UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q /A
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2009
Commission file number 000-23561
MEXORO MINERALS LTD.
(Exact name of small business issuer as specified in its charter)
Colorado |
| 84-1431797 | |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification Number) | |
|
| ||
C. General Retana #706 Col. San Felipe Chihuahua, Chih. Mexico | 31203 | ||
(Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code: +52 (614) 426 5505
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). - Not Applicable
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o |
| Accelerated filer o |
| Non-accelerated filer o |
| Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of June 30, the Issuer had 34,845,493 shares of common stock issued and outstanding
1
EXPLANATORY NOTE
Mexoro Minerals, Ltd. is filing this Amendment No. 1 on Form 10-Q/A (this "Amendment") to its Quarterly Report on Form 10-Q/A for the fiscal period ended May 31, 2009, which was filed with the Securities and Exchange Commission on July 20, 2009 (the "Original Filing"), to amend certain information relating to Exhibit 31.1 - Certification.
This Amendment No. 1 on Form 10-Q/A does not update other items or disclosures in the Original Filing. This Amendment No. 1 on Form 10-Q/A does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures, including any exhibits to the Original Filing affected by subsequent events. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the Original Filing. Accordingly, this Amendment No. 1 on Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing, including any amendments to those filings.
ITEM 1.
FINANCIAL STATEMENTS
MEXORO MINERALS LTD.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Expressed in U.S. Dollars)
May 31, 2009
2
MEXORO MINERALS LTD.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
| May 31, 2009 | February 28, 2009 | ||
| (Unaudited) | (Audited) | ||
Assets |
| |||
|
|
|
|
|
Current |
|
|
|
|
Cash and cash equivalents | $ | 6,884 | $ | 38,704 |
Accounts receivable |
| 341,770 |
| 248,589 |
Prepaid expenses |
| 34,826 |
| 34,048 |
|
| 383,480 |
| 321,341 |
|
|
|
|
|
Equipment (note 4) |
| 282,393 |
| 275,900 |
|
|
|
|
|
Total assets | $ | 665,873 | $ | 597,241 |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
Accounts payable and accrued liabilities | $ | 2,742,439 | $ | 2,679,512 |
Current portion of loans payable (note 9) |
| 63,306 |
| 63,232 |
Promissory notes (note 7) |
| 1,013,551 |
| 968,543 |
Current portion of convertible debentures (note 8) |
| 1,384,993 |
| 1,267,314 |
|
| 5,204,289 |
| 4,978,601 |
|
|
|
|
|
Loans payable (note 9) |
| 1,830 |
| 7,608 |
Convertible debentures (note 8) |
| 907,205 |
| 673,887 |
|
|
|
|
|
Total liabilities |
| 6,113,324 |
| 5,660,096 |
|
|
|
|
|
Stockholders’ deficiency |
|
|
|
|
Capital stock |
|
|
|
|
Preferred stock |
|
|
|
|
Authorized: 20,000,000 shares without par value (note 10) |
|
|
|
|
Issued: nil |
| - |
| - |
Common stock |
|
|
|
|
Authorized: 200,000,000 shares without par value |
|
|
|
|
Issued: 31,019,302 (2008 – 25,380,502) (note 11) |
| 26,047,901 |
| 25,556,901 |
Additional paid-in capital |
| 13,128,135 |
| 12,676,908 |
Stock subscriptions |
| 121,258 |
| 121,258 |
Accumulated deficit from prior operations |
| (2,003,427) |
| (2,003,427) |
Accumulated deficit during the development stage |
| (42,936,798) |
| (41,864,219) |
Accumulated other comprehensive income |
| 195,480 |
| 449,724 |
Total stockholders’ deficiency |
| (5,447,451) |
| (5,062,855) |
|
|
|
|
|
Total liabilities and stockholders’ deficiency | $ | 665,873 | $ | 597,241 |
Going-concern (note 3)
Commitments (notes 6, 13 and 16)
Subsequent events (note 17)
The accompanying notes are an integral part of these consolidated financial statements.
3
MEXORO MINERALS LTD.
(A Development Stage Company)
Consolidated Statements of Operations and Deficit
(Unaudited) (Expressed in U.S. Dollars)
The accompanying notes are an integral part of these consolidated financial statements,
4
MEXORO MINERALS LTD.
(A Development Stage Company)
Consolidated Statements of Cash Flow
(Unaudited) (Expressed in U.S. Dollars)
Supplemental cash flow information (note 15)
The accompanying notes are an integral part of these consolidated financial statements.
5
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
1.
Basis of presentation
Mexoro Minerals Ltd. (formerly Sunburst Acquisitions IV, Inc.) ("Mexoro" or the “Company”) was incorporated in the state of Colorado on August 27, 1997 and on February 15, 2006 its name was changed to Mexoro Minerals Ltd. The Company was formed to seek out and acquire business opportunities. Between 1997 and 2003, the Company was engaged in two business acquisitions and one business opportunity, none of which generated a significant profit or created sustainable business. All were sold or discontinued. Currently, the main focus of the Company’s operations is in Mexico.
The Company had previously been pursuing various business opportunities and, effective March 1, 2004, the Company changed its operations to mineral exploration. On February 12, 2009, the Company entered into a joint venture through a definitive agreement for development of Cieneguita project with Minera Rio Tinto, S.A. de C.V. (“MRT”), a company duly incorporated pursuant to the laws of Mexico, which is controlled by a former officer of the Company. The purpose of the joint venture is to put Cieneguita property into production. As per the agreement, MRT is to provide the necessary working capital to begin and maintain mining operations estimated to be $3,000,000. MRT will spend 100% of the money to earn 75% of the net cash flow from production. Accordingly, as of February 12, 2009 the Company is considered to be a Development stage company.
On May 25, 2004, the Company completed a “Share Exchange Agreement” with Sierra Minerals and Mining, Inc. (“Sierra Minerals”), a Nevada corporation, which caused Sierra Minerals to become a wholly-owned subsidiary. Sierra Minerals held certain rights to properties in Mexico that the Company now owns or has an option to acquire. Through Sierra Minerals, the Company entered into a joint venture agreement with MRT. In August 2005, the Company cancelled the joint venture agreement in order to directly pursue mineral exploration opportunities through a wholly-owned Mexican subsidiary, Sunburst Mining de Mexico S.A. de C.V. (“Sunburst de Mexico”). On August 25, 2005, Sunburst de Mexico, Mexoro and MRT entered into agreements providing Sunburst de Mexico the right to explore and exploit certain properties in Mexico. In December 2005, the Company and Sunburst de Mexico entered into a new agreement with MRT (the “New Agreement”) (note 6). On January 20, 2006, Sierra Minerals was dissolved.
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended May 31, 2009 are not necessarily indicative of the results that may be expected for the year ending February 28, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 1 0-K for the year ended February 28, 2009.
6
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES
(a)
Recent accounting pronouncements
(i)
In March 2008, the FASB issued SFAS No. 161, “Disclosure About Derivative Instruments and Hedging Activities”, an amendment to Financial Accounting Standards Board Financial Accounting Standard No. 133”. SFAS No. 161 requires among other things, enhanced disclosure about the volume and nature of derivative and hedging activities and a tabular summary showing the fair value of derivative instruments included in the statement of financial position and statement of operations. SFAS No. 161 also requires expanded disclosure of contingencies included in derivative instruments related to credit risk. SFAS No. 161 is effective for fiscal 2009. The adoption of SFAS No. 161 will not have an impact on our consolidated financial condition or results of operations.
(ii)
In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources for GAAP in the U.S. and lists the categories in descending order. An entity should follow the highest category of GAAP applicable for each of its accounting transactions. The adoption will not have a material effect on the Company’s consolidated financial statements.
(iii)
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (previously FSP APB 14-a), which will change the accounting treatment for convertible securities which the issuer may settle fully or partially in cash. Under the final FSP, cash settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability will be recorded as additional paid-in capital. As a result, the debt will be recorded at a discount reflecting its below market coupon interest rate. The debt will subsequently be accreted to its p ar value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the income statement. This change in methodology will affect the calculations of net income and earnings per share for many issuers of cash settled convertible securities. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of FSP No. APB 14-1 on its consolidated financial statements.
(iv)
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities", which applies to the calculation of earnings per share (“EPS”) under Statement 128 for share-based payment awards with rights to dividends or dividend equivalents. Under the final FSP EITF 03-6-1, Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. The FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of EITF 03-6-1 on its consolidated financial statements.
(v)
SFAS No. 165, "Subsequent Events" ("SFAS 165"), establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. SFAS 165 establishes (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company is currently assessing the potential effect that the adoption of SFAS 165 will have on its consolidated financial statements.
7
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (continued)
(vi)
On June 15, 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-4 (“EITF 08-4”). EITF 08-4 addressed conforming changes made to EITF Issue 98-5 which resulted from the implantation of EITF Issue 00-27 and SFAS No. 150. EITF Issued 98-5 addresses the accounting for beneficial conversion features. Previously, beneficial conversion features were amortized to the securities earliest conversion date. Under EITF 08-4, beneficial conversion features are amortized to the stated redemption date, if one exists, rather than the earliest termination date. For beneficial conversion features without a stated redemption date, the beneficial conversion features continue to be amortized to the earliest conversion date. EITF 08-4 is effective for fiscal years ending after December 15, 2008 with early application permitted. The effects of implementing EITF 08-4 are to be presented retrospectively with th e cumulative-effect of the change being reported in retained earnings at the beginning of the first year presented. The Company adopted EITF 08-4 during the year ended February 28, 2009. As a result of adoption of EITF 08-4, the Company was amortizing its beneficial conversion features of $416,200 to the stated redemption dates of the debentures. As a result, $312,399 of the beneficial conversion features was recognized as interest expense in the consolidated statement of operations for the year ended February 28, 2009 and the remaining $103,801 was deferred. Prior to adoption of EITF 08-04, the entire $416,200 beneficial conversion feature would have been recognized in the year ended February 28, 2009.
3.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis. The Company has a history of operating losses and will need to raise additional capital to fund its planned operations. As at May 31, 2009, the Company had a working capital deficiency of $4,820,809 (February 29, 2008 - $1,810,905) and a cumulative loss during the development period of $42,936,798 (February 29, 2008 - $33,828,011). These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company intends to reduce its cumulative loss through the attainment of profitable operations from its investment in a Mexican mining venture (note 6). In addition, the Company has conducted private placements of convertible debt and common stock (note 11), which have generated a portion of the initial cash requirements of its planned Mexican mining ventures (note 6).
In February 2009, the Company signed a definitive agreement with MRT to provide funding of up to $9,000,000 to the Company to initiate production at its Cieneguita property, to complete a feasibility study as well to continue the exploration of its properties.
8
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
4.
EQUIPMENT
5.
JOINT VENTURE WITH MRT
On February 12, 2009, the Company entered into a joint venture through a definitive agreement for development of the Cieneguita project with MRT. The purpose of the joint venture is to put Cieneguita property into production. As per the agreement, MRT is to provide the necessary working capital to begin and maintain mining operations estimated to be $3,000,000. MRT will spend 100% of the money to earn 75% of the net cash flow from production. The agreement limits the mining of the mineralized material that is available from the surface to a depth of 15 meters or approximately 10% of the mineralized material found till the date of the agreement. The Company incurs no obligations to the joint venture’s creditors as the operations and working capital requirements are controlled by MRT. Accordingly, the Company’s share of income and expenses are reflected in these financial statements under the prop ortionate consolidation method.
6.
MINERAL PROPERTIES
The Company incurred exploration expenses as follows in the three months ended May 31, 2009:
9
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
6.
MINERAL PROPERTIES (CONTINUED)
The Company incurred exploration expenses as follows in the three months ended May 31, 2008:
| Cieneguita Operations | Sahuayacan | Guazapares | Cieneguita | Encino Gordo | New Projects | Total |
|
|
|
|
|
|
|
|
Drilling and sampling | $ - | $ - | $ 86,309 | $ 617,631 | $ - | $ - | $ 703,940 |
Geological, geochemical, geophysics | - | - | 35,736 | 124,553 | - | 30,652 | 190,941 |
Land use permits | 52 | 26,850 | 3,009 | 115,117 | (2,281) | - | 142,747 |
Automotive | 255 | - | 2,416 | 2,253 | - | - | 4,924 |
Travel | 682 | 209 | 12,928 | 6,760 | 209 | - | 20,788 |
Consulting | 12,771 | - | 42,311 | 46,060 | - | - | 101,142 |
Equipment | 111 | - | 14,673 | 12,925 | - | - | 27,709 |
General | 8,560 | 2,017 | 21,473 | 68,433 | 149 | - | 100,632 |
| $ 22,431 | $ 29,076 | $ 218,855 | $ 993,732 | $ (1,923) | $30,652 | $1,292,823 |
Since May 2004, the Company has held interests in gold exploration properties in Mexico.
In August 2005, the Company formed its wholly owned subsidiary, Sunburst de Mexico, which allowed the Company to take title to the properties in the name of Sunburst de Mexico. On August 25, 2005, the Company entered into property agreements with MRT, which provided Sunburst de Mexico options to purchase the mineral concessions of the Cieneguita and Guazapares properties and the right of refusal on three Encino Gordo properties. The Company also entered into an exploration and sale agreement, in October 2006, with Minera Emilio for the mineral concessions of the Sahuayacan Property.
In August 2005, the parties also entered into an operator’s agreement, that gave MRT the sole and exclusive right and authority to manage the Cieneguita Property, and a share option agreement which granted MRT the exclusive option to acquire up to 100% of all outstanding shares of Sunburst de Mexico if the Company did not comply with the terms of the property agreements. The operator’s agreement and share option agreement were subsequently cancelled when the Company and Sunburst de Mexico entered into a new contract with MRT as described below under Encino Gordo property.
In November 2008, the Company signed a letter of intent with MRT to initiate production at its Cieneguita property, complete a feasibility study and to continue the exploration of its properties. Under the agreement, MRT and Mexoro’s wholly owned subsidiary Sunburst Mining de Mexico will form a new Mexican joint venture company for the purpose of putting Cieneguita property into production.
The material provisions of the property agreements are as follows:
Cieneguita
MRT assigned to Sunburst de Mexico, with the permission of the Cieneguita Property’s owner, Corporativo Minero, S.A. de C.V. (“Corporativo Minero”), all of MRT’s rights and obligations acquired under a previous agreement (the Cieneguita option agreement), including the exclusive option to acquire the Cieneguita Property for a price of $2,000,000. As the Cieneguita Property was not in production by May 6, 2006, Sunburst de Mexico was required to pay $120,000 to Corporativo Minero to extend the contract. Corporativo Minero agreed to reduce the obligation to $60,000, of which $10,000 was paid in April 2006 and the balance paid on May 6, 2006. The Company made this payment to Corporativo Minero and the contract was extended.
10
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
6.
MINERAL PROPERTIES (CONTINUED)
The Company has the obligation to pay a further $120,000 per year for the next 13 years and the balance of the payments in the 14th year, until the total amount of $2,000,000 is paid. The Company renegotiated the payment due May 6, 2007, to $60,000 payable on November 6, 2007, which was paid, and the balance of $60,000 was paid on December 20, 2007. We paid $60,000 on May 12, 2008 of the $120,000 due on May 6, 2008, and the balance was paid in June 2008. We are not in default on our payments.
In the alternative, if the Cieneguita Property is put into production, of which there is no guarantee, the Company must pay the Cieneguita owners $20 per ounce of gold produced, if any, from the Cieneguita Property to the total $2,000,000 due. In the event that the price of gold is above $400 per ounce, the property payments payable to the Cieneguita owners from production will be increased by $0.10 for each dollar increment over $400 per ounce. The total payment of $2,000,000 does not change with fluctuations in the price of gold. Non-payment of any portion of the $2,000,000 total payment will constitute a default. In such case, the Cieneguita owners will retain ownership of the concessions, but the Company will not incur any additional default penalty. MRT retained no interest in the Cieneguita Property.
On February 12, 2009 the Company entered into a definitive agreement for development of Cieneguita project with Minera Rio Tinto (“MRT”), a private Mexican corporation whose president was a former president of our Company. The definitive agreement covers project financing of up to USD $9,000,000. The major points of the agreement are as follows:
(i)
MRT and/or its investors will subscribe for up to USD$1 million of a secured convertible debenture at 8% interest (payable in stock or cash). The debenture is convertible into units at $0.60 per unit. Each unit comprises 2 common shares and 1 warrant. Each warrant is exercisable at $0.50 per share for a period of 3 years. The placement will be used for continued exploration of our properties and general working capital.
(ii)
MRT is to provide the necessary working capital to begin and maintain mining operations estimated to be $3,000,000 used for the purpose of putting the Cieneguita property into production. MRT will spend 100% of the money to earn 75% of the net cash flow from production. The agreement will limit the mining to the mineralized material that is available from surface to a depth of 15 meters or approximately 10% of the mineralized material found to date.
(iii)
MRT will spend up to USD $5 million to take the Cieneguita property through the feasibility stage. In doing so, MRT will earn a 60% interest in Mexoro’s rights to the property. After the expenditure of the $5 million all costs will be shared on a ratio of 60% to MRT and 40% to Mexoro Minerals. If the Company elects not to pay its portion of costs after the $5 million has been spent, the Company’s position shall revert to a 25% carried interest on the property.
Guazapares
MRT assigned to Sunburst de Mexico, with the consent of the Guazapares Property owner Compañía Minera, S.A. de C.V. (“Compañía Minera”), MRT’s rights and obligations concerning the Guazapares Property, including the exclusive option, for a term of four years, to purchase eight of the Guazapares Property concessions upon payment of $910,000. The total payments for the Company to acquire and retain 100% ownership of all eight concessions are as follows: November 30, 2005 - $100,000 (this payment date was extended – see below), October 31, 2006 - $60,000 (this payment date was extended to February 28, 2007, then to May 31, 2007 and then to August 31, 2007- see below), August 2, 2007 - $140,000 (see below), August 2, 2008 - $110,000 (payment terms are being negotiated) and August 2, 2009 - $500,000.
On September 19, 2007, Sunburst de Mexico, Mexoro and MRT entered into an agreement to defer any and all property payments regarding Guazapares that were due by December 31, 2007 owing to MRT, until such time as Sunburst de Mexico and Mexoro have sufficient funds to make the payments, in the opinion of the disinterested.
Mexoro agreed to issue 250,000 shares to MRT and/or its assignees in consideration for the deferral of any and all Guazapares Property payments that were outstanding and those arising on or before December 31, 2007.
11
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
6.
MINERAL PROPERTIES (CONTINUED)
In return, Sunburst de Mexico granted MRT a 2.5% net smelter royalties (“NSR”) and the right to extract from the Guazapares concessions up to 5,000 tons per month of rock material; this right will terminate on exercise of the option to purchase the concessions. Otherwise, MRT retained no interest in the Guazapares Property.
San Francisco (Guazapares)
MRT assigned to Sunburst de Mexico, for a term of 60 months, commencing from June 25, 2004 (the “Option Period”), with the consent of the San Francisco concessions owner Minera Rachasa, S.A. de C.V. (“Minera Rachasa”), MRT’s rights and obligations acquired under the San Francisco option agreement, including the option to purchase the San Francisco concessions for a price of $250,000 on June 25, 2009.
To maintain the option, Sunburst de Mexico assumed the obligation to pay to the San Francisco owner cumulative annual payments. The payments are: $20,000 on June 25, 2006 (paid); $30,000 on June 25, 2007 (paid); and $40,000 on June 25, 2008 (paid).
If the option is exercised prior to the expiration of the Option Period by payment of the purchase price of $250,000; the obligation to pay the annual payments will be terminated. MRT and the San Francisco owner reserved a combined 2.5% NSR. MRT reserved no other rights on the San Francisco concessions.
San Antonio (Guazapares)
MRT assigned to Sunburst de Mexico, with the consent of the San Antonio concessions owner (Rafael Fernando Astorga Hernández), MRT’s rights and obligations acquired under the San Antonio option agreement, including the option to purchase the San Antonio concessions for a price of $500,000, commencing on January 15, 2004 (the signing date of the San Antonio option agreement) and due on January 15, 2010.
To maintain the option, Sunburst de Mexico assumed the obligation to pay to the San Antonio owner cumulative annual payments. The remaining payments are: $50,000 on January 15, 2008 (this payment was deferred to January 31, 2008 and paid) and $50,000 on January 15, 2009 (the Company is in default and renegotiating the payment terms).
If the option is exercised prior to the expiration of the option period by payment of the purchase price, the obligation to pay the annual payments will be terminated. The San Antonio owner reserved the right to extract from the San Antonio concessions up to 50 tonnes per day of rock material; this right will terminate on the date of the exercise of the option. MRT and the San Antonio owner reserved a combined 2.5% NSR to be paid to them. MRT reserved no other rights on the San Antonio concessions.
Encino Gordo
On December 8, 2005, the Company and Sunburst de Mexico entered into a “New Agreement” with MRT to exercise their option under the sale and purchase of the mining concessions agreement, dated August 18, 2005, to obtain two mining concessions in the Encino Gordo region. The New Agreement also provided the Company the option to obtain three additional concessions in the Encino Gordo region.
The following are additional material terms of the New Agreement:
(a)
The share option agreement with MRT was cancelled;
(b)
The Company granted MRT the option to buy all of the outstanding shares of Sunburst de Mexico for $100 if the Company failed to transfer $1,500,000 to Sunburst de Mexico by April 30, 2006. On April 6, 2006, MRT agreed to waive its option to purchase the shares of Sunburst de Mexico and also waived the Company’s obligation to transfer $1,500,000 to Sunburst de Mexico. The property agreements were modified to change the NSR to a maximum of 2.5% for all properties covered by the agreements. The property agreements contained NSRs ranging from 0.5% to 7%;
12
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
6.
MINERAL PROPERTIES (CONTINUED)
(c)
The Company agreed to issue 2,000,000 shares of the Company’s common stock to MRT within four months of the date of the signing of the New Agreement. These shares were issued to MRT and its assignee at the market value of $1.05 per share on February 23, 2006, and $2,100,000 was charged to operations for the year ended February 28, 2006. This issuance fulfilled the Company’s payment obligations under the previous property agreements;
(d)
The Company agreed to issue 1,000,000 additional shares of the Company’s common stock to MRT if and when the Cieneguita Property is put into production and reaches 85% of production capacity over a 90-day period, as defined in the New Agreement; and
(e)
The operator’s agreement with MRT was cancelled.
Sunburst de Mexico purchased two of the Encino Gordo concessions from MRT for a price of 1,000 pesos (approximately US$100), and MRT assigned to Sunburst de Mexico a first right of refusal to acquire three additional Encino Gordo concessions. The total payments to acquire 100% of these three additional concessions are as follows: $10,000 on June 30, 2006 (paid); $25,000 on December 31, 2006 (paid), $50,000 on December 31, 2007 ($20,000 of this payment was made on January 3, 2008 and the balance was paid on February 29, 2008), $75,000 on December 31, 2008 (the Company is in default and renegotiating the terms), $125,000 on December 31, 2009 and $200,000 on December 31, 2010.
Sahuayacan
On June 21, 2006, Sunburst de Mexico entered into an exploration and sale option agreement of mining concessions with Minera Emilio, S.A. de C.V. (“Minera Emilio”) for mineral concessions of the Sahuayacan Property. Minera Emilio granted the Company the exclusive right to conduct exploration on the Sahuayacan Property and the Company must pay $282,000 in the following manner: $20,000 on date of signing agreement (paid); $10,000 due December 1, 2006 (paid); $2,500 per month effective from August 21, 2006 to July 21, 2007, for a total of $30,000 (paid); $3,500 per month effective from August 21, 2007 to July 21, 2008 for a total of $42,000 (paid); and $5,000 per month effective August 21, 2008 to July 21, 2011 (all payments except from March 2009 to May 2009 have been made) for a total of $180,000 until the balance of the total $282,000 is paid (36 months).
Segundo Santo Nino (Sahuayacan)
On May 15, 2006, Sunburst de Mexico entered into an exploration contract with Jose Maria Rascon and Sabino Amador Rascon Polanco and, on November 20, 2007, Sunburst de Mexico entered into an exploration contract with Rene Muro Lugo (all three representatives constitute the “Concessionaires”) for the Segundo Santo Nino concession on the Sahuayacan Property. Each concession representative owns 33.3% of the total Segundo Santo Nino title. The Company must pay the Concessionaires a total of $255,000 for this concession. As of May 31, 2009, we’ve paid $105,000 of the payments required till May 15, 2009 payment, November 15, 2009 - $30,000 and May 15, 2010 - $120,000.
La Maravilla (Sahuayacan)
On January 25, 2008, Sunburst de Mexico entered into an exploration and option agreement with Maria Luisa Wong Madrigal for mineral concessions under the “La Maravilla” project on the Sahuayacan Property. The Company must pay Maria Luisa Wong Madrigal $600,000 to acquire 100% of this concession as follows: $33,000 – January 25, 2008 (paid); $33,000 – July 25, 2008 (paid); $34,000 – January 25, 2009 (this payment is outstanding and the Company is renegotiating the payment terms); $500,000 – at the option to purchase the concession or 36 months – January 25, 2010.
13
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
7.
PROMISSORY NOTES
As at May 31, 2009, the Company had $1,013,551 (May 31, 2008 - $1,593,611) of promissory notes outstanding, comprising the following:
(a)
During the twelve months ended February 29, 2008, the Company converted accounts payable of $465,994 (Swiss Franc (“CHF”) 565,000) into promissory notes. The Company had an implied obligation to pay the accounts payable in Swiss Francs as the funds to pay the expense came from Swiss investors in CHF. Accordingly, the promissory notes were issued in CHF. The notes consist of one warrant for each CHF 5.00 of notes issued, exercisable at $1.00 each. The principal and interest on the notes became due and payable on April 30, 2008. The Company has not repaid the promissory notes as of May 31, 2009 and is in default. The principal and interest on the notes due and payable as of May 31, 2009 was $521,679. Interest rate payable during the default period is 12%.
(b)
$491,872 of promissory notes is due to related parties and close associates that bear no interest and have no terms of repayment (14).
8.
CONVERTIBLE DEBENTURES
On May 5, 2008, the Company signed a LOI to enter into a strategic alliance with Paramount Gold and Silver Corp. (“Paramount”). The agreement called for Paramount to invest a minimum of $4 million and maximum of $6 million into the Company, fixed at a price of $0.50 per unit by June 23, 2008. The investment timeline was extended until July 21, 2008, and then to August 5, 2008. On August 6, 2008 Mexoro terminated the LOI with Paramount as Paramount did not meet the terms of the agreement.
The Company issued secured convertible debentures to Paramount as follows:
On May 9, 2008, the Company issued $500,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.
On June 10, 2008, the Company issued $70,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.
On June 25, 2008, the Company issued $300,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.
On July 11, 2008, the Company issued $500,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.
Paramount had the option to convert all or a portion of the principal amount of the debenture into units consisting of one share of our common stock and half a warrant to purchase one share of our common stock. Subject to certain adjustments upon the occurrence of various capital reorganizations and other events, the units were convertible at $0.50 per unit for a total of up to 2,740,000 shares of common stock and up to 1,370,000 warrants at $0.75 to purchase shares of common stock (the “Warrants”). The Warrants would have had a term of four years if Paramount had converted the debenture or the portion of the debenture covering those warrants.
The value assigned to the beneficial conversion feature of the convertible debentures issued to Paramount was $416,200. The fair value of the Warrants attached to the convertible debentures as discussed above was estimated to be $423,000. The fair value of the Warrants was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
14
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
|
| 2008 |
Expected volatility |
| 71.48-110.72% |
Weighted-average volatility |
| 71.48-110.72% |
Expected dividend rate |
| - |
Expected life of warrants in years |
| 4 |
Risk-free rate |
| 2.30-3.41% |
The weighted average fair value of the warrants was $0.30 per warrant, while the weighted average stock price on the dates granted was $0.50. Stock-based compensation for these warrants of $423,000 was being amortized over the one year term of the convertible debentures starting on May 9, 2008.
On March 19, 2009, the Company entered into an agreement with Paramount restructuring its payment terms on the three outstanding secured convertible debentures held by Paramount. Under the terms of the agreement, the Company paid Paramount $1,000,000 to cancel two debentures held by them, one issued on May 9, 2008 for $500,000 and another issued on July 11, 2009 for $500,000.
The Company also amended a debenture issued to them on June 18, 2009 in the face amount of $370,000. The amount of that debenture was increased to $521,047, which, among other things, includes interest accrued on all three debentures to March 31, 2009. The Company was obligated to make a payment on March 31, 2009 on this debenture in the amount of $393,547 and the balance of $127,500 was to be re-paid on April 30, 2009. This remaining amount of $127,500 was interest free as long as the debenture remained in good standing. On March 31, 2009, the Company paid $300,000 of the debenture issued to them on June 18, 2009. As per the agreement, the remaining amount of $221,047 is accruing interest at 8% per year payable monthly, in arrears on the 10th day of each month. As of May 31, 2009 the Company has not paid the accrued interest and is in default.
As part of a restructuring fee, the Company issued to Paramount 150,000 shares of common stock. As part of the agreement, Paramount has released its security interest on the Company’s Cieneguita properties. The other security as described in the original security agreement issued with the original debentures remains in place until the amended debenture has been repaid in full.
The Company bought back the convertible debentures from Paramount by issuing $1,300,000 of convertible debentures to four investors. The total offering for these debentures was $1,500,000. During the quarter ended May 31, 2009, the Company also converted $100,000 of accounts payables into convertible debentures as part of the $1,500,000 offering. The debentures are due in 1 year and accrue interest at 15% paid quarterly in either cash or stock of the Company valued at 20% discount to the 20 day trading average on the day the payment is due. At the debenture holder’s option the debenture may be repaid with accrued interest and a 20% warrant coverage on the value of the debenture. The warrants would be exercisable for 3 years and have a strike price equal to a 20% discount to the 20 day trading average of the shares on the day of the payment. Alternatively the debenture holder can convert, at any time, their debentures into units. Each unit comprises 1 share and 1 warrant at $0.20 per unit. The warrants are exercisable at $0.30 for 3 years. The third option to the debenture holder is that they may convert their debentures, after one year, into a pro rata share of 10% of our Cieneguita project. The debenture holders are guaranteed a minimum 15% dividend for 3 years from mining operations on the property and are entitled to their pro rata share in net proceeds above the 15% dividend from the mining operation.
As consideration for the debentures, the Company granted a security interest in our Cieneguita properties to these debenture holders.
15
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
8.
CONVERTIBLE DEBENTURES (CONTINUED)
The value assigned to the beneficial conversion feature of the convertible debentures issued to Paramount ($221,047) and the four investors ($1,400,000) was $1,389,200. The fair value of the Warrants attached to the convertible debentures as discussed above was estimated to be $387,800. The fair value of the warrants was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
|
| 2009 |
Expected volatility |
| 110.36% |
Weighted-average volatility |
| 110.36% |
Expected dividend rate |
| - |
Expected life of warrants in years |
| 3-4 |
Risk-free rate |
| 1.21-1.45% |
The weighted average fair value of the warrants was $0.24 per warrant, while the weighted average stock price on the dates granted was $0.35. Stock-based compensation for these warrants of $387,800 is being amortized over the one year term of the convertible debentures starting on March 19, 2009.
During the quarter ended May 31, 2009, the Company issued 273,510 warrants to MRT under a convertible debenture agreement, where one warrant is issued for each $0.60 of convertible debentures issued (note 6). The warrants can be exercised at any time at a price of $0.50 for 3 years.
The value assigned to the beneficial conversion feature of the convertible debentures issued to MRT was $71,866. The fair value of the Warrants attached to the convertible debentures as discussed above was estimated to be $51,800. The fair value was estimated at the date of the grants using the Black-Scholes option pricing model with the following weighted average assumptions:
|
| 2009 |
Expected volatility |
| 108.54-110.36% |
Weighted-average volatility |
| 108.54-110.36% |
Expected dividend rate |
| - |
Weighted-average expected life of warrants in years |
| 3 |
Risk-free rate |
| 1.36-1.45% |
The weighted average fair value of the warrants was $0.19 per warrant, while the weighted average stock price on the dates granted was $0.32. Stock-based compensation for these warrants of $51,800 is being amortized till December 31, 2010.
9.
LOANS PAYABLE
As at May 31, 2009, there were loans payable in the amount of $65,136, of which $63,306 is current and $1,830 is long-term. The loans are repayable in monthly installments of $3,477, including interest ranging from 5.3% to 15.6% per annum, and are partially secured by specified automotive equipment.
10.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock. The Company’s board of directors is authorized to divide the preferred stock into series, and with respect to each series, to determine the preferences and rights and qualifications, limitations or restrictions thereof, including the dividend rights, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions, and the number of shares constituting the series and the designations of such series. The board of directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting rights of the holders of common stock, which issuance could have certain anti-takeover effects.
16
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
11.
COMMON STOCK
In March and April 2009, the Company issued 700,000 shares pursuant to amended convertible debenture agreement and financing arrangements.
In April 2009, the Company issued 2,250,000 shares under an escrow agreement as security against convertible debentures issued.
In May 2009, the Company converted $250,000 of debt into subscription proceeds and issued 833,334 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.60 of debt. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.50, which expires on December 31, 2010.
In May 2009, the Company issued 42,837 shares for $13,500 of investors’ relations services as per the agreement.
In February 2009, the Company issued 400,000 shares of common stock to an officer of the Company as bonus for the 500,000 ounce gold discovery.
In November 2008, the Company issued 50,000 shares of common stock to an officer of the Company as bonus for the 500,000 ounce gold discovery.
In November 2008, the Company issued 500,000 shares of common stock to the president of the Company as a signing bonus.
In October, 2008, the Company converted subscription proceeds of $4,943 into 9,886 shares of common stock. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of subscription proceeds. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
In October 2008, the Company issued 100,000 shares of common stock to an officer of the Company as bonus for the 500,000 ounce gold discovery.
In October 2008, the Company converted $151,866 of debt into 415,000 shares of common stock.
In September 2008, the Company converted $835,514 of debt into subscription proceeds and issued 1,671,028 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of debt. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
In September, 2008, the Company received subscription proceeds of $170,000 and issued 425,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of subscription proceeds. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
In September 2008, the Company converted $42,800 of debt into 107,000 shares of common.
In August 2008, the Company converted $142,508 (MXN 1,449,989) of promissory notes into subscription proceeds and issued 280,000 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of debt. Each unit consists of two shares of the Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
In July 2008, the Company converted $67,424 of debt into 150,000 shares of common.
In June 2008, the Company converted $60,000 of debt into subscription proceeds and issued 120,000 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of debt. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
In June, 2008, the Company issued 9,885 shares of common stock in a private placement.
17
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
11.
COMMON STOCK (CONTINUED)
In May 2008, the Company converted $535,500 of debt into subscription proceeds and issued 1,071,000 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $1.00 of debt.
On April 25, 2008, stock subscriptions of $330,000 were converted into 330,000 shares of common stock.
In the year ended February 29, 2008, the Company issued 1,174,000 shares of common stock on the exercise of 1,174,400 warrants where each warrant was exercisable into shares of common stock at the price of $1.00 per share. The warrants were to expire on April 30, 2008.
In the second and third quarters of the year ended February 29, 2008, the Company issued 1,000,000 shares of common stock on the exercise of 1,000,000 warrants where each warrant was exercisable into shares of common stock at the price of $0.75 per share. The warrants were to expire on December 31, 2007.
In the first two quarters of the year ended February 29, 2008, the Company issued 1,000,000 shares of common stock on the exercise of 1,000,000 warrants where each warrant was exercisable into shares of common stock at the price of $0.50 per share. The warrants were to expire on June 30, 2007.
Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.75, which expire in four years.
On April 25, 2008, stock subscriptions of $330,000 were converted into 330,000 shares of common stock.
In fiscal 2008, the Company issued 1,174,000 shares of common stock on the exercise of 1,174,400 warrants where each warrant was exercisable into shares of common stock at the price of $1.00 per share. The warrants were to expire on April 30, 2008.
In the second and third quarter of fiscal 2008, the Company issued 1,000,000 shares of common stock on the exercise of 1,000,000 warrants where each warrant was exercisable into shares of common stock at the price of $0.75 per share. The warrants were to expire on December 31, 2007.
In the first two quarters of fiscal 2008, the Company issued 1,000,000 shares of common stock on the exercise of 1,000,000 warrants where each warrant was exercisable into shares of common stock at the price of $0.50 per share. The warrants were to expire on June 30, 2007.
12.
STOCK COMPENSATION PROGRAM
On March 18, 2009, the board of directors approved the granting of stock options according to the 2008 Nonqualified Stock Option Plan (“2008 Option Plan”) whereby the board is authorized to grant to employees and other related persons stock options to purchase an aggregate of up to 6,000,000 shares of the Company's common stock. Subject to the adoption of the 2008 Option Plan, the options were granted and vest, pursuant to the terms of the 2008 Option Plan, in three equal installments, with the first installment vesting at the date of grant, the second installment vesting September 18, 2009 and the last installment vesting March 18, 2010.
In the three months ended May 31, 2009, the Company awarded 150,000 options to purchase common shares (2008 – 1,250,000) and recorded stock-based compensation expense of $156,138 (2008 - $176,510). The following weighted average assumptions were used for the Black-Scholes option-pricing model to value stock options granted in 2009 & 2009:
18
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
12.
STOCK COMPENSATION PROGRAM (CONTINUED)
| 2009 |
| 2008 |
Expected volatility | 110.36% |
| 72.15% |
Weighted-average volatility | 110.36% |
| 72.15% |
Expected dividend rate | - |
| - |
Expected life of options in years | 10 |
| 10 |
Risk-free rate | 2.95% |
| 3.86% |
There were no capitalized stock-based compensation costs at May 31, 2009 or May 31, 2008.
The summary of option activity under the 2008 Option Plan as of May 31, 2009, and changes during the period then ended, is presented below:
|
|
|
|
|
|
|
|
|
| Weighted |
| Number of |
| Weighted- | Aggregate |
|
| Average |
| Shares |
| Average | Intrinsic |
|
| Exercise |
|
|
| Remaining | Value |
|
| Price |
|
|
| Contractual |
|
Options |
|
|
|
|
| Term |
|
|
|
|
|
|
|
|
|
Balance at March 1, 2009 | $ | 0.56 |
| 4,835,000 |
|
|
|
Options granted |
| 0.16 |
| 150,000 |
|
|
|
Options exercised |
| - |
| - |
|
|
|
Options cancelled/forfeited | $ | 0.65 |
| (285,000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2009 | $ | 0.55 |
| 4,700,000 |
| 8.43 | $ 256,450 |
|
|
|
|
|
|
|
|
Exercisable at May 31, 2009 | $ | 0.76 |
| 2,318,334 |
| 7.57 | $ 3,750 |
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the three months ended May 31, 2009 and May 31, 2008 was $0.29 and $0.30, respectively.
A summary of the status of the Company’s nonvested options as of May 31, 2009, and changes during the three months ended May 31, 2009, is presented below:
|
|
|
| Weighted-average |
|
|
|
| Grant-Date |
Non-vested options |
| Shares |
| Fair Value |
|
|
|
|
|
Nonvested at February 28, 2009 |
| 2,502,499 |
| $ 0.28 |
Granted |
| 150,000 |
| 0.29 |
Vested |
| (450,000) |
| 0.55 |
Cancelled/forfeited |
| (105,000) |
| 0.40 |
|
|
|
|
|
Nonvested at May 31, 2009 |
| 2,097,499 |
| $ 0.28 |
As of May 31, 2009, there was an estimated $542,586 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2007 and 2008 nonqualified stock option plans. That cost is expected to be recognized over a weighted-average period of approximately 1.70 years.
19
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
13.
WARRANTS
As at May 31, 2009, the Company had a total of 5,789,733 (February 28, 2009 – 7,102,890) warrants outstanding to purchase common stock. Each warrant entitles the holder to purchase one share of the Company’s common stock. The Company has reserved 5,789,733 shares of common stock in the event that these warrants are exercised.
During the three months ended May 31, 2009, the Company received $nil from warrants exercised.
The outstanding warrants include 1,000,000 Series D Warrants exercisable at $1.25 per share and 1,000,000 Series E Warrants exercisable at $1.50 per share; of which all are exercisable at the option of the holder, have no redemption features, and are settled on a physical basis. All the warrants were fully vested upon issuance. The Series E Warrants will become exercisable only when the Series D Warrants have been fully exercised. Unless terminated earlier as a result of failure to vest, the Series D and Series E Warrants will each expire on December 31, 2009.
The Company had issued 2,917,500 warrants exercisable at $1.00 each pursuant to the issuance of convertible debentures. These warrants expired on April 30, 2008.
The Company had issued 375,000 warrants exercisable at $1.00 each pursuant to the issuance of a private placement unit offering. These warrants expired on April 30, 2008.
The following table summarizes the continuity of the Company’s share purchase warrants:
| Number of Warrants | Weighted Average Exercise Price | |
Balance, February 29, 2008 | 4,486,100 | $ | 1.17 |
|
|
|
|
Issued | 3,513,400 |
| 0.73 |
Cancelled | (2,043,100) |
| 1.00 |
Exercised | (330,000) |
| 1.00 |
|
|
|
|
Balance, February 28, 2009 | 7,102,890 | $ | 1.03 |
Issued | 783,333 |
| 0.43 |
Cancelled | (2,096,490) |
| 0.66 |
Exercised | - |
| - |
|
|
|
|
May 31, 2009 | 5,789,733 | $ | 1.08 |
|
|
|
|
As at May 31, 2009, the following share purchase warrants were outstanding:
Number of Warrants | Exercise Price |
| Expiry Date |
166,666 | $ 0.30 |
| May 8, 2012 |
200,000 | $ 0.40 |
| March 24, 2012 |
100,000 | $ 0.43 |
| September 8, 2010 |
416,667 | $ 0.50 |
| December 31, 2010 |
250,000 | $ 0.65 |
| June 30, 2012 |
1,793,400 | $ 0.75 |
| April 2012 to August, 2013 |
113,000 | $ 1.00 |
| January 31, 2010 |
1,000,000 | $ 1.25 |
| December 31, 2009 |
250,000 | $ 1.30 |
| June 30, 2012 |
1,000,000 | $ 1.50 |
| December 31, 2009 |
250,000 | $ 2.00 |
| June 30, 2012 |
250,000 | $ 2.75 |
| June 30, 2012 |
5,789,733 |
|
|
|
20
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
14.
RELATED PARTY TRANSACTIONS
For the three months ended May 31, 2009, the Company paid or accrued management fees of $37,834 (May 31, 2008 - $54,077) to certain officers and directors. The Company also paid or accrued $1,947 (May 31, 2008 - $6,157) to certain officers and directors for travel, office and other related expenses.
As at May 31, 2009, accounts payable of $13,000 (May 31, 2008 - $66,000) was owing to a director of the Company and $106,277 (May 31, 2008 - $nil) was owing to a company controlled by a director. In addition, promissory notes of $nil (May 31, 2008 - $640,500) were owed to companies controlled by directors (note 7).
All related party transactions are in the normal course of business at the exchange amount agreed to by each party.
15.
SUPPLEMENTAL CASH FLOW INFORMATION
| Quarter Ended May 31, 2009 |
| Quarter Ended May 31, 2008 |
| Period From Inception of Development Stage (March 1, 2004) to May 31, 2009 | |
Interest paid | $ | - | $ | 13,053 | $ | 280,053 |
Common stock issued on conversion of debt |
| 250,000 |
| 103,000 |
| 3,570,500 |
Common stock issued on settlement of notes payable |
| - |
| - |
| 1,883,322 |
Common stock issued for interest costs |
| 82,500 |
| - |
| 82,500 |
Common stock issued for financing costs |
| 145,000 |
| - |
| 145,000 |
Common stock issued for mineral property costs |
| - |
| - |
| 580,000 |
Common stock issued for bonuses costs |
| - |
| - |
| 232,750 |
Shares issued for services |
| 13,500 |
| - |
| 365,590 |
16.
COMMITMENTS
On July 1, 2008, the Company entered into an investor relations agreement with Vastani Company (“Vastani”), whereby Vastani will act as an investor relationship advisor to the Company. The Company has agreed to pay a monthly retainer of €20,000 and 1,000,000 warrants to purchase shares of the Company’s common stock. This includes 250,000 warrants at a price of $0.65 per share vesting on signing, 250,000 warrants at an execution price of $1.30 per share vesting after 90 days, 250,000 warrants at a price of $2.00 per share vesting after 120 days and 250,000 warrants at a price of $2.75 per share vesting after 180 days. The warrants expire on June 30, 2012.
On February 10, 2009, the Company entered into a consultancy agreement with Consulting for Strategic Growth 1, Ltd. for investor relation services. The Company will pay $3,000 per month in cash and $4,500 in shares of the Company’s common stock for the consultant’s services. The term of the agreement ends on August 10, 2009.
On March 3, 2009, the Company entered into a consulting agreement with Dusford Overseas Investments, Ltd., a British Virgin Islands company (“Dusford”). One of the Company’s non-executive directors, Steven Sanders, is a principal of Dusford. Under the agreement, Dusford will provide the Company with a variety of services including financial public relations, strategic planning, acquisition consulting and assistance in securing equity or debt financing. The agreement has an initial term of 12 months beginning on the effective date of March 3, 2009, but the Company has the right to terminate the Agreement early with 30 days’ notice.
21
MEXORO MINERALS LTD.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2009
(Unaudited) (Expressed in U.S. Dollars)
16.
COMMITMENTS (CONTINUED)
Under the terms of the Agreement, the Company paid Dusford a signing fee of 200,000 restricted shares and is paying a monthly fee of $10,000 (payable in shares or cash). The Company will issue Dusford a warrant which entitles Dusford to purchase one million shares of the Company’s common stock at $0.40 per share for three years. The warrant vests and becomes issuable at the close of any financings introduced by Dusford in increments of 100,000 shares for every $100,000 raised.
17.
SUBSEQUENT EVENTS
(a)
In June 2009, the Company signed a definitive agreement to sell its Guazapares project located in South western Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount for a total consideration of up to $5.3 million. The sale is subject to satisfaction of various conditions precedent prior to closing. Payment for the properties is expected once the title of the claims has been re-registered in Paramount’s name with the Mining Bureau in Mexico. A 5.7% commission is payable on the closing of the sale.
(b)
In June 2009, the Company cancelled its consulting agreements with Vastani Company, Consulting for Strategic Growth 1, Ltd. and Dusford Overseas Investments, Ltd.
22
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q constitute "forward-looking statements". These statements, identified by words such as “plan”, "anticipate", "believe", "estimate", "should", "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q. We do not intend to update the forward - -looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”), particularly our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K.
Overview
Mexoro Minerals Ltd. (“Mexoro” or the “Company”) is a start-up development stage company and has not yet generated or realized any significant revenues from exploration projects, which commenced on May 1, 2004. As of May 31, 2009, we had $6,884 in our bank account.
On May 17, 2009 we entered into a letter of agreement and on June 29, 2009 we signed the definitive agreement to sell our Guazapares project located in Southwestern Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount Gold and Silver Corp. (“Paramount”) for a total consideration of up to $5.3 million USD. The sale is subject to satisfaction of various conditions precedent prior to closing and payment for the sale of the properties is expected once the concessions have been re-registered in the name of Paramount Gold de Mexico, SA de C.V. A 5.7% commission is payable on the closing of the sale. Mexoro’s Guazapares project comprises 12 claims close to Paramount’s San Miguel discovery. The purchase price is to be paid in two stages. The first payment of $3.7 million will be deposited into escrow at closing, and will be released from escrow to Mexoro when the transfer of th e 12 claims to Paramount is finalized. An additional payment of $1.6 million is due to Mexoro if, within 36 months following execution of the letter of agreement, either (i) Paramount Gold de Mexico SA de C.V. is sold by Paramount, either through a stock sale or a sale of substantially all of its assets, or (ii) Paramount’s San Miguel project is put into commercial production. As such, the final repayment of the outstanding debenture with Paramount has been deferred until the closing of the sale of the Guazapares properties. Interest will accrue on the outstanding amount at 8% per annum and the final payment will be deducted from the first $3.7 million purchase price payable to us.
On November 23, 2008, we signed a letter of intent (“LOI”) and on February 12, 2009 we signed a definitive agreement with Minera Rio Tinto (“MRT”), a related party, to provide us with immediate funding to initiate production at our Cieneguita property, to complete a feasibility study and to continue the exploration of our properties. The definitive agreement covers project financing of up to USD $9,000,000. The major points of the agreement are as follows:
1.
Minera Rio Tinto (“MRT”) and/or its investors will subscribe for up to USD$1 million of a secured convertible debenture at 8% interest (payable in stock or cash). The debenture is convertible into units at $0.60 per unit. Each unit comprises 2 common shares and 1 warrant. Each warrant is exercisable at $0.50 per share for a period of 3 years. The placement will be used for continued exploration of our properties and general working capital. As of May 30, 2009 MRT had contributed the $1 million.
2.
MRT is to provide the necessary working capital to a Mexican joint venture company owned 75% by MRT and 25% by us. The purpose of the joint venture company is to begin and maintain mining operations estimated to be $3,000,000 used for the purpose of putting the Cieneguita property into production. MRT will spend 100% of the money to earn 75% of the net cash flow from production in the joint venture company. Mexoro will contribute its mining equipment located at Cieneguita to the joint venture company. If, at any time, the joint venture company is dissolved Mexoro’s mining equipment will be returned to Mexoro. The agreement will limit the extraction of the mineralized material that is available from surface to a depth of 15 meters or approximately 10% of the mineralized material found to date. It is anticipated that production at the rate of 750 tonnes per day will commence by July 2009 though no assurance may be given that production will ever start on the property. The joint venture company is in the process of being registered in Mexico
3.
MRT will spend up to USD $5 million to take the Cieneguita property through the feasibility stage. In doing so, MRT will earn a 60% interest in Mexoro’s rights to the property. After the expenditure of the $5 million all costs will be
23
shared on a ratio of 60% to MRT and 40% to Mexoro Minerals. If we elect not to pay our portion of costs after the $5 million has been spent, our position shall revert to a 25% carried interest on the property.
4.
Initially, portions of the joint venture agreement required for us to obtain consent from Paramount Gold and Silver Corporation, our secured convertible debenture holder or for us to repay the debenture held by Paramount Gold and Silver Corporation. Subsequently, we repaid approximately $1,300,000 of the debenture owed to Paramount Gold and Silver Corp and in doing so, Paramount agreed to release the Cieneguita property as part of its security under the debenture. Therefore, we no longer need the consent of Paramount to begin extraction of mineralized material at Cieneguita.
5.
The Spanish version of this agreement is the governing agreement in case of dispute between the English version and the Spanish versions.
As of May 31, 2009, MRT had contributed its $1 million commitment. It has also initiated steps to take the Cieneguita project to production with commencement of drilling, sampling and metallurgical testing. MRT also sent 4,203 tons of material to MRT’s milling facility located in Sinaloa, Mexico to determine grade recovery and best milling practise to process the mineralized material. Initial results from the commercial pilot test have been positive.
On May 5, 2008, we signed a letter of intent (Paramount “LOI”) to enter into a strategic alliance with Paramount Gold and Silver Corp. (“Paramount”) to combine mining and exploration expertise, along with efficient use of personnel, drill rigs and current mining concessions to improve efficiencies and potentially reduce costs for both companies. We believed that the alignment of interest between the two companies created synergy, especially as the two companies’ Guazapares projects are contiguous and create a large land position located in the state of Chihuahua, Mexico.
The Paramount LOI called for Paramount to invest a minimum of $4 million and maximum of $6 million into the Company, at a fixed price of $0.50 per unit by June 23, 2008. This date was extended until July 21, 2008 and then to August 5, 2008. Paramount was unable to complete the minimum investment on August 5, 2008 and as such the strategic alliance with Paramount was terminated on August 6, 2008. Prior to the termination, we issued three debentures to Paramount in the amount of $1,370,000. The proceeds from these placements were primarily used to continue the drilling programs on our Cieneguita and Guazapares properties
On August 6, 2008, the strategic alliance between Mexoro and Paramount was terminated, including Paramount’s right of first refusal on financings. As a result of Paramount holding convertible debentures in the amount of $1,370,000 resulting from advances made to Mexoro Minerals to fund exploration, they agreed to defer interest payments on the advances until September 10, 2008. The September 10, 2008 interest payment date was subsequently extended again to November 10, 2008. All interest payments were brought up to date by December 30, 2008 and we are now current with all of our interest payments to Paramount Gold and Silver Corp as the final payments will be deducted from the proceeds of the sale of the Guazapares project.
In March, 2009 we entered into an agreement with Paramount Gold and Silver Corp. (“Paramount”) restructuring our payment terms on the three outstanding secured convertible debentures held by Paramount. Under the terms of the agreement we paid Paramount $1,000,000 to cancel two debentures held by them, the first debenture issued May 9, 2008 for $500,000 and the third debenture issued to them July 11, 2009 for $500,000. We also amended the second debenture that we issued to them in June 18, 2009 in the face amount of $370,000. The amount of that debenture was increased to $521,047.37 which, among other things, includes interest accrued to March 31, 2009. We were obligated to make a payment on March 31, 2009 on this debenture in the amount of $393,547.37 (of which $300,000 was paid on March 31, 2009) and the balance of $127,500 was to be re-paid on April 30, 2009. This remaining amount of $127,500 is interest free as long as the debenture remains in good standing. As part of a restructuring fee, we issued to Paramount 150,000 shares of our common stock. As we were granted an extension for the balance of the March 31, 2009 payment, we have issued an additional 100,000 shares to Paramount as an extension fee. As part of the agreement, Paramount has released its security interest on our Cieneguita properties. The other security as described in the original security agreement issued with the original debentures remains in place until the amended debenture has been repaid in full.
On May 17, 2009, when we entered into the letter of Agreement with Paramount to sell our Guazapares properties, Paramount agreed to defer all of the outstanding payments plus accrued interest until the closing of the sale of the properties and the final payment will be taken from the funds in escrow, held for the sale of the Guazapares project to Paramount.
Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity. While we believe that we have raised sufficient funds in our recent offerings to allow us to continue in business until August 31, 2009, we may not be able to continue in business beyond that date unless we obtain additional capital. As of May 30, 2009, the joint venture with MRT had generated approximately gross revenue of $595,800 of which $148,950 is attributable to us under the joint venture agreement. We are
24
expecting additional revenue subsequent to May 30, 2009 from an additional bulk sample that is being processed at MRT’s facilities. The amount of revenue to be received from the test cannot be determined at this time. In fact, no assurance may be given that any revenue will be realized from the second bulk sample test. Once MRT puts the Cieneguita property into production, anticipated to be in August 2009, we anticipate the 25% interest to generate ongoing revenue for us. The timing and amount of revenue, at this time, cannot be determined and no assurance may be given that any revenue will be generated from the operations at Cieneguita.
For the 12-month period from June 2009 through May 2010, we need to raise additional capital to maintain operations. We will need a minimum of $2,579,000 for property payments, $221,047 to repay the convertible debenture to Paramount Gold and Silver Corp if our sale of the Guazapares properties to Paramount does not close, and an additional $840,000 for general and administrative costs. This does not include any capital needed to pay our accounts payables and to execute our exploration programs as detailed below. The following table shows our contractual property payments that are due until May 2010:
Name | Date | Payment Type | USD |
|
|
|
|
Guazapares Property1 | August 2008 | Property payment | $110,000 |
|
|
|
|
Sahuayacan Property2 | March 2009 to April 2010 | Property payments | $75,000 |
|
|
|
|
Encino Gordo Property3 | December 2008 and December 2009 | Property payments | $200,000 |
|
|
|
|
San Antonio (Guazapares) | January 2009 & January 2010 | Property payments | $550,000 |
|
|
|
|
Sahuayacan Property ( La Estrella y la Sultana Menor )4 | January 2009 & January 2010 | Property payments | $534,000 |
|
|
|
|
Segundo Santo Nino (Sahuayacan) | November 2009 & May 2010 | Property payments | $150,000 |
|
|
|
|
Cieneguita Property | May 2009 & May 2010 | Property payment | $210,000 |
|
|
|
|
San Francisco (Guazapares) | June 2009 | Property payment | $250,000 |
|
|
|
|
Guazapares Property | August 2009 | Property payment | $500,000 |
|
|
|
|
1All Guazapares payments due by December 31, 2007 have been deferred, until in the opinion of the directors of Mexoro, Sunburst de Mexico and Mexoro have sufficient funds to make the payments. This includes deferred payments of $100,000 due in November 2005, $60,000 due in August 2006 and $140,000 due in August 2007. Mexoro has not made the payment of $110,000 that was due in August 2008. Based on the signing of the definitive agreement to sell the Guazapares properties to Paramount, we are renegotiating the terms of payment.
2All Sahuayacan payments due by February 28, 2009 have been made. The Company has not made the payments due for March 2009, April 2009 and May2009. The Company is in default and is negotiating the terms of payment with Minera Emilio, SA de CV.
3The Encino Gordo property payment of $75,000 was due in December 2008. Mexoro is in default of this payment and is renegotiating the terms of payment.
4The Sahuayacan property payment of $34,000 was due in January 2009. Mexoro is in default of this payment and is renegotiating the terms of payment.
Additionally, if our exploration during that time period is successful, we may need to raise additional capital to fund those exploration programs. At this time, we cannot assess with any accuracy our total capital needs to fund an expanded exploration program beyond our basic program. We do not have any additional sources of additional capital to fund our operations beyond August 31, 2009. We also believe that, other than the initial bulk sample test done by MRT, we cannot determine if the joint venture with MRT will generate any revenues that would allow us to continue operations. If we are unable to raise additional capital through debt or equity beyond August 31, 2009, it is most likely that we would need to cease operations and forfeit our properties as we would be unable to make the necessary property payments.
Plan of Operation
Summary
25
Our business plan is to proceed with the exploration of our Mexican mineral properties to determine whether they contain commercially exploitable reserves of gold, silver or other metals. On May 17, 2009 we entered into a letter of agreement and on June 29, 2009 we signed the definitive agreement to sell our Guazapares project located in Southwestern Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount Gold and Silver Corp. (“Paramount”) for a total consideration of up to $5.3 million USD. The sale is subject to satisfaction of various conditions precedent prior to closing and payment for the sale of the properties is expected once the concessions have been re-registered in the name of Paramount Gold de Mexico, SA de C.V. A 5.7% commission is payable on the closing of the sale. Mexoro’s Guazapares project comprises 12 claims close to Paramount’s San Miguel discovery. The purchase price is to b e paid in two stages. The first payment of $3.7 million will be deposited into escrow at closing, and will be released from escrow to Mexoro when the transfer of the 12 claims to Paramount is finalized. An additional payment of $1.6 million is due to Mexoro if, within 36 months following execution of the letter of agreement, either (i) Paramount Gold de Mexico SA de C.V. is sold by Paramount, either through a stock sale or a sale of substantially all of its assets, or (ii) Paramount’s San Miguel project is put into commercial production. As such, the final repayment of the outstanding debenture with Paramount has been deferred until the closing of the sale of the Guazapares properties. Interest will accrue on the outstanding amount at 8% per annum and the final payment will be deducted from the first $3.7 million purchase price payable to us.
On November 23, 2008 we signed a letter of intent (“LOI”) and on February 12, 2009 we signed a definitive agreement with Minera Rio Tinto (“MRT”) to provide us with immediate funding to initiate production at our Cieneguita property, to complete a feasibility study and to continue the exploration of its properties. The Definitive Agreement calls for project funding of up to USD$9,000,000 to be spent over the next twenty-four month period. To date MRT has contributed $1,000,000 in working capital and has initiated production plans for the Cieneguita project. MRT has shipped a 4,203 tonne bulk sample to its mill in Sinaloa Mexico for processing to verify the metallurgical process need to process the mineralized material from the Cieneguita property.
In the event that our exploration program finds exploration targets that warrant additional exploration work, including exploration by drilling, we will not have enough cash available to fund an expanded exploration program. If we decide to expand our exploration program, we would need to raise additional capital to meet these needs. We currently do not have any sources of additional capital available to us and we may not have any in the future. The failure to raise additional capital would severely curtail our ability to conduct any additional exploration work that might be warranted because of the results of our current exploration program.
We are not involved in any research and development on our exploration properties. We have no known reserves on the Cieneguita property. Our original strategy was to put the Cieneguita property into production, and as such we purchased approximately $250,000 worth of new and used mining equipment to be used for heap leach production. We contemplated putting the Cieneguita property into production during 2008 but the positive exploration results from our drilling programs changed those plans. The mineralized material that has been defined by the extensive drilling appears to suggest that the mineralized material is far larger than originally contemplated and of a different material that is not suitable for heap leaching. As such, we entered into the joint venture agreement with Minera Rio Tinto to put the Cieneguita into production using a simple crushing and floatation circuit process and not a heap leach operation as originally planned.
With the joint venture with MRT, we do plan to put the Cieneguita project into production in August 2009 but we will not be using the heap leach process as originally contemplated. We still plan to use the equipment as part of the new mining process designed in the joint venture agreement. Though the mining equipment will be contributed to the joint venture company to be used in the mining process, at the end of the joint venture the mining equipment will revert back to us. Then it is managements’ plan to try and sell the equipment that we have purchased. At this time, we have no estimates on what the equipment will be worth in the secondary market. If we are unable to sell it, we may lose all of our capital investment. No assurances can be given that we will be able to sell the equipment at a price to recover our original investment, or at all.
In the event that we do discover a mineral deposit on one of our properties, of which there is no guarantee, we would need to expend substantial amounts of capital to put any of our properties into production, if so warranted. The amount of such expenditures is indeterminable at this time as our exploration program has not advanced far enough to provide us with results to determine this information.
Such expenditures depend upon the size of the mineralized body, the grade of the mineralized and the type of mining that is required to extract any minerals that may be found. Regardless, we do not have enough capital available to us to make any such expenditure that would be required to put any mineral property into production, and we therefore would have to raise the additional capital or, if possible, enter into a joint venture for the production phase. If we were to form a joint venture, we cannot assess what our final position in the project would be. We do not have any sources of capital available to us at this time to fund such a project if one should be discovered.
We hired Francesco Quiroz as our VP of Exploration on March 1, 2007. On November 15, 2008 we appointed Mr. Quiroz to the position of president to replace Mario Ayub, who resigned. We also hired an office administrator for our office in Chihuahua.
26
We do not expect any significant change in additional contractors to conduct exploration over the next 12 months. Other than the president and our geologists, all of the employees we hire are contracted from third parties specializing in providing employees for Mexican companies. In using third party contractors, we minimize our exposure to Mexican employment law, and all liabilities are undertaken by the third party contractors providing the services. We pay a flat rate to the third parties for their services.
In the event that we should find a mineable reserve, it is management’s intention to contract the mining and milling of any mineralized reserves out to third parties. We do not have any known reserves at this time.
Exploration Projects – Current Status
To date the Sierra Madre gold exploration program has been focused on advancing current exploration projects to the next exploration stage. During most of 2008, exploration activities were concentrated in four projects: Sahuayacan, Guazapares, Encino Gordo and Cieneguita. However, exploration activities during the quarter ended May 31, 2009 were focused exclusively on the Cieneguita project. The figure below shows the location of the different projects.
![[mexoro_10qa52009finalredl001.jpg]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl001.jpg)
This figure is illustrating the location of the Mexoro’s project and the major Au-Ag deposits within the Sierra Madre Gold-Silver Belt
To date most of the data gathered during our field campaigns and drilling programs is completely compiled and is being evaluated. The next exploration stages for all three projects have been already planned.
Cieneguita
During the quarter ended May 31, 2009, Mexoro Minerals concentrated its exploration activities only in the Cieneguita project, where a drilling program has been completed.
The main activities in the Cieneguita project are set forth below:
·
100 diamond drillholes completed for a total of 20,215 meters of drilling
·
Broad mineralized intercepts including 111.5 meters with 1.24 g/t Au, 99.6 g/t Ag, 0.45% Pb and 0.73% Zn (C-21) and 94 meters with 1.21 g/t Au, 79.8 g/t Ag, 0.78% Pb and 1.2% Zn (CI-30)
27
·
Mineralization at Cieneguita has been traced over 900 meters along strike and still remains open to the southwest and to depth
·
Exploration ongoing; infill drilling program has been designed to expand the size of the mineralized material
Cieneguita is a new gold‐silver and polymetallic discovery made in 2008 by our exploration team. The project consisting of three concessions totaling 822 hectares is located in Chihuahua State, Mexico. The area has well developed infrastructure being located 20 km to the north of Gold Corp’s El Sauzal mine. Mexoro holds a 100% interest subject to a sliding scale royalty starting at USD$20 per ounce of gold sold from the property up to a maximum payment of USD$2 million.
We have conducted a series of exploration programs at Cieneguita since March 2007. Our exploration work to date includes 100 diamond core drillholes totaling 20,215 meters of drilling. The Drilling exploration program commenced in December 2007 with one drill rig and a second rig was added in July 2008. Due to our financial constraints, one of the drill rigs was taken away in October 2008 and drilling continued with one rig until December 19, 2008.
Mexoro has received analysis results for only 58 holes (CI-01 to CI-54, CI-67, CI-69, CI-71 and CI-74). A complete listing of the drill logs is published at our website, www.mexoro.com. The assay results from the remaining 42 holes are still pending. No assurance may be given, though, that these new holes will have the same values as previously analyzed holes. Two different styles of mineralization have been identified: precious (gold‐silver) and base (lead‐zinc-silver) metal mineralization, with higher gold‐silver grades starting on surface and lead‐zinc-silver mineralization intercepted at depth and to the west of the Cieneguita deposit. We interpret the Cieneguita deposit as a diatreme breccia body where disseminated oxide and sulphide mineralization is mainly hosted by quartz‐sericite altered diatreme breccias and lapilli tuffs.
The mineralized body is shaped like a funnel which has been flattened laterally, measuring over 900 meters by 300 meters as defined by the drill results. Mexoro has completed a cross section‐based geological model and has calculated inferred mineralized material of 15.249 million tons with 2.62 g/t Au equivalent based on assays that were composited using the sum of the dollar values for Au, Ag, Pb and Zn in each drill interval. Three-year trailing average prices used were: gold = $727.22 per ounce, silver = $13.66 per ounce, lead = $1.00 per pound, zinc = $1.36 per pound. A cutoff of $30 was applied and weighted averages calculated for each above-cutoff interval. These intervals were projected between drill holes and between sections to produce resource blocks, which were then compiled using weighted averages to produce a total tonnage and grade with a dollar value per ton.
Mineralization intersected in CI‐34 (46 meters with 4.68 grams per ton gold, 87.67 grams per ton silver, 0.24% lead and 0.22% zinc) and CI‐29 (51 meters with 0.5 grams per ton gold, 55.03 grams per ton silver, 0.34% lead and 0.46% zinc), both collared in the western portion of Cieneguita suggests that mineralization still remains open to west, southwest and to depth in the western part of the Cieneguita deposit. No assurance may be given, though, that additional mineralized material will be found in these areas.
28
![[mexoro_10qa52009finalredl003.gif]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl003.gif)
This figure is showing the geological units and distribution of the 100 drillholes.
Because of the favorable mapping, sampling and drilling results in Cieneguita, we initiated a brownfield exploration program aimed at locating additional mineralization within our properties. The exploration process around the main mineralization zone at Cieneguita has identified two new areas of mineralization 500 meters to south of the current known mineralization. These two areas known as Piedras Blancas and Piedra Amarilla are exhibiting the same size, characteristics, and intensity of alteration-mineralization on surface as encountered at Cieneguita. No assurance, though, may be given that any positive exploration results will come from these similarities.
This brownfield exploration program for the Piedras Blancas area has now been completed. As a result of this mapping and sampling program, we have designed a drilling exploration program consisting initially of 3,000 meters of drilling to test three different targets. As we do not have available capital at this, no assurance may be given that we will initiate this drilling program.
A figure exhibiting main geological and mineralization features on the Piedras Blancas and Piedra Amarilla areas is shown below.
29
![[mexoro_10qa52009finalredl005.gif]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl005.gif)
There are no known reserves on the Cieneguita property.
Guazapares
On May 17, 2009 we entered into a letter of agreement and on June 29, 2009 we signed the definitive agreement to sell our Guazapares project located in South western Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount Gold and Silver Corp. (“Paramount”) for a total consideration of up to $5.3 million USD. The sale is subject to satisfaction of various conditions precedent prior to closing and payment for the sale of the properties is expected once the claims have been re-registered in the name of Paramount Gold de Mexico, SA de C.V. A 5.7% commission is payable to non-affiliates on the closing of the sale. Mexoro’s Guazapares project comprises 12 claims close to Paramount’s San Miguel discovery. The purchase price is to be paid in two stages. The first payment of $3.7 million will be deposited into escrow at closing, and will be released from escrow to Mexoro when the transfer of the 12 claim s to Paramount is finalized. An additional payment of $1.6 million is due to Mexoro if, within 36 months following execution of the letter of agreement, either (i) Paramount Gold de Mexico SA de C.V. is sold by Paramount, either through a stock sale or a sale of substantially all of its assets, or (ii) Paramount’s San Miguel project is put into commercial production. As such, the final repayment of the outstanding debenture with Paramount has been deferred until the closing of the sale of the Guazapares properties. Interest will accrue on the outstanding amount at 8% per annum and the final payment will be deducted from the first $3.7 million purchase price payable to us.
30
Encino Gordo
During fiscal 2007, the Company carried out a detailed and property scale mapping and sampling program outlining numerous gold, silver and gold-copper coincident geochemical anomalies. Phase 1 of the exploration program was undertaken in an effort to define the style and characteristics of the mineralization areas indicated by the geochemical anomalies. Within this stage several gold and sulphide mineralization areas including pyrite and chalcopyrite have been identified within an over 500 meters stockwork area and fault-veins structure.
All information and field evidence gathered during the mapping and sampling process suggest the presence of “porphyry” style alteration and mineralization characterized by the presence of concentric alteration patterns (potassic alteration grading outward to quartz-sericite and propylitic alteration), coincident Cu, Au and Mo geochemical anomalies and a multiple-event of veining. No assurance can be given, though, that we will find such a deposit, if at all.
Phase II of the exploration program aimed to detail and characterize all identified alteration and mineralization areas and define and prioritize drilling sites is underway and is expected to be completed by the second quarter of 2009. In addition, a stream sediment sampling program is being undertaken to fully evaluate all the concessions.
There are no known reserves on the Encino Gordo property.
Sahuayacan
Mexoro has completed a diamond drilling program of 13 holes comprising 2,027 meters. Three of the 13 holes were directed to test the Santo Niño vein, two drillholes were collared on the La Cumbre target and two more were drilled on the south of the property to test the Santa Teresa target. Of the 13 drillholes, only three have intersected economically attractive mineralization. The mineralized intercepts are as follows:
Drill Hole Number | Depth in Meters | Width of Intersection in Meters | Grade |
Drillhole SDH-01collared on the Santo Niño vein | from 65.00 to 72.50 meters from 96.50 to 104.5 meters | 7.50 meters 8.0 meters | 2.56 g/t Au 2.98 g/t Au |
Drillhole SDH-05collared on La Cumbre target | from 0 to 4.5 meters | 4.5 meters | 1.77 g/t Au |
Drillhole SDH-12drilled to test the Santa Teresa vein | from 74.50 to 82.00 | 7.5 meters | 56.01 g/t Au and 283.22 g/t Ag |
A second phase drilling program is anticipated to be aimed to define the potential volume and grade of the mineralized system at Sahuayacan, primarily focusing on the Santa Teresa and La Cumbre targets which may represent a mineralization system developed along a caldera margin. Additional targets have been identified along the circular feature that seems to control the emplacement of alteration and mineralization zones on the Sahuayacan project.
There are no known reserves on the Sahuayacan property.
Proposed 2009 Program: Exploration Projects – Potential and Next Exploration Stage
Over the next twelve month, we intend to explore our three projects (Cieneguita, Sahuayacan and Encino Gordo) to determine whether there are economically attractive concentrations of gold and gold-silver mineralization. We do not intend to hire any additional employees or to make any purchase of equipment over the next twelve months, as we intend to rely upon current personnel for the exploration work being conducted. At this time, though, the exploration program is only planned for the next 12 months, which we will undertake when the necessary capital has been raised to complete these programs. We do not have any sources of capital indentified at this time and no assurance can be given that we will be able to complete the proposed exploration program.
31
The following exploration program, assuming the necessary capital is available, has been planned for each of the projects:
Cieneguita
The recent exploration activities in Cieneguita have shown that additional exploration is warranted. Our president has made the following determinations to date:
·
Infill drilling displays continuity of mineralization and overall grades.
·
Mineralization extends 900 meters along strike, is up to 300 meters wide and is open to the Southwest and open to depth.
![[mexoro_10qa52009finalredl007.gif]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl007.gif)
Figure is showing main mineralization zones on the Cieneguita project. Areas in red are exhibiting mineralization areas where grades is >1.5 g/t Au
The known mineralized material on the Cieneguita property combined with the assay results from drilling and the new areas found 500 meters away from Cieneguita are providing the possibility to increase the size of the mineralized material. Considering the latest results and findings the proposed work program for Cieneguita will include:
·
Completing the infill drilling program by doing an additional 10,000 meters of drilling to expand inferred resources;
·
Conducting metallurgical tests;
·
Initiating a pre-feasibility study and;
·
Commencing exploration drilling program at the Piedras Blancas project.
The proposed exploration budget for the Cieneguita project for 2009 is $1,128,047. This budget does not include any money to be spent by MRT in our joint venture program with them. The break down of the expenditures is as follows:
Geochemistry | $130,050 |
Geophysics | $0 |
Safety | $3,000 |
Land Costs | $0 |
Contractors | $894,760 |
Travel and Vehicles | $37,820 |
Field Support | $4,500 |
Communications | $4,200 |
Subtotal | $1,074,330 |
Contingency (5%) | $53,717 |
Total | $1,128,047 |
We do not have the necessary working capital at this time to implement this exploration program. There are no known
32
reserves on the Cieneguita property.
Sahuayacan
Surface mapping and drilling results are suggesting that the high gold values tend to cluster at certain areas along the Santo Niño and the Santa Teresa vein structures with intervening areas of low gold grades. A more disseminated structure seems to be present at the La Cumbre area. We believe that the cluster of high gold values indicate the development of mineralized shoots within the extensive Sahuayacan system as evidenced by the intercepts from the SDH-1 in the Santo Niño vein and the SDH-12 along the Santa Teresa vein.
We believe that all evidence suggests that the mineralization is controlled by a circular feature that may represent a caldera margin running from the Santa Teresa target up to north to the La Cumbre target. This evidence opens up the potential to further extend the mineralization found at Santa Teresa and La Cumbre targets further north though no assurance may given that any mineralization will be found.
The figure below shows the different geological elements encountered in the Sahuayacan system and also exhibits the relationship between the Santo Niño, La Cumbre and Santa Teresa target areas.
![[mexoro_10qa52009finalredl009.gif]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl009.gif)
The next exploration stage will include mapping and sampling along the circular feature trying to define additional mineralization areas and drilling targets. The proposed exploration program will include:
·
Mapping and sampling at 1:1,000 scale along the La Cumbre-Santa Teresa trend;
·
Obtaining ASTER image analysis to identify additional alteration-mineralization areas along the semi-circular feature within the entire concession;
·
Identifying drilling targets on the La Cumbre and Santa Teresa areas; and
·
Commencing a 4,000 to 6,000 meters exploration drilling program aimed to define the potential of the project.
The total exploration budget for Sahuayacan for 2009 is $849,686. The breakdown of the budget is as follows:
Geochemistry | $165,000 |
Geophysics | $0 |
Safety | $2,000 |
Land Costs | $0 |
Contractors | $599,450 |
Travel and Vehicles | $34,725 |
Field Support | $3,850 |
Communications | $4,200 |
Subtotal | $809,225 |
Contingency(5%) | $40,461 |
Total | $849,686 |
33
We do not have the necessary working capital at this time to implement this exploration program. There are no known reserves on the Sahuayacan properties.
Encino Gordo
The geology at Encino Gordo project area is dominated by flows and tuff of andesitic to dacitic composition intruded by small plugs of porphyritic intrusions varying in composition from diorite to quartz-diorite. Small and localized areas exhibiting dacite porphyries are also common. The volcanic sequence which may be part of the Lower Volcanic Series (LVS) of the Sierra Madre Occidental Volcanic Complex (SMOVC) host most of the mineralization in the Encino Gordo area and in the whole Moris district host to Palmarejo deposit and the Guazapares gold hydrothermal system. The alteration and mineralization at the Encino Gordo project is mainly characterized by two different styles:
La Junta area. Most of the alteration and mineralization in this area is associated with andesitic rocks intruded by composite stock (diorite and quartz-diorite) and dacite porphyries. The alteration at La Junta is characterized by propylitic alteration (chlorite-calcite-pyrite) exhibiting small and localized areas with incipient K-silicate alteration, where K-feldspar is mainly replacing groundmass in the intrusion phases.
Mineralization is occurring at La Junta in different styles, including: stockwork, fault-veins, sheeted veins, dissemination and breccias. However, main mineralization consists of an approximately 500 meter wide stockwork fault-vein zone developed in a dilatant jog “flower structure”. In this mineralized area, multiple cross-cutting vein types are present including:
·
Pyrite-only veins
·
Quartz-only veins
·
Quartz + pyrite veins
·
Quartz + chalcopyrite veins
·
Quartz + pyrite + chalcopyrite veins
·
Calcite veins
·
Quartz + galena veins
·
Chlorite + calcite veins
![[mexoro_10qa52009finalredl010.jpg]](https://capedge.com/proxy/10-QA/0001137050-09-000208/mexoro_10qa52009finalredl010.jpg)
Figure is illustrating coincident Cu and Au geochemical anomalies in La Junta area which are spatially associated to a potassic alteration core resembling the classical geochemical-alteration signature of the porphyry systems.
34
Supergene alteration is represented by an argillic alteration pervasive event developed by the oxidation and alteration of the primary sulfide zone observed at La Junta area. Limonites developed within this supergene event are dominated by goethite (± hematite – jarosite).
The alteration assemblages, the style of mineralization, the content and type of sulfide mineralization suggest that La Junta area might be a mesothermal to near-mesothermal system, resembling a “porphyry-style” alteration-mineralization.
Potential exists in this area to find a porphyry-style system and a similar gold mineralization, though, no assurance may be given that any mineralization whatsoever will be found. The proposed exploration program for the upcoming year will be focused on trying to asses the potential of the identified targets, including:
·
The porphyry-style mineralization in La Junta area
·
Anomaly N and La Elyka areas
The total 2009 exploration budget for Encino Gordo is $739,232. The exploration expenditures are as follows:
Geochemistry | $84,030 |
Geophysics | $84,000 |
Safety | $2,000 |
Land Costs | $0 |
Contractors | $507,100 |
Travel and Vehicles | $17,100 |
Field Support | $6,650 |
Communications | $3,150 |
Subtotal | $704,030 |
Contingency(5%) | $35,202 |
Total | $739,232 |
We do not have the necessary working capital at this time to implement this exploration program. There are no known reserves on the Encino Gordo properties.
New Properties-Target Generation and Growth Strategy
A fundamental component of our strategy is to advance all of our properties to the drilling stage and implement a strong generative and property acquisition program through a well established financial process and a proper funding consistency.
The proposed generative program contemplates four main directions:
1.
A new targets generation program that may create a pipeline of quality properties providing a steady stream of new prospect and/or projects for the Company to explore, farm-out and/or joint venture.
2.
A property acquisition program aimed to identify and acquire at low cost (whenever possible) early- to mid-stage properties on selected locations along the main gold-silver belts in Mexico.
3.
A Focus on small- to medium-size gold-silver deposits (minimum deposits containing 500,000 ounces of Au Eq.)
4.
The new targets generation and property acquisition program may be initially focused on the Sierra Madre belt and Central Mexico. It may be extended further south in Mexico and other countries if conditions and project’s potential warranted.
The proposed exploration program is to be undertaken by the Mexoro’s exploration team using in-house knowledge in combination for support and guidance of high-quality consultant with expertise in the region. The new targets generation program is aimed to feed our project pipeline two at drilling stage and/or near drilling stage projects per year. We do not have the necessary working capital at this time to implement this target generation program.
Phase I - Target Generation
Objectives
·
Identify two to four target areas (approximately 20 x 30 kilometers) which have potential to host small- to medium-size gold and/or gold-silver deposits.
·
Identify one or two specific opportunities with close to drill ready targets. For example, identify old workings or existing mines with good upside potential.
35
·
Time frame: six months.
Key Steps and Exploration Tools
After initial evaluations of potential gold and gold-silver deposits it has become evident that the acquisition and evaluation of more detailed geological maps and geochemistry with field follow-up is critically important in identifying new areas of mining potential. Careful and selective use of such data may be the most immediate and cost-effective way to focus exploration efforts toward prospective gold-silver areas.
Key steps may include mainly the following activities, among other considerations:
·
Acquiring geological maps 1:250,000 and 1:50,000 (from Servicio Geologico Mexicano);
·
Generating geological and mineral occurrences base maps;
·
Identifying key host rocks;
·
Completing structural interpretation from known geology, TM imagery, and geophysical data (if available);
·
Integrating mineral occurrences, alteration, lithology and structures;
·
Completing initial targeting using the above compilation; and
·
Selecting and prioritizing targets.
The proposed new target generation budget for 2009 is $438,690. The breakdown of the budget expenditures is as follows:
Geochemistry | $24,000 |
Geophysics | $0 |
Landsat Imagery | $30,000 |
GIS & Database | $40,000 |
Safety | $1,500 |
Land Costs | $170,000 |
Contractors | $99,300 |
Travel & Accommodation | $24,000 |
Vehicles | $15,500 |
Field Support | $7,500 |
Communications | $6,000 |
Subtotal | $417,800 |
Contingency(5%) | $20,890 |
Total | $438,690 |
We do not have the necessary working capital at this time to implement this target generation program.
Results of Operations
Three months ended May 31, 2009 compared to the three months ended May 31, 2008.
In this discussion of the Company’s results of operations and financial condition, amounts, other than per-share amounts, have been rounded to the nearest thousand dollars.
Revenues
The Company earned its 25% proportionate revenue from the joint venture with MRT from the commercial pilot test during the three months ended May 31, 2009. Other than the commercial pilot test, which generated $149,000 in revenue, we did not have commercial production of any of our properties in 2009. We do not anticipate earning revenues until such time as we have entered into commercial production of our mineral properties, if ever. We are presently in the development stage of our business. We can provide no assurance that we will discover commercially exploitable levels of mineral resources on our properties or, if such resources are discovered, that we will enter into commercial production of our mineral properties.
36
Operating Costs
We did not incur any operating costs during the three months ended May 31, 2009 or 2008 due to the fact that we did not achieve production from exploration activities during either year.
Expenses
Our expenses decreased to $815,000 for the three months ended May 31, 2009 compared to $1,908,000 for the three months ended May 31, 2008. The decrease is primarily attributable to lower exploration costs which was due to lack of funding, and curtailment of exploration on Cieneguita because of the joint venture agreement with MRT, where MRT has agreed to spend up to $5,000,000 to take Cieneguita to a feasibility stage.
General and administrative expenses increased slightly to $667,000 in the three month ended May 31, 2009 compared to $615,000 in the three months ended May 31, 2008. The increase during the current three month period is attributable to higher legal fees offset by lower travel costs. Included in the general and administrative expenses, is the non-cash stock-based compensation expense of $185,000 in 2009 compared to $189,000 in 2008. The amount for the three-month period in 2009 had $156,000 of stock-based compensation expense relating to options granted to officers, directors and consultants and $29,000 of stock-based compensation relating to warrants. The amount for the corresponding period in 2008 relates to stock options granted to management and key personnel and compensation relating to warrants for $177,000 and $12,000, respectively.
Accounting and legal fees increased to $175,000 in the three months ended May 31, 2009 compared to $74,000 in the three months ended May 31, 2009. The increase was primarily attributable to higher legal costs relating to issuance, payment and restructuring of convertible debentures.
Mineral exploration in the three months ended May 31, 2009 decreased to $171,000 compared to $1,293,000 for the three months ended May 31, 2008 as the Company reduced its exploration activity as described above.
Loss
Our net loss decreased to $1,073,000 for the three months ended May 31, 2009 compared to $2,322,000 for the three months ended May 31, 2008.
Other than the lower operating loss as described above, this change in our loss was attributable to higher interest expense recognized in 2009 relating to beneficial conversion feature offset by gain on settlement of repayment of convertible debentures.
We anticipate that we will continue to incur a loss until such time as we can commence the development stage of our operations and achieve significant revenues from sales of gold recovered from our Mexican mineral properties, if ever. There is no assurance that we will commence the development stage of our operations at any of our Mexican mineral properties or achieve revenues.
Liquidity and Capital Resources
Since inception, we have undergone two unsuccessful business combinations, which have caused us to incur significant liabilities and have resulted in the accumulation of a substantial deficit during the development stage.
As of May 31, 2009, we had total assets of $666,000, total liabilities of $6,113,000 and a deficit of $42,937,000 accumulated during the development stage.
Cash and Working Capital
We had cash and cash equivalents of $6,884 as of May 31, 2009, compared to cash of $12,947 at February 28, 2009 and $4,467 at May 31, 2009. We had working capital deficiency of $4,821,000 as of May 31, 2009, compared to a working capital deficiency of $4,657,000 as of February 28, 2009 and $3,509,000 as of May 31, 2008.
During the first quarter of 2009, we reduced the activities for our exploration program considerably but have continued to incur corporate administrative expenses but were unable to raise sufficient funds to pay many of our suppliers. Our accounts payable and accrued liabilities increased from $1,341,000 in the first quarter of 2008 to $2,742,000 in the first quarter of 2009, most of which being carried forward from the fiscal year ended February 28, 2009. Of the $2,742,000 accounts payable and accrued liabilities as of May 31, 2009, $1,559,000 related to exploration expenses.
37
We will require additional financing during the current fiscal year according to our planned exploration activities. We plan to spend approximately $4,400,000 from June 2009 to May 2010 to carry out exploration and administration activities on our Mexican mineral properties. We also anticipate spending approximately $840,000 during the next 12 months on general and administrative costs. At this time we do not have the necessary capital to initiate the exploration program and to cover general and administrative costs.
We will need to raise additional working capital to maintain basic operations. We plan to raise those funds through the sale of equity or debt. Other than our definitive agreements signed with MRT and Paramount, at this time we do not have any other sources to raise additional capital for the Company and no assurance may be given that we will be able to find sources to raise additional capital. Failure to raise any additional capital would most likely require us to cease operations and abandon all of our exploration properties.
The amount of working capital could be adversely affected further in the event claims are made against us alleging that certain shares we previously issued pursuant to Form S-8 registration statements constituted an illegal public offering because the company was a “shell company” at the time and, as a result, was not eligible to use Form S-8 for registration of shares under the Securities Act of 1933. In August and October of 2005, the Company issued shares of common stock to an officer of the Company, as compensation for consulting services. The two share issuances were for a combined total of 30,000 shares and each of the share issuances was made pursuant to a registration statement on Form S-8 under the Securities Act of 1933. Although the Company believes these shares were properly issued, a claim could be made that issuance of the shares constituted an illegal public offering because the Company was a “shell company” at th e time. Shell companies [i.e. companies which have no or nominal operations and either (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets] are not eligible to use Form S-8 for registration under the Securities Act of 1933. If either of these transactions did violate federal securities laws, subsequent purchasers of the shares may have claims against us for damages or for rescission of their purchase transaction and recovery of the full subscription price paid, together with interest. As of the date of this quarterly report, no one has made or threatened any claim against us alleging violation of the federal securities laws. In the event such claims were successfully asserted, there is no assurance that we would have sufficient funds available to pay and it is likely that we would be required to use funds currently designated as working capital for that purpose. That would su bstantially reduce the amount of working capital available for other purposes and, in that event, we could be forced to cease or discontinue certain operations and to liquidate certain assets to pay our liabilities, including, but not limited to, rescission claims.
Cash Used in Operating Activities
Cash used in operating activities decreased to $387,000 for the three months ended May 31, 2009 compared to $1,003,000 for the three months ended May 31, 2008. The cash used in operating activities was primarily for exploration costs and general and administrative expenses.
Cash Used in Investing Activities
The Company used cash of $14,000 for purchase of equipment for the three months ended May 31, 2009 compared to cash used of $nil for purchase of equipment for the three months ended May 31, 2008.
Financing Activities
Cash provided by financing activities decreased to $335,000 for the three months ended May 31, 2009 compared to $992,000 for the three months ended May 31, 2008. Almost all of the cash provided by financing activities was from issuing of convertible debentures and notes payables. Cash provided by financing activities was used to fund our operating and investing activities.
We anticipate continuing to rely on equity sales of our common stock or issuance of debt in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing shareholders.
During the three months ended May 31, 2009, the Company issued a total of $1,894,557 convertible debentures to Paramount, MRT and other investors:
The convertible debentures of $221,047 to Paramount with principal and accrued interest at 8% per year are convertible into 442,094 units at a price of $0.75 per unit at the discretion of Paramount. Each unit shall be comprised of one common share plus one-half common share purchase warrant. One full warrant is exercisable immediately at a price of $0.50 for four years.
The convertible debentures of $237,510 to MRT with principal and accrued interest at 8% per year are convertible into 455,850 units at a price of $0.60 per unit at the discretion of MRT. Each unit shall be comprised of two common share plus one common share purchase warrant. One full warrant is exercisable immediately at a price of $0.50 for three years.
38
The convertible debentures of $1,400,000 to MRT and other investors with principal and accrued interest at15% per year are convertible into 7,000,000 units at a price of $0.20 per unit at the discretion of the investors. Each unit shall be comprised of one common share plus one common share purchase warrant. One full warrant is exercisable immediately at a price of $0.30 for three years.
Going Concern
Our financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern depends upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
The Company has a history of operating losses and will need to raise additional capital to fund its planned operations. As at May 31, 2009, the Company had working capital deficiency of $4,821,000 (May 31, 2008 – working capital deficiency of $3,042,000) and an accumulated deficit during the development stage of $42,937,000 (May 31, 2008 - $36,150,000). These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
There is no assurance that our operations will be profitable. The Company has conducted private placements of convertible debt and common stock, which have generated funds to satisfy all of the initial cash requirements of its planned Mexican mining ventures. Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
As we did not have to disclose quantitative and qualitative information about our market risk as of and for our last fiscal year, this item is not applicable to us at this time.
Item 4 and Item 4(T).
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintai ns such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to chief executive and chief financial officers to allow timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not designed and were not effective in providing reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring
39
that such information is recorded, processed, summarized and reported with the time periods specified because the Company did not have sufficient personnel resources within the accounting function to affect timely financial close.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Other than disclosed herein, all other sections in Part II are inapplicable to the Company.
Item 1.
Legal Proceedings
Other than as disclosed herein, neither Mexoro nor its properties are the subject of any pending legal proceedings and no such proceeding is known to be contemplated by any governmental authority. We are not aware of any legal proceedings in which any director, officer or affiliate of Mexoro, any owner of record or beneficially of more than 5% of any class of our voting securities, or any associate of any such director, officer, affiliate or security holder of Mexoro, is a party adverse to Mexoro or any of its subsidiaries or has a material interest adverse to Mexoro or any of its subsidiaries.
In November 2007, the British Columbia Securities Commission (“BCSC”) placed a cease trade order (“CTO”) on the Company in the Province of British Columbia, Canada affecting residents of British Columbia. This CTO was rescinded on February 20, 2008 as the Company filed the required documents in British Columbia. On February 20, 2008, the BCSC issued a second CTO requiring the Company to file a technical report in British Columbia on its Mexican properties. This CTO was rescinded on August 21, 2008 as the Company filed the required documents in British Columbia.
In February 2007, Mexoro obtained a temporary restraining order in a civil action against Mr. Argang Schariat for libel and slander. In June 2009 this restraining order was continued against Mr. Schariat. The civil action for the restraining order was made before the Tribunal of Vevey, Switzerland. We believe that Mr. Schariat is refusing to abide by the Swiss Court ruling and we are taking the necessary steps to enforce our rights by filing a criminal complaint against Mr. Schariat for libel and slander. The hearing for this criminal complaint against Mr. Schariat has not been scheduled yet. If we are successful in our action, it is unlikely that we would be able to recover any damages from Mr. Schariat as he has asserted that he plans to declare bankruptcy to avoid paying any penalties.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Name | # of Shares | # of Warrants Issued ** | Dated | Price per Share | Amount USD$ | Notes |
Paramount Gold and Silver Corp. | 75,000 | - | 04/02/2009 | $0.30 | Stock issued for interest cost | (1) (6) |
Paramount Gold and Silver Corp. | 25,000 | - | 04/24/2009 | $0.30 | Stock issued for interest cost | (2) (6) |
Terra Exploracion Y Mineria S.A. DE C.V. | 833,334 | 416,667 | 05/13/2009 | $0.30 | $250,000 | (3) (5) |
Consulting for Strategic Growth 1 Ltd. | 42,857 | - | 05/18/2009 | $0.315 | Stock issued for services | (4) (6) |
|
|
|
|
|
|
|
* Affiliate of the Company.
** Each warrant entitles the holder to purchase one share of common stock.
(1)
On April 2, 2009, the Company issued 75,000 shares to Paramount Gold and Silver Corp. in consideration of interest costs for the convertible debentures.
(2)
On April 24, 2009, the Company issued 25,000 shares to Paramount Gold and Silver Corp. in consideration of interest costs for the convertible debentures.
40
(3)
On May 13, 2009, the Company issued 416,667 units (consisting of two common shares of the Company and one warrant, exercisable at $0.50 to purchase one share) toTerra Exploracion Y Mineria S.A. DE C.V.for subscription proceeds of $250,000. The warrants will expire on December 31, 2010.
(4)
On May 18, 2009, the Company issued 42,857 shares to Consulting for Strategic Growth 1 Ltd. in exchange of investor relation services of $13,500.
(5)
These issuances were made in private placement transactions and were made to non-U.S. persons (as defined under Rule 902 section (k)(2)(i) of Regulation S), pursuant to an offshore transaction, and no directed selling efforts were made in the United States by us, a distributor, any respective affiliates, or any person acting on behalf of any of the foregoing. The investors were not inside the United States at the time the offer was made to them nor at the time the buy order was placed. These investors are not (1) residents of the U.S., (2) partnerships or corporations organized or incorporated under the laws of the U.S., (3) the estate of which any executor or administrator is a U.S. person, (4) a trust of which any trustee is a U.S. person, (5) an agency or branch of a foreign entity located in the U.S., (6) a non-discretionary account held for the benefit of a U.S. person, or (7) a corporation formed by a U.S. person for the purpose of investing in unregistered securities. The investors were purchasing for their own accounts and acknowledged that the securities were not registered under the Securities Act and cannot be sold unless they are registered or unless an exemption from registration is available. The sales were made without any advertising or public solicitation.
(6)
These units were only offered to individuals or entities who qualified as accredited investors under the Securities Act of 1933. The units were offered under an exemption from registration found in Rule 506 of Regulation D.
No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of our company or executive officers of our company, and transfer was restricted by our company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section of the registration statement are unaffiliated with us.
Item 3.
Defaults Upon Senior Securities
On January 14, 2009, the Company received Notice of Acceleration of three outstanding Secured Convertible Debentures held by Paramount Gold and Silver Corp. Paramount Gold and Silver alleged that we defaulted upon a series of debentures issued from May to August 2008 totaling $1,370,000. Paramount Gold and Silver alleged that these defaults arose from a failure to make interest payments in a timely manner and a failure to register securities into which the debentures were convertible, in a timely manner. We disagree with Paramount Gold and Silver’s assessment and do not consider ourselves in default of the debentures. Subsequently, we have repaid a portion of these debentures and have negotiated the repayment of the balance still owing on the debentures.
Item 6.
Exhibits
The following exhibits are filed in reference:
Exhibit Number | Description |
|
|
|
|
31.1 | Certification of Chief Executive Officer and Chief Financial Officer of Mexoro Minerals Ltd. pursuant to Rule 13a-14(a)/15d-14(a).* |
|
|
32.1 | Certification of Chief Executive Officer and Chief Financial Officer of Mexoro Minerals Ltd. pursuant to 18 U.S.C. Section 1350.* |
|
|
*filed herewith
41
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Mexoro Mineral Ltd.
/S/ Barry Quiroz
Name: Barry Quiroz
Title: President of the Company
Date: August 25 , 2009
42