The accompanying notes are an integral part of these consolidated financial statements.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
| 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 Accounting Standards Codification (the “Codification” or “ASC”) 915-10, “Development Stage Entities”. 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 September 2009 and for the nine 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 $10,130,884 for the nine month period ended 30 September 2009 (30 September 2008 – $4,998,408) and has working capital deficit of $386,590 at 30 September 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)
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.
| 2. | Changes in Accounting Policies |
The Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principle – a replacement of FASB Statement No. 162”. The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setter into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after 15 September 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.
Subsequent Events
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855, “Subsequent Events” 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. 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. The new guidance was effective on a prospective basis for interim or annual reporting periods ending after 15 June 2009. The adoption of this guidance 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)
Convertible Debt
In May 2008, the FASB issued new guidance for accounting for convertible debt instruments that may be settled in cash. The new guidance, which is now part of ASC 470-20, “Debt with Conversion and Other Options” requires the liability and equity components to be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate. 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 nonconvertible 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 new guidance was to be applied retrospectively to all periods presented upon those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Useful Life of an Intangible Assets
In April 2008, the FASB issued new guidance for determining the useful life of an intangible assets. The new guidance, which is now part of ASC 350, “Intangibles – Goodwill and Other”. In determining the useful life of intangible assets, ASC 350 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. ASC 350 also requires expanded disclosure related to the determination of intangible asset useful lives. The new guidance was effective for financial statements issued for fiscal years beginning after 15 December 2008. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued new guidance on the disclosure of derivative instruments and hedging activities. The new guidance, which is now part of ASC 815, “Derivatives and Hedging Activities” requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The new guidance was effective prospectively for financial statements issued for fiscal years beginning after 15 November 2008, with early application encouraged. The adoption of this guidance did not have a significant 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)
Business Combinations
In December 2007, the FASB issued revised guidance for accounting for business combinations. The revised guidance, which is now part of ASC 805, “Business Combination” requires the fair value measurement of assts acquired, liabilities assumed and any noncontrolling interest in the acquiree, at the acquisition date with limited exceptions. Previously, a cost allocation approach was used to allocate the cost of the acquisition based on the estimated fair value of the individual assets acquired and liabilities assumed. The cost allocation approach treated acquisition-related costs and restructuring costs that the acquirer expected to incur as a liability on the acquisition date, as part of the cost of the acquisition. Under the revised guidance, those costs are recognized in the consolidated statement of income separately from the business combination. The revised guidance applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 15 December 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Noncontrolling Interests in Consolidated Financial Statements.
In December 2007, the FASB issued new guidance for accounting for noncontrolling interests. The new guidance, which is now part of ASC 810, “Consolidation” 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. The new guidance also establishes disclosure requirements that clearly identify and distinguishes between the interests of the parent and the interests of the noncontrolling owners. The new guidance was effective for fiscal years beginning after 15 December 2008. The adoption of this guidance did not have a material effect on the Compayn’s results of operations, financial position or cash flows.
| 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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.
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 ASC 740, “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 ASC 260 “Earnings per Share”. ASC 260 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
ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at 30 September 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
Mineral property costs
Mineral property acquisition costs are initially capitalized as tangible assets when purchased. 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.
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 ASC 350-40, “Internal-Use Software”, will be expensed as incurred. The costs of website development during the planning stage, as defined under ASC 350-50, “Website 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
Segments of an enterprise and related information
ASC 280, “Segment Reporting” establishes guidance 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. ASC 280 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 Codification and does not believe it is applicable at this time.
Start-up expenses
The Company has adopted ASC 720-15, “Start-Up Costs”, 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 September 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 ASC 830, “Foreign Currency Matters”. 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
Stock-based compensation
Effective 1 January 2006, the Company adopted the provisions of ASC 718, “Compensation – Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, 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). The Company adopted ASC 718 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 ASC 718 does not change the way the Company accounts for share-based payments to non-employees, with guidance provided by ASC 505-50, “Equity-Based Payments to Non-Employees”.
Recent accounting pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)”. SFAS No. 167, which amends ASC 810-10, “Consolidation”, prescribes a qualitative model for identifying whether a company has a controlling financial interest in a variable interest entity (“VIE”) and eliminates the quantitative model. The new model identifies two primary characteristics of a controlling financial interest: (1) provides a company with the power to direct significant activities of the VIE, and (2) obligates a company to absorb losses of and/or provides rights to receive benefits from the VIE. SFAS 167 requires a company to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. SFAS No. 167, which is referenced in ASC 105-10-65, has not yet been adopted into the Codification and remains authoritative. SFAS No. 167 is effective 1 January 2010. The Company does not expect that the adoption of SFAS No. 167 will have a material impact on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfer of Financial Assets – an amendment of FASB Statement”. SFAS No. 166 removes the concept of a qualifying special-purpose entity from ASC 860-10, “Transfers and Servicing”, and removes the exception from applying ASC 810-10, “Consolidation”. This statements also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale acconting. SFAS No. 166, which is referenced in ASC 105-10-65, has not yet been adopted into the Codification and remains authoritative. This statement is effective 1 January 2010. The Company does not expect that the adoption of SFAS No. 166 will have a material impact on its consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair Value Measurement and Disclosure (Topic 820) – Measuring Liabilities at Fair Value”, which provides valuation techniques to measure fair value in circumstances in which a quoted price in an active market for the identical liability is not available. The guidance provided in this update is effective 1 January 2010. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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.
Amounts receivable are non-interest bearing, unsecured and have settlement dates within one year.
Included in amounts receivable at 30 September 2009 is $62,000 related to an amount due from a company controlled by a former director of the Company. This amount is non-interest bearing, unsecured and has no fixed terms of repayment.
| | | | | | | | | Net Book Value | |
| | | Cost | | | Accumulated amortization | | | 30 September 2009 | | | 31 December 2008 (Audited) | |
| | | | $ | | | | $ | | | | $ | | | | $ | |
| | | | | | | | | | | | | | | | | |
| Equipment | | | 210,288 | | | | 70,166 | | | | 140,122 | | | | 102,049 | |
During the nine month period ended 30 September 2009, total additions to equipment were $85,258 (30 September 2008 - $96,387).
6. Website Development Cost
| | | | | | | | | Net Book Value | |
| | | Cost | | | Accumulated amortization | | | 30 September 2009 | | | 31 December 2008 (Audited) | |
| | | | $ | | | | $ | | | | $ | | | | $ | |
| | | | | | | | | | | | | | | | | |
| Website development | | | 64,693 | | | | 33,527 | | | | 31,166 | | | | 47,295 | |
During the nine month period ended 30 September 2009, total additions to website development were $Nil (30 September 2008 - $64,693).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
| 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). |
The Company entered into an amending agreement dated 12 May 2009 (the “Peruvian Amendment”) and a second amending agreement dated 29 October 2009 (the “Second Peruvian Amendment”) with Temasek. Under the Second 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 Second Peruvian Amendment:
| a. | Exercise and complete the initial 25% option by 29 March 2009 (completed); |
| b. | Issue an additional 2,000,000 common shares by 29 March 2009 (issued and valued at $0.65) (Notes 11 and 14); |
| c. | Pay an additional $750,000 by 29 October 2009 (Note 16); |
| d. | Issue an additional 500,000 common shares by 29 October 2009 (Note 16); and |
The Company may exercise the third 25% option by fulfilling the following conditions:
| a. | Exercise and complete the initial and second 25% options by 29 October 2009; |
| b. | Issue an additional 2,000,000 common shares by 29 October 2009 (Note 16); and |
| c. | Pay an additional $3,000,000 by 31 March 2010. |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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 nine month period ended 30 September 2009, the Company incurred $1,498,014 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 16):
| 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. |
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 nine month period ended 30 September 2009, the Company incurred $87,982 in exploration costs for the Atena Agreement.
During the nine month period ended 30 September 2009, the Company announced that it 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
During the nine month period ended 30 September 2009, the Company recorded a provision for write-down of mineral property costs of $3,530,260 related to the Atena property.
Cerro Amarillo Property
On 8 January 2008, the Company entered into an assignment agreement (the “Cerro 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 Cerro 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 16):
| 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 nine month period ended 30 September 2009, the Company incurred $Nil in exploration costs for the Cerro Amarillo Agreement.
During the nine month period ended 30 September 2009, the Company announced that it 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.
During the nine month period ended 30 September 2009, the Company recorded a provision for write-down of mineral property costs of $524,000 related to the Cerro Amarillo property.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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 16):
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. 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 (not paid).
During the nine month period ended 30 September 2009, the Company incurred $4,048 in exploration costs for the Amira Agreement.
During the nine month period ended 30 September 2009, the Company announced that it 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 September 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
| 9. | Due to Related Parties |
As at 30 September 2009, the amount due to related parties consists of $236,871 (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.
| 10. | Related Party Transactions |
During the nine month period ended 30 September 2009, the Company paid or accrued management and consulting fees of $232,470 (30 September 2008 - $251,134) to directors and officers of the Company or companies controlled by directors and officers.
During the nine month period ended 30 September 2009, director and shareholder of the Company made contributions to capital for management fees and rent of $Nil (30 September 2008 - $Nil, cumulative - $12,000) and $Nil (30 September 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).
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 September 2009, the total issued and outstanding capital stock is 68,022,523 common shares with a par value of $0.001 per common share.
On 2 September 2009, the Company issued 923,428 Units at a price of $0.35 per Unit for total proceeds of $323,200. 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 2 September 2011, commencing 2 March 2010.
On 14 August 2009, a total of 5,007,300 previously outstanding share purchase warrants expired.
On 14 August 2009, a total of 350,511 previously outstanding agent compensation warrants expired.
On 9 July 2009, the Company issued 4,129,639 Units at a price of $0.35 per Unit for total proceeds of $1,445,374. 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
On 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 2010, commencing 17 October 2009.
On 7 April 2009, a total of 1,009,211 previously outstanding share purchase warrants were cancelled.
On 7 April 2009, a total of 70,645 previously outstanding agent compensation warrants were cancelled.
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).
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).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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 $1,699,350 cash received by the Company for 2,614,384 common shares valued at $0.65 that were not yet issued at 30 September 2009.
Share Purchase Warrants
The following share purchase warrants were outstanding at 30 September 2009:
| | | Exercise price | | | Number of warrants | | | Remaining contractual life (years) | |
| | | $ | | | | | | | | |
| | | | | | | | | | | |
| Warrants | | | 0.70 | | | | 200,000 | | | | 0.55 | |
| Warrants | | | 0.70 | | | | 4,129,639 | | | | 1.77 | |
| Warrants | | | 0.70 | | | | 923,428 | | | | 1.92 | |
| | | | | | | | 5,253,067 | | | | | |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
The following is a summary of warrant activities during the nine month periods ended 30 September 2009 and 2008:
| | | Number of warrants | | | Weighted average exercise price | |
| | | | | | | $ | |
| | | | | | | | |
| Outstanding at 1 January 2009 | | | 6,437,667 | | | | 1.40 | |
| | | | | | | | | |
| Granted | | | 5,253,067 | | | | 0.70 | |
| Exercised | | | - | | | | - | |
| Cancelled | | | (1,079,856 | ) | | | 1.40 | |
| Expired | | | (5,357,811 | ) | | | 1.40 | |
| | | | | | | | | |
| Outstanding at 30 September 2009 | | | 5,253,067 | | | | 0.70 | |
| | | | | | | | | |
| Weighted average fair value of warrants granted during the period | | | | | | | 0.15 | |
| | | Number of warrants | | | Weighted average exercise price | |
| | | | | | | $ | |
| | | | | | | | |
| Outstanding at 1 January 2008 | | | - | | | | - | |
| | | | | | | | | |
| Granted | | | 6,437,667 | | | | 1.40 | |
| Exercised | | | - | | | | - | |
| Cancelled | | | - | | | | - | |
| Expired | | | - | | | | - | |
| | | | | | | | | |
| Outstanding at 30 September 2008 | | | 6,437,667 | | | | 1.40 | |
| | | | | | | | | |
| Weighted average fair value of warrants granted during the period | | | | | | | 0.62 | |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
The weighted average grant date fair value of warrants issued during the nine month period ended 30 September 2009, amounted to $0.15 per warrant (30 September 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 | | | 0.89 | % | | | 2.02 | % |
| Expected life | | 1.96 years | | | 1 year | |
| Annualized volatility | | | 97.84 | % | | | 120.80 | % |
| Expected dividends | | | - | | | | - | |
Stock Options
The following incentive stock options were outstanding at 30 September 2009:
| | | Exercise price | | | Number of options | | | Remaining contractual life (years) | |
| | | $ | | | | | | | | |
| | | | | | | | | | | |
| Options | | | 1.05 | | | | 1,425,000 | | | | 9.11 | |
| Options | | | 1.00 | | | | 3,210,000 | | | | 8.35 | |
| Options | | | 0.70 | | | | 5,440,000 | | | | 9.64 | |
| | | | | | | | 10,075,000 | | | | | |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
The following is a summary of stock option activities during the nine month periods ended 30 September 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 September 2009 | | | 10,075,000 | | | | 0.84 | |
| | | | | | | | | |
| Weighted average fair value of options granted during the period | | | | | | | 0.63 | |
| | | | | | | | | |
| Outstanding and exercisable at 1 January 2008 | | | 3,200,000 | | | | 0.30 | |
| | | | | | | | | |
| Granted | | | 6,880,000 | | | | 1.00 | |
| Exercised | | | - | | | | | |
| Cancelled | | | (6,220,000 | ) | | | 0.67 | |
| | | | | | | | | |
| Outstanding and exercisable at 30 September 2008 | | | 3,860,000 | | | | 1.00 | |
| | | | | | | | | |
| Weighted average fair value of options granted during the period | | | | | | | 0.93 | |
| 12. | Stock-Based Compensation |
During the nine month period ended 30 September 2009, the Company granted 5,440,000 stock options (30 September 2008 – 6,880,000) 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 nine month period ended 30 September 2009 (30 September 2008 – 6,220,000) (Note 11).
The total estimated fair value of the 2,380,000 stock options which vested during the nine month period ended 30 September 2009 was $2,271,494 ($0.95 per option). During the nine month period ended 30 September 2009, stock-based compensation of $2,271,494 (30 September 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.
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
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.
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 | | | - | | | | - | |
The Company has losses carried forward for income tax purposes to 30 September 2009. There are no current or deferred tax expenses for the nine month period ended 30 September 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.
The provision for refundable federal income tax consists of the following:
| | | For the nine month period ended 30 September 2009 | | | For the nine month period ended 30 September 2008 | |
| | | | $ | | | | $ | |
| Deferred tax asset attributable to: | | | | | | | | |
| Current operations | | | 3,449,412 | | | | 1,699,458 | |
| Amortization | | | (21,614 | ) | | | (8,717 | ) |
| Stock-based compensation | | | (772,308 | ) | | | (691,426 | ) |
| Provision for potential legal claims | | | 45,900 | | | | - | |
| Less: Change in valuation allowance | | | (2,701,390 | ) | | | (999,315 | ) |
| | | | | | | | | |
| Net refundable amount | | | - | | | | - | |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
The composition of the Company’s deferred tax assets as at 30 September 2009 and 31 December 2008 is as follows:
| | | As at 30 September 2009 | | | As at 31 December 2008 (Audited) | |
| | | | $ | | | | $ | |
| | | | | | | | | |
| Net income tax operating loss carryforward | | | (11,730,217 | ) | | | (3,799,141 | ) |
| | | | | | | | | |
| Statutory federal income tax rate | | | 34.06 | % | | | 34.15 | % |
| Effective income tax rate | | | 0.00 | % | | | 0.00 | % |
| | | | | | | | | |
| Deferred tax assets | | | | | | | | |
| Tax loss carryforward | | | 3,995,409 | | | | 1,296,269 | |
| Less: Valuation allowance | | | (3,995,409 | ) | | | (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 September 2009, the Company has an unused net operating loss carryforward balance of approximately $11,730,217 that is available to offset future taxable income. This unused net operating loss carryforward balance for income tax purposes expires between the years 2020 to 2029.
| 14. | Supplemental Disclosures with Respect to Cash Flows |
| | | For the period from the date of inception on 6 March 2000 to 30 September 2009 | | | For the three month period ended 30 September 2009 | | | For the three month period ended 30 September 2008 | | | For the nine month period ended 30 September 2009 | | | For the nine month period ended 30 September 2008 | |
| | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash paid during the period for interest | | | - | | | | - | | | | - | | | | - | | | | - | |
| Cash paid during the period for income taxes | | | - | | | | - | | | | - | | | | - | | | | - | |
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
During the nine month period ended 30 September 2009, the Company recorded a total write-down of mineral property expenditures in the amount of $4,054,260 related to the Atena, Cerro Amarillo and Amira properties (Note 7).
During the nine month period ended 30 September 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 nine month period ended 30 September 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 nine month period ended 30 September 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 nine month period ended 30 September 2009, director and shareholder of the Company made contributions to capital for management fees and rent of $Nil (30 September 2008 - $Nil, cumulative - $12,000) and $Nil (30 September 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).
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).
Constitution Mining Corp.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
During the period ended 31 December 2008 the Company accrued interest of $Nil (31 December 2007 - $74,770, cumulative – $126,525) on convertible debentures.
The Company is subject to certain outstanding and future commitments related to its mineral property interest (Note 7).
Subsequent to the nine month period ended 30 September 2009 to the date the financial consolidated statements were available to be issued on 6 November 2009, the following events occurred:
| a. | On 20 October 2009, the Company terminated the Atena Agreement, the Cerro Amarillo Agreement and the Amira Agreement (Note 7). |
| b. | On 21 October 2009, the Company completed its reincorporation in the State of Delaware by merging into a wholly-owned subsidiary, Constitution Mining Corp., a Delaware Corporation. The reincorporation was approved by the stockholders of the Company at the special meeting of stockholders held on 21 October 2009. In the reincorporation, each outstanding share of common stock of the Company was converted into one share of common stock of the surviving Delaware corporation. |
| c. | On 29 October 2009, the Company entered into a second amending agreement with Temasek related to the Peruvian property (the “Second Peruvian Amendment”) (Note 7). |
| d. | On 2 November 2009, the Company paid $750,000 and issued 2,500,000 common shares of the Company related to Peruvian property (Note 7). |
