NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
The Company is currently engaged in the acquisition,
exploration, and development of its natural resource properties.
The Company’s activities are subject
to significant risks and uncertainties. The search for valuable natural resources as a business is extremely risky. There are
no assurances that the properties the Company has contain commercially exploitable reserves. Additionally, natural resource exploration
and development requires significant capital and the Company’s assets and resources are limited. The Company may fail to
secure additional funding to support necessary exploration and development.
On April 16, 2010, we caused the incorporation
of our wholly owned subsidiary, Provex Resources, Inc., (“Provex”) under the laws of Nevada. On April 16, 2010 the
Company entered into an Assignment Agreement to assign the exclusive option to an undivided right, title and interest in the Bruner
and Vernal property and the Bruner Expansion property to Provex. Pursuant to the Assignment Agreement, Provex assumed the rights,
agreed to perform all duties and obligations of the Company arising under the Bruner and Vernal Property Option Agreement and
the Bruner Expansion Property Option Agreement. Provex’s only assets are the aforementioned agreements and it does not have
any liabilities.
NOTE 2 - GOING CONCERN
As shown in the accompanying consolidated
financial statements, the Company has not realized any revenue from its present operations. During the year ended May 31, 2016,
the Company incurred a net operating loss of $145,734 and had negative cash flows from operations of $902,399. The Company had
a retained deficit of $27,798,345 at May 31, 2016.
The Company's ability to continue as a going
concern is dependent on its ability to develop its natural resource properties and ultimately achieve profitable operations and
to generate sufficient cash flow from financing and operations to meet its obligations as they become payable. Management estimates
that the Company will require approximately $350,000 to fund the Company’s planned operations for the next twelve months.
Current cash on hand is not sufficient to fund planned operations for 2017 after payment of outstanding checks written in-excess
of cash and accounts payable outstanding at May 31, 2016. Please refer to Note 5 Mineral Properties for additional details on
property commitments. Our policy is to pay all operational expenses when due, provided that the vendor, in the normal course of
business, has satisfied all necessary conditions for payment. Management plans to seek the additional capital through private
placements of its common stock but there can be no assurance that management will be successful in its attempt to raise the additional
funds. Accordingly, no adjustment relating to the recoverability and classification of recorded asset amounts and the classification
of liabilities has been made to the accompanying financial statements in anticipation of the Company not being able to continue
as a going concern.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary, Provex. Collectively, they are referred
to herein as “the Company”. Inter-company accounts and transactions have been eliminated.
Management’s Estimates and Assumptions
The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Exploration and Development Costs
Mineral exploration costs and payments related
to the acquisition of the mineral rights are expensed as incurred. When it has been determined that a mineral property can be
economically developed as a result of establishing proven and probable reserves, the costs incurred to acquire and develop such
property will be capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the
probable reserve. No costs have been capitalized through May 31, 2016.
Cash and Cash Equivalents
The Company considers all investment 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. The Company had no cash equivalent as of May 31, 2016 and 2015.
Marketable Securities
The Company’s short-term marketable
securities are comprised of Northern Vertex common stock which are classified as trading securities and are carried at their fair
value based on the quoted market prices of the securities at May 31, 2016. Net realized and unrealized gains and losses
on trading securities are included in net earnings. For purpose of determining realized gains and losses, the cost of securities
sold is based on specific identification. The Company acquired the stock on May 26, 2016 as part of the Moss Property sale and
is required to hold the stock for four-months after the date of acquisition and thereafter, the Company will not sell the shares
in an amount exceeding 100,000 shares per month. The common stock will be free of trading restrictions within twelve months of
acquisition.
Foreign Currency Translation
The Company’s functional currency and
reporting currency is the U.S. dollar. Monetary items denominated in foreign currency are translated to U.S. dollars at exchange
rates in effect at the balance sheet date and non-monetary items are translated at rates in effect when the assets were acquired
or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange
gains and losses are included in the consolidated statements of operations.
Concentration of Credit Risk
The Company has no off-balance-sheet concentrations
of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains
the majority of its cash balances with two financial institutions in the form of demand deposits.
Income/Loss per Share
Basic earnings per share is computed by dividing
the net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed
by dividing net income by the weighted-average number of common shares plus dilutive potential common shares outstanding during
the period. As of the years ended May 31, 2016 and 2015, the Company had 7,590,000 and 5,700,000, respectively, common stock options
outstanding and 5,376,667 and 1,700,000, respectively, exercisable. As of the years ended May 31, 2016 and 2015, the Company had
35,711,204 and 34,011,204, respectively, warrants outstanding of which 32,011,204 and 26,274,247, respectively, were exercisable.
At May 31, 2016 and 2015, the effect of the Company’s outstanding options and warrants would have been anti-dilutive. Accordingly,
only basic income per common share is presented for 2016 and 2015.
Comprehensive Income
The Company has adopted ASC 220 (formerly
SFAS No. 130, “Reporting Comprehensive Income”), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. The Company has disclosed this information on its Statement of Operations. Comprehensive
income is comprised of net income (loss) and all changes to retained deficit except those resulting from investments by owners
and distribution to owners.
Accumulated other comprehensive income at
May 31, 2016 and 2015, consists of foreign currency adjustments related to the Company changing its functional currency from Canadian
to U.S. dollar in 2003.
Stock Options
The Company measures all employee stock-based
compensation awards using a fair value method on the date of grant and recognizes such expense in its consolidated financial statements
over the requisite service period. The Company uses the Black-Scholes pricing model to determine the fair value of stock-based
compensation awards on the date of grant. The Black-Scholes pricing model requires management to make assumptions regarding option
lives, expected volatility, and risk free interest rates.
The Company accounts for non-employee stock-based
awards in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”),
which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of
stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. The Company uses the Black-Scholes
pricing model to determine the fair value of stock-based compensation awards. The Black-Scholes pricing model requires management
to make assumptions regarding option lives, expected volatility, and risk free interest rates.
Fair Value of Financial Instruments
The carrying value of the Company's
financial instruments, including prepaids, accounts payable and accrued liabilities, at May 31, 2016 and 2015 approximates
their fair values due to the short-term nature of these financial instruments. Management is of the opinion that the
Company is not exposed to significant interest or credit risks arising from these financial instruments. The Company carries
other company’s equity instruments at fair value as required by U.S. GAAP, which are valued using level 1 inputs under
the fair value hierarchy.
In general, investments with original
maturities of greater than 90 days and remaining maturities of less than one year are classified as short-term investments. Investments
with maturities beyond one year may also be classified as short-term based on their highly liquid nature and can be sold to fund
current operations.
Fair Value Hierarchy
Fair value is defined
within the accounting rules 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. The rules established a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three
broad levels:
Level 1
. Quoted 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 with observable market data for substantially the full term of the assets or
liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data,
as well as quoted prices that were adjusted for security-specific restrictions.
Level 3
. Unobservable
inputs to the valuation methodology are significant to the measurement of the fair value of assets or liabilities. These Level
3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with
observable market data.
Asset measured at
fair value on a recurring basis by level within the fair value hierarchy as of May 31, 2016 and May 31, 2015 is as follows:
|
|
Fair Value Measurement at
|
|
Fair Value Measurement at
|
|
|
May 31, 2016
(1)
|
|
May 31,
2015 (1)
|
|
|
Using
Level 1
|
|
|
Total
|
|
Using
Level 1
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
235,564
|
|
|
$
|
235,564
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset
|
|
$
|
235,564
|
|
|
$
|
235,564
|
|
|
$
|
–
|
|
|
$
|
–
|
|
(1)
|
The Company did not have any assets or liabilities measured at fair value using Level
2 or 3 of the fair value hierarchy as of May 31, 2016 and 2015.
|
Related Party Transactions
A related party is generally defined as (i)
any person who holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management,
(iii) someone who directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone
who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between related parties.
Income Taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, 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 income in the period that includes the enactment date. Deferred income tax expense represents the change during the period
in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually
classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
Interest costs related to unrecognized tax
benefits are classified as “Interest expense, net” in the accompanying statements of operations. Penalties, if any,
would be recognized as a component of “Selling, general and administrative expenses”. The Company recognized $0 of
interest expense related to unrecognized tax benefits for the years ended May 31, 2016 and 2015.
New Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, management believes that the impact of recently issued standards did not or will not
have a material impact on the Company’s consolidated financial statements upon adoption.
In August 2015, the FASB issued ASU 2015-15,
Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments in this update provide that guidance. The amendments are intended to reduce diversity in the timing
and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the
amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period,
including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require
certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require
an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period
of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update
are effective for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is currently evaluating
the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations,
cash flows and financial condition.
In November 2015, the FASB issued ASU 2015-17
which simplifies income tax accounting. The update requires that all deferred tax assets and liabilities be classified as noncurrent
on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This update is effective for fiscal
years beginning after December 15, 2016 and interim periods within those fiscal years, and early adoption is permitted. Adoption
of the new guidance is not expected to have an impact on the financial position, results of operations or cash flows.
In January 2016,
the FASB issued ASU 2016-01 new guidance which requires entities to measure all investments in equity securities at fair value
with changes recognized through net income. This requirement does not apply to investments that qualify for the equity method
of accounting, investments that result in consolidation of the investee, or investments for which the entity meets a practicability
exception to fair value measurement. The new guidance also changes certain disclosure requirements for financial instruments.
This standard is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently
evaluating the effect this new guidance will have on its consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02 a new standard on the accounting for leases, which requires a lessee to record a right-of-use asset
and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve months. The standard also
expands the required quantitative and qualitative disclosures surrounding lease arrangements. The standard is effective for
annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the effect this
new guidance will have on its consolidated financial statements.
In March 2016, the
FASB issued ASU 2016-09 which simplifies several aspects of the accounting for share-based payment award transactions, including
the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement
of cash flows. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016. The
Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.
There are no other recently issued accounting
pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows.
NOTE 4 - RECLAMATION DEPOSITS
The Company has been granted an exploration
permit from the State of Nevada for its Vernal property. As part of the application process, the Company was required to
pay a refundable deposit to the State as surety for the estimated reclamation costs associated with the planned exploration program. During
the years ended May 31, 2016 and 2015, the Company received a refund for the reclamation bond relating to the Vernal property
in the amounts of $nil and $900, respectively.
In addition, as part of the Company’s
acquisition and subsequent termination of the Imperial Property Option Agreement, the right to the reclamation bond for this property
was transferred to the Company. Upon completion of the required reclamation, the Company will receive a refund of the deposit.
NOTE 5 - MINERAL PROPERTIES
Bruner and Vernal Properties
Pursuant to a Property Option Agreement (“BV
Agreement”), dated as of July 25, 2003, with MinQuest, Inc., a Nevada corporation (“MinQuest”), we acquired
the option to earn a 100% interest in the Bruner and Vernal mineral exploration properties located in Nevada. Together, these
two properties originally consisted of 28 unpatented mining claims on a total of 560 acres in the northwest trending Walker Lane
located in western central Nevada. The Bruner position was subsequently expanded from 16 unpatented mining claims to 80 unpatented
mining claims bringing the total at Bruner to approximately 1,653 acres. Any additional claims agreed by the Company to be
staked by MinQuest within 2 miles from the existing perimeter of the Property boundaries shall form part of the BV Agreement.
In order to earn a 100% interest in these
two properties, option payments totaling $92,500 and an additional $500,000 in exploration expenditures were required. All mining
interests in the property are subject to MinQuest retaining a 3% royalty of the aggregate proceeds received by us from any smelter
or other purchaser of any ores, concentrates, metals or other material of commercial value produced from the property, minus the
cost of transportation of the ores, concentrates or metals, including related insurance, and smelting and refining charges, including
penalties.
Pursuant to the BV Agreement, we have a one-time
option to purchase a portion of MinQuest’s royalty interest at a rate of $1,000,000 for each 1%. We may exercise our option
90 days following completion of a bankable feasibility study of the Bruner and Vernal properties, which, as it relates to a mineral
resource or reserve, is an evaluation of the economics for the extraction (mining), processing and marketing of a defined ore
reserve that would justify financing from a banking or financing institution for putting the mine into production.
To date, the Company has paid the option payments
totaling $92,500, and has accumulated approximately $625,070 and $83,740 of exploration expenditures on the Bruner and Vernal
properties respectively. These expenditures have satisfied the requirements of the BV Agreement and 100% interest in these two
properties have been transferred to Patriot, subject to MinQuest retaining a 3% royalty.
On April 16, 2010, the Company entered into
an Assignment Agreement with its wholly owned subsidiary, Provex Resources, Inc., a Nevada corporation (“Provex”),
to assign the exclusive option to an undivided right, title and interest in the Bruner, Bruner Expansion and Vernal Properties
to Provex. Pursuant to the Agreement, Provex assumed the rights, and agreed to perform all of the duties and obligations,
of the Company arising under the original property option agreements.
On May 28, 2010 Provex entered into an exclusive
right and option agreement with Canamex Resources Corp. (“Canamex”) whereby Canamex may earn a 70% (or up to 75% if
a bankable feasibility study is performed) undivided interest in the Bruner, and Bruner Expansion properties, herein after collectively
referred to as (the “Bruner Properties”). Upon the completion of the terms of the Agreement by Optionee, and upon
earning its’ initial interest, the parties have agreed to negotiate a definitive joint venture agreement in good faith which
will supersede the current agreement.
On April 1, 2009, the Company entered into
a Property Option Agreement (the “AIV Agreement”) with American International Ventures Inc. (“AIV”), to
acquire the exclusive option to an undivided right, title and interest in 28 patented Federal mining claims and mill sites located
in Nye County, Nevada. Simultaneous with the execution and delivery of the Agreement, the Company paid AIV $30,000. In order to
earn its option in the Property, the Company agreed to make annual property option payments each year on April 1 consisting of
$35,000 in 2010, $40,000 in 2011, $45,000 in 2012, $50,000 in 2013, $55,000 in 2014, $60,000 in 2015, and $1,185,000 in 2016.
Following which the Company would be deemed to have exercised its option under the Agreement and would be entitled to an undivided
100% right, title and interest in and to the Bruner Property Expansion subject to a 1.5% Net Smelter Return (“NSR”)
royalty payable to AIV and a 2% NSR payable to the former Property owner. The 2% NSR royalty may be purchased by the Company for
a total payment of $500,000 and 1% of AIV’s 1.5% NSR royalty can be purchased by the Company for an additional payment of
$500,000 at any time up to 30 days after beginning mine construction. The claims optioned under the agreement with AIV are
contiguous with the Company’s existing Bruner property claims and therefore are also subject to the terms and conditions
of the original BV Agreement with MinQuest.
In November 2015, Canamex announced that it
had completed the purchase of the patented claims from AIV for US$760,000, securing ownership of those claims for the joint venture
(in anticipation of Canamex earning 70% of the Bruner project) and saving the joint venture US$425,000. Canamex purchased the
claims directly from American International Ventures Inc. (“AIV”), subject to Patriot Gold’s rights under an
Option Agreement dated April 1, 2009 that gives Patriot Gold the ability to purchase those patented claims by making a final payment
of US$1,185,000 on or before April 1, 2016. Both Canamex and Patriot Gold expect, however, that those patented claims will be
conveyed to the joint venture once the more comprehensive joint venture agreement has been executed.
During the first half of 2016 it was determined
by the company that Canamex had successfully earned a 70% interest in the Bruner Property according to the terms of the Bruner
Option Agreement, and the parties have began working to negotiate terms of a definitive joint venture agreement. This joint venture
agreement is still being negotiated.
As of May 31, 2016, the Company has incurred
approximately $625,070 and $83,740 of accumulated exploration expenses on the Bruner and Vernal properties respectively. During
the years ended May 31, 2016 and 2015, the Company incurred exploration expenses of $nil and $nil on the Bruner property, respectively,
and $1,990 and $1,990 on the Vernal property, respectively.
Moss Property
The Moss Property consists of 104 unpatented
claims and 15 patented claims located in the Oatman Mining District of Mohave County, Arizona. The Company acquired these claims
in a series of transactions during fiscal 2004 and 2005.
We hold the MinQuest claims via 104 unpatented
mining claims that were acquired from MinQuest. On March 4, 2004 the Company signed a Letter Agreement (the “Agreement”)
that earned it a 100% interest in these claims by paying MinQuest a one-time fee of $50,000. This $50,000 fee was paid on
July 7, 2004. Subject to the terms and conditions of the Agreement, MinQuest will retain a 3% NSR on any and all production derived
from the unpatented mining claims listed under the Agreement and on public lands within 1 mile of MinQuest, Inc.’s outside
perimeter of the present claim boundary; a 1.0% NSR on patented claims with no other royalty within the property; and a 0.5% overriding
NSR on all production within the property derived from patented claims with other royalty interests.
On February 28, 2011, the Company entered
into an Exploration and Option to Enter Joint Venture Agreement (the “Moss Agreement”), with Idaho State Gold Company,
LLC, (“ISGC”) whereby the Company granted the option and right to earn a vested seventy percent (70%) interest in
the property and the right and option to form a joint venture for the management and ownership of the properties called the Moss
Property, Mohave County, Arizona. Pursuant to the Moss Agreement, ISGC paid US $500,000 upon execution, and agreed to spend an
aggregate total of US $8 million on exploration and related expenditures over the next five years and subsequent to exercise the
earn-in, ISGC and Patriot Gold would form a 70/30 joint venture. Under this agreement financing of future work on the property
would be on a proportional basis under the direction of a management committee with voting rights proportional to ownership percentage.
Either party could be diluted on the basis of a standard formula if it does not contribute to the planned programs. If either
party is diluted below 10 percent, their interest would convert to a three percent NSR (net smelter return) royalty. An existing
3-3.5 percent NSR exists on the Moss Mine Property.
In March, 2011, ISGC transferred its rights
to the Exploration and Option Agreement dated February 28, 2011, to Northern Vertex Mining Corp. (“Northern Vertex”).
On January 21, 2016, an arbitrator ruled that
Northern Vertex met the required expenditures, successfully carried out pilot production, and produced a feasibility study thereby
fulfilling the Exploration and Option Agreement terms entitling them to have earned an undivided 70% interest in the Moss Property.
On May 12, 2016, the Company entered into
a material definitive Agreement for Purchase and Sale of Mining Claims and Escrow Instructions (the “Purchase and Sale Agreement”)
with Golden Vertex Corp., an Arizona corporation (“Golden Vertex,” a wholly-owned Subsidiary of Northern Vertex) whereby
Golden Vertex agreed to purchase the Company’s remaining 30% working interest in the Moss Gold/Silver Mine for $1,155,600
(C$1,500,000) plus the retention by the Company of a 3% net smelter returns royalty. Specifically, the Company conveyed all of
its right, title and interest in those certain patented and unpatented lode mining claims situated in the Oatman Mining District,
Mohave County, Arizona together with all extralateral and other associated rights, water rights, tenements, hereditaments and
appurtenances belonging or appertaining thereto, and all rights-of-way, easements, rights of access and ingress to and egress
from the claims appurtenant thereto and in which the Company had any interest. The purchase price consisted of $924,479 (C$1,200,000)
in cash payable at closing and the remaining $231,120 (C$300,000) was paid by the issuance of Northern Vertex common shares to
the Company valued at $0.26 (C$0.35) (857,140 shares), issued pursuant to the terms and provisions of an investment agreement
entered between the Company and Northern Vertex contemporaneous to the Purchase and Sale Agreement. The investment agreement prohibits
the resale of the shares during the four-month period following the date of issuance and thereafter, the Company will not sell
the shares in an amount exceeding 100,000 shares per month. As of May 31, 2016, the Company recognized a gain on sale of mineral
property of $1,155,600 in the Consolidated Statements of Operations.
During the years ended May 31, 2016 and 2015,
MinQuest earned a 1.0% NSR totaling $12 and $26,827, respectively, generated from minerals recovered and sold during a Phase 1
plant operation completed by Northern Vertex. In accordance with the agreements, Northern Vertex paid the NSR to the Company and
the Company paid the NSR to MinQuest. The receipt and disbursement of the NSR are recorded in mineral costs in the Consolidated
Statement of Operations for a net effect of $nil. As part of the Purchase and Sale Agreement of the Moss Property, MinQuest retains
their 1.0% NSR and will be paid directly by Northern Vertex.
As of May 31, 2016, the Company has incurred
approximately $1,538,141 of accumulated exploration expenses on the Moss Property, $21,660 and $161 were spent on exploration
for the years ended May 31, 2016 and 2015, respectively.
Windy Peak Property
The Windy Peak Property, (“Windy Peak”)
consists of 79 unpatented mineral claims covering approximately 1630 acres, 3 miles NNE of the Bell Mountain and 7 miles east
of the Fairview mining district in southwest Nevada.
Windy Peak was acquired on May 22, 2015 when
the Company entered into an Assignment and Assumption Agreement with Goldfields International, Inc., for the assignment of the
rights, title and interest in the Windy Peak property for $75,000. Consideration for the assignment is included in the Consolidated
Statement of Operations as mineral costs during the year ended May 31, 2015.
Right of First Refusal - Peak Mineral Claims
On July 20, 2015, Patriot entered into a Right
of First Refusal Agreement, (the “ROFR Peak Agreement”), with an unrelated third party whereby Patriot was granted
a right of first refusal with respect to certain mineral claims which are located in British Columbia and registered to the third
party. In consideration of the ROFR Peak Agreement, Patriot paid the sum of $12,977 ($16,500 CAD). Subject to the exercise of
the ROFR Patriot would have the opportunity to enter into a mutually agreeable option with the third party to earn up to a 100%
undivided interest in the property subject to Peak retaining a net smelter royalty. The ROFR expired on June 30, 2016.
NOTE 6 - STOCK OPTIONS
Approval of 2014 Stock Plan
On June 30, 2014, the Board of Directors adopted
the 2014 Stock Option Plan (the “2014 Plan”). The 2014 Plan provides for the authority to grant options to purchase
5,000,000 shares (subject to adjustment) of Patriot's common stock to officers, directors, consultants and agents of Patriot and
its subsidiaries. Options granted to officers under the 2014 Plan may be incentive stock options or non-qualified stock options.
Options granted to others under the 2014 Plan are limited to non-qualified stock options.
The 2014 Plan is administered by the Board
of Directors or a committee designated by the Board of Directors. Subject to the provisions of the 2014 Plan, the Board of Directors
or the Committee has the authority to determine the directors, officers, consultants and advisors to whom options will be granted,
the number of shares covered by each option, vesting rights and the terms and conditions of each option that is granted to them.
However, the aggregate fair market value (determined at the time the option is granted) of the shares with respect to which incentive
stock options are exercisable for the first time by an optionee during any calendar year cannot exceed $100,000.
Options granted pursuant to the 2014 Plan
are exercisable no later than ten years after the date of grant. The exercise price per share of common stock for options granted
under the 2014 Plan shall be determined by the Board of Directors or the designated committee, except for incentive stock options
granted to a holder of ten percent or more of Patriot's common stock, for whom the exercise price per share will not be less than
110% of the fair market value. No option can be granted under the 2014 Plan after June 30, 2024.
As of May 31, 2016, there were 2,980,000 shares available for grant
under the 2014 Plan.
2005 and 2012 Stock Option Plans
The Company’s Board of Directors adopted
the 2005 Stock Option Plan in November 2005 which has reserved 2,000,000 shares of common stock and adopted the 2012 Stock Option
Plan in July 2012 which has reserved an additional 3,900,000 shares of common stock reserved for grant to employees, officers,
directors, consultants and independent contractors. In November 2015, the 2005 Stock Option Plan expired so that no share maybe
granted pursuant to this Plan.
As of May 31, 2016, there were 130,000 shares
of common stock available for grant under the 2012 Plan.
In general, options are granted with an exercise
price equal to the fair value of the underlying common stock on a 30 day rolling average. Options generally have a contractual
life of 10 years and vest over periods ranging from being fully vested as of the grant dates to four years.
Pursuant to the 2005 and 2012 Stock Option
Plans, grants of shares can be made to employees, officers, directors, consultants and independent contractors of non-qualified
stock options as well as for the grant of stock options to employees that qualify as incentive stock options under Section 422
of the Internal Revenue Code of 1986 (“Code”) or as non-qualified stock options. The Plan is administered by the Option
Committee of the Board of Directors (the “Committee”), which has, subject to specified limitations, the full authority
to grant options and establish the terms and conditions for vesting and exercise thereof. Currently the entire Board functions
as the Committee.
Stock Option Activity
On December 24, 2015, the Board of Directors
of the Company granted an aggregate 2,020,000 common stock options to five consultants and two Directors of the Company under
the 2014 Plan. The stock options vested immediately and have an exercise price of $0.10 per share and expire on December 24, 2025.
The Company recognized stock option compensation expense of approximately $254,791.
On July 17, 2015, the Board of Directors of
the Company granted options to a Director of the Company to purchase 100,000 shares of the Company’s common stock under
the 2014 Plan. The stock options vested immediately and have an exercise price of $0.05 per share and expire on July 17, 2025.
The Company recognized stock option compensation expense of approximately $5,709. On July 20, 2015, the director exercised all
100,000 common stock options for total proceeds to the Company of $5,000.
On June 20, 2014, the Board of Directors of
the Company granted an aggregate 1,070,000 common stock options to six consultants and one director of the Company. The stock
options vest in three equal installments of 356,667 on the anniversary dates of June 20, 2016, 2016 and 2017. The options have
an exercise price of $0.10 per share and expire on June 20, 2024. The Company will recognize stock option compensation expense
of approximately $103,000 over the vesting period.
The fair value of each stock option is estimated
at the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted in
2016 was $0.067 per share. Assumptions regarding volatility, expected term, dividend yield and risk-free interest rate are required
for the Black-Scholes model. The volatility assumption is based on the Company’s historical experience. The risk-free interest
rate is based on a U.S. treasury note with a maturity similar to the option award’s expected life. The expected life represents
the average period of time that options granted are expected to be outstanding. The assumptions for volatility, expected life,
dividend yield and risk-free interest rate are presented in the table below:
|
2016
|
|
2015
|
|
Risk-free interest rate
|
1.37% - 1.73%
|
|
1.710% - 1.965%
|
|
Expected life in years
|
5.5
|
|
5.0 - 6.5
|
|
Volatility
|
126.11% - 130.20%
|
|
116.88% - 125.12%
|
|
Expected dividend yield
|
$0
|
|
$0
|
|
Weighted average grant date fair value
|
$0.067
|
|
$0.095
|
|
The following table summarizes stock option activity and related
information for the years ended May 31, 2016 and 2015:
|
|
Number of Stock Options Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual
Life (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance, May 31, 2014
|
|
|
200,000
|
|
|
$
|
0.25
|
|
|
|
1.8
|
|
|
$
|
0.00
|
|
Option granted
|
|
|
5,570,000
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
|
5,770,000
|
|
|
|
0.11
|
|
|
|
8.4
|
|
|
|
0.00
|
|
Option granted
|
|
|
2,120,000
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(200,000
|
)
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(100,000
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
0.02
|
|
Balance May 31, 2016
|
|
|
7,590,000
|
|
|
|
0.10
|
|
|
|
8.6
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2016
|
|
|
5,376,666
|
|
|
|
0.10
|
|
|
|
8.6
|
|
|
|
0.03
|
|
For the years ended May 31, 2016 and 2015,
total stock compensation expense recognized in general and administrative expenses in the Consolidated Statement of Operations
was $260,500 and $289,150, respectively.
The following table summarized information pertaining to unvested
stock options for the years ended May 31, 2016 and 2015:
|
|
Shares
|
|
|
Weighted Average Grant Date
Fair Value
|
|
Unvested at May 31, 2014
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
5,570,000
|
|
|
|
0.096
|
|
Vested / Forfeited
|
|
|
(1,500,000
|
)
|
|
|
0.096
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Unvested at May 31, 2015
|
|
|
4,070,000
|
|
|
|
0.096
|
|
Granted
|
|
|
2,120,000
|
|
|
|
0.067
|
|
Vested / Forfeited
|
|
|
(3,876,667
|
)
|
|
|
0.067
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
0.057
|
|
Unvested at May 31, 2016
|
|
|
2,213,333
|
|
|
|
–
|
|
The following tables summarizes outstanding options as of May 31,
2016:
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Price
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
(yrs)
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
(yrs)
|
|
|
$0.10
|
|
|
|
7,590,000
|
|
|
$
|
0.10
|
|
|
|
8.6
|
|
|
|
5,376,666
|
|
|
$
|
0.10
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,590,000
|
|
|
|
|
|
|
|
|
|
|
|
5,376,666
|
|
|
|
|
|
|
|
|
|
As of May 31, 2016, the Company had $20,845 of total unrecognized
compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 1.32
years.
The Company issues new stock when options are exercised.
NOTE 7 - COMMON STOCK
The Company may issue up to 100,000,000 shares
of $.001 par value common stock. As of May 31, 2016 the Company had 52,375,604 common shares outstanding.
In June 2014, the Company closed private placements
totaling 1,236,957 units at a range of $0.046 to $0.05 per unit for a total offering price of $57,500 of which $37,141 was allocated
to the warrants. Each unit consists of one common stock share and one Class A Warrant exercisable twelve months from issuance
for a period of four years at an exercise price ranging from $0.069 to $0.08. The relative fair value of the warrants was determined
using the Black-Scholes option pricing model and was recorded in the equity section of the balance sheet.
During the year ended May 31, 2016, the Company
completed multiple private placements issuing 2,400,000 shares of the Company’s common stock at $0.05 per share. Total proceeds
were $120,000.
During the year ended May 31, 2016, the Company
completed multiple private placements issuing 1,700,000 units for $0.05 per unit where a unit consists of one share of the Company’s
common stock and one Class A Warrant. Total proceeds were $85,000 of which $39,726 was allocated to the warrants. The relative
fair value was determined using a Black-Scholes option pricing model and was recorded in the equity section of the balance sheet.
Each warrant allows for the purchase of one share of the Company’s common stock for $0.08. The vesting period of the warrants
is one year from the date of grant.
The following table summarizes the assumptions
used in the Black-Scholes models to estimate the grant date fair value of the warrants:
|
2016
|
|
2015
|
Volatility
|
115.34% - 123.98%
|
|
133.77%
|
Expected life
|
2.5 years
|
|
2.5 years
|
Risk-free interest rate
|
0.775% - 1.055%
|
|
0.630% - 0.635%
|
Dividend yield
|
$0
|
|
$0
|
Weighted average grant date fair value
|
$0.044
|
|
$0.085
|
The following table summarizes warrant activity during the years
ended May 31, 2016 and 2015.
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Warrants Exercisable
|
|
|
Weighted Average Exercise Price
|
|
Outstanding May 31, 2014
|
|
|
32,774,247
|
|
|
$
|
0.09
|
|
|
|
5,811,757
|
|
|
$
|
0.13
|
|
Issued
|
|
|
1,236,957
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Canceled / exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding May 31, 2015
|
|
|
34,011,204
|
|
|
$
|
0.09
|
|
|
|
26,274,247
|
|
|
$
|
0.08
|
|
Issued
|
|
|
1,700,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
Canceled / exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding May 31, 2016
|
|
|
35,711,204
|
|
|
$
|
0.09
|
|
|
|
32,011,204
|
|
|
$
|
0.089
|
|
The following tables summarizes outstanding warrants as of May
31, 2016:
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Range
of
Exercise
Price
|
|
|
Number
of
Warrants
|
|
|
Weighted
Avg Exercise Price
|
|
|
Remaining
Contractual Life (yrs)
|
|
|
Number
of
Warrants
|
|
|
Weighted
Avg Exercise Price
|
|
|
Remaining
Contractual Life (yrs)
|
|
|
$0.06
- $0.08
|
|
|
|
22,196,957
|
|
|
$
|
0.07
|
|
|
|
3.2
|
|
|
|
20,496,957
|
|
|
$
|
0.07
|
|
|
|
3.0
|
|
|
$0.09
- $0.14
|
|
|
|
9,839,643
|
|
|
$
|
0.11
|
|
|
|
5.2
|
|
|
|
9,839,643
|
|
|
$
|
0.11
|
|
|
|
5.2
|
|
|
$0.15
- $0.21
|
|
|
|
3,674,604
|
|
|
$
|
0.17
|
|
|
|
4.6
|
|
|
|
1,674,604
|
|
|
$
|
0.19
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,711,204
|
|
|
|
|
|
|
|
|
|
|
|
32,011,204
|
|
|
|
|
|
|
|
|
|
On March 1, 2014, the Company decreased the
exercise price on the remaining outstanding warrants issued on November 27, 2003, as follows: 320,000 Class A warrants exercise
price decreased from $1.40 to $0.06; 320,000 Class B warrants exercise price decreased from $1.45 to $0.07; 320,000 Class C warrants
exercise price decreased from $1.50 to $0.08; and 320,000 Class D warrants exercise price decreased from $1.55 to $0.09. These
warrants are exchangeable for one share of the Company’s common stock. On October 23, 2012, the expiration date on these
Warrants was extended from November 27, 2013 to November 27, 2015. On October 29, 2015, the expiration date of the Warrants was
extended from November 27, 2015 to November 27, 2017. The Company determined there was no material financial statement impact
due to the extension of the expiration date and the reduction of the exercise price as the warrants were originally classified
as equity when issued and modifications were done primarily as a benefit to the Company. Accordingly, no additional warrant expense
was recorded for the year ended May 31, 2016.
NOTE 8 - PREFERRED STOCK
The Preferred Stock may be issued in one or
more series, from time to time, with each such series to have such designation, relative rights, preferences or limitations, as
shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of
Directors of the Company.
The Company has authorized a total of 20,000,000
shares of Preferred Stock with a par value of $0.001 of which 13,500,000 Preferred Stock have been designated as the Series A,
7% Redeemable Preferred Stock, par value of $0.001. The Corporation is under no obligation to pay dividends on the Series A Redeemable
Preferred Stock, and the stock is redeemable at the option of the Company. In the event of any liquidation, dissolution or winding-up
of the Corporation, the holders of outstanding shares of Series A Preferred shall be entitled to be paid out of the assets of
the Corporation available for distribution to shareholders, before any payment shall be made to or set aside for holders of the
Common Stock, at an amount of $.001 plus any unpaid and accrued dividends per share.
A holder of Series A Preferred has the right to one vote per share in the case of matters provided for in the General Corporation
Law of the State of Nevada or the Amended and Restated Articles of Incorporation or Bylaws to be voted on by the holders of the
Series A Preferred Stock as a separate class. In the case of matters to be voted on by the holders of Common Stock and the holders
of Series A Preferred voting together as a single class, each share of Series A Preferred, has full voting rights and powers equal
to the voting rights and powers of the holders of the Common Stock.
As of May 31, 2016, there are no preferred
shares outstanding.
NOTE 9 - INCOME TAXES
As of May 31, 2016, the Company had a net
operating loss (“NOL”) carryforward for income tax reporting purposes of approximately $10,840,000 that may be offset
against future taxable income through 2036. Current tax laws limit the amount of loss available to be offset against future taxable
income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the
carryforwards will expire unused. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation
allowance of the same amount.
Deferred tax assets of the Company are as
follows:
|
|
2015
|
|
|
2015
|
|
Loss carryforwards
|
|
$
|
3,685,000
|
|
|
$
|
3,723,000
|
|
Stock compensation expense
|
|
|
186,000
|
|
|
|
101,000
|
|
Mineral property amortization
|
|
|
11,000
|
|
|
|
16,000
|
|
Deferred tax asset
|
|
|
3,882,000
|
|
|
|
3,840,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(3,882,000
|
)
|
|
|
(3,840,000
|
)
|
Deferred tax asset recognized
|
|
$
|
–
|
|
|
$
|
–
|
|
A valuation allowance has been recorded to
reduce the net benefit recorded in the financial statements related to these deferred tax assets. The valuation allowance is deemed
necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets.
The provision for income taxes differs from
the amount computed by applying the statutory federal income tax rate of 34% (2016 - 34%) to net loss for the year. The sources
and tax effect of the differences are as follows:
|
|
2016
|
|
|
2015
|
|
Computed expected tax benefit
|
|
$
|
49,550
|
|
|
$
|
302,407
|
|
Permanent differences
|
|
|
(1,616
|
)
|
|
|
(11
|
)
|
Other
|
|
|
(5,934
|
)
|
|
|
4,604
|
|
Change in valuation allowance
|
|
|
(42,000
|
)
|
|
|
(307,000
|
)
|
Income tax provision
|
|
$
|
–
|
|
|
$
|
–
|
|
With few exceptions, the Company is generally no longer subject
to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2013.
NOTE 10 - RELATED PARTY TRANSACTIONS
For the years ended May 31, 2016
and 2015, consulting services fees in the amount of $23,008 and $3,719, respectively, were paid to Mr. Robert Coale the President,
Chief Financial Officer, Secretary, Treasurer and Director. On May 27, 2016, Mr. Coale resigned these positions and
was simultaneously appointed as Chairman of the Board. Mr. Coale provides geological consulting services to the Company pursuant
to a consulting agreement. He is paid on an hourly basis for his services and reimbursed for his out-of-pocket expenses
in performing such consulting services.
For the years ended May 31, 2016
and 2015, consulting services fees in the amount of $110,921 and $23,110, respectively, were paid to Mr. Trevor Newton a Director
of the Company. On May 27, 2016, Mr. Newton was appointed as President, Chief Financial Officer, Secretary and Treasurer.
Mr. Newton provides geological consulting services to the Company pursuant to a consulting agreement. He is paid on an hourly
basis for his services and reimbursed for his out-of-pocket expenses in performing such consulting services.
The Company recognizes these consulting fees
as general and administrative expenses in the Consolidated Statements of Operations.
On May 22, 2015, the Company entered into
an Assignment and Assumption Agreement with Goldfields International, Inc., for the assignment of the rights, title and interest
in the Windy Peak property for $75,000. One individual serves on the Board of Directors for both companies. Consideration for
the assignment is included in the Consolidated Statement of Operations as mineral costs during the year ended May 31, 2015.
NOTE 11 - SUBSEQUENT EVENTS
During
the period June 1, 2016 through June 22, 2016, the Company issued a series of private placements for a total of 3,336,000 shares
of the Company’s common stock at a price of $0.05 per share for total proceeds of $176,800.
On
July 27, 2016, one director of the Company exercised 66,000 common stock options at an exercise price of $0.10 per option for
total proceeds to the Company for $6,600.
On
August 8, 2016, one warrant holder exercised 100,000 Class A Warrants to purchase 100,000 common stock shares for $0.06 per share
for total proceeds to the Company of $6,000.