of $3,000 which will be amortized over the life of the note. For the nine months ended September 30, 2017, the Company amortized $453 of debt discount to current period operations as interest expense. As of September 30, 2017 the gross balance of the note was $35,000 and accrued interest was $495.

 

Silo Equity Partners – On August 22, 2017, the Company issued an unsecured Convertible Promissory Note (“Note”) to Silo Equity Partners (“Silo”), in the principal amount of $53,000 (the “Note”) due on August 22, 2018 and bears 8% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (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, provided however, if the Company’s common stock at any time trades below $0.05 per share then the conversion price shall equal 50% of the lowest trading price for the common stock during the 20 trading days immediately preceding the conversion date. For the nine months ended September 30, 2017, the Company amortized $5,663 of debt discount to current period operations as interest expense. As of September 30, 2017, the gross balance of the note was $53,000 and accrued interest was $453.

 

F- 19

 

 

Typenex Co-Investment, LLC – On February 27, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Typenex Co-Investment, LLC (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $130,000. The Note has a maturity date of September 1, 2017. The total net proceeds the Company received was $100,000 The Note accrues no interest, but does include an original issue discount of $25,000 and transaction expenses of $5,000. The Company has the right to prepay the Note prior to the Maturity Date without penalty.

 

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 $0.30 as set forth in the Note, subject to adjustment as set forth in the Note if the Note is in Default. Subject to limited exceptions, the Purchaser will not have the right to convert any portion of the Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. On August 23, 2017, the Company paid $130,000 to pay the note in full. The Company recognized a debt discount on this note of $30,000 which will be amortized over the life of the note. For the nine months ended September 30, 2017, the Company amortized $30,000 of debt discount to current period operations as interest expense. As of September 30, 2017 the gross balance of the note was $0 and accrued interest was $0.

 

UP and Burlington Development – On February 25, 2013, the Company, its majority shareholder, and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement with Inception Resources, LLC, a Utah corporation, pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock valued at $160 (valued at par value of $0.00001 because of the entities being under common control), the assumption of promissory notes in the amount of $800,000 and $150,000 and the assignment of a 3% net royalty. The Asset Purchase Agreement closed on February 25, 2013. On November 1, 2013, one of the notes was renegotiated with the note holder. The original note was restructured and treated as an extinguishment and as such is now convertible into shares of the Company’s common stock at $2.48 (0.45 pre-split) per share. All the other points of the note remained the same. A beneficial conversion feature on the new note was recorded for $630,000. On February 11, 2014, the Company converted $130,000 of principal into 288,889 shares of common stock. On December 10, 2014, the note holder elected to convert $41,250 of the principle balance of the note into 91,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to convert $300,000 of the principle balance of the note into 666,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to forgive $148,750 of the principle balance of the note. The Company made a payment of $10,000 towards the principal balance on May 18, 2017. As of September 30, 2017, the outstanding balance on this note was $0.

 

12. Stockholders’ Deficit

 

Preferred Stock – Series A

 

On August 30, 2016, the board of directors designated 51 shares of preferred stock as Series A. The shares have voting rights shall equal to: (x) 0.019607 multiplied by the total issued and outstanding shares of common stock eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. These shares have preferential voting rights, no conversion rights and no liquidation preferences.

 

Common Stock

 

On January 20, 2017, 15,000 shares of common stock were issued to Brunson Chandler & Jones PLLC as payment for legal services performed for the Company. These shares were valued at $0.555 per share for a value of $8,325.The Company recognized a loss on settlement of debt of $3,325.

 

On March 8, 2017, in connection with the issuance of the Note to Labrys Fund LP, the Company issued to the Note Purchaser 127,910 shares of its common stock that shall be returned to the Company’s treasury if the Note is fully repaid and satisfied. The Company recognized an expense of $51,816 for these shares of stock. These shares were returned to the Company and immediately canceled in August 2017.

 

F- 20

 

 

On March 29, 2017, a shareholder returned 3,120 shares of common stock to the Company for cancellation. There was no cost to the Company for these shares.

 

On April 6, 2017, a shareholder returned 15,600 shares of common stock to the Company for cancellation. There was no cost to the Company for these shares.

 

From April through July 2017, the Company issued 57,891 shares of common stock to Red Cloud Klondike Strike, Inc. for investor relations per a consulting agreement. These shares were payment for $20,000 in services and were valued at the stock price on the last day of each month.

 

On July 21, 2017, 600,000 shares of common stock were issued to Trent D’ambrosio for the conversion of $150,000 of the MDL Ventures note payable. These shares were valued at $0.25 per share.

 

On August 13, 2017, the Company issued 20,000 shares of common stock to Sandeep Sull for website design per a consulting agreement. These shares were payment for $7,000 in services and were valued at $0.35 per share.

 

On August 23, 2017, the Company issued 200,000 shares of common stock to John Bushnell for $35,000 in cash. These shares were valued at $0.175 per share.

 

On August 31, 2017, the Company issued 80,000 shares of common stock to John Bushnell for $14,000 in cash. These shares were valued at $0.175 per share.

 

Warrants

 

On March 8, 2017, the Company issued 100,000 warrants associated with the issuance of a convertible note payable to Labrys Fund LP. The warrants have a two year life and are exercisable at $0.75 per share.

 

On July 1, 2017, the Company issued 400,000 warrants associated with an investor relations agreement to Red Cloud Klondike Strike, Inc. The warrants have a two year life and are exercisable at 100,000 warrants at $0.55 per share, 100,000 warrants at $0.65 per share and 200,000 warrants at $0.75 per share.

 

During the nine months ended September 30, 2017, 34,048 three year warrants expired without being exercised. These warrants had an exercise price of $4.95.

 

The following tables summarize the warrant activity during the six months ended September 30, 2017 and the year ended December 31, 2016:

 

Stock Warrants   Number of Warrants     Weighted Average Exercise Price  
Balance at December 31, 2015     118,096     $ 5.72  
Granted     180,000       1.50  
Exercised     -       -  
Forfeited     (20,411 )     -  
Balance at December 31, 2016     277,685       3.08  
Granted     500,000       0.69  
Exercised     -       -  
Forfeited     (34,048 )     -  
Balance at September 30, 2017     743,637     $ 1.28  

 

F- 21

 

 

2017 Outstanding Warrants     Warrants Exercisable  
Range of Exercise Price     Number Outstanding at September 30, 2016     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price     Number Exercisable at September 30, 2016     Weighted Average Exercise Price  
$ 0.50 - 6.88       743,637       1.80     $ 1.28       743,637     $ 1.28  

 

13. 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. As of September 30, 2017, the Company owed $756,000 to the stockholder/director in accrued consulting fees.

 

14. Commitments and Contingencies

 

Litigation

 

The Company at times is subject to other legal proceedings that arise in the ordinary course of business.

 

On January 26, 2017, the Company was served a copy of a complaint filed by Danzig Ltd. (“Danzig”) and Brett Bertolami (“Bertolami”) in the Western District of North Carolina, Statesville Division District Court. The complaint alleges fraud, breach of contract, state securities fraud, federal securities fraud, breach of fiduciary duty, unjust enrichment, and negligent misrepresentation against the Company, and its current CEO/CFO and director, Trent D’Ambrosio, and current director and former officer, Michael Ahlin. The allegations arise from the change of control transaction in February 2013 and other documents related to that transaction. The Company has retained counsel to vigorously defend the allegations. The Company has filed a motion to dismiss the lawsuit, which has been fully briefed and is awaiting a ruling.

 

On June 11, 2017, Danzig Ltd (whose principal is Elliott Foxcroft), filed an arbitration in Boston, Massachusetts, with the American Arbitration Association (AAA) against the Company and Messrs. Trent D’Ambrosio and Michael Ahlin. The Boston arbitration asserts claims that largely mirror those in the pending lawsuit in North Carolina, and seeks an unspecified amount of damages. The Respondents filed a motion to stay the arbitration against Messrs. D’Ambrosio and Ahlin, which was granted pending a decision by a court as to whether Messrs. D’Ambrosio and Ahlin are subject to the arbitration. The Boston arbitration is currently in discovery.

 

On July 20, 2017, Elliott Foxcroft filed an AAA arbitration in Salt Lake City, Utah, against the Company and Messrs. D’Ambrosio and Ahlin. The Salt Lake City arbitration alleges federal securities fraud, state securities fraud, breach of contract, unjust enrichment, fraud, breach of fiduciary duty, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing, relating to a consulting agreement between the Company and Elliott Foxcroft, dated March 27, 2014. Mr. Foxcroft seeks an unspecified amount of damages. The Company has retained counsel to vigorously defend the allegations in both arbitrations. The Company has also alleged a counterclaim for breach of the consulting agreement with Mr. Foxcroft in the Salt Lake City arbitration, seeking damages in the initial amount of $150,000. The parties have fully briefed and are awaiting a ruling on a motion to determine whether the arbitrator has authority to determine whether Messrs. D’Ambrosio and Ahlin are proper parties to the arbitration.

 

On August 22, 2017, the Company and Messrs. D’Ambrosio and Ahlin filed a complaint against Danzig Ltd., Elliott Foxcroft, and Brett Bertolami in the United States District Court, District of Utah, Central Division. The complaint primarily seeks declaratory and injunctive relief to resolve issues of arbitrability in the pending Boston and Salt Lake City arbitrations discussed in the paragraph above. Plaintiffs have filed a motion for an injunction seeking to stay the Boston and Salt Lake City arbitrations, and Defendants have filed a motion to strike Plaintiffs’ motion for injunctive relief and a motion to dismiss plaintiffs’ complaint. The motions are have been fully briefed. The parties are currently waiting for the motions to be decided.

 

F- 22

 

 

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 will be heard in a labor court in Honduras and a labor judge will make the final decision regarding the case.

 

In the opinion of management, as of September 30, 2017, 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.

 

15. Concentrations

 

We generally sell a significant portion of our mineral production to a relatively small number of customers. For the nine months ended September 30, 2017, 100 percent 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 September 30, 2017. 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.

 

16. Subsequent Events

 

On October 16, 2017, Inception Mining, Inc. (“Inception”), a Nevada corporation, entered into a joint venture agreement (the “Agreement”) and subsequent amendment with Corpus Mining and Exploration, LTD., (“Corpus”) a Turks and Caicos Islands company that is effective as of October 1, 2017.

 

Corpus is a mineral exploration company that desires to locate and quantify precious metals in Honduras and is willing to provide the necessary funds to carry out this objective. Inception’s various mineral concessions located in Honduras and desire to locate the capital necessary to explore and determine the precious metals content on such concession prove the ideal opportunity for the Parties to form a joint venture.

 

The Parties shall form a jointly owned joint venture company to facilitate the exploration, drilling, and evaluation of the mineral resources in the Concessions. Under the Agreement, Inception will provide management services to direct the exploration and drilling of the mineral resources and will introduce and negotiate with drilling companies to complete the investigations and evaluations of the Concessions, among other things. Corpus will provide the capital necessary to complete the exploration and drilling of the Concessions.

 

F- 23

 

 

ITEM 2. 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. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

 

Introduction to Interim Consolidated Financial Statements.

 

The interim consolidated financial statements included herein have been prepared by Inception Mining Inc. (“Inception Mining” or the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in this filing.

 

In the opinion of management, all adjustments have been made consisting of normal recurring adjustments and consolidating entries, necessary to present fairly the consolidated financial position of the Company and subsidiaries as of September 30, 2017, the results of its consolidated statements of comprehensive income/(loss) for the nine-month period ended September 30, 2017, and its consolidated cash flows for the nine-month period ended September 30, 2017. The results of consolidated operations for the interim periods are not necessarily indicative of the results for the full year.

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

Overview and Plan of Operation

 

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 but also include acquisition, exploration, and development of mineral properties, primarily for gold, from owned mining properties. Inception Mining has acquired two projects, as described below. Our target properties are those that have been the subject of historical exploration. We have generated revenue from mining operations.

 

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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” or the “Mine”) pursuant to that certain asset purchase agreement entered between the Company, its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”) on one hand, and Inception Resources on the other hand, dated February 25, 2013 (the “Asset Purchase Agreement”). Accordingly, the Company owns and controls this property exclusively; there are no third parties who impose conditions of any kind on operations at this location. We are presently in the exploration stage at UP and Burlington. UP and Burlington contain two federal patented mining claims which Inception Resources acquired for the purpose of the exploration and potential development of gold on the 40 acres which comprises UP and Burlington. Production at this mine is subject to a 3% net smelter royalty, which may increase or decrease depending on the amount of gold produced.

 

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. The UP and Burlington site is located six miles from the city of Salmon; is 0.6 miles away from the closest major road (Ridge Rd.); and is 1.56 miles away from the closest major power line. We believe Salmon, along with the surrounding County of Lemhi, provides an excellent infrastructure for our mine. Salmon has a population of 3,122 and Lemhi County has a population of 7,806. In September 2011, heavy maintenance and right-of-way repair was completed and a new road to UP and Burlington was constructed.

 

UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres. Subsequently, in 1989, a U.S. Forest Survey was performed on the UP and Burlington site confirming that the patented claims cover an area which is six hundred feet by three thousand feet (600’x3000’). The Mine’s patented claims remove the challenges associated when working on U.S. Forest lands, Bureau of Land Management (“BLM”), state or other property types. With our purchase of UP and Burlington, we have the benefit of working on private land, which requires only a hauling / road permit to commence significant operations.

 

The Company has obtained the necessary permitting, cut additional access roads, made surface improvements, and initiated surface mining on a 2,500 foot per day lighted vein for bulk sampling, vein definition and ore valuation. In Phase II, we plan to contract an underground mining and operations plan, expand portal development leveraging existing underground access, and implement underground mining to a depth based on optimizing costs versus processed ore value. There is no guarantee that we will be successful in implementing any stage of our plans.

 

Our plan includes the continuation of obtaining a Lemhi County Conditional Use Permit and an Idaho Department of Lands Surface Reclamation Bond. Since receiving the permitting for the U.S. Forest Service Access Road, the access road is now complete. In addition, we have contracts such as geotechnical contracts, mining contracts, toll processing contracts, and underground mine plan contracts.

 

The Company and its independent consultants are in the process of developing a detailed exploration-drilling program to confirm and expand mineralized zones in the Mine and collect additional environmental and technical data. The first phase began in 2013. The Company intends to continue drilling, metallurgical testing, engineering and environmental programs and studies and has updated the historic feasibility study and environmental permit applications.

 

We also plan to review opportunities and acquire additional mineral properties with current or historic precious and base metal mineralization with meaningful exploration potential.

 

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 recovery bed to capacity by the end of June 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

 

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

 

We incurred a net loss of $2,470,972 for the nine-month period ended September 30, 2017, and a net income of $8,656,767 for the nine-month period ended September 30, 2016. This change in our results over the two periods is primarily the result of lower precious metal production, decreased depreciation included in cost of sales and depreciation expense and changes in derivatives and the changes in debt discounts which are included in other income/expense. The following table summarizes key items of comparison and their related increase (decrease) for the nine-month periods ended September 30, 2017 and 2016:

 

    Nine Months Ended September 30,     Increase/  
    2017     2016     (Decrease)  
Revenues   $ 2,940,961     $ 4,800,247     $ (1,859,286 )
Cost of Sales     2,633,406       2,926,680       (293,274 )
General and Administrative     1,173,509       1,371,653       (198,144 )
Depreciation and Amortization Expenses     111,232       81,741       29,491  
Total Operating Expenses     3,918,147       4,380,074       (461,927 )
Income (Loss) from Operations     (977,186 )     420,173       1,397,359  
Other Income (expense)     8,578       7,516       (1,062 )
Change in Derivative Liabilities     (193,583 )     12,836,872       13,030,455  
Loss on Extinguishment of Debt     (3,325 )     (20,179 )     (16,854 )
Change in Consignment Gold     16,338       (2,127 )     (18,465 )
Interest Expense     (1,321,794 )     (4,585,488 )     (3,263,694 )
Income (Loss) from Operations Before Taxes     (2,470,972 )     8,656,767       11,127,739  
Net Income (Loss)   $ (2,470,972 )   $ 8,656,767     $ 11,127,739  

 

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Three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

We incurred a net loss of $981,237 for the three-month period ended September 30, 2017, and a net loss of $5,335,978 for the three-month period ended September 30, 2016. This change in our results over the two periods is primarily the result of lower precious metal production, decreased depreciation included in cost of sales and depreciation expense and changes in derivatives and the changes in debt discounts which are included in other income/expense. The following table summarizes key items of comparison and their related increase (decrease) for the three-month periods ended September 30, 2017 and 2016:

 

    Three Months Ended September 30,     Increase/  
    2017     2016     (Decrease)  
Revenues   $ 1,145,591     $ 1,643,295     $ (497,704 )
Cost of Sales     936,392       1,297,736       (361,344 )
General and Administrative     410,364       595,616       (185,252 )
Depreciation and Amortization Expenses     4,807       34,972       (30,165 )
Total Operating Expenses     1,351,563       1,928,324       (576,761 )
Income (Loss) from Operations     (205,972 )     (285,029 )     (79,057 )
Other Income (expense)     4,474       5,078       604  
Change in Derivative Liabilities     (193,583 )     (3,593,201 )     (3,399,618 )
Loss on Extinguishment of Debt     -       (5,654 )     (5,654 )
Change in Consignment Gold     -       (2,127 )     (2,127 )
Interest Expense     (586,156 )     (1,455,045 )     (868,889 )
Income (Loss) from Operations Before Taxes     (981,237 )     (5,335,978 )     (4,354,741 )
Net Income (Loss)   $ (981,237 )   $ (5,335,978 )   $ (4,354,741 )

 

Liquidity and Capital Resources

 

Our balance sheet as of September 30, 2017 reflects assets of $2,963,393. We had cash in the amount of $105,963 and working capital deficit in the amount of $12,666,147 as of September 30, 2017. Thus, we do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.

 

Working Capital

 

    September 30, 2017     December 31, 2016  
Current assets   $ 2,027,661     $ 1,714,321  
Current liabilities     14,693,808       12,669,217  
Working capital deficit   $ (12,666,147 )   $ (10,954,896 )

 

We anticipate generating losses and, therefore, may be unable to continue operations in the future, if we don’t acquire additional capital and issue debt or equity or enter into a strategic arrangement with a third party.

 

Going Concern Consideration

 

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company and has an accumulated deficit of $15,469,683. In addition, there is a working capital deficit of $12,666,147 as of September 30, 2017. 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.

 

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    Nine Months Ended September 30,  
    2017     2016  
Net Cash Provided by Operating Activities   $ 137,954     $ 593,250  
Net Cash Used in Investing Activities     (285,228 )     (133,070 )
Net Cash Provided by (Used in) Financing Activities     58,525       (124,498 )
Effects of Exchange Rate Changes on Cash     59       (6,704 )
Net Increase (Decrease) in Cash   $ (88,690 )   $ 328,978  

 

Operating Activities

 

Net cash flow provided by operating activities during the nine months ended September 30, 2017 was $137,954, a decrease of $455,296 from the $593,250 net cash provided during the nine months ended September 30, 2016. This decrease in the cash provided by operating activities was primarily due to the decrease of precious metals production and the increase in cost of precious metals production by the Company.

 

Investing Activities

 

Investing activities during the nine months ended September 30, 2017 used $285,228, an increase of $152,158 from the $133,070 used by investing activities during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, the Company purchased $285,228 in property, plant and equipment.

 

Financing Activities

 

Financing activities during the nine months ended September 30, 2017 provided $58,525, an increase of $183,023 from the $124,498 used in financing activities during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, the Company received $532,000 in proceeds from notes payable, $813,700 in proceeds from notes payable - related parties, and $591,750 in proceeds from convertible notes payable. The Company made $556,000 in payments on notes payable, $250,000 in payments on convertible notes payable and $1,149,164 payments in notes payable – related parties. The Company also received $49,000 in cash from the sale of common stock of the Company.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.

 

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. 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.

 

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Recent Accounting Pronouncements

 

For recent accounting pronouncements, please refer to the notes to financial statements in Part I, Item 1 of this Quarterly Report.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to include disclosure under this item.

 

ITEM 4. 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 September 30, 2017.

 

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 September 30, 2017 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, 2016 and September 30, 2017 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties, tax compliance issues and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s 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.

 

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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 quarter ended September 30, 2017 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended September 30, 2017 are fairly stated, in all material respects, in accordance with US GAAP.

 

This Quarterly 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 Quarterly Report on Form 10-Q.

 

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 Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. 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.

 

On January 26, 2017, the Company was served a copy of a complaint filed by Danzig Ltd. (“Danzig”) and Brett Bertolami (“Bertolami”) in the Western District of North Carolina, Statesville Division District Court. The complaint alleges fraud, breach of contract, state securities fraud, federal securities fraud, breach of fiduciary duty, unjust enrichment, and negligent misrepresentation against the Company, and its current CEO/CFO and director, Trent D’Ambrosio, and current director and former officer, Michael Ahlin. The allegations arise from the change of control transaction in February 2013 and other documents related to that transaction. The Company has retained counsel to vigorously defend the allegations. The Company has filed a motion to dismiss the lawsuit, which has been fully briefed and is awaiting a ruling.

 

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On June 11, 2017, Danzig Ltd (whose principal is Elliott Foxcroft), filed an arbitration in Boston, Massachusetts, with the American Arbitration Association (AAA) against the Company and Messrs. Trent D’Ambrosio and Michael Ahlin. The Boston arbitration asserts claims that largely mirror those in the pending lawsuit in North Carolina, and seeks an unspecified amount of damages. The Respondents filed a motion to stay the arbitration against Messrs. D’Ambrosio and Ahlin, which was granted pending a decision by a court as to whether Messrs. D’Ambrosio and Ahlin are subject to the arbitration. The Boston arbitration is currently in discovery.

 

On July 20, 2017, Elliott Foxcroft filed an AAA arbitration in Salt Lake City, Utah, against the Company and Messrs. D’Ambrosio and Ahlin. The Salt Lake City arbitration alleges federal securities fraud, state securities fraud, breach of contract, unjust enrichment, fraud, breach of fiduciary duty, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing, relating to a consulting agreement between the Company and Elliott Foxcroft, dated March 27, 2014. Mr. Foxcroft seeks an unspecified amount of damages. The Company has retained counsel to vigorously defend the allegations in both arbitrations. The Company has also alleged a counterclaim for breach of the consulting agreement with Mr. Foxcroft in the Salt Lake City arbitration, seeking damages in the initial amount of $150,000. The parties have fully briefed and are awaiting a ruling on a motion to determine whether the arbitrator has authority to determine whether Messrs. D’Ambrosio and Ahlin are proper parties to the arbitration.

 

On August 22, 2017, the Company and Messrs. D’Ambrosio and Ahlin filed a complaint against Danzig Ltd., Elliott Foxcroft, and Brett Bertolami in the United States District Court, District of Utah, Central Division. The complaint primarily seeks declaratory and injunctive relief to resolve issues of arbitrability in the pending Boston and Salt Lake City arbitrations discussed in the paragraph above. Plaintiffs have filed a motion for an injunction seeking to stay the Boston and Salt Lake City arbitrations, and Defendants have filed a motion to strike Plaintiffs’ motion for injunctive relief and a motion to dismiss plaintiffs’ complaint. The motions are have been fully briefed. The parties are currently waiting for the motions to be decided.

 

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 will be heard in a labor court in Honduras and a labor judge will make the final decision regarding the case.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we are not required to include disclosure under this item. We refer readers to our Form 10-K for additional risk factor disclosures.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the nine-month period ended September 30, 2017, the Company issued the following equity securities:

 

On July 18, 2017, 600,000 shares of common stock were issued for the conversion of debt obligation to MDL Ventures LLC assigned to Trent D’Ambrosio. The amount of the debt converted was $150,000. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On August 21, 2017, 20,000 shares of common stock were issued to Sandeep Sull as payment for web development services performed for the Company through August 13, 2017. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On August 21, 2017, 57,891 shares of common stock were issued to Red Cloud Klondike Strike, Inc. as payment for investor relations services performed from April 2017 through July 2017. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On August 23, 2017, Labrys Fund LP returned 127,910 shares of common stock of the Company that were being held as a security deposit.

 

On August 23, 2017, 200,000 shares of common stock of the Company were issued to John Bushnell for a cash payment of $35,000 or $0.175 per share. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On August 31, 2017, 80,000 shares of common stock of the Company were issued to John Bushnell for a cash payment of $14,000 or $0.175 per share. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On October 30, 2017, 600,000 shares of common stock were issued for the conversion of debt obligation to MDL Ventures LLC assigned to Trent D’Ambrosio. The amount of the debt converted was $150,000. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

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

 

ITEM 5. OTHER INFORMATION

 

Joint Venture Agreement with Corpus Mining and Exploration

 

On October 16, 2017, Inception Mining, Inc. (“Inception”), a Nevada corporation, entered into a joint venture agreement (the “Agreement”) and subsequent amendment with Corpus Mining and Exploration, LTD., (“Corpus”) a Turks and Caicos Islands company that is effective as of October 1, 2017.

 

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Corpus is a mineral exploration company that desires to locate and quantify precious metals in Honduras and is willing to provide the necessary funds to carry out this objective. Inception’s various mineral concessions located in Honduras and desire to locate the capital necessary to explore and determine the precious metals content on such concession prove the ideal opportunity for the Parties to form a joint venture.

 

The Parties shall form a jointly owned joint venture company to facilitate the exploration, drilling, and evaluation of the mineral resources in the Concessions. Under the Agreement, Inception will provide management services to direct the exploration and drilling of the mineral resources and will introduce and negotiate with drilling companies to complete the investigations and evaluations of the Concessions, among other things. Corpus will provide the capital necessary to complete the exploration and drilling of the Concessions.

 

ITEM 6. EXHIBITS

 

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   Securities Purchase Agreement with Typenex Co-Investment, LLC dated February 27, 2017(13)
     
4.3   Convertible Promissory Note issued to Typenex Co-Investment, LLC dated February 27, 2017(13)
     
4.4   Warrant to Purchase Shares of Common Stock issued to Labrys Fund LP dated March 7, 2017(13)
     
4.5   Convertible Promissory Note issued to Labrys Fund LP dated March 7, 2017(13)
     
4.6   Securities Purchase Agreement with Labrys Fund LP dated March 7, 2017 (13)
     
4.7   Convertible Promissory Note issued to Power Up Lending Group Ltd. on April 21, 2017(14)
     
4.8   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

 

10.13

 

List of Subsidiaries (12)

 

Joint Venture Agreement with Corpus Mining and Exploration, LTD dated as of October 1, 2017. (15)

     
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.

 

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SIGNATURES

 

Pursuant to the requirements 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: November 20, 2017 By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Executive Officer (Principal Executive Officer)
    Chief Financial Officer (Principal Financial and Accounting Officer)

 

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