UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-49725
Constitution Mining Corp.
(Exact name of registrant as specified in its charter)
Nevada | 88-0455809 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Pasaje Mártir Olaya 129, Oficina 1203, Centro Empresarial José Pardo Torre A, Miraflores, Lima, Perú |
(Address of principal executive offices) |
+51-1-446-6807 |
(Registrant’s telephone number, including area code) |
Manuela Saenz 323, Suite 706, Buenos Aires, Argentina C1107BPA |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
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,” “non-accelerated filer,” and “a smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
FORM 10-Q CONSTITUTION MINING CORP. JUNE 30, 2009 | Page | |
PART I – FINANCIAL INFORMATION | ||
Item 1. | 3 | |
Item 2. | 4 | |
Item 3. | 18 | |
Item 4T. | 18 | |
PART II – OTHER INFORMATION | ||
Item 1. | 20 | |
Item 1A. | 20 | |
Item 2. | 20 | |
Item 3. | 20 | |
Item 4. | 20 | |
Item 5. | 21 | |
Item 6. | 21 | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Our unaudited consolidated financial statements included in this Form 10-Q are as follows: | |
F-1 | Unaudited Consolidated Balance Sheet as of June 30, 2009. |
F-2 | Unaudited Consolidated Statements of Loss and Comprehensive Loss for the three and six months ended June 30, 2009 and 2008 and from inception on March 6, 2000 to June 30, 2009. |
F-3 | Unaudited Consolidated Statements of Cash Flows for the three and six months ended June 30, 2009 and 2008 and from inception on March 6, 2000 to June 30, 2009. |
F-4 | Unaudited Consolidated Statement of Changes in Stockholders' Equity (Deficiency) from inception on March 6, 2000 to June 30, 2009. |
F-5 | Notes to Unaudited Consolidated Financial Statements. |
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended June 30, 2009 are not necessarily indicative of the results that can be expected for the full year.
Constitution Mining Corp.
(An Exploration Stage Company)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
(Unaudited)
As at 30 June 2009 | As at 31 December 2008 (Audited) | |||||||
$ | $ | |||||||
Assets | ||||||||
Current | ||||||||
Cash and cash equivalents | 117,830 | 66,580 | ||||||
Amounts receivable (Note 4) | 30,000 | 60,000 | ||||||
Prepaid expenses | 5,814 | 271,250 | ||||||
153,644 | 397,830 | |||||||
Mineral property costs (Note 7) | 8,124,260 | 5,120,260 | ||||||
Equipment (Note 5) | 155,852 | 102,049 | ||||||
Website development cost (Note 6) | 36,513 | 47,295 | ||||||
8,470,269 | 5,667,434 | |||||||
Liabilities | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities (Note 8) | 708,454 | 547,891 | ||||||
Due to related parties (Note 9) | 189,193 | 12,379 | ||||||
897,647 | 560,270 | |||||||
Stockholders’ equity | ||||||||
Capital stock (Note 11) | ||||||||
Authorized | ||||||||
300,000,000 common shares, par value $0.001 and | ||||||||
50,000,000 preferred shares, par value $0.001 | ||||||||
Issued and outstanding | ||||||||
30 June 2009 – 62,969,456 common shares, par value $0.001 | ||||||||
31 December 2008 – 58,469,456 common shares, par value $0.001 | 62,969 | 58,469 | ||||||
Share subscriptions received in advance (Note 11) | 1,506,977 | - | ||||||
Additional paid in capital | 13,729,820 | 7,945,496 | ||||||
Warrants (Note 11) | 3,598,533 | 3,976,863 | ||||||
Deficit, accumulated during the exploration stage | (11,325,677 | ) | (6,873,664 | ) | ||||
7,572,622 | 5,107,164 | |||||||
8,470,269 | 5,667,434 |
Nature, Basis of Presentation and Continuance of Operations (Note 1), Commitments (Note 15), Subsequent Events (Note 16) and Contingency (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Consolidated Statements of Loss and Comprehensive Loss
(Expressed in U.S. Dollars)
(Unaudited)
For the period from the date of inception on 6 March 2000 to 30 June 2009 | For the three month period ended 30 June 2009 | For the three month period ended 30 June 2008 | For the six month period ended 30 June 2009 | For the six month period ended 30 June 2008 | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Operating expenses | ||||||||||||||||||||
Acquisition of mineral property interests | - | - | 110,000 | - | 760,260 | |||||||||||||||
Amortization expense (Notes 5 and 6) | 243,118 | 21,115 | 9,376 | 42,237 | 13,019 | |||||||||||||||
Default on oil and gas deposit | 25,000 | - | - | - | - | |||||||||||||||
Exploration costs | 1,802,009 | 394,897 | 269,124 | 877,048 | 690,615 | |||||||||||||||
Interest on convertible debentures | 126,525 | - | - | - | - | |||||||||||||||
Interest on mineral property (Note 7) | 3,042 | 3,042 | - | 3,042 | - | |||||||||||||||
Investor relations | 1,383,170 | 355,326 | 176,897 | 614,452 | 271,890 | |||||||||||||||
Management fees (Note 10) | 652,141 | 86,982 | 95,312 | 161,058 | 173,312 | |||||||||||||||
Office and miscellaneous | 402,308 | 83,382 | 29,050 | 164,150 | 68,491 | |||||||||||||||
Professional fees | 1,562,779 | 195,585 | 166,060 | 357,210 | 316,309 | |||||||||||||||
Rent (Note 10) | 146,848 | 15,243 | 10,866 | 42,043 | 18,163 | |||||||||||||||
Stock-based compensation (Note 12) | 4,930,136 | 774,274 | - | 2,271,494 | - | |||||||||||||||
Travel and entertainment | 368,708 | 8,284 | 38,757 | 61,134 | 82,958 | |||||||||||||||
Net operating loss before other items | (11,645,784 | ) | (1,938,130 | ) | (905,442 | ) | (4,593,868 | ) | (2,395,017 | ) | ||||||||||
Other items | ||||||||||||||||||||
Foreign exchange gain | 5,201 | 1,713 | 8,456 | 6,855 | 301 | |||||||||||||||
Gain on sale of oil and gas property | 307,115 | - | - | - | 307,115 | |||||||||||||||
Interest income | 12,791 | - | 254 | - | 2,244 | |||||||||||||||
Recovery of project management fees | 60,000 | - | - | - | - | |||||||||||||||
Provision for potential legal claims (Notes 7, 8, 16 and 17) | (65,000 | ) | 135,000 | - | 135,000 | - | ||||||||||||||
320,107 | 136,713 | 8,710 | 141,855 | 309,660 | ||||||||||||||||
Net operating loss and comprehensive loss for the period | (11,325,677 | ) | (1,801,407 | ) | (896,732 | ) | (4,452,013 | ) | (2,085,357 | ) | ||||||||||
Basic and diluted loss per common share | 0.030 | 0.018 | 0.074 | 0.042 | ||||||||||||||||
Weighted average number of common shares used in per share calculations | 59,361,763 | 50,343,244 | 59,918,075 | 49,758,162 |
The accompanying notes are an integral part of these consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
For the period from the date of inception on 6 March 2000 to 30 June 2009 | For the three month period ended 30 June 2009 | For the three month period ended 30 June 2008 | For the six month period ended 30 June 2009 | For the six month period ended 30 June 2008 | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Cash flows used in operating activities | ||||||||||||||||||||
Loss for the period | (11,325,677 | ) | (1,801,407 | ) | (896,732 | ) | (4,452,013 | ) | (2,085,357 | ) | ||||||||||
Adjustments to reconcile loss to net cash used by operating activities | ||||||||||||||||||||
Accrued interest (Note 7) | 126,525 | - | - | - | - | |||||||||||||||
Amortization (Notes 5 and 6) | 243,118 | 21,115 | 9,376 | 42,237 | 13,019 | |||||||||||||||
Contributions to capital by related party – expenses (Notes 10 and 14) | 15,000 | - | - | - | - | |||||||||||||||
Common shares issued for services (Note 11) | 24,199 | - | 49,452 | - | 49,452 | |||||||||||||||
Value of common shares issued for mineral properties | - | - | - | - | 560,000 | |||||||||||||||
Warrant issued for services | 25,252 | - | - | - | - | |||||||||||||||
Gain on sale of oil and gas property | (307,115 | ) | - | - | - | (307,115 | ) | |||||||||||||
Stock-based compensation (Note 12) | 4,930,136 | 774,274 | - | 2,271,494 | - | |||||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||||||
(Increase) decrease in deposit and prepaid expenses | (5,814 | ) | 8,971 | - | 265,436 | 53,708 | ||||||||||||||
Increase (decrease) in amounts receivable | (30,000 | ) | - | - | 30,000 | - | ||||||||||||||
Increase (decrease) in accounts payable and accrued liabilities | 708,454 | (386,572 | ) | 361,979 | 160,563 | 531,623 | ||||||||||||||
Increase (decrease) in due to related parties | 156,918 | 38,618 | (221,279 | ) | 176,814 | 640,291 | ||||||||||||||
(5,439,004 | ) | (1,345,001 | ) | (697,204 | ) | (1,505,469 | ) | (544,379 | ) | |||||||||||
Cash flows used in investing activities | ||||||||||||||||||||
Acquisition of mineral property interests (Note 7) | (975,260 | ) | - | - | (25,000 | ) | - | |||||||||||||
Purchase of equipment (Note 5) | (210,288 | ) | - | (76,442 | ) | (85,258 | ) | (80,909 | ) | |||||||||||
Website development costs (Note 6) | (64,693 | ) | - | - | - | (39,693 | ) | |||||||||||||
Purchase of oil and gas property | (642,006 | ) | - | - | - | - | ||||||||||||||
(1,892,247 | ) | - | (76,442 | ) | (110,258 | ) | (120,602 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Common shares issued for cash (Note 11) | 1,491,068 | 145,809 | 706,447 | 145,809 | 706,447 | |||||||||||||||
Increase in due to related parties | 32,275 | 364 | - | 32,275 | - | |||||||||||||||
Issuance of warrants (Note 11) | 3,753,761 | 14,191 | - | 14,191 | - | |||||||||||||||
Convertible debentures | 665,000 | - | - | - | - | |||||||||||||||
Share subscriptions received in advance (Note 11) | 1,506,977 | 1,266,977 | - | 1,506,977 | - | |||||||||||||||
7,449,081 | 1,427,341 | 706,447 | 1,666,977 | 706,447 | ||||||||||||||||
Increase (decrease) in cash and cash equivalents | 117,830 | 82,340 | (67,199 | ) | 51,250 | 41,466 | ||||||||||||||
Cash and cash equivalents, beginning of period | - | 35,490 | 163,307 | 66,580 | 54,642 | |||||||||||||||
Cash and cash equivalents, end of period | 117,830 | 117,830 | 96,108 | 117,830 | 96,108 |
Supplemental Disclosures with Respect of Cash Flows (Note 14)
The accompanying notes are an integral part of these consolidated financial statements.
(An Exploration Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)
(Expressed in U.S. Dollars)
(Unaudited)
Number of shares issued | Share capital | Additional paid-in capital | Share subscription received in advance | Warrants | Deficit, accumulated during the exploration stage | Total stockholders’ equity | ||||||||
$ | $ | $ | $ | $ | $ | |||||||||
Balance at 6 March 2000 (inception) | ||||||||||||||
Common shares issued – cash | 2,000,000 | 2,000 | 1,000 | - | - | - | 3,000 | |||||||
Net loss for the period | - | - | - | - | - | (2,291) | (2,291) | |||||||
Balance at 31 December 2000 | 2,000,000 | 2,000 | 1,000 | - | - | (2,291) | 709 | |||||||
Common shares issued – cash | 5,000,000 | 5,000 | 42,000 | - | - | - | 47,000 | |||||||
Net loss for the year | - | - | - | - | - | (10,571) | (10,571) | |||||||
Balance at 31 December 2001 | 7,000,000 | 7,000 | 43,000 | - | - | (12,862) | 37,138 | |||||||
Net loss for the year | - | - | - | - | - | (12,097) | (12,097) | |||||||
Balance at 31 December 2002 | 7,000,000 | 7,000 | 43,000 | - | - | (24,959) | 25,041 | |||||||
Net loss for the year | - | - | - | - | - | (11,019) | (11,019) | |||||||
Balance at 31 December 2003 | 7,000,000 | 7,000 | 43,000 | - | - | (35,978) | 14,022 | |||||||
3 for 1 forward split | 14,000,000 | 14,000 | (14,000) | - | - | - | - | |||||||
Net loss for the year | - | - | - | - | - | (6,451) | (6,451) | |||||||
Balance at 31 December 2004 | 21,000,000 | 21,000 | 29,000 | - | - | (42,429) | 7,571 | |||||||
2 for 1 forward split | 21,000,000 | 21,000 | (21,000) | - | - | - | - | |||||||
Net loss for the year | - | - | - | - | - | (18,338) | (18,338) | |||||||
Balance at 31 December 2005 | 42,000,000 | 42,000 | 8,000 | - | - | (60,767) | (10,767) | |||||||
Common shares issued – cash | 4,000,000 | 4,000 | 76,000 | - | - | - | 80,000 | |||||||
Contributions to capital by related party – expenses (Notes 10 and 14) | - | - | 14,400 | - | - | - | 14,400 | |||||||
Net loss for the year | - | - | - | - | - | (289,343) | (289,343) | |||||||
Balance at 31 December 2006 | 46,000,000 | 46,000 | 98,400 | - | - | (350,110) | (205,710) | |||||||
Contributions to capital by related party – expenses (Notes 10 and 14) | - | - | 600 | - | - | - | 600 | |||||||
Common shares issued – debt (Notes 11 and 14) | 1,145,300 | 1,145 | 21,761 | - | - | - | 22,906 | |||||||
Common shares issued – cash (Note 11) | 1,437,000 | 1,437 | 501,513 | - | - | - | 502,950 | |||||||
Stock-based compensation (Note 12) | - | - | 625,035 | - | - | - | 625,035 | |||||||
Net loss for the year | - | - | - | - | - | (1,218,721) | (1,218,721) | |||||||
Balance at 31 December 2007 | 48,582,300 | 48,582 | 1,247,309 | - | - | (1,568,831) | (272,940) | |||||||
Common shares issued – mineral properties (Notes 7, 11 and 14) | 3,800,000 | 3,800 | 4,166,200 | - | - | - | 4,170,000 | |||||||
Common shares issued – cash (Note 11) | 6,016,511 | 6,016 | 4,706,272 | - | - | - | 4,712,288 | |||||||
Common shares issued – services (Notes 11 and 14) | 70,645 | 71 | 49,380 | - | - | - | 49,451 | |||||||
Value assigned to warrants (Note 11) | - | - | (3,739,570) | - | 3,739,570 | - | - | |||||||
Share issuance costs | - | - | (517,702) | - | 237,293 | - | (280,409) | |||||||
Stock-based compensation (Note 12) | - | - | 2,033,607 | - | - | - | 2,033,607 | |||||||
Net loss for the year | - | - | - | - | - | (5,304,833) | (5,304,833) | |||||||
Balance at 31 December 2008 | 58,469,456 | 58,469 | 7,945,496 | - | 3,976,863 | (6,873,664) | 5,107,164 | |||||||
Common shares issued - mineral | ||||||||||||||
properties (Notes 7, 11 and 14) | 4,300,000 | 4,300 | 2,974,7000 | - | - | - | 2,979,000 | |||||||
Common shares issued - cash (Note 11) | 200,000 | 200 | 145,609 | - | - | - | 145,809 | |||||||
Value assigned to warrants (Note 11) | - | - | - | - | 14,191 | - | 14,191 | |||||||
Warrants expired (Note 11) | - | - | 367,267 | - | (367,267) | - | - | |||||||
Agent comensation warrants | ||||||||||||||
expired (Note 11) | - | - | 25,254 | - | (25,254) | - | - | |||||||
Share subscription received in advance | - | - | - | 1,506,977 | - | - | 1,506,977 | |||||||
Stock-based compensation (Note 12) | - | - | 2,271,494 | - | - | - | 2,271,494 | |||||||
Net loss for the period | - | - | - | - | - | (4,452,013) | (4,452,013) | |||||||
Balance at 30 June 2009 | 62,969,456 | 62,969 | 13,729,820 | 1,506,977 | 3,598,533 | (11,325,677) | 7,572,622 |
The accompanying notes are an integral part of these consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
1. Nature, Basis of Presentation and Continuance of Operations
Constitution Mining Corp. (the “Company”) was incorporated in the State of Nevada under the name “Crafty Admiral Enterprises, Ltd.” on 6 March 2000. On 9 March 2007 the Company changed their name to “Nordic Nickel Ltd.”. The Company changed their name pursuant to a parent/subsidiary merger between the Company (as Crafty Admiral Enterprises, Ltd.) and its wholly-owned non-operating subsidiary, Nordic Nickel Ltd., which was established for the purpose of giving effect to this name change. On 15 November 2007 the Company changed their name to “Constitution Mining Corp.”. The Company changed their name pursuant to a parent/subsidiary merger between the Company (as Nordic Nickel Ltd.) and its wholly-owned non-operating subsidiary, Constitution Mining Corp., which was established for the purpose of giving effect to this name change. The Company is in the exploration stage as its operations principally involve the examination and investigation of land that may contain valuable minerals, for the purpose of discovering the presence of ore, if any, and its extent.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Constitution Mining Argentina SA, a company incorporated under the laws of Argentina, since its date of incorporation on 4 March 2008.
The Company is an exploration stage enterprise, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7. The Company is devoting all of its present efforts in securing and establishing a new business, and its planned principle operations have not commenced, and, accordingly, no revenue has been derived during the organization period.
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to exploration stage enterprises, and are expressed in U.S. dollars. The Company’s fiscal year end is 31 December.
The Company’s consolidated financial statements as at 30 June 2009 and for the six month period then ended have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company had a loss of $4,452,013 for the six month period ended 30 June 2009 (30 June 2008 – $2,085,357) and has working capital deficit of $744,003 at 30 June 2009 (31 December 2008 – $162,440).
Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that the Company’s capital resources should be adequate to continue operating and maintaining its business strategy during the fiscal year ending 31 December 2009. However, if the Company is unable to raise additional capital in the near future, due to the Company’s liquidity problems, management expects that the Company will need to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
On 27 June 2006, the Company acquired a 100% interest in an oil and gas property lease located in St. Francis County, Arkansas (the “Tombaugh Lease”) for cash payment of $642,006. In 2007, the Company shifted its focus from oil and gas sector to mineral exploration.
Although management is currently implementing its business plan, and seeking additional sources of equity or debt financing and or a partner, there is no assurance these activities will be successful. This raises substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principle – a replacement of FASB statement No. 162”. SFAS No. 168 replaces the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles as stated with FASB Accounting Standards Codification becoming the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for fiscal years and interim periods beginning after 15 September 2009. The Company does not expect this adoption will have a material impact on the Company’s interim consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. SFAS No. 167 is intended to establish general standards of financial reporting for companies with variable interest entities. It requires timely and useful disclosure of information related to the Company’s involvement with variable interest entities. This disclosure should alert all users to the effects on specific provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, related to the changes to the special-purpose entity proposal in FASB Statement No. 166, “Accounting for Transfers of Financial Assets”, and the treatment of specific provisions of Interpretation 46(R). SFAS No. 167 is effective for financial statements issued for fiscal years and interim periods beginning after 15 November 2009. The Company has determined that the adoption of SFAS No. 167 will have no impact will have on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement” (“SFAS 166”). SFAS No. 166 is intended to establish standards of financial reporting for the transfer of assets and transferred assets to improve the relevance, representational faithfulness, and comparability. SFAS 166 was established to clarify derecognition of assets under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 166 is effective for financial statements issued for fiscal years and interim periods beginning after 15 November 2009. The Company has determined that the adoption of SFAS No. 166 will have no impact will have on its consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
International Financial Reporting Standards
In November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Under the proposed roadmap, the Company would be required to prepare consolidated financial statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently assessing the potential impact of IFRS on its consolidated financial statements and will continue to follow the proposed roadmap for future developments.
2. Changes in Accounting Policies
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. SFAS No. 165 is intended to establish 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. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date–that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS No. 165 is effective for financial statements issued for fiscal years and interim periods ending after 15 June 2009. The adoption of this statement did not have a material impact on its interim consolidated financial statements.
In May 2008, the FASB issued FSP Accounting Principles Board Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”. FSP 14-1 requires issuers of convertible debt instruments that may be settled in cash to separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in periods subsequent to adoption. Upon adoption of FSP 14-1, the Company will allocate a portion of the proceeds received from the issuance of convertible notes between a liability and equity component by determining the fair value of the liability component using the Company’s non-convertible debt borrowing rate. The difference between the proceeds of the notes and the fair value of the liability component will be recorded as a discount on the debt with a corresponding offset to paid-in-capital. The resulting discount will be accreted by recording additional non-cash interest expense over the expected life of the convertible notes using the effective interest rate method. The provisions of FSP 14-1 are to be applied retrospectively to all periods presented upon adoption and are effective for fiscal years beginning after 15 December 2008 and interim periods within those fiscal years. The adoption of this statement did not have a material impact on its interim consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60”. SFAS No. 163 provides enhanced guidance on the recognition and measurement to be used to account for premium revenue and claim liabilities and related disclosures and is limited to financial guarantee insurance (and reinsurance) contracts, issued by enterprises included within the scope of FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises.” SFAS No. 163 also requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods beginning after 15 December 2008, with early application not permitted. The adoption of this statement did not have a material impact on its interim consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”. In determining the useful life of intangible assets, FSP FAS 142-3 removes the requirement to consider whether an intangible asset can be renewed without substantial cost of material modifications to the existing terms and conditions and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after 15 December 2008. The adoption of this statement did not have a material impact on its interim consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”. SFAS No. 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivate instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS No. 133. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years beginning after 15 November 2008, with early application encouraged. The adoption of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after 15 December 2008. The adoption of SFAS No. 141(R) did not have a material impact on the Company’s consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51”. SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after 15 December 2008. The adoption of SFAS No. 160 did not have a material impact on the Company’s consolidated financial statements.
3. Significant Accounting Policies
The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements.
Principles of consolidation
All inter-company balances and transactions have been eliminated in these consolidated financial statements.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Financial instruments
The carrying value of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities and amounts due to related parties approximates their fair value because of the short maturity of these instruments. The Company’s operations are in the U.S. and Argentina and virtually all of its assets and liabilities are giving rise to significant exposure to market risks from changes in foreign currency rates. The Company’s financial risk is the risk that arises from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.
Derivative financial instruments
The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Income taxes
Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.
Basic and diluted net loss per share
The Company computes net income (loss) per share in accordance with SFAS No.128, “Earnings per Share”. SFAS No. 128 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Comprehensive loss
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at 30 June 2009, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the consolidated financial statements.
Mineral property costs
Mineral property acquisition costs are initially capitalized as tangible assets when purchased in accordance with Emerging Issues Task Force (“EITF”) 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets”. At the end of each fiscal quarter end, the Company assesses the carrying costs for impairment. If proven and probable reserves are established for a property and it has been determined that a mineral property can be economically developed, costs will be amortized using the units-of-production method over the estimated life of the probable reserve.
Mineral property exploration costs are expensed as incurred.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Estimated future removal and site restoration costs, when determinable are provided over the life of proven reserves on a units-of-production basis. Costs, which include production equipment removal and environmental remediation, are estimated each period by management based on current regulations, actual expenses incurred, and technology and industry standards. Any charge is included in exploration expense or the provision for depletion and depreciation during the period and the actual restoration expenditures are charged to the accumulated provision amounts as incurred.
As of the date of these consolidated financial statements, the Company has not established any proven or probable reserves on its mineral properties and incurred only acquisition and exploration costs.
Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the usual industry standards for the stage of exploration of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.
Equipment
Equipment is recorded at cost and depreciation is provided over its estimated economic life at 30%.
Website development costs
The costs of computer software developed or obtained for internal use, during the preliminary project phase, as defined under AICPA Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, will be expensed as incurred. The costs of website development during the planning stage, as defined under EITF No. 00-2 “Accounting for Web Site Development Costs”, will also be expensed as incurred.
Computer software, website development incurred during the application and infrastructure development stage, including external direct costs of materials and services consumed in developing the software and creating graphics and website content, will be capitalized and amortized over the estimated useful life, beginning when the software is ready for use and after all substantial testing is completed and the website is operational.
Segments of an enterprise and related information
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, supersedes SFAS No. 14, “Financial Reporting for Segments of a Business Enterprise.” SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has evaluated this SFAS and does not believe it is applicable at this time.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Start-up expenses
The Company has adopted Statement of Position No. 98-5, “Reporting the Costs of Start-up Activities”, which requires that costs associated with start-up activities be expensed as incurred. Accordingly, start-up costs associated with the Company's formation have been included in the Company’s expenses for the period from the date of inception on 6 March 2000 to 30 June 2009.
Foreign currency translation
The Company’s functional and reporting currency is U.S. dollars. The consolidated financial statements of the Company are translated to U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation.” Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from these estimates.
Comparative figures
Certain comparative figures have been adjusted to conform to the current period’s presentation.
Stock-Based Compensation
Effective 1 January 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No.123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant). Before 1 January 2006, the Company accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and complied with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. The Company adopted SFAS No. 123(R) using the modified prospective method, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, financial statements for the periods prior to 1 January 2006 have not been restated to reflect the fair value method of expensing share-based compensation. Adoption of SFAS No. 123(R) does not change the way the Company accounts for share-based payments to non-employees, with guidance provided by SFAS No. 123 (as originally issued) and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
4. Amounts Receivable
Amounts receivable are non-interest bearing, unsecured and have settlement dates within one year.
5. Equipment
Net Book Value | ||||||||||||||||
Cost | Accumulated amortization | 30 June 2009 | 31 December 2008 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Equipment | 210,288 | 54,436 | 155,852 | 102,049 |
During the six month period ended 30 June 2009, total additions to equipment were $85,258 (30 June 2008 - $80,909).
6. Website Development Cost
Net Book Value | ||||||||||||||||
Cost | Accumulated amortization | 30 June 2009 | 31 December 2008 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Website development | 64,693 | 28,180 | 36,513 | 47,295 |
During the six month period ended 30 June 2009, total additions to website development were $Nil (30 June 2008 - $39,693).
7. Mineral Property Costs
Peruvian Gold Sands
On 29 September 2008, the Company entered into a Mineral Right option agreement with Temasek Investments Inc. (“Temasek”) to acquire mining properties totalling 382 km2 in Northeastern Peru (the “Peruvian Agreement”). Pursuant to this Peruvian Agreement, the company acquired four separate options from Temasek, each providing for the acquisition of a 25% interest in certain mining properties.
The Company may exercise the initial 25% option by fulfilling the following conditions:
a. | Pay a non-refundable $375,000 on the date the Peruvian Agreement is executed (paid); |
b. | Issue 2,000,000 common shares within 5 business days (issued and valued at $1.01) (Notes 11 and 14); and |
c. | Pay an additional $375,000 prior to 28 December 2008 (paid). |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
The Company entered into an amending agreement dated 12 May 2009 (the “Peruvian Amendment”) with Temasek. Under the Peruvian Amendment, the Company may now exercise the second 25% option resulting in the acquisition of a 50% interest in the Mineral Rights by fulfilling the following conditions as set out in the Peruvian Amendment as soon as practicable thereafter:
a. Exercise and complete the initial 25% option (completed);
b. Pay an additional $1,250,000;
c. Issue an additional 2,000,000 common shares (issued and valued at $0.65) (Notes 11 and 14); and
d. The Company must also pay interest on any unpaid amount of the option payment of $1,250,000 at 5% per
annum accruing from 12 May 2009 to the date that payment is made (Note 14).
The Company may exercise the third 25% option by fulfilling the following conditions by 29 September 2009:
a. | Exercise and complete the initial and second 25% options; |
b. | Pay an additional $3,000,000; and |
c. | Issue an additional 2,000,000 common shares. |
The Company may exercise the final 25% option by fulfilling the following conditions by 29 March 2010:
a. | Exercise and complete the initial, second and third 25% options; |
b. | Pay an additional $5,000,000; and |
c. | Issue an additional 4,000,000 common shares. |
The property is subject to a 2.5% net returns royalty that the Company can reduce to 1.0% upon payment of a further $2,000,000 within 90 days of the exercise and completion of the final 25% option (Note 15).
During the six month period ended 30 June 2009, the Company incurred $796,852 in exploration costs for the Peruvian Agreement.
Atena Gold Project
On 12 December 2007, the Company entered into an assignment agreement (the “Atena Agreement”) to acquire the right to explore and option to purchase the 3,676 hectare Atena Gold Project located in the Salta Province of Argentina. Pursuant to the Atena Agreement, the Company is required to issue 500,000 common shares (issued and valued at $0.70 per common share) and pay $60,000 (paid). The Company will acquire 100% of the option if it incurs a minimum of $3,740,000 in work commitment expenditures on the property and issue 7,000,000 common shares according to the following schedule (Notes 11, 14 and 15):
a. | $240,000 in expenditures (incurred) plus a further issuance of 1,000,000 common shares (issued and valued at $1.59 per common share) on or before 15 March 2008; |
b. | a further $500,000 in expenditures plus a further issuance of 2,000,000 common shares on or before 15 March 2009 (issued and valued at $0.73); |
c. | a further $1,000,000 in expenditures plus a further issuance of 4,000,000 common shares on or before 15 March 2010; and |
d. | a further $2,000,000 in expenditures on or before 15 March 2011. |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
The Company entered into an amending agreement dated 5 May 2009 (the “Atena Amendment”) with Proyectos Mineros S.A. (“PMSA”). Under the Atena Amendment, the $500,000 in expenditures originally required to be made by the Company on the Atena Gold Project property by 15 March 2009 is waived upon the issuance of the 2,000,000 common shares (issued) of the Company as required under the Atena Agreement.
The option is subject to a 1% net smelter returns royalty.
During the six month period ended 30 June 2009, the Company incurred $79,980 in exporation costs for the Atena Agreement.
During the six month period ended 30 June 2009, the Company announced that is was suspending their exploration program on the Atena Gold Project for at least the remainder of 2009 and would allocated their resources exclusively to pursue the exploration and development of their property interests in Northeastern Peru, the Peruvian Agreement, as a result of the Company's decision to seek disposal of their interest in the Atena Gold Project.
Cerro Amarillo Property
On 8 January 2008, the Company entered into an assignment agreement (the “Cero Amarillo Agreement”) to explore and option the 14,221 hectare Cerro Amarillo Property located in the Province of Mendoza, Argentina with a company related to the Company by way of a director and shareholder in common. Pursuant to the terms of the Cero Amarillo Agreement, the Company issued 300,000 common shares (issued and valued at $0.70 per common share) and pay $10,000 (paid). The Company is to acquire a 100% of the option if it incurs a minimum of $450,000 in work commitment expenditures on the property and issues 2,100,000 common shares according to the following schedule (Notes 11, 14 and 15):
a. | $200,000 in expenditures (incurred $25,000) plus a further issuance of 300,000 common shares on or before 8 January 2009 (issued and valued at $0.73); |
b. | a further $250,000 in expenditures plus a further issuance of 600,000 common shares on or before 8 January 2010; |
c. | a further issuance of 600,000 common shares on or before 8 January 2011; and |
d. | a further issuance of 600,000 common shares on or before 8 January 2012. |
The Company entered into an amending agreement dated 5 May 2009 (the “Cerro Amarillo Amendment”) with PMSA. Under the Cerro Amarillo Amendment, the $200,000 in expenditures originally required to be made by the Company on the Cerro Amarillo property by 8 January 2009 is waived upon the issuance of the 300,000 common shares (issued) of the Company as required under the Cerro Amarillo Agreement.
To exercise the option the company is required to issue a further 3,000,000 common shares. The option is subject to a 1% net smelter returns royalty.
During the six month period ended 30 June 2009, the Company incurred $Nil in exploration costs for the Cerro Amarillo Agreement.
During the six month period ended 30 June 2009, the Company announced that is was suspending their exploration program on the Cerro Amarillo Property for at least the remainder of 2009 and would allocated their resources exclusively to pursue the exploration and development of their property interests in northeastern Peru, the Peruvian Agreement, as a result of the Company's decision to seek disposal of their interest in the Cerro Amarillo Property.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Amira, Amira Norte and Esparta II
On 17 March 2008, the Company entered into an assignment agreement with PMSA (the “Amira Agreement”), a company related to the Company by way of a director and shareholder in common. Under the Agreement, PMSA assigned to the Company PMSA’s right to explore and option to purchase a 90% interest in three mining properties referred to as “Amira”, “Amira Norte” and “Esparta II” (collectively, the "Properties"), which are located in the Province of Salta, Argentina. In order for the Company to keep its interest in good standing and to exercise the option to acquire a 90% interest in the Properties, the Company must make the following payments to the Titleholder, as set forth in the Amira Agreement (Note 15):
a. US$75,000 by 19 January 2009;
b. a further US$150,000 by 19 January 2010;
c. a further US$200,000 by 19 January 2011; and
d. a further US$1,000,000 by 19 January 2012, by means of which final payment the Option to acquire a
90% interest in the Properties will have been automatically exercised.
The Company entered into an amending assignment agreement dated 5 May 2009 (the “Amira Amendment”) with Silvia Rodriguez, owner of the Properties, whereby the payment originally due on 19 January 2009 under the Amira Agreement is due as follows:
a. US$25,000 on or by the end on 30 June 2009 (not paid); and
b. US$50,000 on or before by the end of 30 September 2009.
During the six month period ended 30 June 2009, the Company incurred $216 in exploration costs for the Amira Agreement.
During the six month period ended 30 June 2009, the Company announced that is was suspending their exploration program on the Properties for at least the remainder of 2009 and would allocated their resources exclusively to pursue the exploration and development of their property interests in Northeastern Peru, the Peruvian Agreement, as a result of the Company's decision to seek disposal of their interest in the Properties.
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are non-interest bearing, unsecured and have settlement dates within one year.
Included in accounts payable and accrued liabilities at 30 June 2009 is $45,000 (31 December 2008 - $200,000) related to settlement of potential legal claims on incidents arising from the mineral property interests and $20,000 for the legal fees relating to it (Notes 7, 16 and 17).
9. Due to Related Parties
As at 30 June 2009, the amount due to related parties consists of $189,193 (31 December 2008 - $12,379) payable to the directors of the Company. This balance is non-interest bearing, unsecured and has no fixed terms of repayment.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
10. Related Party Transactions
During the six month period ended 30 June 2009, the Company paid or accrued management and consulting fees of $154,958 (30 June 2008 - $173,312) to directors and officers of the Company or companies controlled by directors and officers.
During the six month period ended 30 June 2009, director and shareholder of the Company made contributions to capital for management fees and rent of $Nil (30 June 2008 - - $Nil, cumulative - $12,000) and $Nil (30 June 2008 - $Nil, cumulative - $3,000) respectively. This amount has been recorded as an increase in expenditures and an increase in additional paid-in capital (Note 14).
11. Capital Stock
Authorized
The total authorized capital consists of:
· | 300,000,000 of common shares with par value of $0.001 |
· | 50,000,000 of preferred shares with par value of $0.001 |
Issued and outstanding
As at 30 June 2009, the total issued and outstanding capital stock is 62,969,456 common shares with a par value of $0.001 per common share.
29 June 2009, the Company issued 2,000,000 common shares valued at $0.65 per common share pursuant to the Peruvian Gold Sands assignment agreement (Notes 7 and 14).
On 2 June 2009, the Company issued 2,000,000 common shares valued at $0.73 per common share pursuant to the Atena Agreement (Notes 7 and 14).
On 2 June 2009, the Company issued 300,000 common shares valued at $0.73 per common share pursuant to the Cerro Amarillo Agreement (Notes 7 and 14).
On 17 April 2009, the Company issued 200,000 Units at a price of $0.80 per Unit for proceeds of $160,000. Each unit consists of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase an additional common share at a price of $0.70 up to 17 April 2009, commencing 17 October 2009.
On 7 April 2009, a total of 1,009,211 previously outstanding share purchase warrants expired.
On 7 April 2009, a total of 70,645 previously outstanding agent compensation warrants expired.
During the year ended 31 December 2008, the company issued 2,000,000 common shares valued at $1.01 per common share in pursuant to the Peruvian Gold Sands assignment agreement (Notes 7 and 14).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
During the year ended 31 December 2008, the Company issued 350,511 agent compensation warrants for services rendered by a private placement agent. Each share purchase warrant entitles the holder to purchase one common share at a price of $1.40 up to 19 August 2009, commencing 19 February 2009 (Note 14).
During the year ended 31 December 2008, the Company issued 5,007,300 Units at a price of $0.80 per Unit for proceeds of $3,725,431, net of issue costs of $280,409. Each unit consists of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase an additional common share at a price of $1.40 up to 19 August 2009, commencing 19 February 2009.
During the year ended 31 December 2008, the Company issued 1,000,000 common shares valued at $1.59 per common share pursuant to the Atena Gold Project assignment agreement (Notes 7 and 14)
During the year ended 31 December 2008, the Company issued an additional 70,645 Units at a price of $0.70 per Unit for services rendered by a private placement agent. Each Unit consists of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase an additional common share at a price of $1.40 up to 7 April 2009, commencing 7 October 2008 (Note 14).
During the year ended 31 December 2008, the Company issued 1,009,211 Units at a price of $0.70 per Unit. Each Unit consists of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase an additional common share at a price of $1.40 up to 7 April 2009, commencing 7 October 2008.
During the year ended 31 December 2008, the Company issued 300,000 common shares valued at $0.70 per common share pursuant to the Cerro Amarillo assignment agreement (Notes 7 and 14).
During the year ended 31 December 2008, the Company issued 500,000 common shares valued at $0.70 per common share pursuant to the Atena Gold Project assignment agreement (Notes 7 and 14).
During the year ended 31 December 2007, the Company issued 1,145,300 common shares for convertible debentures of $22,906 (Note 14).
During the year ended 31 December 2007, the Company issued 1,437,000 common shares for cash proceeds of $502,950.
Share Subscriptions Received in Advance
Share subscriptions received in advance consists of $1,506,977 cash received by the Company for 4,305,648 common shares valued at $0.35 that were not yet issued at 30 June 2009.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Share Purchase Warrants
The following share purchase warrants were outstanding at 30 June 2009:
Exercise price | Number of warrants | Remaining contractual life (years) | ||||||||||
$ | ||||||||||||
Warrants | 1.40 | 5,007,300 | 0.13 | |||||||||
Agent compensation warrants | 1.40 | 350,511 | 0.13 | |||||||||
Warrants | 0.70 | 200,000 | 1.8 | |||||||||
5,557,811 |
The following is a summary of warrant activities during the six month periods ended 30 June 2009 and 2008:
Number of warrants | Weighted average exercise price | |||||||
$ | ||||||||
Outstanding at 1 January 2009 | 6,437,667 | 1.40 | ||||||
Granted | 200,000 | 0.70 | ||||||
Exercised | - | - | ||||||
Cancelled | (1,079,856 | ) | 1.40 | |||||
Outstanding at 30 June 2009 | 5,557,811 | 1.40 | ||||||
Weighted average fair value of warrants granted during the period | 0.07 |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
Number of warrants | Weighted average exercise price | |||||||
$ | ||||||||
Outstanding at 1 January 2008 | - | - | ||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Cancelled | - | - | ||||||
Outstanding at 30 June 2008 | - | - | ||||||
Weighted average fair value of warrants granted during the period | - |
The weighted average grant date fair value of warrants issued during the six month period ended 30 June 2009, amounted to $0.07 per warrant (31 December 2008 - $0.62). The fair value of each warrant granted was determined using the Black-Scholes warrant pricing model and the following weighted average assumptions:
2009 | 2008 | |||||||
Risk free interest rate | 0.57 | % | 2.02 | % | ||||
Expected life | 1 years | 1 year | ||||||
Annualized volatility | 91.00 | % | 120.80 | % | ||||
Expected dividends | - | - |
Stock Options
The following incentive stock options were outstanding at 30 June 2009:
Exercise price | Number of options | Remaining contractual life (years) | ||||||||||
$ | ||||||||||||
Options | 1.05 | 1,425,000 | 9.36 | |||||||||
Options | 1.00 | 3,210,000 | 8.60 | |||||||||
Options | 0.70 | 5,440,000 | 9.89 | |||||||||
10,075,000 |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
The following is a summary of stock-based compensation activities during the six month periods ended 30 June 2009 and 2008:
Number of shares | Weighted average exercise price | |||||||
$ | ||||||||
Outstanding at 1 January 2009 | 4,835,000 | 1.02 | ||||||
Granted | 5,440,000 | 0.70 | ||||||
Exercised | - | |||||||
Cancelled | (200,000 | ) | 1.03 | |||||
Outstanding at 30 June 2009 | 10,075,000 | 0.84 | ||||||
Weighted average fair value of options granted during the period | 0.63 |
Number of shares | Weighted average exercise price | |||||||
$ | ||||||||
Outstanding and exercisable at 1 January 2008 | 3,200,000 | 0.30 | ||||||
Granted | 6,380,000 | 1.00 | ||||||
Exercised | - | |||||||
Cancelled | (3,200,000 | ) | 0.30 | |||||
Outstanding and exercisable at 30 June 2008 | 6,380,000 | 1.00 | ||||||
Weighted average fair value of options granted during the period | 1.00 |
12. Stock-Based Compensation
During the six month period ended 30 June 2009, the Company granted 5,440,000 stock options (30 June 2008 – 6,380,000) entitling the holders to purchase common shares of the Company for proceeds of $0.70 per common share expiring 20 May 2019. A total of 200,000 of the outstanding stock options were cancelled during the six month period ended 30 June 2009 (30 June 2008 – 3,200,000) (Note 11).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
The total estimated fair value of the 2,380,000 stock options which vested during the six month period ended 30 June 2009 was $2,271,494 ($0.95 per option). During the six month period ended 30 June 2009, stock-based compensation of $2,271,494 (30 June 2008 - $Nil, cumulative - $4,930,136) has been recorded in the consolidated statement of operations with a corresponding amount recorded as contributed surplus in stockholders’ equity.
The fair value of each option was estimated on the date of grant using Black-Scholes option pricing model. The assumptions about stock-price volatility have been based exclusively on the implied volatilities of publicly traded options to buy the Company’s stock with contractual terms closest to the expected life of options granted to employees, directors or consultants applying the guidance provided by SAB 107.
The following assumptions were used for the Black-Scholes valuation of stock options granted:
2009 | 2008 | |||||||
Risk free interest rate | 3.19 | % | 3.65 | % | ||||
Expected life | 10 years | 10 years | ||||||
Annualized volatility | 120 | % | 149 | % | ||||
Expected dividends | - | - |
13. Income Taxes
The Company has losses carried forward for income tax purposes to 30 June 2009. There are no current or deferred tax expenses for the six month period ended 30 June 2009 due to the Company’s loss position. The Company has fully reserved for any benefits of these losses. The deferred tax consequences of temporary differences in reporting items for consolidated financial statement and income tax purposes are recognized, as appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
The provision for refundable federal income tax consists of the following:
For the six month period ended 30 June 2009 | For the six month period ended 30 June 2008 | |||||||
$ | $ | |||||||
Deferred tax asset attributable to: | ||||||||
Current operations | 1,515,810 | 709,021 | ||||||
Amortization | (14,473 | ) | (4,426 | ) | ||||
Stock-based compensation | (772,308 | ) | - | |||||
Provision for potential legal claims | 45,900 | - | ||||||
Less: Change in valuation allowance | (774,929 | ) | (704,595 | ) | ||||
Net refundable amount | - | - |
The composition of the Company’s deferred tax assets as at 30 June 2009 and 31 December 2008 is as follows:
As at 30 June 2009 | As at 31 December 2008 (Audited) | |||||||
$ | $ | |||||||
Net income tax operating loss carryforward | (6,072,267 | ) | (3,799,141 | ) | ||||
Statutory federal income tax rate | 34.15 | % | 34.15 | % | ||||
Effective income tax rate | 0.00 | % | 0.00 | % | ||||
Deferred tax assets | ||||||||
Tax loss carryforward | 2,073,679 | 1,296,269 | ||||||
Less: Valuation allowance | (2,073,679 | ) | (1,296,269 | ) | ||||
Net deferred tax asset | - | - |
The potential income tax benefit of these losses has been offset by a full valuation allowance.
As at 30 June 2009, the Company has an unused net operating loss carryforward balance of approximately $6,072,267 that is available to offset future taxable income. This unused net operating loss carryforward balance for income tax purposes expires between the years 2009 to 2029.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
14. Supplemental Disclosures with Respect to Cash Flows
For the period from the date of inception on 6 March 2000 to 30 June 2009 | For the three month period ended 30 June 2009 | For the three month period ended 30 June 2008 | For the six month period ended 30 June 2009 | For the six month period ended 30 June 2008 | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Supplemental cash flows information | ||||||||||||||||||||
Interest expense | 3,042 | 3,042 | - | 3,042 | - | |||||||||||||||
Foreign exchange (gain) loss | - | - | - | - | - |
During the six month period ended 30 June 2009, the Company accrued interest of $3,042 (30 June 2008 2007 - $Nil, cumulative – $3,042) on a mineral property (Note 7).
During the six month period ended 30 June 2009, the Company issued 2,000,000 common shares valued at $0.65 per common share pursuant to the Peruvian Gold Sands assignment agreement (Notes 7 and 11).
During the six month period ended 30 June 2009, the Company issued 2,000,000 common shares valued at $0.73 per common share pursuant to the Atena Agreement (Notes 7 and 11).
During the six month period ended 30 June 2009, the Company issued 300,000 common shares valued at $0.73 per common share pursuant to the Cerro Amarillo Agreement (Notes 7 and 11).
During the six month period ended 30 June 2009, director and shareholder of the Company made contributions to capital for management fees and rent of $Nil (30 June 2008 - - $Nil, cumulative - $12,000) and $Nil (30 June 2008 - $Nil, cumulative - $3,000) respectively. This amount has been recorded as an increase in expenditures and an increase in additional paid-in capital (Note 10).
During the year ended 31 December 2008, the Company issued 500,000 common shares valued at $0.70 per common share in pursuant to the Atena Gold Project assignment agreement (Notes 7 and 11).
During the year ended 31 December 2008, the Company issued 2,000,000 common shares valued at $1.01 per common share in pursuant to the Peruvian Gold Sands assignment agreement (Notes 7 and 11).
During the year ended 31 December 2008, the Company issued 300,000 common shares valued at $0.70 per common share pursuant to the Cerro Amarillo assignment agreement (Notes 7 and 11).
During the year ended 31 December 2008, the Company issued 70,645 common shares valued at $49,252 and 70,645 warrants valued at $25,252 for agent services rendered (Note 11).
During the year ended 31 December 2008, the Company issued 1,000,000 common shares valued at $1.59 per common share pursuant to the Atena Gold Project assignment agreement (Notes 7 and 11).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
During the year ended 31 December 2008, the Company issued 350,511 agent compensation warrants valued at $237,293 for agent services rendered (Note 11).
By agreements effective 18 January 2008, the Company assigned all of its rights, title and interest in the Tombaugh Lease with a book value of $481,504 to a purchaser in consideration for the purchaser assuming the Company’s outstanding payment obligations of $788,619 related to its convertible debentures. The Company recorded a gain of $307,115 upon completion of the transaction.
During the year ended 31 December 2008, the Company issued $Nil common shares (31 December 2007 – 1,145,300) for convertible debentures of $Nil (31 December 2007 - - $22,906) (Note 11).
During the period ended 31 December 2008 the Company accrued interest of $Nil (31 December 2007 - $74,770, cumulative – $126,525) on convertible debentures.
15. Commitments
The Company is subject to certain outstanding and future commitments related to its mineral property interest (Note 7).
16. Subsequent Events
Subsequent to the six month period ended 30 June 2009 to the date the financial statements were available to be issued on 4 August 2009, the following events occurred:
a. | On 20 July 2009, the Company announced that the management and the Board of Directors of the Company have adopted, approved, confirmed and ratified the merger (the “Merger”) of the Company with and into its proposed wholly owned subsidiary, Constitution Mining Corp., a Delaware Corporation (“CMC-Delaware”) which shall be created for the sole purpose of reincorporating the Company from the State of Nevada to the State of Delaware. The Merger will be submitted to a vote by the Company's shareholders at a special meeting of the Company's shareholders for the sole purpose of the approval of the plan of the Merger and its transactions contemplated thereby. |
b. | On 13 July 2009 the Company entered into a lawsuit settlement agreement that requires the Company to pay a total of $65,000, $45,000 for the settlement and $20,000 for legal expenses (Notes 7, 8 and 17). |
c. | On 9 July 2009, the Company announced a non-brokered private placement for 4,129,639 Units at a price of $0.35 per Unit for total proceeds of $1,445,374. As a result, the Company issued a total of 4,129,639 Units where each Unit consist of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase an additional common share at the price of $0.70 up to 9 July 2011, commencing 9 January 2010 (Note 11). |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
30 June 2009
17. Contingency
In January 2008, a contractor of the Company was critically injured in an automobile accident while working for the Company in the area referred to as the Atena Project located in northwestern Argentina. The contractor’s family has filed a claim in the Argentina court system seeking monetary damages from the driver of the automobile, who is considered an employee under Argentina labor law. Although the Company has not been named as a party in this action, the Company anticipates that the Company may be named as a defendant in this action. Subsequent to period end, the Company has settled the legal claims for a total amount of $65,000, $45,000 for the settlement and $20,000 for legal expenses, in the consolidated financial statements (Notes 7, 8, and 16).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) risk that we fail to meet the requirements of the agreement under which we acquired our options, including any payments or any exploration obligations that we have regarding these properties, which could result in the loss of our right to exercise the options to acquire the mineral and mining rights underlying these properties as well as the ability to recover any consideration paid to date; (ii) risk that we cannot attract, retain and motivate qualified personnel, particularly employees, consultants and contractors for our operations in Peru; (iii) risk that we will be unable to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina and be unable to recover any consideration paid concerning these property interests; (iv) our short operating history; (v) our ability to manage business expansion; (vi) risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits; (vii) results of initial feasibility, pre-feasibility and feasibility studies, and the possibility that future exploration, development or mining results will not be consistent with our expectations; (viii) mining and development risks, including risks related to accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in production; (ix) the potential for delays in exploration or development activities or the completion of feasibility studies; (x) risks related to the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses; (xi) risks related to commodity price fluctuations; (xii) the uncertainty of profitability based upon our history of losses; (xiii) risks related to failure to obtain adequate financing on a timely basis and on acceptable terms for our planned exploration and development projects; (xiv) risks related to environmental regulation and liability; (xv) risks that the amounts reserved or allocated for environmental compliance, reclamation, post-closure control measures, monitoring and on-going maintenance may not be sufficient to cover such costs; (xvi) risks related to tax assessments; (xvii) political and regulatory risks associated with mining development and exploration; (xviii) other risks and uncertainties related to our prospects, properties and business strategy; (xix) potential that stockholders may lose all or part of their investment if we are unable to compete in our industry; (xx) our dependence on key personnel; (xxi) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xxii) possible issuance of common stock subject to options and warrants that may dilute the interest of stockholders; (xxiii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404; (xxiv) our nonpayment of dividends and lack of plans to pay dividends in the future; (xxv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxvi) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvii) our stock price which is likely to be highly volatile because of several factors, including a relatively limited public float; and (xxviii) indemnification of our officers and directors.
As used in this Quarterly Report, the terms “we,” “us,” “our,” and “Constitution Mining” mean Constitution Mining Corp. and our subsidiaries, unless otherwise indicated.
Overview
We were incorporated in the state of Nevada under the name Crafty Admiral Enterprises, Ltd. on March 6, 2000. Our original business plan was to sell classic auto parts to classic auto owners all over the world through an Internet site and online store; however, we were unsuccessful in implementing the online store and were unable to afford the cost of purchasing, warehousing and shipping the initial inventory required to get the business started. As a result, we ceased operations in approximately July 2002.
During our fiscal year ended December 31, 2006, we reorganized our operations to pursue the exploration, development, acquisition and operation of oil and gas properties. On June 27, 2006, we acquired a leasehold interest in a mineral, oil and gas property located in St. Francis County, Arkansas for a cash payment of $642,006, pursuant to an oil and gas agreement we entered into on April 29, 2006 (the “Tombaugh Lease”). Shortly after acquiring the Tombaugh Lease, we suspended our exploration efforts on the property covered by the Tombaugh Lease in order to pursue business opportunities developing nickel deposits in Finland, Norway and Western Russia. On January 18, 2008, we assigned all of our right, title and interest in and to the Tombaugh Lease to Fayetteville Oil and Gas, Inc., which agreed to assume all of our outstanding payment obligations on the Tombaugh Lease as consideration for the assignment. On March 9, 2007, we changed our name to better reflect our business to “Nordic Nickel Ltd.” pursuant to a parent/subsidiary merger with our wholly-owned non-operating subsidiary, Nordic Nickel Ltd., which was established for the purpose of giving effect to this name change. We were not successful pursuing business opportunities developing nickel deposits in Finland, Norway and Western Russia and again sought to reorganize our operations in November 2007.
In November 2007, we reorganized our operations and changed our name to “Constitution Mining Corp.” to better reflect our current focus which is the acquisition, exploration, and potential development of mining properties. Since November 2007, we entered into agreements to secure options to acquire the mineral and mining rights underlying properties located in the Salta and Mendoza provinces of Argentina and in northeastern Peru.
We are considered an exploration or exploratory stage company because we are involved in the examination and investigation of land that we believe may contain valuable minerals, for the purpose of discovering the presence of ore, if any, and its extent. There is no assurance that a commercially viable mineral deposit exists on any of the properties underlying our mineral property interests, and a great deal of further exploration will be required before a final evaluation as to the economic and legal feasibility for our future exploration is determined. We have no known reserves of any type of mineral. To date, we have not discovered an economically viable mineral deposit on any of the properties underlying our mineral property interests, and there is no assurance that we will discover one. If we cannot acquire or locate mineral deposits, or if it is not economical to recover any mineral deposits that we do find, our business and operations will be materially and adversely affected.
Our current business plan calls for investing any surplus operating capital resulting from retained earnings into bullion accounts and does not include holding retained earnings, if any, in cash or cash equivalents. In the event that commercially exploitable reserves of minerals exist on any of our property interests and we are able to make a profit, our business plan is to sell enough mineral reserves to satisfy all of our expenses and invest all retained mineral reserves in bullion accounts established in Zurich, Switzerland. The price of precious and base metals such as gold and silver has fluctuated widely in recent years, and is affected by numerous factors beyond our control, including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities and increased production due to new extraction developments and improved extraction and production methods. The effect of these factors on the price of base and precious metals, and, therefore, the change in the value of our retained earnings, if any, held in bullion accounts cannot accurately be predicted and is subject to significant fluctuation. There can be no assurance that the value of any bullion accounts established by us in the future to hold retained mineral reserves, if any, will not be adversely impacted by fluctuations in the price of base and precious metals resulting in significant losses.
In light of the current economic environment, our management in this second quarter of fiscal 2009 determined that it was necessary to reassess the Company’s current direction and proposed plans for exploration. In connection with this review, we announced that we were suspending our exploration program on the properties located in the Salta and Mendoza provinces of Argentina for at least the remainder of 2009 and would allocate our resources exclusively to pursue the exploration and development of our property interests in northeastern Peru.
We continued to monitor the current economic environment globally and within Argentina and have noted an increasing trend toward instability within Argentina. Rising and excessive inflation rates in Argentina have significantly increased the costs of the proposed operations in Argentina beyond our initial expectations. We believe, after further evaluation, that Argentinean governmental bodies are pursing policies and regulations which would adversely impact our planned operations in Argentina. We currently have a working capital deficiency and believe that it is presently not the best allocation of our resources to conduct exploration activities in two different countries. For the foregoing reasons, we have determined it to be in our best interest to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as soon as practicable so as to prevent any default on any of these underlying option agreements.
We are reviewing our available alternatives to dispose of our interests in the Argentinean properties for value. We will continue to canvass a number of qualified parties with respect to a possible transaction and one party has requested information regarding the Atena Property. At the present time, there is no certainty that we will successfully be able to complete a disposition for value of any or all of our interests in the properties located in the Salta and Mendoza provinces of Argentina. In the event that we cannot complete a disposition of our interests in these Argentinean properties and we default on any of these underlying option agreements, our rights to acquire the underlying mineral and mining rights will revert back to Proyectos Mineros S.A. (“PMSA”) (formerly Recursos Maricunga S.A.), the assignor, and we may not be entitled to recover of any consideration we have paid to date, an aggregate of 4,100,000 shares of our common stock and $70,000.
The assignor for the properties located in the Salta and Mendoza provinces of Argentina is PMSA. Dr. Willem Fuchter, our Chief Executive Officer and board member, is also the president and director of PMSA and holds a 50% ownership interest in the voting securities of PMSA. As a result of this conflict of interest, Dr. Fuchter abstained from the board of director’s vote approving the decision to seek to dispose of our interests in the Argentinean properties.
Peru Property
Our properties located in Peru are in the exploration state. These properties are without known reserves and the proposed plan of exploration detailed below is exploratory in nature. These properties are described below.
On September 29, 2008 (the “Effective Date”), we entered into a Mineral Right Option Agreement (the “Option Agreement”) with Temasek Investments Inc. (“Temasek”), a company incorporated under the laws of Panama in relation to the Peru property. Pursuant to the Option Agreement, we acquired four separate options from Temasek, each providing for the acquisition of a twenty-five percent interest in certain mineral rights in Peru described in Annex 1 of the Option Agreement (the “Mineral Rights”), pursuant to which we could potentially acquire one hundred percent of the Mineral Rights. The Mineral Rights are owned by Compañía Minera Marañón S.A.C. (“Minera Marañón”). Bacon Hill Invest Inc. (“Bacon Hill”), a corporation incorporated under the laws of Panama and a wholly-owned subsidiary of Temasek, owns 999 shares of the 1,000 shares of Minera Marañón that are issued and outstanding. Temasek owns the single remaining share of Minera Marañón. The acquisition of each twenty-five percent interest in the Mineral Rights will occur through the transfer to us of twenty-five percent of the outstanding shares of Bacon Hill.
A description of the Mineral Rights is set forth below:
Name | Area (hectares) | Dept. | Province | District | Observation |
Aixa 2 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Alana 10 | 900 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 11 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 12 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 13 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 14 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 15 | 800 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 16 | 800 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 17 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 18 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 19 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 4 | 900 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 5 | 700 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 6 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 7 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 8 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Alana 9 | 1000 | Loreto | Datem del Marañon | Manseriche | Fully overlap Zona de Amortiguamiento ANP |
Bianka 5 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Castalia 1 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Castalia 2 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Castalia 3 | 500 | Loreto | Datem del Marañon | Manseriche | |
Delfina 1 | 900 | Amazonas | Condorcanqui | Nieva | Partially overlap Zona de Amortiguamiento ANP |
Delfina 2 | 900 | Amazonas | Condorcanqui | Nieva | Partially overlap Zona de Amortiguamiento ANP |
Delfina 3 | 1000 | Amazonas | Condorcanqui | Nieva | Partially overlap Zona de Amortiguamiento ANP |
Delfina 4 | 700 | Amazonas | Condorcanqui | Nieva | Partially overlap Zona de Amortiguamiento ANP |
Delfina 5 | 1000 | Amazonas | Condorcanqui | Nieva | Partially overlap Zona de Amortiguamiento ANP |
Mika 1 | 600 | Loreto | Datem del Marañon | Manseriche | |
Mika 10 | 900 | Loreto | Datem del Marañon | Manseriche | Partially overlap Zona de Amortiguamiento ANP |
Mika 2 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Mika 3 | 900 | Loreto | Datem del Marañon | Manseriche | |
Mika 4 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Mika 5 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Mika 6 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Mika 7 | 900 | Loreto | Datem del Marañon | Manseriche | |
Mika 8 | 1000 | Loreto | Datem del Marañon | Manseriche | Partially overlap Zona de Amortiguamiento ANP |
Mika 9 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Rosalba 1 | 900 | Loreto | Datem del Marañon | Manseriche | |
Rosalba 2 | 900 | Loreto | Datem del Marañon | Manseriche | |
Rosalba 3 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Rosalba 4 | 1000 | Loreto | Datem del Marañon | Manseriche | |
Rosalba 5 | 1000 | Loreto | Datem del Marañon | Manseriche - Barranca |
We may exercise the initial twenty-five percent option, which provides for the acquisition of a twenty-five percent interest in the Mineral Rights, after fulfilling the following conditions:
· Payment of $375,000 to Temasek upon execution of the Option Agreement;
· Issuance of 2,000,000 shares of our common stock to Temasek within five business days from the Effective Date; and
· Payment of an additional $375,000 to Temasek within ninety days of the Effective Date.
Since the execution of the Option Agreement, we have paid a total of $750,000 and have issued 2,000,000 shares of our common stock to Temasek in accordance with the terms of the Option Agreement, enabling us to exercise the initial twenty-five percent option and acquire a twenty-five percent interest in the Mineral Rights.
The Option Agreement provided that we may exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, after fulfilling the following conditions within six months of the Effective Date:
· Payment of an additional $1,250,000 to Temasek, and
· Issuance of 2,000,000 additional shares of our common stock to Temasek.
On May 12, 2009, we entered into an agreement with Temasek to amend the Temasek Option Agreement (the “Amended Option Agreement”) in order to revise the conditions required by us to exercise the second twenty-five percent option. Under the terms of the Amended Option Agreement, we may exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, after fulfilling the following conditions:
· Issuance of 2,000,000 additional shares of our common stock to Temasek within six months from the Effective Date
or as soon as practicable thereafter (which shares were issued in June 2009), and
· Payment within 12 months from the Effective Date of an additional $1,250,000 to Temasek plus interest at a rate of 5%
per annum accruing from the date of the Amended Option Agreement to the date such payment is made.
On June 29, 2009, we issued 2,000,000 shares of common stock to Temasek and its designees as partial consideration for the exercise of the second twenty-five percent option to acquire an aggregate fifty percent interest in the Mineral Rights. We will be able to exercise the second twenty-five percent option, resulting in the acquisition of an aggregate fifty percent interest in the Mineral Rights, if on or before September 29, 2009, we pay $1,250,000 to Temasek, plus interest at a rate of 5% per annum accruing from May 12, 2009, the date of the Amended Option Agreement, to the date that payment is made. We will require additional financing in order to be able to exercise the second twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the second twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the second twenty-five percent option. In the event that we are unable to secure additional financing in order to be able to exercise the second twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to our twenty-five percent interest.
We may exercise the third twenty-five percent option, resulting in our acquisition of a seventy-five percent interest in the Mineral Rights, after fulfilling the following conditions within twelve months of the Effective Date (September 29, 2009):
· Payment of an additional $3,000,000 to Temasek, and
· Issuance of 2,000,000 additional shares of our common stock to Temasek.
We will require additional financing in order to be able to exercise the third twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the third twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the third twenty-five percent option. In the event that we have exercised the second twenty-five percent option, but are unable to secure sufficient financing in order to be able to exercise the third twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to a fifty percent interest.
We may exercise the fourth twenty-five percent option, resulting in our acquisition of a one hundred percent interest in the Mineral Rights, after fulfilling the following conditions within eighteen months of the Effective Date (March 29, 2010):
· | Payment of an additional $5,000,000 to Temasek, and |
· | Issuance of 4,000,000 additional shares of our common stock to Temasek. |
We will require additional financing in order to be able to exercise the fourth twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the fourth twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the fourth twenty-five percent option. In the event that we have exercised the third twenty-five percent option, but are unable to secure sufficient financing in order to be able to exercise the fourth twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to a seventy-five percent interest.
Upon our fulfillment of the conditions set forth above resulting in our acquisition of a one hundred percent interest in the Mineral Rights, Temasek will hold its single share of Minera Marañón in trust for our sole benefit and hold the share strictly in accordance with our instructions.
In the event that we acquired a one hundred percent interest in the Mineral Rights, Temasek is entitled to an annual 2.5% net returns royalty related to the Mineral Rights. However, if we pay Temasek $2,000,000 within ninety days of our acquisition of a one hundred percent interest in the Mineral Rights, Temasek will only be entitled to an annual 1.0% net returns royalty related to the Mineral Rights.
If we exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, but we fail to acquire a one hundred percent interest in the Mineral Rights, the Option Agreement provides that we and Temasek will form a joint venture for the purpose of placing the Peru Property into commercial production. In the event that this condition is satisfied and we enter into a joint venture agreement with Temasek, our responsibilities under the joint venture would include developing a feasible mining project and all necessary facilities and Temasek shall retain a carried free interest in the mining rights. If we enter into a joint venture with Temasek, but do not develop a feasible mining project within three years of the Effective Date (September 29, 2011), we will be required to pay Temasek an advance minimum mining royalty of $500,000 per year, which will be deducted from Temasek’s net return royalty on the Mineral Rights.
Proposed Exploration Program
Shortly after our acquisition of the Peru property in September 2008, we commenced the initial stages of our exploration and development program and have carried out the following activities:
· | Completed an initial social base line study to document all surface rights owners and people resident in the project area; |
· | Implemented a community relations program to inform local communities of the project and what potential opportunities that may exist for community involvement in the implementation phases of the development program; |
· | Submitted a Declaración de Impacto Ambiental to the Ministry of Mines and Energy in Peru and received approval to start the exploration; |
· | Completed the field work for the Evaluación de Impacto Ambiental semidetallado which, if approved by the Peruvian Ministry of Mines & Energy, will allow us to undertake extensive drilling and bulk sampling programs; |
· | Acquired churn drilling equipment for further evaluation and development of resources; |
· | Set-up an operational base in the project area in the town of Saramiriza; |
· | Contracted various consulting firms and experienced and knowledgeable individuals with specific skills in the exploration of alluvial deposits to assist us with the exploration and development of the Peru property; and |
· | Commissioned and subsequently received a preliminary master plan which indicated the size and scope of our projected operations and areas where more information is required. |
The principle objective of our planned exploration and development program is to bring a dredger and appropriately matched floating plant onto the property to assist us in conducting trial mining tests which requires that we undertake the following actions:
· | Drill an area on the property where known mineralization exists at closely-spaced centers in accordance with mining industry standards; |
· | Extend the resource though a wider-spaced program of reconnaissance drilling so as to indicate the potential size of the deposit; |
· | Perform additional geotechnical and metallurgical studies to complement existing information in order to prepare the optimum processing route to be adopted in the exploitation phase; and |
· | Prepare scoping, prefeasibility, and full feasibility studies. |
An exploration base was set up in the town of Saramiriza. Provided we are successful in securing additional financing, a seismic survey is anticipated to be conducted along selected lines across the Marañón gravels in order to define the limit of the gold bearing sands and gravels and be completed by December 2009. The selection of seismic lines will be made on the basis of interpretation of aerial photos and satellite images, as well as from reconnaissance-scale mapping of sedimentary features. Scout drilling utilizing churn drills will be undertaken on favorable areas, and anomalous zones will be followed up with reverse circulation drilling in order to fully develop resources and reserves.
We recently purchased churn drilling equipment in the United States and had it shipped to Peru. The equipment cost approximately $85,000 and we acquired such funds through the issuance of securities in private equity offerings. The drill is now in place on the project and our plans are to commence drilling in August 2009 and continue drilling for a period of 18 months. If we are unable to secure additional financing in the near future, we will be unable to sustain any drilling activity and be forced to cease our exploration and development program. Our plans currently anticipate that 200 holes will be drilled to a depth of 50m at 100m centers in the area of known mineralization, with a view to developing a reserve which will sustain trial or pilot mining by a bucket wheel dredge connected to a floating processing plant by December 2010. At the same time, we anticipate that an additional 300 holes will be drilled to a depth of 50m at one-kilometer spacing along fences of holes spaced 5 kilometers apart across the 20km-wide alluvial field in order to extend the mineralization and the resource potential. The objective of this drilling is to define additional resources in order to sustain a fleet of high capacity dredges and floating plants in the future. Bulk samples collected by excavating small pits and shafts will be required for metallurgical testing as well as to confirm drill results. At the same time, mine development planning, process design, and other engineering studies will be conducted with a view to completing a feasibility study within a twenty-four month period. Permitting is anticipated to be initiated as early in the exploration and development cycle as possible, so that trial or pilot dredging can be started as soon as feasibility has been established.
Our current cash on hand is insufficient to complete any of the activities set forth in our planned exploration program. If we are unable to secure additional financing in the near future, we will be forced to cease our exploration and development program. Provided we are able to secure additional financing through ongoing private equity offerings, we anticipate that we will incur the following costs for the next twelve months:
Activity | USD 000s |
MINERAL PROPERTY COSTS: | |
Surface Rights Access | 150 |
EXPLORATION | |
Mapping | 230 |
Geophysics - Seismic | 400 |
DRILLING | |
Reconnaissance | 1,500 |
Resource Definition | 2,000 |
GEOTECHNICAL | 200 |
Pits & Shafts | |
TECHNICAL SERVICES | |
Consultants | 580 |
Personnel | 430 |
CAMP AND FIELD EXPENSES | |
Camp | 630 |
Field | 250 |
TRANSPORT AND LOGISTICS | |
Air Transport | 480 |
Water Transport | 120 |
Ground Transport | 150 |
EQUIPMENT & PERMITTING | 210 |
COMMUNITY OUTREACH | 300 |
ADMINISTRATION | 150 |
TOTAL | 7,780 |
Atena Property
On December 12, 2007, we entered into an assignment agreement with Proyectos Mineros S.A. (“PMSA”) (formerly Recursos Maricunga S.A.) to acquire PMSA’s right to explore and an option (the “Atena Option”) to purchase certain mineral rights on properties known as the Atena Gold Project (“Atena”) located in the Salta Province of Argentina (the “Atena Property”). The Atena Property consists of an aggregate 3,676 hectares. PMSA acquired its right to explore and the Atena Option to purchase the mineral rights to these properties from Rio Tinto Mining & Exploration Ltd., Argentine Branch.
The mineral rights on the Atena Property consist of mining claims referred to in Argentina as “minas” which remain valid so long as the annual fee referred to as “canon minero” is paid.
Pursuant to the terms of the assignment agreement, we issued to either PMSA or its designees 3,500,000 shares of our common stock and paid PMSA $60,000. In order to acquire 100% of this Atena Option, we must incur a minimum of an additional $3,500,000 in work commitment expenditures on the Atena Property (the “Atena Expenditures”) and issue 4,000,000 shares of our common stock to PMSA in accordance with the following schedule:
· | $1,500,000 in Atena Expenditures, plus a further issuance of 4,000,000 shares of our common stock on or before March 15, 2010; and |
· | a final $2,000,000 payment in Atena Expenditures on or before March 15, 2011. |
In the event that we completed the acquisition and payment of the consideration set forth above, we would be required to grant PMSA a 1% net smelter returns royalty. The Atena Option grants us the exclusive possession of the properties for mineral exploration, together with the right to purchase the minerals rights to these properties upon exercise of the Atena Option.
We do not expect to incur any additional expenditures related to the Atena Property as a result of our decision to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as was described above. In the event that we cannot complete a disposition of our interests in the Atena Property and we default on the underlying option agreement, our rights to acquire the underlying mineral and mining rights will revert back to the assignor and we may not be entitled to recover of any consideration we have paid to date, an aggregate of 3,500,000 shares of our common stock and $60,000. The assignor for the Atena Property is PMSA. Dr. Willem Fuchter, our Chief Executive Officer and board member, is also the president and director of PMSA and holds a 50% ownership interest in the voting securities of PMSA. As a result of this conflict of interest, Dr. Fuchter abstained from the board of director’s vote approving the decision to seek to dispose of our interests in the Atena Property.
Amira, Amira Norte and Esparta II Properties
Effective March 17, 2008, we entered into an assignment agreement with PMSA, whereby PMSA assigned to us PMSA’s right to explore and an option (the “Amira-Esparta Option”) to purchase a 90% interest in the mineral rights of three mining properties referred to as “Amira”, “Amira Norte” and “Esparta II”, located in the Province of Salta, Argentina (the “Amira-Esparta Properties”). Pursuant to the terms of our agreement with PMSA, PMSA has assigned to us all of PMSA’s rights and obligations under an option agreement by and between PMSA and the registered titleholder to the Amira-Esparta Properties, Ms. Silvia Rene Rodriguez, in consideration of our recognizing to PMSA a 1% net smelter returns royalty on the Amira-Esparta Properties. The mineral rights underlying the Amira-Esparta Properties consist of manifestations of discovery (referred to as “manifestciones de descubrimientos”), which are a form of mineral title that allows the conversion of exploration concessions (referred to as “cateos”) to mining claims (referred to as “minas”). The manifestations of discovery are used as a basis for location of mining claims, but do not have a definite area until the claims are proposed. Within a period following designation of a manifestation of discovery, the claimant may do further exploration, if necessary, to determine the size and shape of the ore body. All of these forms of mineral title require the payment of an annual fee referred to as “canon minero.”
In order for us to keep our interest in good standing and to exercise the Amira-Esparta Option, we must make the following payments to Ms. Rodriguez, as set forth in the underlying option agreement:
· | $75,000 on or before January 19, 2009; |
· | an additional payment of $150,000 on or before January 19, 2010; |
· | an additional payment of $200,000 on or before January 19, 2011; and |
· | a final payment of $1,000,000 on or before January 19, 2012, which shall also be the final payment required and such payment will cause the Amira-Esparta Option to have been automatically exercised. |
As of January 19, 2009, we had not paid Ms. Rodriguez the $75,000 payment required in order to be able to exercise the Amira-Esparta Option. Ms. Rodriguez agreed to modify the payment terms for this payment. As a result of this modification to the payment terms, Ms. Rodriguez was due to be paid $25,000 on or before June 30, 2009 and $50,000 on or before September 30, 2009 in order to satisfy this obligation. We did not make our scheduled $25,000 payment which was required to be paid to Ms. Rodriguez prior to June 30, 2009 and are currently in default on the Amira-Esparta Option. At the present time, we have not received any notice of default from Ms. Rodriguez. In the event that we were to receive a notice of default from Ms. Rodriguez, we would have 30 calendar days to cure the default. In the event that we failed to cure the default within 30 calendar days of being provided with such notice, we could lose our entire interest in the Amira-Esparta Option.
We do not expect to incur any additional expenditures related to the Amira-Esparta Properties as a result of our decision to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as was described above. In the event that we cannot complete a disposition of our interests in the Amira-Esparta Properties and we are unable to cure our default of the underlying option agreement, our rights to acquire the underlying mineral and mining rights will revert back to the assignor. The assignor for the Amira-Esparta Properties is PMSA. Dr. Willem Fuchter, our Chief Executive Officer and board member, is also the president and director of PMSA and holds a 50% ownership interest in the voting securities of PMSA. As a result of this conflict of interest, Dr. Fuchter abstained from the board of director’s vote approving the decision to seek to dispose of our interests in the Amira-Esparta Properties.
Cerro Amarillo Property
On January 8, 2008, we entered into an assignment agreement with PMSA to acquire PMSA’s right to explore and option (the “Cero Amarillo Option”) to purchase certain mineral rights on properties known as the Cerro Amarillo Property located in the Departamento Malargue, Province of Mendoza, Argentina (the “Cerro Amarillo Property”). The Cerro Amarillo Property consists of an aggregate 14,221.7 hectares.
The mineral rights underlying the Cerro Amarillo Property consist of manifestations of discovery (referred to as “manifestciones de descubrimientos”), which are a form of mineral title that allows the conversion of exploration concessions (referred to as “cateos”) to mining claims (referred to as “minas”). The manifestations of discovery are used as a basis for location of mining claims, but do not have a definite area until the claims are proposed. Within a period following designation of a manifestation of discovery, the claimant may do further exploration, if necessary, to determine the size and shape of the ore body. All of these forms of mineral title require the payment of an annual fee referred to as “canon minero.”
Pursuant to the terms of the assignment agreement, we issued to either PMSA or its designees 600,000 shares of our common stock and paid PMSA $10,000 in July 2008. In order to acquire 100% of this Cerro Amarillo Option, we must incur a minimum of an additional $450,000 in work commitment expenditures on the Cerro Amarillo Property (the “Cerro Amarillo Expenditures”) and issue 1,800,000 shares of our common stock to PMSA in accordance with the following schedule:
· | $450,000 in Cerro Amarillo Expenditures, plus a further issuance of 600,000 shares of our common stock on or before January 8, 2010; |
· | an additional issuance of 600,000 shares of our common stock on or before January 8, 2011; and |
· | a final issuance of 600,000 shares of our common stock on or before January 8, 2012. |
In the event that we exercised the Cerro Amarillo Option and acquired 100% of the Cerro Amarillo Property, we would be required to issue an additional 3,000,000 shares of our common stock to PMSA. The Cerro Amarillo Option is subject to a 1% net smelter returns royalty on the Cerro Amarillo Property in favor of the underlying titleholder. The Cerro Amarillo Option contains certain work expenditure obligations, which are intended to be satisfied by the Cerro Amarillo Expenditures.
We do not expect to incur any additional expenditures related to the Cerro Amarillo Property as a result of our decision to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as was described above. In the event that we cannot complete a disposition of our interests in the Cerro Amarillo Property and we default on the underlying option agreement, our rights to acquire the underlying mineral and mining rights will revert back to the assignor and we may not be entitled to recover of any consideration we have paid to date, an aggregate of 600,000 shares of our common stock and $10,000. The assignor for the Cerro Amarillo Property is PMSA. Dr. Willem Fuchter, our Chief Executive Officer and board member, is also the president and director of PMSA and holds a 50% ownership interest in the voting securities of PMSA. As a result of this conflict of interest, Dr. Fuchter abstained from the board of director’s vote approving the decision to seek to dispose of our interests in the Cerro Amarillo Property.
Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008
We have not generated any revenues from operations since our inception.
We incurred operating expenses in the amount of $1,938,130 for the three months ended June 30, 2009, as compared to operating expenses of $905,442 for the three months ended June 30, 2008. We incurred operating expenses in the amount of $4,593,868 for the six months ended June 30, 2009, as compared to operating expenses of $2,395,017 for the six months ended June 30, 2008. The substantial increase in our operating expenses for the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, relates to stock-based compensation expenditures incurred during the three and six months ended June 30, 2009. We reported stock-based compensation of $774,274 for the three months ended June 30, 2009 and $2,271,494 for the six months ended June 30, 2009, compared to nil stock-based compensation for the three or six months ended June 30, 2008.
We reported other income of $136,713 during the three months ended June 30, 2009, as compared to other income of $8,710 for the three months ended June 30, 2008. The increase in other income for the three months ended June 30, 2009, as compared to the three months ended June 30, 2009, relates to us entering into a settlement agreement of potential legal claims in an amount which was $135,000 less than the provision amount for potential legal claims which we had previously recorded.
We reported other income of $141,855 during the six months ended June 30, 2009, as compared to other income of $309,660 for the six months ended June 30, 2008. The substantial decrease in other income for the six months ended June 30, 2009, as compared to the six months ended June 30, 2009, is attributable to a one time event in 2008 where we assigned all of our right, title and interest in and to a leasehold interest in an oil and gas property located in St. Francis County, Arkansas to an assignee who agreed to assume all of our outstanding payment obligations as consideration for the assignment. In connection with this assignment, we reported other income of $307,115 during the six months ended June 30, 2008.
As a result of the above, for the three months ended June 30, 2009, we reported a net loss of $1,801,407, as compared to a net loss of $896,732 for the three months ended June 30, 2008. We reported a net loss of $4,452,013 for the six months ended June 30, 2009, as compared to a net loss of $2,085,357 for the six months ended June 30, 2008. The increase in our net loss was primarily attributable to increased operating expenses incurred as a result of stock-based compensation expenditures incurred during the three and six months ended June 30, 2009, as compared to nil stock-based compensation expenditures incurred during the three or six months ended June 30, 2008.
As a result of the above, the basic and diluted loss per common share was $0.030 and $0.018 for the three months ended June 30, 2009 and 2008, respectively. The basic and diluted loss per common share was $0.074 and $0.042 for the six months ended June 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
At June 30, 2009, we had cash and cash equivalents of $117,830 (December 31, 2008 - $66,580) and a working capital deficit of $744, 003 (December 31, 2008 - $162,440).
During the three month period following the date of this report, we anticipate that we will not generate any revenue. Our proposed plan of exploration anticipates that we will incur exploration related expenditures of $7,780,000 over the next twelve months. We anticipate spending approximately $200,000 in ongoing general and administrative expenses per month for the next twelve months, for a total anticipated general and administrative expenditures of $2,400,000 over the next twelve months. The general and administrative expenses for the year will consist primarily of professional fees for the audit and legal work relating to our regulatory filings throughout the year, investor relations related expenditures, as well as transfer agent fees and general office expenses. Our current cash on hand is insufficient to be able to make our planned exploration expenditures and to pay for our general administrative expenses over the next twelve months. Accordingly, we must obtain additional financing in order to continue our plan of operations during and beyond the next twelve months. We believe that debt financing will not be an alternative for funding additional phases of exploration as we do not have limited tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. We are currently seeking additional funding in the form of equity financing from the sale of our common stock, but cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our complete exploration program. In the absence of such financing, we will not be able to pursue our exploration program and maintain our mineral property interests in good standing. If we do not fulfill the terms of any of these option agreements according to our business plan, then our ability to commence or continue operations could be materially limited. We also may be forced to abandon our mineral property interests and cease operations.
Due to our ongoing need to obtain additional financing to fund our operations in the current economic environment, our management determined during this reporting period initially that it would be in our best interest to postpone indefinitely our exploration program on the properties located in the Salta and Mendoza provinces of Argentina for at least the remainder of 2009 and exclusively pursue the exploration and development of our property interests in northeastern Peru. Following further review, we determined it to be in our best interest to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as soon as practicable so as to prevent any default on any of these underlying option agreements. If we are unable to raise additional capital in the near future, we will continue to experience liquidity problems and management expects that we will need to further curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.
We may also consider entering into a joint venture arrangement to provide the required funding to explore the properties underlying our mineral property interests. We have not undertaken any efforts to locate a joint venture participant. Even if we determine to pursue a joint venture participant, there is no assurance that any third party would enter into a joint venture agreement with us in order to fund exploration of the properties underlying our mineral property interests. If we enter into a joint venture arrangement, we would likely have to assign a percentage of our interest in our mineral property interests to the joint venture participant.
Cash Used in Operating Activities
Operating activities for the six months ended June 30, 2009 and 2008 used cash of $1,505,469 and $544,379, respectively, which reflect our recurring operating losses. Our net loss of $4,452,013 for six months ended June 30, 2009 was the primary reason for our negative operating cash flow, as compared to our net loss of $2,085,357 for the six months ended June 30, 2008.
Cash Used in Investing Activities
For the six months ended June 30, 2009, we used $110,258 in investing activities, as compared to $120,602 used in investing activities during the six months ended June 30, 2008. For the six months ended June 30, 2009, we purchased $85,258 in equipment, and expended $25,000 in connection with the acquisition of mineral property interests, as compared to $80,909 in purchased equipment and $39,693 in website development costs during the six months ended June 30, 2008.
Cash from Financing Activities
As we have had no revenues since inception, we have financed our operations primarily by using existing capital reserves and through private placements of our common stock. Net cash flows provided by financing activities for the six months ended June 30, 2009 was $1,666,977 as compared to $706,447 for the six months ended June 30, 2008. An increase in the cash flow provided by financing activities was primarily due to an increase in equity financing secured during the six months ended June 30, 2009, as compared to the six months ended June 30, 2008.
During the six months ended June 30, 2009, we completed a private equity offering of 4,129,639 units at $0.35 per Unit. Each unit consisted of one (1) share of common stock, par value $0.001, and one (1) common stock purchase warrant (the “ Warrant”) to purchase one (1) share of common stock, exercisable commencing six months from the closing date of the offering and terminating two years from the closing date of the offering. As a result, we issued a total of 4,129,639 shares of common stock and warrants to purchase 4,129,639 shares of common stock in connection with this private equity offering. The exercise price for the Warrant is priced at $0.70. The gross proceeds we received from this private equity offering was $1,445,374. During the six months ended June 30, 2009, we also sold to a single investor 200,000 units at $0.80 per unit. Each unit consisted of one (1) share of common stock, par value $0.001, and one (1) Warrant to purchase one (1) share of common stock, exercisable commencing six months from the issuance date and terminating one year from the issuance date. As a result, we issued a total of 200,000 shares of common stock and warrants to purchase 200,000 shares of our common stock in connection with this sale of securities. The exercise price for the Warrant is $0.70 per share of common stock. The gross proceeds we received from this sale of securities was $160,000.
Off Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
Going Concern
We have incurred net losses for the period from inception on March 6, 2000 to June 30, 2009 of $11,325,677 and have no source of revenue. The continuity of our future operations is dependent on our ability to obtain financing and upon future acquisition, exploration and development of profitable operations from our mineral properties. These conditions raise substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Mineral Property Costs
Mineral property acquisition costs are initially capitalized as tangible assets when purchased. At the end of each fiscal quarter end, we assess the carrying costs for impairment. If proven and probable reserves are established for a property and it has been determined that a mineral property can be economically developed, costs will be amortized using the units-of-production method over the estimated life of the probable reserve.
Mineral property exploration costs are expensed as incurred.
Estimated future removal and site restoration costs, when determinable are provided over the life of proven reserves on a units-of-production basis. Costs, which include production equipment removal and environmental remediation, are estimated each period by management based on current regulations, actual expenses incurred, and technology and industry standards. Any charge is included in exploration expense or the provision for depletion and depreciation during the period and the actual restoration expenditures are charged to the accumulated provision amounts as incurred.
As of the date of these financial statements, we have not established any proven or probable reserves on our mineral properties and incurred only acquisition and exploration costs.
Although we have taken steps to verify title to mineral properties in which it has an interest, according to the usual industry standards for the stage of exploration of such properties, these procedures do not guarantee our title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.
Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No.123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant). Before January 1, 2006, we accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and complied with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. We adopted SFAS No. 23(R) using the modified prospective method, which requires us to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, financial statements for the periods prior to 1 January 2006 have not been restated to reflect the fair value method of expensing share-based compensation. Adoption of SFAS No. 123(R) does not change the way we account for share-based payments to non-employees, with guidance provided by SFAS No. 123 (as originally issued) and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Foreign Currency Translation
Our functional and reporting currency is U.S. dollars. Our consolidated financial statements are translated to U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation.” Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. We have not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
International Financial Reporting Standards
In November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Under the proposed roadmap, we would be required to prepare financial statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. We are currently assessing the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2009. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Mr. Willem Fuchter, and our Chief Financial Officer, Mr. Kenneth Phillippe. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2009 that have materially affected or are reasonably likely to materially affect such controls.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
In January 2008, a contractor was critically injured in an automobile accident while working for us in the area referred to as the Atena Project located in northwestern Argentina. The contractor’s family has filed a claim in the Argentina court system seeking monetary damages in the amount of $300,000 from the driver of the automobile, who is considered an employee under Argentinean labor law. Although we were not been named as a party in this action, we have anticipated that we may be named as a defendant in this action. During the year ended December 31, 2008, we recorded provisions for potential legal claims relating to this incident in the amount of $200,000. Subsequent to the reporting period, we agreed to make scheduled payments totaling $65,000 in settlement of any potential legal claims arising out of the accident described above.
Item 1A. Risk Factors.
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Pursuant to the terms of the assignment agreement we entered into with PMSA relating to the Atena Property, we issued to PMSA and its designees a total of 2,000,000 shares of our common stock as part of the consideration required to exercise the Atena Option. These shares were issued pursuant to Section 4(2) of the Securities Act. We did not engage in any general solicitation or advertising. The stock certificate will be issued with the appropriate legends affixed to the restricted stock.
Pursuant to the terms of the assignment agreement we entered into with PMSA relating to the Cerro Amarillo Property, we issued to PMSA and its designees a total of 300,000 shares of our common stock as part of the consideration required to exercise the Cerro Amarillo Option. These shares were issued pursuant to Section 4(2) of the Securities Act. We did not engage in any general solicitation or advertising. The stock certificate will be issued with the appropriate legends affixed to the restricted stock.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our Annual Meeting of Shareholders on April 27, 2009. The director nominees named below were each elected to a term expiring at the 2010 Annual Meeting of Shareholders by the indicated votes cast for and withheld with respect to each nominee.
Name of Nominee | For | Withheld | ||
Willem Fuchter | 30,805,871 | 0 | ||
Patrick Gorman | 31,270,772 | 0 | ||
Hernan Zaballa | 30,806,486 | 0 | ||
Gary Artmont | 30,806,871 | 0 | ||
Robert Van Tassell | 31,270,772 | 0 | ||
Alois Wiget | 30,805,871 | 0 | ||
Michael Stocker | 30,806,871 | 0 |
All of the other proposals, as set forth in our proxy statement for the 2009 Annual Meeting of Shareholders, were approved by our shareholders as follows:
For | Against | Abstain | ||||
Approval of the Stock Incentive Plan, as amended. | 31,200,127 | 100,525 | 70,645 | |||
Ratification of the selection of James Stafford, Inc., Chartered Accountants to serve as our independent registered public accounting firm for 2009. | 25,382,572 | 20,385 | 0 |
Item 5. Other Information.
None.
Item 6. Exhibits.
See the Exhibit Index following the signatures page of this report, which is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Constitution Mining Corp. | |
Date: | August 14, 2009 |
By: /s/ Willem Fuchter Willem Fuchter Title: Chief Executive Officer and Director | |
Date: | August 14, 2009 |
By:/s/ Kenneth Phillippe Kenneth Phillippe Title: Chief Financial Officer |
CONSTITUTION MINING CORP.
(the “Registrant”)
(Commission File No. 000-49725)
to
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2009
Exhibit | Description | Incorporated Herein by Reference to | Filed Herewith |
10.1 | Amendment to Mineral Right Option Agreement, dated May 12, 2009 | Exhibit 10.1 of Form 10-Q filed on May 15, 2009 | |
31.1 | X | ||
31.2 | X | ||
32.1 | X |
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