Notes
to Condensed Consolidated Financial Statements (Unaudited)
June
30, 2021
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) change its name to Silver America, Inc. and (2) increase 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 were then focused on the ownership and
operation of the mine acquired from Inception Resources and the Company then ceased to be a shell company as it no longer has nominal
operations. On February 21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc.
in exchange for $250,000 in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian
company.
On
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 240,225,901 shares of common stock of Inception and
assumed promissory notes in the amount of $5,488,980 and accrued interest of $3,434,426. Under this merger agreement, there was a change
in control, and it has been treated for accounting purposes as a reverse recapitalization with Clavo Rico, Ltd. being the surviving entity.
Its workings include several historical underground operations dating back to the early Mayan and Spanish occupation.
The
Company’s primary mine is located on the 200-hectare Clavo Rico Concession, located in southern Honduras. This mine was originally
explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía Minera Cerros
del Sur, S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased
its ownership to 99.9%.
COVID-19
- The challenges posed by the COVID-19 pandemic on the global economy increased significantly as the first quarter of 2020 progressed.
COVID-19 has spread across the globe during 2020 and is impacting economic activity worldwide. In response to COVID-19, national and
local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings,
shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. Based on management’s
assessment as of June 30, 2021, the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition
and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the
global economy, which are uncertain and cannot be predicted at this time.
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 had net loss of $782,417 during the period ended June 30, 2021 and had a working capital deficit of
$28,414,132 as of June 30, 2021. These factors among others indicate that the Company may be unable to continue as a going concern for
a period of one year from the issuance of these financial statements.
The
Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding
sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution
of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
Management
is currently working to make changes that will result in profitable operations and to obtain additional funding sources to meet the Company’s
need for cash during the next twelve months and beyond.
Principles
of Consolidation - The accompanying consolidated financial statements include the accounts of Inception Mining, Inc. and its wholly
owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compañía Minera Cerros
del Río, S.A. de C.V., and its controlling interest subsidiaries, Compañía Minera Cerros del Sur, S.A. de C.V. and
Compañía Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been
eliminated upon consolidation.
Basis
of Presentation - The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted
in the United States of America.
Condensed
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 June 30, 2021, the results of its consolidated
statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2021, and its consolidated
cash flows for the six-month period ended June 30, 2021. The results of consolidated operations for the interim periods are not necessarily
indicative of the results for the full year.
Cash
and Cash Equivalents - The Company considers all highly liquid temporary cash investments with an original maturity of three months
or less to be cash equivalents. At June 30, 2021 and December 31, 2020, the Company had $0 and $0 in cash equivalents, respectively.
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.
Mineralized
Material on Leach Pads - The Company utilizes a heap leaching process to recover gold from its mineralized material. Under
this method, the mineralized material is placed on leach pads where it is treated with a chemical solution that dissolves the gold contained
in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered. Costs are added
to mineralized material on leach pads based on current mining and processing costs, including applicable depreciation relating to mining
and processing operations. Costs are transferred from mineralized material on leach pads to subsequent stages of in-process inventories
as the gold-bearing solution is processed. The value of such transferred costs of mineralized material on leach pads is based on the
average cost per estimated recoverable ounce of gold on the leach pad.
The
estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured tons
added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.
Although
the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material placed
on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature of the leaching
process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly
monitored, and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting
from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective
basis.
In-process
Inventories - In-process inventories represent mineralized materials that are currently in the process of being converted
to a saleable product through the absorption, desorption, recovery (ADR) process. The value of in-process material is measured based
on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued at the average
cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus
the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.
Finished
Goods Inventories - Finished goods inventories include gold that has been processed through the Company’s ADR facility
and are valued at the average cost of their production.
Exploration
and Development Costs - Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless
proven and probable reserves exist and the property is a commercially mineable property in accordance with FASB ASC 930, Extractive
Activities- Mining. Mine development costs incurred either to develop new gold and silver deposits, expand the capacity of operating
mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred to maintain current production
or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment.
The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs,
if any, to determine if these costs are in excess of their net realizable value and if a permanent impairment needs to be recorded. The
periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected
future cash flows and/or estimated salvage value.
The
Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the prospects
for economic productions are reasonably certain.
Capitalized
costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.
Mineral
Rights and Properties - We defer acquisition costs until we determine the viability of the property. Since we do not have proven
and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration expenditures
are expensed as incurred. We expense care and maintenance costs as incurred.
We
review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our
estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting
the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these
factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties
and possibly require future asset impairment write-downs.
Where
estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability
of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method
to deplete the mineral rights and properties.
Settlement
of Contracts in Company’s Equity – In accordance with ASC 815-40-25, the Company must meet certain requirements in order
to report contracts as equity versus liabilities. These requirements must be met by the Company or the contracts need to be reported
as liabilities. The Company has adopted the sequencing approach as guidance on contracts that permit partial net share settlement. The
Company evaluates the contracts based on the earliest issuance date. Currently, the Company doesn’t have any items that are reported
as equity instead of liabilities.
Fair
Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to
bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market
participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk, including the party’s own credit risk.
Fair
value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the
information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that
is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
|
|
Level
1: Quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
Level
2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs
are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
|
|
Level
3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
|
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair
value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed
and is determined based on the lowest level input that is significant to the fair value measurement.
The
carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other
current assets and liabilities approximate fair value because of their short-term maturity.
The
fair value of financial instruments on June 30, 2021 are summarized below:
Schedule
of Fair Value of Financial Instruments
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Marketable securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,570
|
|
|
$
|
20,570
|
|
|
Debt derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,055,121
|
|
|
|
5,055,121
|
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,075,691
|
|
|
$
|
5,075,691
|
|
The
fair value of financial instruments on December 31, 2020 are summarized below:
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Marketable
securities
|
|
$
|
118,166
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,166
|
|
|
Total Assets
|
|
$
|
118,166
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,914
|
|
|
$
|
22,914
|
|
|
Debt derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
7,541,393
|
|
|
|
7,541,393
|
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,564,307
|
|
|
$
|
7,564,307
|
|
The
Company recognizes its marketable securities as level 1 and values its marketable securities 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
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.
Marketable
Securities - We measure the fair value of marketable securities in accordance with ASC 825-10 – Financial Instruments. Any
change in the fair value is recognized in net income in the period being reported.
Long-Lived
Assets - We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment.
An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying
amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based
on discounted future cash flows.
Properties,
Plant and Equipment - We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts
sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize
expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs
to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:
Schedule
of Property and Equipment Useful Lives
|
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 - In accordance with ASC 606-10, revenue is measured based on a consideration specified in a contract with a customer
and recognized when we satisfy the performance obligation specified in each contract.
The
Company generates revenue by selling gold and silver produced from its mining operations. The majority of the Company’s sales come
from the sale of refined gold; however, the end product at the Company’s gold operations is generally doré bars. Doré
is an alloy consisting primarily of gold but also containing silver and other metals. Doré is sent to refiners to produce bullion
that meets the required market standard of 99.95% gold. Under the terms of the Company’s refining agreements, the doré bars
are refined for a fee, and the Company’s share of the refined gold and silver is credited to its bullion account.
The
Company recognizes revenue for gold and silver from doré production when it satisfies the performance obligation of transferring
gold and silver inventory to the customer, which generally occurs upon transfer of gold and silver bullion credits as this is the point
at which the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits of ownership of the
asset.
The
Company generally recognizes the sale of gold bullion credits at the prevailing market price when gold bullion credits are delivered
to the customer. The transaction price is determined based on the agreed upon market price and the number of ounces delivered. Payment
is due upon delivery of gold bullion credits to the customer’s account.
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.
2,226,406,340 common share equivalents have been excluded from the diluted loss per share calculation for the six-month period ended June
30, 2021 because it would be anti-dilutive.
The
following tables summaries the changes in the net earnings per common share for the three and six-month periods ended June 30, 2021 and
2020:
Schedule
of Net Earnings Per Common Share
|
Numerator
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
Numerator
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
Net Income (Loss) - Controlling
Interest
|
|
$
|
4,623,592
|
|
|
$
|
(6,012,937
|
)
|
|
$
|
(782,417
|
)
|
|
$
|
(4,882,430
|
)
|
|
Amortization of Debt Discounts
|
|
|
260,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Interest Expense
|
|
|
(496,837
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss on Conversion of Debt
|
|
|
394,722
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Change in Derivative
Liabilities
|
|
|
(5,899,008
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted Net Loss -
Controlling Interest
|
|
$
|
(1,117,238
|
)
|
|
$
|
(6,012,937
|
)
|
|
$
|
(782,417
|
)
|
|
$
|
(4,882,430
|
)
|
|
Denominator
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Basic Weighted Average Number of Shares Outstanding during Period
|
|
|
109,255,630
|
|
|
|
67,672,109
|
|
|
|
124,823,312
|
|
|
|
65,272,158
|
|
|
Dilutive Shares
|
|
|
2,215,430,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Diluted Weighted Average Number of Shares
Outstanding during Period
|
|
|
2,340,253,742
|
|
|
|
67,672,109
|
|
|
|
124,823,312
|
|
|
|
65,272,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Loss per Share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
Other
Comprehensive Loss – Other Comprehensive loss is made up of the exchange differences arising on translating foreign operations,
unrealized losses on marketable securities and the net loss for the three-months ending June 30, 2021 and June 30, 2020.
Derivative
Liabilities - Derivative 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.
Income
Taxes - The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment
of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred
income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating
the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.
In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating
income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions
require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that the Company
is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets for which the Company
does not consider realization of such deferred tax assets to be more likely than not.
Changes
in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such
changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
Business
Segments – The Company operates in one segment and therefore segment information is not presented.
Use
of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, we are required
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could
differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized material on
leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax
assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments,
and contingent liabilities.
Non-Controlling
Interest Policy – Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the
parent company, who has a controlling interest and consolidates the subsidiary’s financial results with its own. The amount of
equity relating to the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of
the net income (loss) relating to the non-controlling interest is separately identified on the statement of operations.
Recently
Issued Accounting Pronouncements – From time to time, new accounting pronouncements are issued by FASB that are adopted by
the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which
are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
3.
Inventories, Stockpiles and Mineralized Materials on Leach Pads
Inventories,
stockpiles and mineralized materials on leach pads at June 30, 2021 and December 31, 2020 consisted of the following:
Schedule
of Inventories
|
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Supplies
|
|
$
|
81,683
|
|
|
$
|
69,768
|
|
|
Mineralized Material on Leach Pads
|
|
|
85,284
|
|
|
|
112,207
|
|
|
ADR Plant
|
|
|
127,884
|
|
|
|
153,307
|
|
|
Finished Ore
|
|
|
363,184
|
|
|
|
401,467
|
|
|
Total Inventories
|
|
$
|
658,035
|
|
|
$
|
736,749
|
|
There
were no stockpiles at June 30, 2021 and December 31, 2020.
4.
Marketable Securities 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 1 financial assets as of June 30, 2021:
Schedule
of Changes in Fair Value of Level 1 Financial Assets
|
|
|
Marketable
Securities
|
|
|
Balance, December 31, 2020
|
|
$
|
118,166
|
|
|
Change in fair value of marketable securities
|
|
|
328,970
|
|
|
Sale of marketable securities
|
|
|
(447,136
|
)
|
|
Balance, June 30, 2021
|
|
$
|
-
|
|
5.
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 non-performance. 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 June 30, 2021:
Summary
of Changes in Fair Value of Level 3 Financial Liabilities
|
|
|
Derivative
Liabilities
|
|
|
Balance, December 31, 2020
|
|
$
|
7,564,307
|
|
|
Change in fair value
of derivative liabilities and warrant liability
|
|
|
(2,488,616
|
)
|
|
Balance, June 30, 2021
|
|
$
|
5,075,691
|
|
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
June 30, 2021, the Company marked to market the fair value of the debt derivatives and determined a fair value of $5,055,121. The Company
recorded a gain from change in fair value of debt derivatives of $2,486,272 for the period ended June 30, 2021. The fair value of the
embedded derivatives was determined using the Binomial Option Pricing Model and the Company’s Enterprise Valuation Model. The Binomial
Option Pricing Model was based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 120.22%, (3) weighted
average risk-free interest rate of 0.06% (4) expected life of 0.53 years, and (5) the quoted market price of the Company’s common
stock at each valuation date. The Company’s Enterprise Valuation Model was based on the following assumptions: (1) outstanding
note balance at June 30, 2021 of $3,088,943, (2) outstanding shares of common stock at June 30, 2021 of 135,598,488 shares and (3) closing
stock price on June 30, 2021 of $0.0145 per share.
Based
upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40
to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance
date.
Warrant
liabilities – Prior to the periods being reported, the Company issued warrants in conjunction with the issuance of three Crown
Bridge Convertible Notes and a Convertible Note with an investor. These warrants contained certain reset provisions. The accounting treatment
of derivative financial instruments required that the Company record fair value of the derivatives as of the inception date (issuance
date) and to fair value as of each subsequent reporting date.
At
June 30, 2021, the Company had a warrant liability of $20,570.
The Company recorded a loss from change in fair value of warrant liability of $2,344
for the period ended June 30, 2021. The fair
value of the embedded derivatives was determined using the Binomial Option Pricing Model and the Monte Carlo Valuation Model. The Binomial
Option Pricing Model was based on the following assumptions: (1) dividend yield of 0%,
(2) expected volatility of 139.29%
to 181.56%,
(3) weighted average risk-free interest rate of 0.07%
to 0.25%
(4) expected life of 1.11
to 2.32
years, and (5) the quoted market price of the
Company’s common stock at each valuation date. The Monte Carlo Valuation Model was based on the following assumptions: (1) expected
volatility of 143.90%,
(2) weighted average risk-free interest rate of 0.07%
and (3) expected life of 0.53
years.
6.
Properties, Plant and Equipment, Net
Properties,
plant and equipment at June 30, 2021 and December 31, 2020 consisted of the following:
Schedule
of Properties and Equipment
|
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Land
|
|
$
|
276,099
|
|
|
$
|
273,248
|
|
|
Buildings
|
|
|
2,413,193
|
|
|
|
2,388,274
|
|
|
Machinery and Equipment
|
|
|
981,244
|
|
|
|
971,374
|
|
|
Office Equipment and Furniture
|
|
|
51,001
|
|
|
|
48,827
|
|
|
Vehicles
|
|
|
104,124
|
|
|
|
85,921
|
|
|
Construction in Process
|
|
|
13,423
|
|
|
|
9,015
|
|
|
Total Property, Plant and Equipment
|
|
|
3,839,084
|
|
|
|
3,776,659
|
|
|
Less Accumulated Depreciation
|
|
|
(3,423,961
|
)
|
|
|
(3,362,848
|
)
|
|
Total Property, Plant
and Equipment
|
|
$
|
415,123
|
|
|
$
|
413,811
|
|
During
the six months ended June 30, 2021 and 2020, the Company recognized depreciation expense of $26,065 and $27,437, respectively. The following
table summarizes the allocation of depreciation expense between cost of goods sold and general and administrative expenses.
Summary
of Allocation of Depreciation Expense
|
Depreciation
Allocation
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Cost of Goods Sold
|
|
$
|
21,466
|
|
|
$
|
23,010
|
|
|
General and Administrative
|
|
|
4,599
|
|
|
|
4,427
|
|
|
Total
|
|
$
|
26,065
|
|
|
$
|
27,437
|
|
7.
Mineral Properties
On
February 25, 2013, the Company acquired certain real property and the associated exploration permits and mineral rights commonly known
as the U.P. and Burlington Gold Mine (“UP & Burlington” 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”). UP & Burlington contains two Federal patented mining claims which Inception Resources
acquired for the purpose of the exploration and potential development of gold on the 40 acres which comprises UP & Burlington. The
property was recorded at cost and the Company recognized $950,160 impairment expense on the property as of July 31, 2015. On February
21, 2020, the Company sold the Up & Burlington property and mineral rights to Ounces High Exploration, Inc. in exchange for $249,660
in cash consideration and 66,974,252 shares of common stock of Hawkstone Mining Limited, a publicly-trade Australian company that was
valued at $221,424, for a net gain of $471,084 on the sale of the mine property.
8.
Mine Reclamation Obligation
The
Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and revegetating 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 $648,131 and $602,337 as of June 30, 2021 and December 31, 2020, 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
obligation for information indicating that our assumptions should change.
Changes
to the asset retirement obligation were as follows:
Schedule
of Changes in Assets Retirement Obligation
|
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Balance, Beginning of Year
|
|
$
|
602,337
|
|
|
$
|
513,051
|
|
|
Liabilities incurred
|
|
|
39,509
|
|
|
|
89,286
|
|
|
Change due to foreign
currency translation
|
|
|
6,285
|
|
|
|
-
|
|
|
Balance, End of Year
|
|
$
|
648,131
|
|
|
$
|
602,337
|
|
9.
Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities at June 30, 2021 and December 31, 2020 consisted of the following:
Schedule
of Accounts Payable and Accrued Liabilities
|
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Accounts Payable
|
|
$
|
634,710
|
|
|
$
|
719,070
|
|
|
Accrued Liabilities
|
|
|
2,507,927
|
|
|
|
1,619,763
|
|
|
Accrued Salaries and Benefits
|
|
|
618,461
|
|
|
|
618,257
|
|
|
Advances Payable
|
|
|
335,434
|
|
|
|
497,395
|
|
|
Total Accrued Liabilities
|
|
$
|
4,096,532
|
|
|
$
|
3,454,485
|
|
10.
Secured Borrowings
On
June 25, 2020, the Company entered into two new financing arrangements with third parties for a combined principal amount of $172,663.
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 $17,266, for a total expected remittance of $189,929. The maturity date of the notes is December 26, 2020. On December 26, 2020, the
Company entered into two new financing arrangements with third parties for a combined principal amount of $118,757. 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 $11,876,
for a total expected remittance of $130,633. Also on that day, one of the lenders chose to liquidate a portion of his balance amounting
to $83,006. This amount was paid to the lender in January 2021. The maturity date of the notes is June 26, 2021. In May 2021, the remaining
agreements were liquidated for an amount totaling $134,508. 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.
Schedule
of Secured Borrowings
|
Secured
Borrowings
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Secured obligations
|
|
$
|
-
|
|
|
$
|
201,763
|
|
|
Guaranteed interest
|
|
|
-
|
|
|
|
11,876
|
|
|
Deferred interest
|
|
|
-
|
|
|
|
(11,550
|
)
|
|
|
|
|
-
|
|
|
|
202,089
|
|
|
Gold held as security
|
|
|
-
|
|
|
|
(52,499
|
)
|
|
Secured Borrowings,
net
|
|
$
|
-
|
|
|
$
|
149,590
|
|
11.
Notes Payable
Notes
payable were comprised of the following as of June 30, 2021 and December 31, 2020:
Schedule
of Notes Payable
|
Notes
Payable
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Phil Zobrist
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
|
Small Business Administration
|
|
|
131,667
|
|
|
|
100,000
|
|
|
Total Notes Payable
|
|
|
191,667
|
|
|
|
160,000
|
|
|
Less Short-Term Notes
Payable
|
|
|
100,000
|
|
|
|
-
|
|
|
Total Long-Term Notes
Payable
|
|
$
|
91,667
|
|
|
$
|
160,000
|
|
Phil
Zobrist – On January 11, 2013, the Company issued an unsecured Promissory Note to Phil Zobrist in the principal amount of $60,000
(the “Note”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $60,000. On
October 2, 2015, the Company entered into a new convertible note with Phil Zobrist that matures on December 31, 2016 and bears 18% per
annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $29,412 and charged this amount
to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at
a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20-trading
day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed, and
the note was extended until December 31, 2024. 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 June 30, 2021, the gross balance of the note was $60,000 and
accrued interest was $91,489.
Small
Business Administration – On April 17, 2020, the Company issued an unsecured Promissory Note to the Small Business Administration
in the principal amount of $100,000
(the “Note”) that matures on April
16, 2022 and bearing 1.00%
per annum interest as part of the Covid-19 Cares Act. The total net proceeds the Company received was $100,000.
On April 30, 2021, the Company issued an additional unsecured Promissory Note to the Small Business Administration in the principal amount
of $31,667
that matures on April
30, 2023 and bears 3.75%
per annum interest under additional funding of the Covid-19 Cares Act. The total net proceeds the Company received was $31,667.
The Company is in the process of getting these loans forgiven under the Covid-19 Cares Act. As of June 30, 2021, the gross balance
of the note was $131,667
and accrued interest was $1,203.
12.
Notes Payable – Related Parties
Notes
payable – related parties were comprised of the following as of June 30, 2021 and December 31, 2020:
Schedule
of Notes Payable Related Parties
|
Notes Payable - Related
Parties
|
|
Relationship
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Clavo Rico, Inc.
|
|
Affiliate - Controlled by Director
|
|
$
|
3,377,980
|
|
|
$
|
3,377,980
|
|
|
Claymore Management
|
|
Affiliate - Controlled by Director
|
|
|
185,000
|
|
|
|
185,000
|
|
|
Debra D’ambrosio
|
|
Immediate Family Member
|
|
|
125,000
|
|
|
|
50,000
|
|
|
Francis E. Rich
|
|
Immediate Family Member
|
|
|
90,000
|
|
|
|
-
|
|
|
Francis E. Rich IRA
|
|
Immediate Family Member
|
|
|
-
|
|
|
|
50,000
|
|
|
Legends Capital
|
|
Affiliate - Controlled by Director
|
|
|
715,000
|
|
|
|
715,000
|
|
|
LWB Irrev Trust
|
|
Affiliate - Controlled by Director
|
|
|
1,101,000
|
|
|
|
1,101,000
|
|
|
MDL Ventures
|
|
Affiliate - Controlled by Director
|
|
|
1,610,163
|
|
|
|
1,476,039
|
|
|
Pine Valley Investments
|
|
Affiliate - Controlled
by Director
|
|
|
-
|
|
|
|
150,000
|
|
|
Total Notes Payable
- Related Parties
|
|
|
|
$
|
7,204,643
|
|
|
$
|
7,105,019
|
|
Clavo
Rico, Incorporated – Between December 2011 and October 2012, the Company issued seven unsecured Promissory Notes to GAIA Ltd.
for a total principal amount of $1,150,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds
the Company received was $1,150,000. On October 2, 2015, the Company entered into a new convertible note with GAIA Ltd. that matures
on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount
of $724,463 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common
stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the
common stock during the 20-trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The
convertible feature was removed, and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment
of debt of $2,524,747 for the remaining derivative liability and of $226,974 for the remaining debt discount. On April 5, 2019, the entire
outstanding balance of $1,150,000 and accrued interest was assigned to Clavo Rico, Incorporated.
Between
March 2011 and February 2015, the Company issued 23 unsecured Promissory Notes to Silverbrook Corporation for a total principal amount
of $2,227,980 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received
was $2,227,980. On October 2, 2015, the Company entered into a new convertible note with Silverbrook Corporation that matures on December
31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $1,209,606
and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s
option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the
20-trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was
removed, and the note was extended until December 31, 2019. The Company recognized a gain on the extinguishment of debt of $4,656,189
for the remaining derivative liability and of $439,733 for the remaining debt discount. On April 5, 2019, the entire outstanding balance
of $2,227,980 and accrued interest was assigned to Clavo Rico, Incorporated.
On
April 5, 2019, GAIA Ltd and Silverbrook Corporation assigned 100% of the outstanding principal balance of their notes and all accrued
interest to Clavo Rico, Incorporated. The GAIA Ltd and Silverbrook Corporation notes had been extended until December 31, 2024 and bear
18% per annum interest. As of June 30, 2021, the gross balance of the notes was $3,377,980 and accrued interest was $5,429,029.
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, 2024. 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 June 30, 2021, the gross balance of the note was $185,000 and accrued
interest was $342,762.
D.
D’Ambrosio – On July 17, 2020, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the
principal amount of $50,000 (the “Note”) due on January 15, 2021 and bears a 5.00% interest rate. The Company made a payment
of $2,500 towards the principal balance of $2,500 on February 2, 2021. The Company made a payment of $47,500 towards the principal balance
and accrued interest of $47,500 on February 22, 2021. As of June 30, 2021, the outstanding balance of the Note was $0 and accrued interest
was $0.
D.
D’Ambrosio – On January 5, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in
the principal amount of $145,000 (the “Note”) due on February 7, 2021 and bears a 5.00% interest rate. The Company made a
payment of $152,250 towards the principal balance and accrued interest of $7,250 on February 2, 2021. As of June 30, 2021, the outstanding
balance of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On February 1, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in
the principal amount of $88,000 (the “Note”) due on March 1, 2021 and bears a 5.00% interest rate. The Company made a payment
of $92,400 towards the principal balance and accrued interest of $4,400 on March 1, 2021. As of June 30, 2021, the outstanding balance
of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On February 25, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio
in the principal amount of $70,000 (the “Note”) due on April 1, 2021 and bears a 5.00% interest rate. The Company made a
payment of $73,500 towards the principal balance and accrued interest of $3,500 on March 23, 2021. As of June 30, 2021, the outstanding
balance of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On March 31, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in
the principal amount of $40,000 (the “Note”) due on May 1, 2021 and bears a 5.00% interest rate. The Company made a payment
of $42,000 towards the principal balance and accrued interest of $2,000 on May 1, 2021. As of June 30, 2021, the outstanding balance
of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On April 23, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in
the principal amount of $72,000 (the “Note”) due on May 31, 2021 and bears a 5.00% interest rate. The Company made a payment
of $75,600 towards the principal balance and accrued interest of $3,600 on May 14, 2021. As of June 30, 2021, the outstanding balance
of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On May 18, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the
principal amount of $72,000 (the “Note”) due on June 30, 2021 and bears a 5.00% interest rate. The Company made a payment
of $75,600 towards the principal balance and accrued interest of $3,600 on June 16, 2021. As of June 30, 2021, the outstanding balance
of the Note was $0 and accrued interest was $0.
D.
D’Ambrosio – On May 27, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the
principal amount of $71,000 (the “Note”) due on November 30, 2021 and bears a 5.00% interest rate. As of June 30, 2021, the
outstanding balance of the Note was $71,000 and accrued interest was $3,550.
D.
D’Ambrosio – On June 21, 2021, the Company issued an unsecured Short-Term Promissory Note to D. D’Ambrosio in the
principal amount of $54,500 (the “Note”) due on July 31, 2021 and bears a 5.00% interest rate. As of June 30, 2021, the outstanding
balance of the Note was $54,500 and accrued interest was $3,225.
Diamond
80, LLC – On April 3, 2017, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal
amount of $50,000 (the “Note”) due on December 31, 2019 and bears a 7.0% interest rate. The Company made a payment of $1,075
towards the principal balance of $1,000 and accrued interest of $75 on September 30, 2018. The Company made a payment of $49,000 towards
the principal balance on May 21, 2019. As of June 30, 2021, the outstanding balance of the Note was $0 and accrued interest was $0.
Francis
E. Rich – On May 24, 2021, the Company issued an unsecured Short-Term Promissory Note to Francis E. Rich in the principal amount
of 50,000 (the “Note”) due on November 23, 2021 and bears a 5.0% interest rate. As of June 30, 2021, the outstanding balance
of the Note was $50,000 and accrued interest was $2,500.
Francis
E. Rich – On June 25, 2021, the Company issued an unsecured Short-Term Promissory Note to Francis E. Rich in the principal
amount of 40,000 (the “Note”) due on July 31, 2021 and bears a 5.0% interest rate. As of June 30, 2021, the outstanding balance
of the Note was $40,000 and accrued interest was $0.
Francis
E. Rich IRA – On October 23, 2020, the Company issued an unsecured Short-Term Promissory Note to Francis E. Rich IRA in the
principal amount of 50,000 (the “Note”) due on April 23, 2021 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 April 23, 2021. As of June 30, 2021, the outstanding balance
of the Note was $0 and accrued interest was $0.
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, 2024. 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 June
30, 2021, the gross balance of the note was $715,000 and accrued interest was $1,284,833.
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, 2024. 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 June 30, 2021, the gross balance of the note was $1,101,000 and accrued interest was $1,953,912.
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, 2024. The Company recognized a gain on the extinguishment of debt of $1,487,158 for the remaining
derivative liability. As of June 30, 2021, the gross balance of the note was $1,610,163 and accrued interest was $0.
Pine
Valley Investments, LLC – On November 30, 2020, the Company issued an unsecured Short-Term Promissory Note to Pine Valley Investments,
LLC in the principal amount of $200,000 (the “Note”) due on December 31, 2020 and bears a 5.0% interest rate. The Company
made a payment of $60,000 towards the principal balance and accrued interest of $10,000 on December 31, 2020. The Company made a payment
of $25,000 towards the principal balance on January 29, 2021. The Company made a payment of $125,000 towards the principal balance on
February 28, 2021. As of June 30, 2021, the outstanding balance of the Note was $0 and accrued interest was $0.
Cluff-Rich
PC – On January 29, 2021, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount
of $40,000 (the “Note”) due on February 28, 2021 and bears a 5.0% interest rate. The Company made a payment of $42,000 towards
the principal balance and accrued interest of $2,000 on March 1, 2021. As of June 30, 2021, the outstanding balance of the Note was $0
and accrued interest was $0.
13.
Convertible Notes Payable
Convertible
notes payable were comprised of the following as of June 30, 2021 and December 31, 2020:
Schedule of Convertible Notes Payable
|
Convertible Notes Payable
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Antczak Polich Law LLC
|
|
$
|
294,123
|
|
|
$
|
320,123
|
|
|
Investor
|
|
|
3,088,943
|
|
|
|
3,448,700
|
|
|
Scotia International
|
|
|
400,000
|
|
|
|
400,000
|
|
|
Total Convertible Notes Payable
|
|
|
3,783,066
|
|
|
|
4,168,823
|
|
|
Less Unamortized Discount
|
|
|
(16,030
|
)
|
|
|
(774,431
|
)
|
|
Total Convertible Notes Payable, Net of Unamortized Debt Discount
|
|
|
3,767,036
|
|
|
|
3,394,392
|
|
|
Less Short-Term Convertible Notes Payable
|
|
|
(3,767,036
|
)
|
|
|
(2,176,677
|
)
|
|
Total Long-Term Convertible Notes Payable, Net of Unamortized Debt Discount
|
|
$
|
-
|
|
|
$
|
1,217,715
|
|
Antczak
Polich Law, LLC – On August 1, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to Antczak
Polich Law, LLC (“Antczak”), in the principal amount of $300,000 (the “Note”) due on August 1, 2019 and bears
8% per annum interest, due at maturity. This Note was issued for $300,000 in legal fees due to Antczak for its services related to several
legal issues handled for the Company. The Note is convertible into common stock, at holder’s option, at a fixed conversion price
of $0.75 per share. During the six months ended June 30, 2021, the Company made payments amounting to $5,877. As of June 30, 2021, the
gross balance of the note was $294,123 and accrued interest was $71,958.
Antczak
Polich Law, LLC – On December 1, 2018, the Company issued an unsecured Convertible Promissory Note (“Note”) to
Antczak Polich Law, LLC (“Antczak”), in the principal amount of $130,000 (the “Note”) due on December 1, 2019
and bears 8% per annum interest, due at maturity. This Note was issued for $130,000 in legal fees due to Antczak for its services related
to several legal issues handled for the Company. The Note is convertible into common stock, at holder’s option, at a fixed conversion
price of $0.75 per share. During the years ended December 31, 2020 and 2019 and the six months ended June 30, 2021, the Company made
several payments amounting to $130,000. As of June 30, 2021, the gross balance of the note was $0 and accrued interest was $15,148.
Investor
– On May 20, 2019, the Company issued a secured Convertible Promissory Note (“Note”) to Investor, in the principal
amount of $4,250,000
(the “Note”)
due on May
20, 2022 and bears 20%
(24%
default) per annum interest, due at maturity. The total net proceeds the Company received was $3,000,000.
The
Note is convertible into common stock, at holder’s option, at 100% of market price less $0.01 per share. Market
price means the mathematical average of the five lowest individually daily volume weighted average prices of the common stock from the
period beginning on the issuance date and ending on the maturity date. The conversion price has a floor price of $0.01 per share of common
stock. The Company issued 9,250,000
warrants to purchase
shares of common stock in connection with this note. The warrants have a three-year
life and an exercise
price as follows: 3,750,000
at an exercise price
of $0.40
per share, 3,000,000
at an exercise price
of $0.50
per share and 2,500,000
at an exercise price
of $0.60
per share. The proceeds
were allocated between the note for $1,788,038
and the warrants for
$1,211,962.
The note has an early payoff penalty of 140%
of the then outstanding face value. On July 29, 2019, the investor converted $265,000
of the principal balance
into 2,986,597
shares of common stock
valued at $0.11
per share. The Company
recognized a loss on the extinguishment of debt of $40,350.
During 2020, the investor converted $36,300
of the principal balance
into 17,833,942
shares of common stock.
The Company recognized a loss on the extinguishment of debt of $531,194.
The Company also made cash payments of $500,000
towards the principal
balance of the note. The Company has required payments as follows: $2,400,000
in 2021 and the remaining
balance due in 2022. During 2020, the Company experienced a triggering event. As a result, the interest rate increased to 20%
for the life of the note. On April 14, 2020, the Company entered into a Forbearance Agreement with Investor in which Investor agreed
to rescind its prior declaration of an Event of Default under the May 20, 2019 Note Purchase Agreement and the Company agreed to pay
certain monthly and quarterly redemptions of the May 20, 2019 Note through 2022. Specifically, the Company has agreed to pay $900,000
during 2020, $2,400,000
during 2021 and $500,000
delivered during each
quarter of 2022 until the Note is converted or redeemed in full. During the six-months ended June 30, 2021, the investor converted $216,900
of the principal balance
into 56,930,068
shares of common stock.
The Company recognized a loss on the extinguishment of debt of $1,491,474.
The Company also made cash payments of $142,857
towards the principal
balance of the note. The Company is not current with all payments due according to the agreement. For
the six months ended June 30, 2021, the Company amortized $727,700
of debt discount to current period operations
as interest expense. As of June 30, 2021, the gross balance of the note was $3,088,943
and accrued interest was $1,925,201.
Scotia
International of Nevada, Inc. – On January 10, 2019, the Company issued an unsecured Convertible Promissory Note (“Note”)
to Scotia International of Nevada, Inc. (“Scotia”), in the principal amount of $400,000 (the “Note”) due on January
10, 2022 and bears 6% per annum interest, due at maturity. The Note was issued as part of a buyout agreement on the net smelter royalty
due Scotia on the precious metals mined from the Company’s mining operation in Honduras. The Note is convertible into common stock,
at holder’s option, at $0.50 per share as long as the Company’s common stock’s bid price is less than $0.75 per share.
If the bid price is more than $0.75 per share, then Scotia may elect to convert at the average bid price of the common stock during the
10-trading day period prior to conversion. For the six months ended June 30, 2021, the Company amortized $14,955 of debt discount to
current period operations as interest expense. As of June 30, 2021, the gross balance of the note was $400,000 and accrued interest was
$59,310.
14.
Stockholders’ Deficit
Common
Stock
On
January 5, 2021, the Company issued to an Investor 2,493,479 shares of its common stock under a conversion notice. The conversion was
for $9,500 in principal. The shares were valued at $0.022 per share for a total value of $54,857. The Company recognized a loss of extinguishment
of debt of $46,971 on this conversion.
On
January 15, 2021, the Company issued to an Investor 2,598,468 shares of its common stock under a conversion notice. The conversion was
for $9,900 in principal. The shares were valued at $0.0224 per share for a total value of $58,206. The Company recognized a loss of extinguishment
of debt of $49,847 on this conversion.
On
January 26, 2021, the Company issued to an Investor 2,624,715 shares of its common stock under a conversion notice. The conversion was
for $10,000 in principal. The shares were valued at $0.024 per share for a total value of $62,993. The Company recognized a loss of extinguishment
of debt of $54,409 on this conversion.
On
February 5, 2021, the Company issued to an Investor 2,598,468 shares of its common stock under a conversion notice. The conversion was
for $9,900 in principal. The shares were valued at $0.029 per share for a total value of $75,356. The Company recognized a loss of extinguishment
of debt of $66,730 on this conversion.
On
February 9, 2021, the Company issued to an Investor 2,755,951 shares of its common stock under a conversion notice. The conversion was
for $10,500 in principal. The shares were valued at $0.035 per share for a total value of $96,458. The Company recognized a loss of extinguishment
of debt of $87,254 on this conversion.
On
February 17, 2021, the Company issued to an Investor 2,677,209 shares of its common stock under a conversion notice. The conversion was
for $10,200 in principal. The shares were valued at $0.046 per share for a total value of $123,152. The Company recognized a loss of
extinguishment of debt of $114,106 on this conversion.
On
February 22, 2021, the Company issued to an Investor 2,703,456 shares of its common stock under a conversion notice. The conversion was
for $10,300 in principal. The shares were valued at $0.0535 per share for a total value of $144,635. The Company recognized a loss of
extinguishment of debt of $135,434 on this conversion.
On
March 2, 2021, the Company issued to an Investor 2,677,209 shares of its common stock under a conversion notice. The conversion was for
$10,200 in principal. The shares were valued at $0.04 per share for a total value of $107,088. The Company recognized a loss of extinguishment
of debt of $97,873 on this conversion.
On
March 8, 2021, the Company issued to an Investor 2,834,692 shares of its common stock under a conversion notice. The conversion was for
$10,800 in principal. The shares were valued at $0.0399 per share for a total value of $113,104. The Company recognized a loss of extinguishment
of debt of $103,264 on this conversion.
On
March 11, 2021, the Company issued to an Investor 2,913,434 shares of its common stock under a conversion notice. The conversion was
for $11,100 in principal. The shares were valued at $0.0522 per share for a total value of $152,081. The Company recognized a loss of
extinguishment of debt of $141,925 on this conversion.
On
March 15, 2021, the Company issued to an Investor 3,018,422 shares of its common stock under a conversion notice. The conversion was
for $11,500 in principal. The shares were valued at $0.039 per share for a total value of $117,718. The Company recognized a loss of
extinguishment of debt of $107,137 on this conversion.
On
March 25, 2021, the Company issued to an Investor 3,149,658 shares of its common stock under a conversion notice. The conversion was
for $12,000 in principal. The shares were valued at $0.0327 per share for a total value of $102,994. The Company recognized a loss of
extinguishment of debt of $91,802 on this conversion.
On
April 5, 2021, the Company issued to an Investor 3,307,141 shares of its common stock under a conversion notice. The conversion was for
$12,600 in principal. The shares were valued at $0.0315 per share for a total value of $104,175. The Company recognized a loss of extinguishment
of debt of $92,252 on this conversion.
On
April 20, 2021, the Company issued to an Investor 3,412,130 shares of its common stock under a conversion notice. The conversion was
for $13,000 in principal. The shares were valued at $0.0205 per share for a total value of $69,949. The Company recognized a loss of
extinguishment of debt of $57,413 on this conversion.
On
April 28, 2021, the Company issued to an Investor 3,569,612 shares of its common stock under a conversion notice. The conversion was
for $13,600 in principal. The shares were valued at $0.021 per share for a total value of $74,962. The Company recognized a loss of extinguishment
of debt of $61,717 on this conversion.
On
May 11, 2021, the Company issued to an Investor 3,648,354 shares of its common stock under a conversion notice. The conversion was for
$13,900 in principal. The shares were valued at $0.019 per share for a total value of $69,319. The Company recognized a loss of extinguishment
of debt of $55,567 on this conversion.
On
May 21, 2021, the Company issued to an Investor 4,986,959 shares of its common stock under a conversion notice. The conversion was for
$19,000 in principal. The shares were valued at $0.0183 per share for a total value of $91,261. The Company recognized a loss of extinguishment
of debt of $72,261 on this conversion.
On
June 18, 2021, the Company issued to an Investor 4,960,711 shares of its common stock under a conversion notice. The conversion was for
$18,900 in principal. The shares were valued at $0.015 per share for a total value of $74,411. The Company recognized a loss of extinguishment
of debt of $55,511 on this conversion.
Warrants
The
following tables summarize the warrant activity during the three months ended June 30, 2021 and the year ended December 31, 2020:
Schedule of Warrants Activity
|
Stock Warrants
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Balance at December 31, 2019
|
|
|
9,613,637
|
|
|
$
|
1.12
|
|
|
Forfeited
|
|
|
(63,637
|
)
|
|
|
0.49
|
|
|
Balance at December 31, 2020
|
|
|
9,550,000
|
|
|
|
0.53
|
|
|
Balance at December 31, 2020
|
|
|
9,550,000
|
|
|
|
0.53
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Balance at June 30, 2021
|
|
|
9,550,000
|
|
|
$
|
0.49
|
|
Schedule of Warrants Outstanding and Exercisable
|
2021 Outstanding Warrants
|
|
|
Warrants Exercisable
|
|
|
Range of Exercise Price
|
|
|
Number Outstanding at June 30, 2021
|
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable at June 30, 2021
|
|
|
Weighted Average Exercise Price
|
|
|
$
|
0.40 - 0.75
|
|
|
|
9,550,000
|
|
|
0.92 years
|
|
$
|
0.49
|
|
|
|
9,550,000
|
|
|
$
|
0.49
|
|
15.
Income Taxes
The
Company’s subsidiaries, Compania Minera Cerros del Sur and Compania Minera Clavo Rico, which are located in Honduras, are required
to pay income tax and solidarity tax on their income and/or assets annually. The annual report was completed during the six month period
ended June 30, 2021 and the company recognized a tax liability of $157,935 during the period and paid $33,832 of this tax liability.
16.
Related Party Transactions
Consulting
Agreement – In February 2014, the Company entered into a consulting agreement with a stockholder/director. The Company agreed
to pay $18,000 per month for twelve months. This agreement was renegotiated in October 2017 and the Company agreed to pay the stockholder/director
$25,000 per month starting in October 2017. This agreement was superseded by an Employment Agreement as of April 1, 2019 (see Employment
Agreements below). As of June 30, 2021, the Company owed $1,035,000 to the stockholder/director in accrued consulting fees.
Mr.
Cluff currently serves as a director of the Company and has a separate agreement as a consultant of the Company effective as of October
2, 2015.
Employment
Agreements – The Company has an employment agreement with its chief executive officer, Trent D’Ambrosio. The employment
agreement was effective as of April 1, 2019 and provides for compensation of $300,000 annually.
Notes
Payable – The Company took several short-term notes payable from related parties during the six months ended June 30, 2021.
The Company received $742,500 in cash from related parties and paid out $777,000 in cash to related parties on notes payable.
17.
Commitments and Contingencies
Litigation
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
June 28, 2021, one of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., settled a labor dispute
brought in Honduras by one of the Company’s former employees for an amount of $19,408.58. The settlement included the Company and
all its related entities.
On
March 4, 2020, one of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., was served with notice
of a civil litigation brought in Honduras by Empresa Agregados y Concretos S.A. (“Agrecon”) for an amount of approximately
$930,000. The complaint alleges a dispute regarding the amounts owed by the Company to Agrecon under a certain Material Crushing Agreement.
The Company has responded disputing the amount owed and placed $125,000 in a dedicated account while the case is being litigated and
until the court makes its determination on any amounts owed.
18.
Concentrations
We
generally sell a significant portion of our mineral production to a relatively small number of customers. For the six months ended June
30, 2021, one hundred percent (100%) 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 June 30, 2021. 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.
19.
Subsequent Events
Management
has evaluated subsequent events, in accordance with FASB ASC Topic 855, “Subsequent Events,” through the date which the financial
statements were available to be issued and there are no material subsequent events, except as noted below:
On
July 2, 2021, the Company issued to an Investor 4,665,219 shares of its common stock under a conversion notice.
On
July 21, 2021, the Company issued to an Investor 4,791,348 shares of its common stock under a conversion notice.