9
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization, History and Business
MineralRite Corporation (“the Company”) was incorporated in Nevada on October 22, 1996 under its original name PSM Corp. The Company changed its emphasis to the exploration and development of natural resources and on November 23, 2005 changed its name to Royal Quantum Group, Inc. On October 18, 2012, the Company again changed its name from Royal Quantum Group, Inc. to MineralRite Corporation. On August 31, 2012, the Company declared a 50-for-1 reverse stock split of its common stock. All references in the accompanying consolidated financials to the number of shares outstanding and per-share amounts have been restated to reflect this stock split.
On March 1, 2013, the Company acquired 100% of the total shares outstanding of Goldfield International, Inc. (“Goldfield”) in exchange for issuing 2,000,000 shares of its common stock. The acquisition was based on the fair value of the shares issued amounting to $900,000. The accompanying consolidated financial statements include the accounts and balances of the Company and also of Goldfield since the date of its acquisition. All material intercompany transactions have been eliminated. Goldfield is in the business of manufacturing gold mining equipment.
On April 24, 2013, the Company entered into a joint venture agreement with CSI Export and Import (“CSI”) to mine copper ore on leased acreage in Chiapas, Mexico. For $850,000, the Company acquired a 50% in the joint venture which has a 25% participation interest in the production and sale of the indicated copper ore. The Company accounts for its investment in with CSI under the equity method pursuant to ASC Topic 323-30. This amount was written off in 2013 due to impairment as CSI did not execute on their part of the joint venture and repayment is doubtful.
Pursuant to a settlement agreement and related court order, effective December 6, 2013, the Company issued 30,000,000 shares of its common stock and transferred its oil and gas operations including related assets and liabilities to Santeo Financial Corporation and other creditors in exchange for the cancelation of debt totaling $325,568. For financial statement presentation purposes, the oil and gas activities for 2012 and 2013, and assets and liabilities directly relating to the oil and gas operation, are accounted for pursuant to ASC Topic 205-20 “Discontinued Operations”.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of September 30, 2014, and the results of its operations and cash flows for the three and nine months ended September 30, 2014 and 2013. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. However, the unaudited condensed consolidated financial statements included herein should be read in
10
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Commission on May 21, 2014.
Going Concern
The Company’s consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and has a working capital deficit, which raise substantial doubt as to the Company’s ability to continue as a going concern. For the nine month ended September 30, 2014, the Company had a net loss from continuing operations of $5,840,118 and accumulated deficit of $15,635,942. The Company has funded its operations through the private sale of its common shares and issuance of convertible debt. Net revenue generated from operations in not sufficient to pay Company debts currently due or to fund future operations. The Company continues to raise additional funds; however, there is no assurance that the necessary funds will be raised or even if the funds are raised, that the funds received will be to sufficient to fund future operations until such time that the Company’s operations become profitable. Until such time as funding is obtained and/or positive results from operations materialize, doubt about the Company’s ability to continue as a going concern may remain.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain reclassifications have been made to conform the 2013 amounts to the 2014 classifications for comparative purposes.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MineralRite Corporation and its wholly-owned subsidiary, Goldfield International, Inc. Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
11
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Management’s Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are reported at the customer’s outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.
Allowance for Doubtful Accounts
An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. Management has determined that as of September 30, 2014, no allowances were required.
Revenue Recognition
Sales and related costs are recognized when the title passes to the customer since the risks and rewards of ownership has transferred, persuasive evidence of an arrangement exists, the services have been performed and all required milestones achieved, the selling price is fixed, determinable, and collection is reasonable assured.
Property and Equipment
Property and equipment are stated at cost. Depreciation and any amortization are computed using the straight-line method for financial reporting over the estimated useful lives. The estimated useful lives of assets range from 5 to 7 years.
Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred. Depreciation expense for the three months ended September 30, 2014 and 2013 from continuing operations amounted to amounted to $5,198 and $5,455, respectively. Depreciation expense for the nine ended September 30, 2014 and 2013 from continuing operations amounted to amounted to $15,413 and $10,231, respectively.
12
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the period and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.
Convertible Debentures
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt using the effective interest method.
Derivative Financial Instruments
In the case of non-conventional convertible debt, the Company bifurcates its embedded derivative instruments and records them under the provisions of ASC Topic 815-15 “Embedded Derivatives.” The Company’s derivative financial instruments consist of embedded derivatives related to non-conventional convertible notes (see Note 8). The embedded derivative includes the conversion feature of the notes. The accounting treatment of derivative financial instruments requires that the Company record the derivatives at their fair values as of the inception date of the respective agreement and at fair value as of each subsequent balance sheet date. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.
At September 30, 2014, the Company did not have sufficient authorized shares in reserve to meet the number of shares that would be issued upon the complete conversion its convertible debt. The Company recognized a liability of $1,813,208 on the share deficiency which was charged to operations and included in change in fair value of derivative liabilities pursuant to ASC Topic 815-40-25.
Concentrations of Credit Risk
The Company primarily transacts its business with one financial institution. The amount on deposit in that one institution may from time to time exceed the federally-insured limit.
13
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Of the Company’s revenue earned during the three months ended September 30, 2014, approximately 37.50% was generated from sales to one customer. Of the Company’s revenue earned during the nine months ended September 30, 2014, approximately 64% was generated from sales to one customer.
The Company’s accounts receivable are typically unsecured and are derived from U.S. customers in different industries. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Historically, such losses have been within management’s expectations. As of September 30, 2014, four customers accounted for 100% of the Company’s net accounts receivable balance, respectively.
Loss per Share of Common Stock
The Company reports earnings (loss) per share in accordance with Accounting Standards Codification “ASC” Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of September 30, 2014 that have been excluded from the computation of diluted net loss per share consist of $756,747 of convertible debt and accrue interest convertible into 12,741,090,168 shares of common shares (See Note 8).
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC No. 360, “Property, Plant and Equipment.” ASC No. 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. During 2013, the Company believed there was an impairment of its long-lived assets and wrote off goodwill and investment in an unconsolidated subsidiary.
Fair Value of Financial Instruments
Pursuant to ASC No. 820, “Fair Value Measurements and Disclosures,” the Company is required to estimate the fair value of all financial instruments included on its balance sheet as of September 30. 2014. The Company’s financial instruments consist of cash, accounts receivables, payables, convertible debt and other obligations. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to the short-term nature of the respective instrument.
Income Taxes
The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and
14
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Risk and Uncertainties
The Company is subject to risks common to companies in the manufacturing of gold mining equipment industry, including, but not limited to, litigation, development of new technological innovations and dependence on key personnel.
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Discontinued Operations
For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an
15
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation, depletion, and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of operations held for sale on the Consolidated Balance Sheet and to discontinued operations on the Consolidated Statement of Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Consolidated Statement of Operations. The Consolidated Statement of Cash Flows is also reclassified for assets and liabilities of operations held for sale and discontinued operations for all periods presented.
Recent Accounting Pronouncements
The Company’s management has evaluated all recent accounting pronouncements since the last audit through the issuance date of these financial statements. In the Company’s opinion, none of the recent accounting pronouncements will have a material effect on the financial statements.
NOTE 3 – ACQUISITION OF GOLDFIELD INTERNATIONAL, INC.
On March 1, 2013, the Company acquired the outstanding stock of Goldfield International, Inc., a manufacture of gold mining equipment and parts located in Lindon, Utah. The acquisition was a stock purchase and therefore encompasses all of Goldfield’s business operations.
In exchange for Goldfield’s outstanding stock, the Company issued 2,000,000 shares of its common stock. The Company valued the acquisition at the fair value of the shares it issued amounting to $900,000.
In addition, the Company entered into separate agreement to acquire the personal goodwill of the seller for $100,000 (See Note 6).
We valued the assets acquired and liabilities assumed as follows:
16
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
| |
Current assets (including cash)
| $
226,809
|
Property and equipment
| 104,600
|
Intangibles and goodwill
| 875,667
|
Current liabilities, including above indicating $100,000 debt
| (307,076)
|
Total purchase price
| $
900,000
|
The intangibles and goodwill of $875,667 was written off in 2013 due to impairment.
NOTE 4 - DISCONTINUED OPERATIONS
Effective December 6, 2013, the Company completed the terms of its settlement agreement with Santeo Financial Corporation and other third party creditors. Under the terms of the settlement agreement, the Company issued 30,000,000 shares of its common stock and transferred all of its oil and gas operations including the related assets and liabilities in exchange for the cancelation of $372,568 of debt.
In accordance with the provisions of ASC Topic 205-20, Discontinued Operations, the Company has reclassified its revenue and expenses of its oil and gas operations to “loss from discontinued operations” for the three months and six months ended June 30, 2013.
NOTE 5 – PREPAID SERVICES
On February 4, 2013, the Company issued a total of 7,000,000 (post-split) shares of its common stock of to five individuals and five entities in exchange for consulting services, valued at $2,450,000. The $2,450,000 is being charged to operations over the three-year term of the respective agreement. Mr. Guy Peckham, the Company’s president, received 2,000,000 of the 7,000,000 shares issued. The 2,000,000 shares were valued at $700,000.
On October 30, 2012, the Company issued a total of 33,000,000 shares of its common stock of to five individuals and five entities in exchange for consulting services, valued at $429,000. The $429,000 is being charged to operations over the three-year term of the respective agreement. As indicated in Note 6, Mr. Guy Peckham, the Company’s president, received 11,500,000 of the 33,000,000 shares issued. The 11,500,000 shares were valued at $149,500.
17
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Consulting fees charged to operations during the three months ended September 30, 2014 and 2013 relating to these two transactions amounted to $239,917 and $299,917, respectively. Consulting fees charged to operations during the nine months ended September 30, 2014 and 2013 relating to these two transactions amounted to $719,751 and $698,643, respectively. The unamortized balance at September 30, 2014 totaled $1,256,745. Amortization expense over the remaining terms of the respective consulting agreement is as follows:
| |
| 9 months ended September 30, 2014
|
2014
| $ 239,917
|
2015
| 959,667
|
2016
| 57,161
|
| $ 1,256,745
|
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company’s manufacturing facilities are being leased from the former sole shareholder of Goldfield on a month-to-month basis at $8,000 per month. The Company did not pay rent for the nine month period ended September 30, 2014 and the Company had an outstanding balance of $40,000 due on this obligation, which has been included in the Company’s accounts payable balance as of September 30, 2014.
On February 4, 2013, the Company issued Mr. Guy Peckham, the Company’s current president 2,000,000 shares of its common stock for services. The 2,000,000 shares were valued at $700,000, which is being charged to operations over the three year term of the underlying agreement.
As of June 30, 2014, certain shareholders have advanced the Company a total of $19,845 that is payable on demand and is non-interest bearing.
18
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
In connection with the acquisition of Goldfield, the Company entered into a consulting agreement with the former shareholder of Goldfield, whereby commencing May 1, 2013, the Company agreed to pay him a consulting fee of $5,000 per month over the 30 month term of the agreement. As of September 30, 2014, the Company had an outstanding balance of $38,000.
As discussed in Note 3, the Company entered into an agreement to acquire the personal goodwill of the former shareholder of Goldfield for $100,000 payable in three installments of $33,000 due April 1, 2013, $33,000 due May 1, 2013 and $34,000 due June 1, 2013. The debt was assigned to the Company’s President in June 2014 and was cancelled on July 1, 2014 through the issuance of 105,000 shares of the Company’s Series A Preferred Stock (See Note 10).
NOTE 7 – NOTES PAYABLE
On December 17, 2013, the Company borrowed $10,000 from an unrelated third party. The loan is assessed interest at an annual rate of 15% and matured on March 1, 2014, when the principal and accrued interest became fully due. Interest accrued and charged to interest expense for the three months and six months ended June 30, 2014 amounted to $370 and $370, respectively. The balance of the note and accrued interest totaling $10,427 was paid off during the three months ended June 30, 2014.
On September 17, 2014, the Company borrowed $25,000 from an unrelated third party. The loan is assessed interest at an annual rate of 12%. The loan matures on September 17, 2015 when the principal and accrued interest becomes fully due. Interest accrued and charged to interest expense for the three months and nine months ended September 30, 2014 amounted to $106 and $106, respectively. The balance of the note and accrued interest at September 30, 2014, amounted to $25,106. The principal and accrued interest became convertible on March 16, 2015.
On September 17, 2014, the Company borrowed $30,000 from an unrelated third party. The loan is assessed interest at an annual rate of 10%. A loan fee of $2,500 was assessed on the loan and is included in the principal balance and is being amortized into interest expense over the life of the loan. The loan matures on September 17, 2015 when the principal and accrued interest becomes fully due. Interest accrued and charged to interest expense for the three months and nine months ended September 30, 2014 amounted to $116 and $116, respectively. Amortization of the loan fee that was charged to interest expense for the three and nine months ended September 30, 2014 totaled $109. The balance of the note and accrued interest at September 30, 2014, net of the unamortized loan fee amounted to $30,225. The principal and accrued interest became convertible on March 16, 2015.
NOTE 8 – CONVERTIBLE DEBT
19
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
On December 31 2013, the Company borrowed $40,000 from an unrelated third party. The loan is secured by the Company’s accounts receivable. The terms of the loan includes a loan fee of $400, which is being amortized and charged to operations over the term of the loan. Under the terms of the loan, the Company was required to pay back a total of $57,600 at a rate of $444 per day (excluding weekends and bank holidays). The effective interest rate on this loan is in excess of 32% per annum. On August 19, 2014, the outstanding principal balance and accrued interest became convertible into the Company’s common stock at a conversion price equal to the 40% of the lowest trading price per share of the Company’s common stock reported for the 10 trading days prior to conversion.
On February 14 2014, the Company borrowed an additional $75,088 from same unrelated third party indicated above. The loan is secured by the Company’s accounts receivable. The Company was required to pay back a total of $111,750 at a rate of $860 per day (excluding weekends and bank holidays). The effective interest rate on this loan is in excess of 50% per annum. During the 2014, the Company has made principal payments totaling $10,836, of which the last payment of $436 was paid in April 2014. On August 19, 2014, the outstanding principal balance and accrued interest became convertible into the Company’s common stock at a conversion price equal to the 40% of the lowest trading price per share of the Company’s common stock reported for the 10 trading days prior to conversion.
During 2013 and 2014, the Company has received funds totaling $655,000 (net of reimbursable loan fees and costs) through the issuance of convertible promissory notes. In addition, the Company has also issued convertible promissory notes to vendors and other creditors in cancelation of amounts due them. These outstanding balances of these notes are convertible into a variable number of the Company’s common stock. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts along with loan fees are being amortized to interest expense over the respective term of the related note. In determining the indicated values of the convertible notes issued in 2014, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.02% to .13%, volatility ranging from 248.26% of 394,74%, trading price of $0,0002 and a conversion prices ranging from $0.00004 per share to $0.00064 per share.
Accrued interest on the above indicated notes that was charged to operations for the three months and nine months ended September 30, 2014 totaled approximately $36,689 and $117,792, respectively. Amortization of the discounts for the three months and nine months ended September 30, 2014 totaled $163,666 and $454,663, respectively, which was charged to interest expense. The balance of the convertible notes at September 30, 2014 including accrued interest and net of the discount amounted to $375,336.
A recap of the balance of outstanding convertible debt at September 30, 2014 is as follows:
| |
| 9 months ended September 30, 2014
|
Principal balance
| $ 691,707
|
Accrued interest
| 65,040
|
Less discounts and
| |
Fees, net of accumulated amortization
| (381,411)
|
Balance maturing for the period ending:
| |
June 30, 2015
| $ 375,336
|
During the three months ended September 30, 2014, 1,029,804,737 shares of the Company’s common stock was issued in the cancelation of convertible debt with totaling $69,064. The Company recognized a net loss on the extinguishment of this debt in the amount of $84,180.
The Company valued the derivative liabilities at September 30, 2014 at $4,258,201 (including a $1,813,208 liability on the Company’s shortage of its remaining common shares authorized for issuance compared to the number of shares required for full conversion if its convertible debt). The Company recognized a change in the fair value of derivative liabilities for the three months ended September 30, 2014 and 2013 of $2,635,411 and $(1,061), respectively, which were charged to operations. The Company recognized a change in the fair value of derivative liabilities for the nine months ended September 30, 2014 and 2013 of $3,605,284 and $238,297, respectively, which was charged to operations. In determining the indicated values at September 30, 2014, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.02% to .13%, volatility ranging from 248.26% of 394,74%, trading price of $0.0002 and a conversion prices ranging from $0.00004 per share to $0.00064 per share.
NOTE 9 - INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company’s net operating loss for income tax reporting purposes was significantly impacted by the change in control which occurred on October 30, 2012. The Company has a net operating loss carryover at September 30, 2014 of approximately $2,560,000 that is available to offset future income for income tax reporting purposes, which will expire in various years through 2034, if not previously utilized.
21
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
The Company adopted the provisions of ASC 740-10-50, formerly FIN 48, “Accounting for Uncertainty in Income Taxes.” The Company had no material unrecognized income tax assets or liabilities for the three months ended September 30, 2014 and 2013.
The Company’s policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the three months and six months ended September 30, 2014 and 2013, there were no income taxes, or related interest and penalty items in the income statement, or liability on the balance sheet. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2009. The Company is not currently involved in any income tax examinations.
NOTE 10 - COMMON STOCK AND WARRANTS
As indicated in Note 1, the Company declared a 50-for-1 reverse stock split of its common stock on August 31, 2012. All references in the accompanying financials to the number of shares outstanding and per-share amounts have been restated to reflect this stock split.
On August 26, 2014, the Company increased the number of common shares it has authorized to 5,000,000,000. In addition, the Company designed 105,000 preferred shares as Series A Preferred and 33,000 shares of preferred shares as Series B Preferred.
Series A Preferred
Dividends
From and after the date of the issuance of any shares of Series A Preferred Stock, dividends at the rate per annum of $0.10 per share shall accrue on such shares of Series A Preferred Stock (subject to appropriate adjustment). Dividends shall accrue from day-to-day, whether or not declared, and shall be cumulative. Accrued dividends shall be payable only when, as, and if declared by the Board of Directors and the Corporation shall be under no obligation to pay such accrued dividends. The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of common stock payable in shares of common stock) unless the holders of the Series A Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred Stock in an amount at least equal to the amount of the aggregate accrued dividends on such share of Series A Preferred Stock and not previously paid.
Liquidation, Dissolution or Winding Up
22
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(a)
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to Series A Original Issue Price (defined below), plus any accrued dividends, but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. The “Series A Original Issue Price” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock.
(b)
If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled under Subsection 3(a) , the holders of shares of Series A Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
(c)
The aggregate amount which a holder of a share of Series A Preferred Stock is entitled to receive under Section 3 is hereinafter referred to as the Dividends. From and after the date of the issuance of any shares of Series A Preferred Stock, dividends at the rate per annum of $0.10 per share shall accrue on such shares of Series A Preferred Stock (subject to adjustment) Dividends shall accrue from day-to-day, whether or not declared, and shall be cumulative; with certain exception.
Voting.
Each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the 3,000 votes for each share of Preferred Series A held.
Optional Redemption.
The Series A Preferred Stock shall be subject to redemption by the Corporation, at any time on or after December 31, 2014, at a price equal to the Series A Original Issue Price per share, plus all declared but unpaid dividends thereon, The Company elects to redeem any shares of Series A Preferred Stock, such redemption shall be with respect to all of the then outstanding Series A Preferred Stock.
Series B Preferred
Dividends
From and after the date of the issuance of any shares of Series B Preferred Stock, holders of Series B Preferred shares are entitled to receive dividends when, as and if declared by the Board of Directors of the Corporation on an “as converted basis” pari passu with the holders of the Company’s common stock.
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MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Liquidation, Dissolution or Winding Up
(d)
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholder ratably with the holders of the Corporation’s Common Stock on an “as converted” basis.
Voting.
Each holder of outstanding shares of Series B Preferred Stock shall be entitled to cast the 1,000 votes for each share of Preferred Series B held.
Conversion.
The holders of Series B Preferred Stock shall have the right to convert one share of Series B Preferred Shares into 1,000 shares of the Company common (subject to adjustments) provided that no share of Series B Preferred Stock shall be convertible unless the Corporation's Articles of Incorporation have an adequate number of authorized shares of Common Stock available for issuance in an amount sufficient to permit the conversion of all the shares of Series B Preferred Stock, and all other convertible securities and instruments of the Corporation.
For the nine months ended September 30, 2014
During the nine months period ended September 30, 2014, the Company issued 1,245,791,995 shares of its common shares to various note holders on the conversion of $409,214 of indebtedness. The Company recognized a $283,016 loss on the debt extinguishment.
During the nine months ended September 30, 2014, the Company issued to its President 105,000 shares of its Series A Preferred Stock in exchange for the cancellation of $109,761 of indebtedness due him from the Company.
During the nine months ended September 30, 2014, the Company issue to 31,000 shares of Series B Preferred Stock in exchange for the cancellation of 31,000,000 shares of common stock held by certain shareholders.
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MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
During the nine months ended September 30, 2014, the Company issued a total of 13,620,000 shares of its common stock in consideration for consulting and professional services valued at $83,384.
For the nine months ended September 30, 2013
As discussed in Note 5, the Company issued on February 4, 2013 a total of 7,000,000 shares of its common stock of to five individuals and five entities in exchange for consulting services, valued at $2,450,000. The $2,450,000 is being charged to operations over the three-year term of the respective agreement. As indicated in Note 5, Mr. Guy Peckham, the Company’s president, received 2,000,000 of the 7,000,000 shares issued. The 2,000,000 shares were valued at $700,000.
As discussed more fully in Note 3, the Company on March 1, 2013 issued 2,000,000 shares of its common stock in exchange all of the outstanding shares of Goldfield International, Inc. The 2,000,000 shares were valued at $900,000.
In addition, the Company issued a total of 3,380,000 common shares during the nine months ended September 30, 2013 of which 1,080,000 common shares were issued for $54,000 and 600,000 shares were issued for past legal and accounting fees totaling $15,000; 300,000 common shares issued to the former President of Goldfield to be applied against past due consulting fees valued at $12,000; 300,000 common shares issued to the Company’s outside accountant for services valued at $12,000; 300,000 common shares issued to the Company’s legal counsel for services valued at $12,000; and 800,000 shares issued to three consultants for services rendered valued at $24,000, which was charged to operations..
NOTE 11 – FAIR VALUE
The Company’s financial instruments at September 30, 2014 consist principally of convertible debentures and derivative liabilities. Convertible debentures are financial liabilities with carrying values that approximate fair value. The Company determines the fair value of convertible debentures based on the effective yields of similar obligations.
The Company believes all other financial instruments’ recorded values at September 30, 2014 and December 31, 2013 approximate fair market value because of their nature and respective durations.
The Company complies with the provisions of ASC No. 820-10 (“ASC 820-10”), “Fair Value Measurements and Disclosures.” ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”),
25
MINERALRITE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, which are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as follows:
NOTE 12 – SUBSEQUENT EVENTS
During the period commencing Sept 30 2014 through March 30, 2015 the Company issued 1,024,372,202 shares to reduce debt on convertible promissory notes and account payable balances in the amount of $31,467.04
On Jan 7, 2015 the Company issued a 6% convertible redeemable promissory note, for one payment of $77,778. The convertible promissory note matures on Jan 7, 2016. The Company has the right to prepay any time before July 7, 2016 for 105% of face value plus accrued interest.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following Management's Discussion and Analysis should be read in conjunction with MineralRite Corporation’s financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with the Company’s Board of Directors, management has identified the following accounting policies that it believes are key to an understanding of its financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.
Revenue Recognition
Sales and related costs are recognized when the title passes to the customer since the risks and rewards of ownership has transferred, persuasive evidence of an arrangement exists, the services have been performed and all required milestones achieved, the selling price is fixed, determinable, and collection is reasonable assured.
Property and Equipment
Property and equipment are stated at cost. Depreciation and any amortization are computed using the straight-line method for financial reporting over the estimated useful lives. The estimated useful lives of assets range from 5 to 7 years. Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred.
Discontinued Operations
For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation, depletion, and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of operations held for sale on the Consolidated Balance Sheet and to discontinued operations on the Consolidated Statement of Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Consolidated Statement of Operations. The Consolidated Statement of Cash Flows is also reclassified for assets and liabilities of operations held for sale and discontinued operations for all periods presented.
Foreign Currency Translation
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The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the period and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.
Convertible Debentures
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt using the effective interest method.
Derivative Financial Instruments
In the case of non-conventional convertible debt, the Company bifurcates its embedded derivative instruments and records them under the provisions of ASC Topic 815-15 “Embedded Derivatives.” The Company’s derivative financial instruments consist of embedded derivatives related to non-conventional convertible notes (see Note 8 to the Footnotes to the Company’s Financial Statements in Item 1 of this Current Report). The embedded derivative includes the conversion feature of the notes. The accounting treatment of derivative financial instruments requires that the Company record the derivatives at their fair values as of the inception date of the respective agreement and at fair value as of each subsequent balance sheet date. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.
Concentrations of Credit Risk
The Company primarily transacts its business with one financial institution. The amount on deposit in that one institution may from time to time exceed the federally-insured limit.
Fair Value Measurement
The Company complies with the provisions of ASC No. 820-10 (“ASC 820-10”), “Fair Value Measurements and Disclosures.” ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, which are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company utilizes the best available information in measuring fair value.
Liquidity and Capital Resources.
For the Nine-Month Period Ended September 30, 2014 versus September 30, 2013
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During the nine months ended September 30, 2014, net cash used in the Company’s operating activities totaled $383,411 compared to $283,304 during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, net cash used by investing activities totaled $nil compared to $104,484 during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, net cash flow provided by financing activities totaled $336,193 compared to $426,556 during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, net cash decreased $47,218 as compared to an increase of $38,599 during the nine months ended September 30, 2013. The increase in cash in 2013 was caused by the merger with Goldfield International Corporation and the consolidation of the two companies.
At September 30, 2014, the Company had cash of $4,988, accounts receivable of $2,606, inventories of $150,808 and prepaid services of $959,667 that comprised the Company’s total current assets totaling $1,118,069. The Company’s property and equipment at September 30, 2014 had a net book value of $96,984 consisting of equipment, furniture, fixtures and construction in process net of $33,951 in accumulated depreciation. The Company also had the long term portion of prepaid services of $297,078, website development of $714, net of accumulated amortization, totaling $297,792 at September 30, 2014, while the Company’s total assets at September 30, 2014 were $1,512,845.
At September 30, 2014, the Company had total current liabilities totaling $5,236,458 consisting of $261,027 in accounts payable, $78,000 in related party accounts payable, $681 in accrued payroll, $97,760 in customer deposits, $375,336 in convertible debt, $110,121 in debt and other obligations to related parties, $55,332 in notes payable and $4,258,201 in derivative liabilities. Included in the derivative liabilities is $1,813,208 recorded given the Company did not have sufficient authorized shares in reserve to meet the number of shares that would be required upon complete conversion of outstanding convertible debt.
Therefore, at September 30, 2014, the Company had total liabilities of $5,236,458. The Company had no other long-term liabilities, commitments or contingencies. Other than anticipated exploration costs associated with the precious metals and mineral interests that the Company anticipates acquiring, and the anticipated increases in the legal and accounting costs associated with being a public company, Company management is not aware of any other known trends, events or uncertainties which may affect the Company’s future liquidity.
At September 30, 2014, the Company had a stockholders’ deficit totaling $3,723,613.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2014 versus September 30, 2013
The Company’s revenue for the three months ended September 30, 2014 was $213,473 with associated cost of sales of $110,117 as compared to September 30, 2013 revenue totaling $164,568 and with costs of sales of $153,481 for the three months ended. The Company incurred general and administrative expenses for the three months ended September 30, 2014 totaling $396,689 that included non-cash compensation of $239,917, rent of $7,200, and professional fees of $120,943. General and administrative expense for the three months ended September 30, 2013 totaled 524,832 that included non-cash compensation of $299,917, related party rent of $8,456, and professional fees of $74,526.
For the Nine Months Ended September 30, 2014 versus September 30, 2013
The Company’s revenue for the nine months ended September 30, 2014 was $396,049 with associated cost of sales of $245,172 as compared to September 30, 2013 revenue totaling $359,058 and with costs of sales of $329,107 for the nine months ended. The Company incurred general and administrative expenses for the nine months ended September 30, 2014 totaling $1,192,793 that included non-cash compensation of $719,750, rent of $21,600, and professional fees of $272,527. General and administrative expense for the nine months ended September 30, 2013 totaled $957,836 that included non-cash compensation of $698,643, related party rent of $24,789, and professional fees of $205,461.
The Company’s Plan of Operation for the Next Twelve Months.
The Company’s recent business focus has been to enter the business of mineral processing, certification, equipment manufacturing and sales. The CEO expects to engage a management team experienced in creating and operating mining companies and intends to focus on the identification, certification and sale of undervalued assets. The Company plans to engage in the extraction of precious metals from ore bodies and reclaimed tailings. The Company intends to continue to raise additional capital for this new line of business although no assurances can be made that it will be successful in doing so or that if it is, that the terms of such additional financing will be favorable to the Company and its existing shareholders.
The Company’s forecast for the period for which the Company’s financial resources will be adequate to support operations involves risks and uncertainties and actual results could differ as a result of a number of factors. The Company plans to enter into the mineral extraction service industry and anticipates significant increases in its cash needs in order to execute its business plan. The Company no longer has its oil and gas business because it discontinued operations via a “spin-off” to its largest creditor as part of its plan to decrease its liabilities and focus on its
30
new line of business. However the oil and gas operations were never expected to provide sufficient working capital to pursue this new line of business; therefore discontinuing the oil and gas operations furthered its objectives by reducing the associated liabilities.
Additionally, as part of its business plan and the acquisition of Goldfield International, Inc. the Company is obligated to pay $100,000 to its former shareholder in 2013, the Company is in the process of negotiating the conversion of this obligation into equity. The Company designated its Series A and Series B preferred stock during the period ended September 30, 2014 in order to facilitate the access to capital that it needs to pursue its business plan.
Collectively the forgoing are significant additional expenses which the Company will continue to incur in the future. Other than anticipated costs associated with the precious metal and mineral interests that the Company intends to acquire and the anticipated increases in the legal and accounting costs associated with being a public company, management is not aware of any other known trends, events or uncertainties which may affect the Company’s future liquidity.
In the event that the Company experiences a shortfall in capital, the Company intends to pursue opportunities to raise funds through public or private financing as well as through borrowings and via other resources, such as the Company’s officers, directors and principal shareholders. The Company cannot guaranty that additional funding will be available on favorable terms, if at all. If adequate funds are not available, then the Company’s ability meet its obligations and to expand operations may be significantly hindered. If adequate funds are not available, the Company believes that the Company’s officers, directors and principal shareholders will contribute funds to pay for the Company’s expenses to achieve the Company’s objectives over the next twelve months.
The Company’s belief that the Company’s officers, directors and principal shareholders will pay the Company’s expenses is based on the fact that the Company’s officers, directors and principal shareholders collectively own approximately a significant amount of the Company’s outstanding common stock and will likely continue paying the Company’s expenses as long as they maintain their ownership of the Company’s common stock and so long as they do not incur financial hardship.
The Company is not currently conducting any research and development activities and management does not anticipate conducting such activities in the near future. In the event that the Company’s customer base expands, then management may need to hire additional employees or independent contractors as well as purchase or lease additional equipment.
ITEM 3. QUANTITATIVE AND QUALITATATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Company management maintains controls and procedures designed to ensure that information required to be disclosed in the reports that is filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of September 30, 2014, the date of this report, the Company’s chief executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures were not effective due to the deficiencies currently identified in its reporting obligations.
(b) Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and principal financial officer.
The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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| pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
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| provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management and the Company’s directors; and
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| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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 of compliance with the policies or procedures may deteriorate.
As part of the Company’s compliance efforts relative to Section 404 of the Sarbanes-Oxley Act of 2002, the Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014. In making this assessment, management used the criteria set forth in the Internal Control - Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Company management evaluated control deficiencies identified through the Company’s test of the design and operating effectiveness of controls over financial reporting to determine whether the deficiencies, individually or in combination, are significant deficiencies or material weaknesses. In performing the assessment, the Company’s management has identified material weaknesses in internal control over financial reporting existing as of September 30, 2014. The Company’s evaluation of the significance of each deficiency included both quantitative and qualitative factors. Based on that evaluation, the Company’s management concluded that as of September 30, 2014, and as of the date that the evaluation of the effectiveness of the Company’s internal controls and procedures was completed, the Company’s internal controls are not effective, for the reason discussed below:
1. Company management does not yet have written documentation of the Company’s internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement Section 404 of the Sarbanes-Oxley Act and may be applicable to the Company in future years.
2. Company management does not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to the Company’s extremely small size and the fact that the Company has only had one management employee, whom is also an executive officer and director, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.
3. The Company currently does not employ any full-time accounting personnel, which means the Company lacks the requisite expertise in the key functional areas of finance and accounting. In addition, this means that the Company does not have available personnel to properly implement control procedures.
4. The Company does not have a functioning audit committee or outside independent directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
5. Company management has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically because there are no employees and only one officer and director with management functions and therefore there the Company lacks segregation of duties.
6. There is a strong reliance on the external auditors and contract accountants to review and adjust the annual and quarterly financial statements, to monitor new accounting principles, and to ensure compliance with GAAP and SEC disclosure requirements.
7. There is a strong reliance on the external attorneys to review and edit the annual and quarterly filings and to ensure compliance with SEC disclosure requirements.
In light of the material weaknesses described above, Company management performed additional analysis and other procedures to ensure the Company’s financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, Company management believes that the financial statements included in this Current Report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented.
In addition, although the Company’s controls are not effective, these significant weaknesses did not result in any material misstatements in the Company’s financial statements. The Company’s management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which is intended to mitigate the lack of segregation of duties until there are sufficient personnel and (3) has, subsequent to the evaluation period, appointed outside directors and will establish an audit committee in the future.
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Changes in Internal Control and Financial Reporting
Other than the weaknesses identified above, there were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
During 2013, Egbert & Barnes, PC (“E&B”), our former counsel brought suit against the Company to collect on past due invoices in the amount of approximately $62,753.00. Effective as of November 30, 2013, the Company entered into a convertible promissory note with E&B in full settlement of the debt (the “E&B Note”). The E&B Note bears interest at 6% per annum, matures on September 10, 2015 and is convertible into the Company’s common stock at a price equal to a 10% discount from the 30 day volume weighted average price. The E&B Note was subsequently assigned to a third party. There continues to be an unresolved issue with E&B but the Company is confident that it will be able to resolve any and all outstanding issues. The additional expenses associated with this is not known at this time
Other than the foregoing, Company management knows of no material, existing or pending legal proceedings against the Company’s company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which the Company’s director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Sale of Notes Payable
On December 17, 2013, the Company borrowed $10,000 from an unrelated third party. The loan is assessed interest at an annual rate of 15% and matured on March 1, 2014, when the principal and accrued interest became fully due. Interest accrued and charged to interest expense for the three months ended March 31, 2014 amounted to $370. The balance of the note at March 31, 2014, including accrued interest amounted to $10,427.
On December 31 2013, the Company borrowed $40,000 from an unrelated third party. The loan is secured by the Company’s accounts receivable. The terms of the loan includes a loan fee of $400, which is being amortized and charged to operations over the term of the loan. Under the terms of the loan, the Company is required to pay back a total of $57,600 at a rate of $444 per day (excluding weekends and bank holidays). The effective interest rate on this loan is in excess of 32% per annum. Interest accrued and charged to operations for three months ended March 31, 2014 amounted to $8,817. During the three month period, the Company made principal payments totaling $26,723. The balance of the note at March 31, 2014, including accrued interest and fees, net of the discounts amounted to $11,171.
On February 14 2014, the Company borrowed an additional $75,088 from same unrelated third party indicated above. The loan is secured by the Company’s accounts receivable. The Company is required to pay back a total of $111,750 at a rate of $860 per day (excluding weekends and bank holidays). The effective interest rate on this loan is in excess of 50% per annum. Interest accrued and charged to interest expense for three months ended March 31, 2014 amounted to $11,960. During the three month period, the Company made principal payments totaling $10,400. The balance of the note at March 31, 2014, including accrued interest amounted to $64,688.
(b) Sale of Convertible Notes – See Note 8 to the accompanying financial statements.
(c) Issuance of Common Stock Upon Conversion of Notes. – See Notes 8 and 10 to the accompanying financial statements.
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(d) Use of Proceeds.
The proceeds from sale of the securities as referenced above were used for working capital including but not limited to payment of the Company’s obligations to vendors and service providers, filing fees, audit fees etc. and the conversion of the notes allowed the company to extinguish the debt associated with the converted notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
*to be filed by exhibit
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| MINERALRITE CORPORATION
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Dated: March 30, 2015By:
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/s/ GuyPeckham
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| Guy Peckham
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| Chief Executive Officer and President
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| Chief Financial Officer
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