On March 20, 2012, the Company issued 250,000 shares of common stock to a third party in consideration for payment of legal services rendered of $129,028 and Continental’s accrued legal fees of $170,614 for a total amount of $299,642. The Company valued these common shares for $299,642 (see Note 11).
In March 2012, the Company issued 200,000 shares of common stock to a consultant in consideration for payment of public relations services rendered. The Company valued these common shares at the fair market value on the date of grants at approximately $0.55 per share or $110,000.
In March 2012, the Company issued an aggregate of 6,229,718 shares of common stock in connection with the exercise of the 11,399,150 stock warrants on a cashless basis. The Company valued these common shares at par value.
On February 23, 2012, a majority of the Company’s outstanding voting capital stock have authorized by written consent, in lieu of a special meeting of the Company’s stockholders, that the Company effect a reverse stock split at a ratio not less than two-for-one and not greater than fifteen-for-one, with the exact ratio to be set and the amendment to the Company’s Articles of Incorporation to be filed at the discretion of the Company’s Board of Directors. Currently, the Company’s stockholders have not set an exact ratio for the reverse stock split.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 12 – STOCKHOLDERS’ EQUITY (continued)
Common Stock Options
On September 29, 2010, the Company’s Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (the “2010 Plan”). The 2010 Plan reserved 2,800,000 shares of common stock for issuance. Upon the closing of the Exchange, the Company had outstanding options to purchase 2,800,000 shares of the Company’s common stock under the 2010 Plan which represents an exchange of 2,800,000 options previously granted with similar terms on June 1, 2010, prior to the reverse merger and recapitalization. In connection with these options,for the three months ended March 31, 2012, the Company recorded stock-based compensation expense of $23,270.
At March 31, 2012, there was a total of $109,388 of unrecognized compensation expense related to these non-vested option-based compensation arrangements under the 2010 Plan.
On July 22, 2011, the Company granted 2,248,000 stock options and warrants to purchase 41,566,999 shares of common stock pursuant to an asset purchase agreement entered into between the Company, Acquisition Sub and Continental (see Note 4). The 2,248,000 9-year options to purchase shares of common stock at $1.423 per share are subject to a vesting schedule based on the stock option holder's continued employment and services. For the three months ended March 31, 2012, the Company recognized stock based compensation of $407,498 which represents the portion of the vested replacement option awards attributable to post-combination services due to the assumption of the stock options of Continental which was accounted for under ASC 805-30-30-9 (“Acquirer Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees). These options were valued on the grant date at $1.11 per option using a Black-Scholes option pricing model with the following assumptions: stock price of $1.10 per share, volatility of 196%, expected term of 10 years, and a risk free interest rate of 2.99%. At March 31, 2012, there was a total of $880,785 of unrecognized compensation expense related to these non-vested replacement option awards.
During the three months ended March 31, 2012, 500,000 options were forfeited in accordance with the termination of employee relationships.
On February 9, 2012, the holders of approximately 53% of the outstanding shares of the Company's common stock voted in favor of the adoption of the Company's 2012 Equity Incentive Plan (the " 2012 Plan"). The Board approved the 2012 Plan on February 9, 2012, which reserves 40,000,000 shares of common stock for issuance thereunder in the form of incentive stock options, non-qualified stock options and restricted stock grants, issuable to the Company's officers, directors, employees and consultants.
10,000,000 options were valued on the grant date (February 9, 2012) at approximately $0.45 per option or a total of $4,537,000 using a Black-Scholes option pricing model with the following assumptions: stock price of 0.49 per share, volatility of 110%, expected term of 10 years, and a risk free interest rate of 2.04%. For the three months ended March 31, 2012, the Company recorded stock-based compensation expense of $4,537,000 in connection with the fully vested options.
On March 6, 2012, the Company granted an aggregate of 1,100,000 10-year options to purchase shares of common stock at $0.45 per share, the market price on the date of issuance, which vests 25% on date of issuance; 25% on each of December 31, 2012; December 31, 2013 and December 31, 2014 to two employees and a consultant of the Company. The 1,100,000 options were valued on the grant date at approximately $0.41 per option or a total of $448,690 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.45 per share, volatility of 103%, expected term of 10 years, and a risk free interest rate of 1.98%. For the three months ended March 31, 2012, the Company recorded stock-based compensation and stock-based consulting expense of $89,228 and 50,988 respectively.
At March 31, 2012, there was a total of $308,474 of unrecognized compensation expense related to these non-vested option-based compensation arrangements under the 2012 Plan.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 12 – STOCKHOLDERS’ EQUITY (continued)
A summary of the stock options and changes during the period are presented below:
| | | Number of Options and Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
| Balance at December 31, 2011 | | | 3,548,000 | | | $ | 1.11 | | | | 8.45 | |
| Granted | | | 11,100,000 | | | | 0.49 | | | | 10 | |
| Exercised | | | - | | | | - | | | | - | |
| Forfeited | | | (500,000 | ) | | | 0.81 | | | | 8.59 | |
| Cancelled | | | - | | | | - | | | | - | |
| Balance outstanding at March 31, 2012 | | | 14,148,000 | | | $ | 0.63 | | | | 9.46 | |
| | | | | | | | | | | | | |
| Options exercisable at March 31, 2012 | | | - | | | $ | - | | | | | |
| Options expected to vest | | | 1,827,667 | | | | | | | | | |
| Weighted average fair value of options granted during the period | | | | | | $ | 0.45 | | | | | |
Stock options outstanding at March 31, 2012 as disclosed in the above table have $710,000 intrinsic value at the end of the period.
Common Stock Warrants
On July 22, 2011, the Company granted 2,248,000 stock options and warrants to purchase 41,566,999 shares of common stock pursuant to an asset purchase agreement entered into between the Company, Acquisition Sub, and Continental (see Note 4). The assumption of stock warrants was replaced with the Company’s 3,200,000 4.5-year warrants to purchase shares of common stock at $2.835 per share granted to an affiliated company and its assignees which are subject to a vesting schedule based on the warrant holder's continued services and the Company’s 38,366,999 (ranging from 5 months to 4.60 years) warrants to purchase shares of common stock at an exercise price of $2.835 which were related to private placement sale of the Company’s common stock. For the three months ended March 31, 2012, the Company recognized stock based compensation of $165,730 which represents the portion of the vested replacement warrants awards attributable to post-combination services due to the assumption of the stock warrants of Continental which was accounted for under ASC 805-30-30-9 (“Acquirer Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees). These warrants were valued on the grant date at $1.11 per option using a Black-Scholes option pricing model with the following assumptions: stock price of $1.10 per share, volatility of 193%, expected term of 10 years, and a risk free interest rate of 1.56%. At December 31, 2011, there was $0 of unrecognized compensation expense related to these replacement warrant awards.
Out of the warrants to purchase 41,566,999 shares of common stock discussed above, a total of 2,050,666 4.5-year warrants were granted to an affiliated company, whereby a Member of the Company’s Board of directors is the President of the affiliated company.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 12 – STOCKHOLDERS’ EQUITY (continued)
Between January 2012 and February 2012, the Company sold an aggregate of 2,237,500 units with net proceeds to the Company of $847,500. Each Unit was sold for a purchase price of $0.40 per Unit and consists of: (i) one share of Common Stock and (ii) a two-year warrant to purchase fifty percent (1,118,750 warrants) of the number of shares of Common Stock purchased at an exercise price of $0.60 per share, subject to adjustment upon the occurrence of certain events. The warrants may be exercised at any time on a cashless basis at 100% of the closing price for the Common Stock on the business day immediately prior to the date of exercise. In March 2012, the Company issued 336,974 shares of common stock in connection with the exercise of these 968,750 stock warrants on a cashless basis.
On February 23, 2012, the Company entered into a Stock Purchase Agreement with two subscribers and sold 1,000,000 shares of the Series D Preferred Stock and an aggregate of 8,750,000 warrants to acquire shares of Common Stock for an aggregate purchase price of $1,000,000 (see Note 12 – Preferred Stock). On March 29, 2012, the Company issued 2,967,143 shares of common stock in connection with the exercise of these 5,250,000 stock warrants on a cashless basis.
On February 23, 2012, in connection with a Note Modification Agreement, the Company issued warrants to purchase an aggregate of 4,144,320 shares of Common Stock to Platinum and warrants to purchase an aggregate of 1,036,080 shares of Common Stock to Lakewood (see Note 7). The warrants may be exercised at any time, in whole or in part, at an exercise price of $0.40 per share until the fifth anniversary of their issuance. The warrants may be exercised on a cashless basis at any time. In February 2012, the Company issued 2,925,601 shares of common stock in connection with the exercise of these 5,180,400 stock warrants on a cashless basis.
On March 6, 2012, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock at an exercise price equal to the market price of the Company’s common stock on the date of issuance or at $0.45 per share to a consultant in consideration for services rendered. The 400,000 warrants were valued on the grant date at approximately $0.41 per option or a total of $163,155 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.45 per share, volatility of 110%, expected term of 10 years, and a risk free interest rate of 1.98%. For the three months ended March 31, 2012, the Company recognized stock based consulting of $163,155.
A summary of the status of the Company's outstanding stock warrants and changes during the period then ended is as follows:
| | | Number of Warrants | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) |
| Balance at December 31, 2011 | | | 35,603,142 | | | $ | 2.64 | | 3.94 |
| Granted | | | 15,449,150 | | | | 0.42 | | 4.81 |
| Cancelled | | | - | | | | - | | - |
| Forfeited | | | - | | | | - | | - |
| Exercised | | | (11,399,150) | | | | 0.42 | | 4.64 |
| Balance at March 31, 2012 | | | 39,653,142 | | | $ | 2.41 | | 3.85 |
| | | | | | | | | | |
| Warrants exercisable at March 31, 2012 | | | 39,653,142 | | | $ | 2.41 | | 3.85 |
| | | | | | | | | | |
| Weighted average fair value of options granted during the three months ended March 31, 2012 | | | | | | $ | 0.40 | | |
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Royalty Agreement - F.R.O.G. Consulting, LLC
On May 24, 2011, the Company, through its subsidiary, Arttor Gold, entered into two lease agreements with F.R.O.G. Consulting, LLC, an affiliate of one of the former members of Arttor Gold, for the Red Rock Mineral Property and the North Battle Mountain Mineral Prospect. The leases grant the exclusive right to explore, mine and develop gold, silver, palladium, platinum and other minerals on the properties for a term of ten (10) years and may be renewed in ten (10) year increments. The terms of the Leases may not exceed ninety-nine (99) years. The Company may terminate these leases at any time.
The Company is required under the terms of the property lease to make annual lease payments. The Company is also required to make annual claim maintenance payments to Federal Bureau of Land Management and to the county in which its property is located in order to maintain its rights to explore and, if warranted, to develop its property. If the Company fails to meet these obligations, it will lose the right to explore for gold on its property.
Until production is achieved, the Company’s lease payments (deemed “advance minimum royalties”) consist of an initial payment of $5,000 upon signing of each lease, followed by annual payments according to the following schedule for each lease:
Due Date of Advance Minimum Royalty Payment | | Amount of Advance Minimum Royalty Payment | |
| 1st Anniversary | | $ | 15,000 | |
| 2nd Anniversary | | $ | 35,000 | |
| 3rd Anniversary | | $ | 45,000 | |
| 4th Anniversary | | $ | 80,000 | |
5th Anniversary and annually thereafter during the term of the lease | | The greater of $100,000 or the U.S. dollar equivalent of 90 ounces of gold | |
In the event that the Company produces gold or other minerals from these leases, the Company’s lease payments will be the greater of (i) the advance minimum royalty payments according to the table above, or (ii) a production royalty equal to 3% of the gross sales price of any gold, silver, platinum or palladium that the Company recovers and 1% of the gross sales price of any other minerals that the Company recovers. The Company has the right to buy down the production royalties on gold, silver, platinum and palladium by payment of $2,000,000 for the first one percent (1%). All advance minimum royalty payments constitute prepayment of production royalties to FROG, on an annual basis. If the total dollar amount of production royalties due within a calendar year exceed the dollar amount of the advance minimum royalty payments due within that year, the Company may credit all uncredited advance minimum royalty payments made in previous years against fifty percent (50%) of the production royalties due within that year. The Leases also requires the Company to spend a total of $100,000 on work expenditures on each property for the period from lease signing until December 31, 2012 and $200,000 on work expenditures on each property per year in 2013 and annually thereafter.
The Company is required to make annual claim maintenance payments to the Bureau of Land Management and to the counties in which its property is located. If the Company fails to make these payments, it will lose its rights to the property. As of the date of this Report, the annual maintenance payments are approximately $151 per claim, consisting of payments to the Bureau of Land Management and to the counties in which the Company’s properties are located. The Company’s property consists of an aggregate of 305 lode claims. The aggregate annual claim maintenance costs are currently approximately $46,000.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
On July 15, 2011, the Company (the “Lessee”) entered into amended and restated lease agreements for the Red Rock Mineral Property and the North Battle Mountain Mineral Prospect by and among Arthur Leger (the “Lessor”) and F.R.O.G. Consulting, LLC (the “Payment Agent”) (collectively the “Parties”) in order to carry out the original intentions of the Parties and to correct the omissions and errors in the original lease, dated May 24, 2011. In the original lease, the Parties intended to identify Arthur Leger as the owner and lessor of the Red Rock Mineral Property and the North Battle Mountain Mineral Prospect and to designate the Payment Agent as the entity responsible for collecting and receiving all payments on behalf of Lessor. Lessor is the sole member of the Payment Agent and owns 100% of the outstanding membership interests of the Payment Agent. All other terms and conditions of the original lease remain in full force and effect. Lessor is the former Chief Geologist of Arttor Gold.
Royalty Agreement – Centerra (U.S.) Inc.
In August 2011, the Company and its subsidiary, Arttor Gold, entered into lease agreements with Centerra (U.S.) Inc. (“Centerra”). The leases grant the exclusive right to explore, mine and develop any and all metals, ores and other minerals on the properties which consist of 24 unpatented mining claims located Lander County, Nevada for a term of ten (10) years and may be renewed in ten (10) year increments. The Company may terminate these leases at any time.
The Company is required under the terms of our property lease to make annual lease payments. The Company is also required to make annual claim maintenance payments to Federal Bureau of Land Management and to the county in which its property is located in order to maintain its rights to explore and, if warranted, to develop its property. If the Company fails to meet these obligations, it will lose the right to explore for gold on its property.
Until production is achieved, the Company’s lease payments (deemed “advance minimum royalties”) consist of an initial payment of $13,616 upon signing of the lease, followed by annual payments according to the following schedule for each lease:
Due Date of Advance Minimum Royalty Payment | | Amount of Advance Minimum Royalty Payment | |
| 1st Anniversary | | $ | 12,000 | |
On or before each of the 2nd and 3rd Anniversary | | | 15,000 | |
| On or before each of the 4th and 5th Anniversary | | | 20,000 | |
| On or before each of the 6th and 7th Anniversary | | | 25,000 | |
| On or before each of the 8th and 9th Anniversary | | | 30,000 | |
10th Anniversary and subsequent anniversaries so long the agreement shall remain in effect | | 40,000 | |
In the event that the Company produces gold or other minerals from these leases, the Company agrees to pay lessor a production royalty of equal to 4% of net smelter returns for all products extracted, produced and sold from this property after recoupment of the advance minimum royalty payments previously made to lessor pursuant to the payment table above. No production royalty shall be payable on rock, dirt, limestone, or similar materials used by lessee in its operations. The Company has the right to buy down the production royalties by payment of $1,500,000 for the first one percent (1%) on or before completion of a positive feasibility study and another one percent (1%) by making cash payment of $2,500,000 on or before achievement of commercial production. The Leases also requires the Company to spend a total of $100,000 on work expenditures on this property for the period from lease signing until 5th anniversary, $150,000 on work expenditures on this property for the period from the 6th anniversary until 10th anniversary and $200,000 on work expenditures on this property per year on the 11th anniversary and annually thereafter. The Company is required to make annual claim maintenance payments to the Bureau of Land Management and to the counties in which its property is located. If the Company fails to make these payments, it will lose its rights to the property.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Agreements Purchased from Continental Resources Group, Inc.
The Company’s wholly owned subsidiary, Continental Resources Acquisition Sub, Inc. was formed in July 2011 to purchase substantially all of the assets of Continental, which assets included 100% of the outstanding shares of common stock of Green Energy Fields, Inc. and ND Energy Inc. (see Note 4). The purchased assets include certain agreements in uranium mining claims in Arizona, California and North Dakota.
Uranium Lease Agreements
In connection with the execution of the Membership Interests Sale Agreements of Secure Energy LLC, a majority-owned subsidiary of ND Energy, Inc. and Green Energy, Inc., the Company acquired the following Uranium lease agreements:
| | 1) | Slope County, North Dakota, Lease 1 and 2 |
On June 28, 2007, Secure Energy, LLC, signed a 20 year mining lease to develop and operate 472.8 acres of uranium mining properties in the Slope County, North Dakota. The Company prepaid the annual payment of $10 per net acre for eight years amounting to $36,717 at the date of signing. The Company will pay a production royalty of $0.75 per pound of all uranium sales.
| | 2) | Slope County, North Dakota, Lease 3 |
On November 23, 2007, Secure Energy, LLC signed a 10 year mining lease, with right to extend an additional 10 years to develop and operate 554.24 acres of uranium mining properties in the Slope County, North Dakota. The Company prepaid the annual payment of $10 per net acre for ten years amounting to $53,775 at the date of signing. The Company will pay a production royalty of $0.75 per pound of all uranium sales or 5% of net proceeds from the sale of uranium bearing ores.
Royalty agreements
On July 22, 2011, through the acquisition of Continental’s assets, the Company had purchased a 100% interest in certain 86 unpatented lode mining claims located in Mohave County, Arizona. The Company will pay a 3% net smelter returns royalty on all uranium sales. The Company shall have the right to reduce the royalty from 3% to 0% by paying the aggregate sum of $1,500,000 ($500,000 for each 1%).
On July 22, 2011, through the acquisition of Continental’s assets, the Company assumed the purchase and sale agreement with Absaroka Stone LLC to purchase certain unpatented mining claims commonly known as the “Uinta County (Carnotite) Uranium Prospect” located in the Uinta County of Wyoming. Pursuant to the terms of the agreement, Absaroka Stone LLC agreed not to stake for its own account any additional mining claims within a 15 mile radius of the property. Any additional mining claims to be located within a 15 mile radius of the property (the “Claim Body”) were to be located, staked and filed by the Company, at its expense and held in its name. Such agreement requires a minimum of $200,000 relating to location, maintenance, exploration, development or equipping any one or more of the mining claims that comprise the Claim Body for commercial production within 24 months from the date of the agreement. If the Company fails to incur a minimum of $200,000 in expenses related to the foregoing within 24 months, the Company shall pay an aggregate sum of $50,000 to Absaroka Stone LLC. Pursuant to the terms of the agreement, the Company would pay a 1% gross royalty to Absaroka Stone LLC on any revenues derived from the sale of all uranium-vanadium, gold, silver, copper and rare earth ores or concentrates produced from the Claim Body, up to an aggregate of $1,000,000. The Company has the option to eliminate the royalty obligations by paying Absaroka Stone LLC an aggregate payment of $1,000,000.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Litigation
On February 7, 2012, the Company obtained a copy of a complaint filed in the United States District Court for the Southern District of New York (the “Complaint”) entitled Relief Gold Group, Inc., v Sagebrush Gold Ltd, Gold Acquisition Corp., Barry C. Honig, and David S. Rector (12 civ 0952). Relief Gold alleges various causes of action including breach of contract, intentional interference with contract, intentional interference with prospective business relationship/economic relations, misappropriation of trade secrets and unjust enrichment, related to the Company’s acquisition on August 30, 2011 of the assets of the Relief Canyon Mine pursuant to Chapter 11 of the Bankruptcy Code. Plaintiff served an amended complaint on May 10, 2012. The Company’s time to answer or move with respect to the amended complaint expires on May 24, 2012.
Further, on or about February 29, 2012, Gold Acquisition Corp. (“GAC”) commenced an adversary proceeding in the United States Bankruptcy Court for the District of Nevada against Firstgold, Terence Lynch and Relief Gold Group Case No. 12-05013-GWZ. Through the adversary proceeding, GAC is seeking confirmation that all information, intellectual property and know how related to Relief Canyon was property of Firstgold that was sold to GAC. In addition, GAC moved for a preliminary injunction and temporary restraining order staying the prosecution of the above-referenced action pending in the Southern District. The motion for a preliminary injunction was denied on or about March 15, 2012. Firstgold filed a motion to dismiss the complaint on April 23, 2012; GAC’s response is due by June 6, 2012. GAC has attempted to start the discovery process and filed a motion to compel on May 11, 2012. A hearing date has not yet been set, but GAC has requested that it be heard on shortened time. A scheduling conference in this matter has been set for June 13, 2012.
GAC also filed a Motion for Order to Show Cause in Firstgold’s main bankruptcy action Case No. 10-50215-GWZ requesting that the court require Firstgold to complete documentation for conveyance of property. That motion was granted on or about February 28, 2012.
Option Agreement
On January 26, 2012, the Company entered into an Option Agreement (the “Option Agreement”) with American Strategic Minerals Corporation, a Colorado corporation (“Amicor”), pursuant to which Amicor obtained the option to acquire certain uranium exploration rights and properties held by the Company (the “Uranium Properties”), as further described herein. In consideration for issuance of the option, Amicor issued to the Company (i) a $1,000,000 promissory note payable in installments upon satisfaction of certain conditions (the “Note”), expiring six months following issuance and (ii) 10,000,000 shares of Amicor’s common stock (collectively, the “Option Consideration”). Pursuant to the terms of the Note, upon the closing of a private placement in which Amicor receives gross proceeds of at least $5,000,000 (within six months of the closing of the Option Agreement), then Amicor shall repay $500,000 under the Note. Additionally, upon the closing of a private placement in which Amicor receives gross proceeds of at least an additional $1,000,000 (within six months of the closing of the Option Agreement), Amicor shall pay the outstanding balance under the Note. The Note does not bear interest. The option was exercisable for a period of 90 days following the closing of the Option Agreement, in whole or in part, at an exercise price of Ten Dollars ($10.00) for any or all of the Uranium Properties. In the event Amicor does not exercise the option, the Company will retain all of the Option Consideration. Between January 2012 and February 2012, the Company collected $930,000 of the Note. On the date of the Option Agreement, the Company recorded the Option Consideration as deferred revenue to be amortized over the term of the Option Agreement. The Company recorded the 10 million shares of Amicor’s common stock at the fair market value (based on the recent selling price of Amicor’s common stock at a private placement) of the shares at $0.50 per share or $5 million. During the three months ended March 31, 2012, the Company recognized other income of $4,333,333 which represents the earned income pursuant to the terms of this Option Agreement. Note receivable from Amicor at March 31, 2012 amounted to $70,000. David Rector, a member of the Company's Board of Directors, is a director of Amicor. Joshua Bleak, Continental's chief executive officer, is a director of Amicor.
In April 2012, the Company and Amicor extended the expiration date to May 15, 2012 and subsequently on May 7, 2012, both parties agreed to extend the expiration date of the option to June 15, 2012.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Operating Lease
In February 2012, the Company signed a three year lease agreement for office space located in Lakewood, Colorado containing approximately 2,390 net rentable square feet and such lease will start in March 2012 and expires in April 2015. The lease requires the Company to pay an annual base rent of $18.50 per rentable square feet or $44,215 plus a pro rata share of operating expenses. The base rent is subject to annual increases beginning on May 1, 2013 as defined in the lease agreement. Future minimum rental payments required under these operating leases are as follows:
| Years ending December 31: | | | |
| 2012 | | | 33,161 | |
| 2013 | | | 45,111 | |
| 2014 | | | 46,306 | |
| 2015 and thereafter | | | 11,651 | |
| | | $ | 136,229 | |
NOTE 14 – MINERAL PROPERTIES
North Battle Mountain and Red Rock Mineral Prospects
Through the Company’s wholly-owned subsidiary, Arttor Gold LLC, the Company has the rights to explore the North Battle Mountain Mineral Prospect located in Lander County, Nevada.
The North Battle Mountain Mineral Prospect is located in Lander County, Nevada, 18 kilometers north of the town of Battle Mountain in north central Nevada. The property consists of 36 unpatented lode mining claims and encompasses approximately 700 acres. The North Battle Mountain Mineral Prospect can be accessed from Battle Mountain by a paved county road for about 5.5 miles to the North Battle Mountain rail siding, and then by a graded gravel road from which an unimproved dirt road leads east to the north-central part of the property.
The Red Rock Mineral Prospect is located in Lander County, Nevada, 26 miles south of the town of Battle Mountain. The property consists of five groups of unpatented lode mining claims, totaling 269 claims and encompassing approximately 5,600 acres. The Red Rock Mineral Prospect can be accessed from Nevada State Highway 305, traveled south from Battle Mountain approximately 26 miles to the Carico Lake Valley/Red Rock Canyon turn-off, then east along an improved gravel road less than a mile to the western claim boundary. Most of the property is accessible by secondary gravel and unimproved dirt roads.
The exploration rights to these properties are held through two amended and restated mining leases dated July 15, 2011 (the “Leger Leases”) between Arttor Gold LLC and Art Leger, formerly the Company’s Chief Geologist, who located the mining claims in 2004, and an additional mining lease dated August 22, 2011 (the “Centerra Lease”) between Arttor Gold LLC and Centerra (US) Inc. (see Note 13). The Leger Leases grant us the exclusive right to explore, mine and develop gold, silver, palladium, platinum and other minerals on the properties for a term of ten years, and may be renewed in ten year increments. The terms of the Leger Leases may not exceed 99 years.
The North Battle Mountain and Red Rock Mineral Prospects properties do not currently have any reserves and all activities undertaken and currently proposed are exploratory in nature.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 14 – MINERAL PROPERTIES (continued)
Relief Canyon Properties
The Relief Canyon properties, which include the Relief Canyon Mine property owned by Gold Acquisition Corp., and the Pershing Pass Property held directly by the Company.
The Relief Canyon properties are located about 100 miles northeast of Reno, Nevada. The nearest town is Lovelock, Nevada, approximately 15 miles west-southwest from the Relief Canyon Mine property, which can be reached from both Reno and Lovelock on U.S. Interstate 80. The Relief Canyon Mine property is reached from Lovelock by travelling approximately seven miles northeast on I-80 to the Coal Canyon Exit (Exit No. 112), then about 10 miles southeast on Coal Canyon Road (State Route 857, a paved road maintained by Pershing County) to Packard Flat, and then north on a gravel road for two miles. All of the Relief Canyon properties can be accessed by unpaved roads from the Relief Canyon Mine property. The Relief Canyon properties are located in Pershing County, Nevada at the southern end of the Humboldt Range. The range is underlain by a sequence of late Paleozoic- to Mesozoic-age volcanic and sedimentary rocks. Gold-bearing rocks at the Relief Canyon properties are primarily developed within breccia zones along the contact between the Grass Valley and Cane Springs Formations. The Relief Canyon properties do not currently have any reserves and all activities undertaken and currently proposed are exploratory in nature.
Relief Canyon Mine
Through the Company’s wholly-owned subsidiary, Gold Acquisition Corp., the Company owns 58 unpatented lode mining claims and 118 unpatented millsites at the Relief Canyon Mine property. The property includes the Relief Canyon Mine and gold processing facilities, currently on care and maintenance, which produced gold periodically from 1984 through 2008. The Relief Canyon Mine includes three open pit mines, five heap leach pads, two solution ponds and a cement block constructed adsorption desorption-recovery (ADR) solution processing circuit. The ADR type process plant consists of four carbon columns, acid wash system, stripping vessel, electrolytic cells, a furnace and a retort for the production of gold doré. The process facility was originally installed by Lacana Mining in 1985 and was updated in 1995 and again in 2007 by Firstgold Corp. The facilities are generally in good condition.
Adequate line power is available to the site to operate the existing process facility and ancillary facilities. There is a generator onsite to provide power for the crusher and a backup generator that could provide 100% of the required power for process facility and heap leach operation in the event of power outages. Sufficient water rights to operate the facility have been appropriated with two operating and permitted wells serving current needs.
The Relief Canyon Mine property was most recently owned and operated by Firstgold Corp. Firstgold Corp. ceased operations at Relief Canyon in 2008 and filed for bankruptcy in January 2010. On December 17, 2010, the Court entered its Order Authorizing And Approving: (1) Sale Of Real Property And Certain Personal Property Assets Pursuant To 11 U.S.C. §363 Free And Clear Of Liens, Claims, and Interests; and (2) Assumption and Assignment Of Executory Contracts and Unexpired Leases Under 11 U.S.C. § 365; and (3) Related Relief entered December 17, 2010 (the “Sale Order”), pursuant to which Platinum Long Term Growth LLC (“Platinum”) was approved as the successful “back up bidder” for certain assets including the Relief Canyon Mine. On August 30, 2011, pursuant to the Sale Order, the Company (through a wholly owned subsidiary) purchased 100% of the Relief Canyon Mine property and related assets for an aggregate purchase price of $12.0 million cash paid at closing and $8.0 million of senior Notes issued to former creditors of Firstgold Corp. The Relief Canyon Mine property is burdened by a production royalty equal to 2% of net smelter returns payable to Battle Mountain Gold Exploration LLC (now owned by Royal Gold).
Gold was first discovered on the property by the Duval Corp. in 1979. Subsequent exploration was performed by various companies including Lacana Mining, Santa Fe Gold Corp., and Pegasus Gold Inc. Firstgold Corp. acquired the property in 1995 and explored and produced gold periodically from 1995 until 2008.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 14 – MINERAL PROPERTIES (continued)
Pershing Pass Property
The Company acquired the Pershing Pass property from Silver Scott Mines, Inc. in March 2012. Pershing Pass consists of 489 unpatented lode mining claims (30 of which were acquired in February 2012) covering approximately 9,700 acres. Silver Scott Mines, Inc. located the claims and was the sole owner of the Pershing Pass property prior to the Company’s purchase. There is evidence of historic mining activity on the Pershing Pass property.
Uranium Exploration Properties
The Company’s wholly owned subsidiary, Continental Resources Acquisition Sub, Inc. was formed in July 2011 to purchase substantially all of the assets of Continental Resources Group, Inc., which assets included 100% of the outstanding shares of common stock of Green Energy Fields, Inc. and ND Energy Inc. The purchased assets include certain interests in uranium unpatented mining claims and leased mineral interests in Arizona, California and North Dakota totaling approximately 7,200 acres. The Company entered into an option agreement on January 26, 2012 pursuant to which American Strategic Minerals Corporation has the right to acquire these uranium exploration properties (see Note 13). The option, as amended, is exercisable until June 15, 2012, in whole or in part, at an exercise price of $10.00 for any or all of the uranium properties. If the option is not exercised, the Company will retain all of the consideration for the option, and the Company plans to continue its efforts to divest these properties. These uranium exploration properties do not currently have any reserves and all activities undertaken and currently proposed are exploratory in nature.
The Coso property is located in Inyo County, California and consists of 169 unpatented lode mining claims on BLM land totaling 3,380 acres. The property is burdened by a 3% royalty payable to NPX Metals, Inc. Annual claim and lease maintenance costs for the Coso property are approximately $25,000. The property is undeveloped, and there are no facilities or structures. There are a number of adits, trenches and drill holes from previous exploration activities.
The Artillery Peak property is located in western north-central Arizona near the southern edge of Mohave County. The property consists of a total of 86 unpatented lode mining claims and is burdened by a 4% royalty. Annual claim maintenance costs for the Artillery Peak property total approximately $13,000. Uranium exploration has been occurring in the Artillery Peak region since the 1950s by a number of exploration and mining entities.
The Blythe project is located in the southern McCoy Mountains in Riverside County, California approximately 15 miles west of the community of Blythe. It consists of 66 unpatented lode mining claims covering 1,320 acres of BLM land and is burdened by a 3% royalty. Annual claim maintenance costs for the claims at the Blythe property are approximately $10,000. A number of companies have worked on the Blythe uranium property during the 1950s through the 1980s.
The Absaroka Stone project consists of one unpatented lode mining claim located in the Uinta County of southwestern Wyoming.
Prospect Uranium consists of private leases to 1,027 acres located in Slope County, in southwestern North Dakota. Annual holding costs under these leases total about $7,100.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 15 – SUBSEQUENT EVENTS
On April 5, 2012, the Company purchase from Victoria Gold Corp.(“VGC”) and Victoria Resources (US) Inc. (“VRI” and collectively with VGC, the “Seller”) the Seller's interest in approximately 13,300 acres of mining claims and private lands adjacent to the Company’s landholdings at the Relief Canyon Mine in Pershing County, Nevada (the “Assets”). The Company refers to these properties as the Relief Canyon Expansion properties. Approximately 8,900 acres of the Relief Canyon Expansion properties are held under leases and subleases with Newmont USA Ltd., which the Company refers to as the Newmont Leased properties. Victoria Gold has reserved a 2% net smelter return royalty from the production on 221 of the 283 unpatented mining claims that it owned directly.
The Assets include (i) unpatented mining claims located in Pershing County, Nevada (the “Owned Claims”); (ii) the assumption by the Company of a leasehold interest in certain unpatented mining claims in Pershing County Nevada referred to as the “Newmont Claims” held by VRI under a Minerals Lease and Sublease dated June 15, 2006, as amended, between Newmont USA Limited, d/b/a in Nevada as Newmont Mining Corporation (“Newmont”) and VRI (the “2006 Mineral Lease”); (iii) the assumption of the sublease, pursuant to the 2006 Mineral Lease, of an interest in certain fee minerals in Pershing County, Nevada in which Newmont holds a leasehold interest pursuant to that Minerals Lease SPL-6700, dated as of August 17, 1987 between Southern Pacific Land Company and SFP Minerals Corporation; (iv) the assumption of the sublease, pursuant to the 2006 Mineral Lease, of an interest in certain fee lands in Pershing County, Nevada, in which Newmont holds a leasehold interest pursuant to a mining lease dated June 1, 1994 between The Atchison, Topeka and Santa Fe Railway Company and Santa Fe Pacific Gold Corporation; and (v) the assumption of the sublease, pursuant to the 2006 Mineral Lease, of an interest in certain fee minerals in Pershing County, Nevada in which Newmont holds a leasehold interest pursuant to a minerals lease, dated as of March 23, 1999 between Nevada Land & Resource Company LLC and Santa Fe Pacific Gold Corporation.
In connection with the purchase of the Assets, the Company has agreed to purchase all of Seller’s data, information and records related to the Assets, including all internal analyses and reports prepared by third party consultants or contractors, and to assume all liabilities and obligations of the Sellers arising after the closing of the transaction, including additional expenditures to be made in accordance with the 2006 Mineral Lease in the amount of approximately $750,000 by June 15, 2012.
The closing of the acquisition of the Assets was subject to the satisfaction by the parties of certain obligations, including, among other things, the transfer of title to the Company of the Owned Claims, the assignment of Seller’s leasehold interests to the Company and the payment of consideration by the Company for the Assets (the “Closing Conditions”). On April 5, 2012, the parties satisfied the Closing Conditions and the Company issued to VGC 10,000,000 shares of the Company’s common stock, and a 2 year warrant to purchase 5,000,000 shares of Common Stock at a purchase price of $0.60 per share. The Company also granted a 2% net smelter returns royalty on production from the Owned Claims which are not encumbered by production royalties payable to Newmont under the 2006 Mineral Lease. The Company also paid the Seller $2,000,000 cash.
The Warrant may be exercised in whole, or in part, at any time by mean s of a “cashless” exercise. In the event of an “Organic Change”, as defined in the Warrant, the Company may elect to: (i) require the holder to exercise the Warrant prior to the consummation of such Organic Change or (ii) secure from the person or entity purchasing such assets or the successor resulting from such Organic Change, a written agreement to deliver to the holder, in exchange for the Warrant, a warrant of such acquiring or successor entity.
On April 2, 2012, the Company sold 4,300,002 shares of common stock to certain investors for an aggregate purchase price of $1,505,000 or a purchase price of $0.35 per share.
On April 17, 2012, the Company sold 85,714 shares of common stock to certain investors for an aggregate purchase price of $30,000 or a purchase price of $0.35 per share.
PERSHING GOLD CORPORATION AND SUBSIDIARIES
(FORMERLY SAGEBRUSH GOLD LTD.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 15 – SUBSEQUENT EVENTS (continued)
On April 6, 2012, the Company and its director, Barry Honig, entered into a consulting agreement (the “Consulting Agreement”) pursuant to which Mr. Honig would provide certain consulting services relating to business development, corporate structure, strategic and business planning, selecting management and other functions reasonably necessary for advancing the business of the Company (the “Services”). The Consulting Agreement has an initial term of three years, subject to renewal. In consideration for the Services, the Company agreed to pay Mr. Honig the following consideration:
| · | A ten-year option (the “Option”) to purchase 12,000,000 shares of the Company’s common stock, exercisable at $0.35 per share which shall be vested in full on the date of issuance; |
| · | On such date that the Company receives minimum gross proceeds of at least $5,000,000 due to the occurrence of a Triggering Event (as defined in the Consulting Agreement) or the combination of multiple Triggering Events, Mr. Honig shall receive a one -time payment of $200,000; and |
| · | Upon a Change in Control (as defined in the Consulting Agreement) of the Company, Mr. Honig shall receive a one-time payment of $500,000. |
The 12,000,000 options were valued on the grant date at approximately $0.43 per option or a total of $5,102,400 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.46 per share, volatility of 105%, expected term of 10 years, and a risk free interest rate of 2.07%. In April 2012, the Company paid the one-time payment of $200,000 to Mr. Honig pursuant to the Consulting Agreement.
As previously disclosed, on July 22, 2011, the Company purchased substantially all of the assets of Continental in consideration for (i) 8 shares of the Company’s common stock for every 10 shares of Common Stock of Continental outstanding; (ii) the assumption by the Company of the outstanding warrants to purchase shares of Continental’s common stock at a ratio of one warrant (the “Company Warrants”) to purchase 8 shares of the Company’s Common Stock for every Continental Warrant to purchase 10 shares of Continental’s common stock; and (iii) the assumption of Continental’s 2010 Equity Incentive Plan and all options granted and issued thereunder at a ratio of one option to purchase 8 shares of the Company Common Stock for every option to purchase 10 shares of Continental’s common stock outstanding. On April 9, 2012, the Company issued an aggregate of 9,576,285 shares of its common stock, to holders of Company Warrants in consideration for the cancellation of such Company Warrants. Additionally, such holders agreed to the elimination of certain most favored nations provisions or price protection associated with the shares of Continental’s common stock issued in connection with the Continental Warrants (the “Warrant Cancellation Transaction”). The Company issued 9,576,285 shares of the Company’s common stock at a ratio of 300 shares for every 1,000 Company Warrants held. An aggregate of 31,920,953 Company Warrants were cancelled as a result of the Warrant Cancellation Transaction. Accordingly, the Company valued the 9,576,285 common shares at the fair market value on the date of grant at $0.505 per share or $4,836,024. On April 27, 2012, the Company issued an additional 24,000 shares of common stock in consideration for the cancellation of 80,000 Company Warrants and the elimination of certain most favored nation provisions or price protection associated with the shares of Continental's common stock issued in connection with the Continental Warrants. The Company values the 24,000 common shares at the fair market value on the date of the grant at $0.31 per share or $7,440.
On May 7, 2012, the Company and Amicor agreed to extend the expiration date to June 15, 2012 in connection with the right to exercise pursuant to an Option Agreement (see Note 13).
On April 27, 2012, the Company issued 50,000 shares of common stock to a consultant in consideration for certain consulting services rendered. The Company has accrued such consulting expense as of March 31, 2012 amounting to $45,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Pershing Gold Corporation (“Pershing Gold”; the “Company” or “we”) is a gold and precious metals exploration company pursuing exploration and development opportunities primarily in Nevada. We are currently focused on exploration at our Relief Canyon properties in Pershing County in northwestern Nevada.
This discussion should be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Overview
During the first quarter our management decided to focus on exploration at our Relief Canyon properties and to reduce our interests in or divest our other exploration properties. An overview of our progress during the first quarter 2012 is provided below.
Relief Canyon property acquisitions. We significantly increased our property position at Relief Canyon with two acquisitions. On March 1, 2012, we purchased approximately 9,700 acres of unpatented mining claims, located to the south of the Relief Canyon Mine property from Silver Scott Mines, Inc. for $550,000. On April 5, 2012, we acquired from Victoria Gold Corporation rights to approximately 13,300 acres of unpatented mining claims and private lands adjacent to the Relief Canyon Mine property. We refer to these properties as the Relief Canyon Expansion properties. Approximately 9,600 acres of the Relief Canyon Expansion properties are held under leases and subleases with Newmont USA Ltd. Victoria Gold has reserved a 2% net smelter return royalty from the production on the 3,800 acres of 283 unpatented mining claims that it owned directly. To acquire the Relief Canyon Expansion properties, we paid Victoria Gold $2.0 million in cash, 10 million shares of our common stock, warrants to purchase 5 million shares of our common stock at $0.60 per share, exercisable at any time on or prior to April 5, 2014, and the 2% net smelter return royalty.
Option on uranium properties. On January 26, 2012, we entered into an agreement under which American Strategic Minerals Corporation (“Amicor”) has the option to acquire certain uranium exploration rights and properties held by us. As consideration for the option, Amicor issued to us a $1,000,000 non interest bearing promissory note payable in installments upon satisfaction of certain conditions, expiring six months following issuance, and 10 million shares of its common stock. The option, which has been extended until June 15, 2012, is exercisable, in whole or in part, at an exercise price of Ten Dollars ($10.00) for any or all of the uranium properties. If Amicor does not exercise the option, we will retain the option consideration. As of March 31, 2012, $930,000 of the principal amount of note has been paid and 700,000 shares of Amicor common stock were sold for net proceeds of approximately $0.3 million. Under the terms of the note, Amicor is required to pay the balance of the note upon completion of a private placement totaling $1 million or more on or before July 26, 2012. If a $1.0 million private placement is not completed by that date, Amicor is not required to pay us the final $70,000 due under the note.
Financing. In the first quarter, we raised $1,847,500 through the sale of our securities, net of placement agent fees. These transactions included $847,500 from the sale of units at $0.40 per unit, comprised of one share of common stock and a two year warrant to purchase half a share of common stock at $0.60 per share, $1.0 million from the sale of 1.0 million shares of Series D Convertible Preferred Stock and five year warrants to acquire 8.75 million shares at an exercise price of $0.40 per share, and $0.5 million received in March 2012 in connection with a 5% secured promissory note which was administratively issued on April 10, 2012. In April 2012, we raised approximately $1,535,000 through the sale of our common stock at a purchase price of $0.35 per share.
Debt Repayment. In January and February 2012, we prepaid approximately $1.0 million of our $8.0 million senior secured notes issued in connection with the acquisition of the Relief Canyon Mine property in August 2011. On March 30, 2012 the outstanding balance of the note was fully paid by conversion into 12,841,082 shares of common stock at a conversion price of $0.35 per share and 3,749,186 shares of Series D Convertible Preferred Stock. Additionally on March 30, 2012, we converted the remaining balance of $1,015,604 plus accrued interest on the 9% secured promissory note issued on September 19, 2011 into 1,024,744 shares of Series D Convertible Preferred Stock.
Conversion of preferred stock. We issued 500,000 shares of common stock upon the conversion of 500,000 shares of Series B Convertible Preferred Stock, and 1,153,143 shares of common stock upon the conversion of 400,000 shares of Series D Convertible Preferred Stock.
Warrants. On April 9, 2012, the Company issued 9,576,285 shares of its common stock to holders of the Company’s warrants to purchase 31,902,953 shares of common stock, originally issued to Continental warrant holders in connection with the acquisition of the Relief Canyon Mine property in exchange for cancellation of the warrants at a ratio of 300 shares for every 1,000 warrants held. The warrant holders also agreed to the elimination of certain price protection provisions related to the warrants. During the first quarter, we also issued 6,229,718 shares of common stock upon the cashless exercise of 11,399,150 warrants that were granted previously to investors and debt holders.
At May 15, 2012, following the transactions discussed above, we had 204,220,557 shares of common stock outstanding, 7,652,190 warrants to acquire common stock at an average exercise prices of $0.46 per share oustanding, no shares of Series B Convertible Preferred Stock outstanding, 3,284,396 shares of Series C Convertible Preferred Stock outstanding, 6,086,968 shares of Series D Convertible Preferred Stock outstanding and approximately $1.1 million of notes outstanding.
Our business began on November 30, 2009. We were incorporated in Nevada on February 10, 2010 to succeed to the business of the predecessor company, Golden Empire, LLC (“Golden Empire”), which was formed and commenced operations on November 30, 2009. We assumed all assets, liabilities and certain promotion rights agreements entered into by Golden Empire at carrying value which approximated fair value on February 10, 2010. Golden Empire ceased operations on that date. The results of operations for the period from January 1, 2010 to February 9, 2010 of Golden Empire were not material. In September 2011, we decided to discontinue our sports and entertainment business and to focus on gold exploration. Prior periods have been restated in the Company’s consolidated financial statements and related footnotes to conform to this presentation, and all transactions relating to our sports and entertainment business are included in discontinued operations.
For the results of continuing operations discussed below, we compare the results from operations for the three month period ended March 31, 2012 to the results of operations for the three month period ended March 31, 2011.
For the three months ended March 31, 2012 and the three months ended March 31, 2011.
Net Revenues
We are an exploration stage company with no operations and generated no revenues in the three months ended March 31, 2012. For the three months ended March 31, 2011, there are no continuing operations.
Operating Expenses
Total operating expenses for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, were approximately $9.7 million and $0.5 million respectively. The $9.2 million increase in operating expenses for the 2012 period includes approximately$6.5 million of compensation expense, related primarily to stock based compensation expense of $5.0 million and other expenses for hiring our executive and management employees and support staff; $1.3 million in exploration expense on our Relief Canyon Mine, North Battle Mountain and Red Rock properties, $0.8 million in general and administrative expenses primarily for public company expenses and litigation and $0.6 million in consulting fees primarily related to financing and investor relations matters.
Operating Loss from Continuing Operations
We reported an operating loss from continuing operations of approximately $9.7 million and $0.5 million, respectively, for the three months ended March 31, 2012 and 2011. The increase in operating loss was due to the increase in operating expenses described above.
Other Income (Expenses)
Total other expense was approximately $13.2 million and $0 for the three months ended March 31, 2012 and 2011, respectively. The increase is primarily attributable to $11.3 million in interest expense primarily attributable to the amortization of debt discounts and deferred financing cost on the notes of approximately $8.0 million of convertible notes converted on March 30, 2012 and interest expense in connection with the issuance of common stock and warrants pursuant to a note modification agreement; $1.5 million increase in fair value of derivative liability on the $8 million senior convertible notes; and $4.8 million due to the conversion of the $8.0 million senior convertible notes to our common stock and Series D Cumulative Convertible Preferred Stock; offset in part by $4.3 million income resulting from the consideration paid by Amicor in its option to acquire our uranium exploration properties.
Discontinued Operations
In September 2011, we decided to discontinue our sports and entertainment business, and all results of operations relating to our sports and entertainment business are included in discontinued operations.
The following table sets forth for the three months ended March 31, 2012 and 2011 indicated selected financial data of the Company’s discontinued operations of its sports and entertainment business.
| | | March 31, 2012 | | | March 31, 2011 | |
| Revenues | | $ | - | | | $ | 291,200 | |
| Cost of sales | | | - | | | | 189,916 | |
| Gross profit (loss) | | | - | | | | 101,284 | |
| Operating and other non-operating expenses | | | (50,174 | ) | | | (924,982 | ) |
| | | | | | | | | |
| Loss from discontinued operations | | $ | (50,174 | ) | | $ | (823,698 | ) |
Net Loss
As a result of the operating expense and other expense discussed above, we reported a net loss of approximately $22.9 million for the three months ended March 31, 2012 as compared to a net loss of $1.3 million for the three months ended March 31, 2011.
Liquidity and Capital Resources
At December 31, 2011, our cash and cash equivalents totaled $3.7 million compared to $2.6 million at March 31, 2012. During the three months ended March 31, 2012, we received proceeds of approximately $0.5 million from issuance of a note payable and gross proceeds of $1.8 million from the sale of common and preferred stock. These increases were more than offset by approximately $1.3 million in exploration costs, and $1 million general and administrative expenses. We also reduced our debt from approximately $9.3 million to approximately $1.1 million, due to conversion of our $8.0 million senior convertible notes and $1million secured convertible note to common stock and Series D Convertible Preferred Stock, partially offset by issuance of a $0.5 million note. Additionally in April 2012, we raised approximately $1,535,000 of gross proceeds through the sale of our common stock at a purchase price of $0.35 per share.
In the remaining 9 months of 2012, we plan to spend approximately $1.1 million on a Phase II 15,000 foot drill program on the Relief Canyon mine property, approximately $0.9 million on initial drilling and general reconnaissance, rock sampling and baseline geophysical surveys on the property we acquired from Victoria Gold, and approximately $2 million on general and administrative expenses. We plan to fund these expenditures from existing cash, and to expand our exploration program if additional external funding becomes available.
The actual amount that we spend through year-end 2012 may vary significantly from the amounts stated above. We currently have no material commitments for capital expenditures or exploration expenses. However, we have no revenues and do not expect to have revenues for at least the remainder of 2012. Therefore our future operations are dependent on our ability to secure additional external funding, through financing activities or the sale of our uranium or gold exploration properties other than Relief Canyon. Funding may not be available on acceptable terms or at all. If financing is not available, we would be required to preserve our cash be reducing exploration activities and general and administrative expenses.
Significant Accounting Policies
We did not adopt any new accounting standards during the quarter ended March 31, 2012 nor were there any new accounting pronouncements during the period that would have an impact on our financial position or results of operation.
Forward-Looking Statements
This Report on Form 10-Q and other written and oral statements made from time to time by us may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. Forward looking statements include, without limitation, statements relating to our business goals, planned exploration, business strategy, planned divestment of our uranium properties, future operating results, and our liquidity and capital resources outlook. Forward –looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Our actual results may differ materially from those contemplated by the forward-looking statements, which are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Important factors that could cause actual results to differ materially from those anticipated in forward- looking statements include without limitation results for future exploration at our Relief Canyon and other projects; our ability to raise necessary capital to conduct our exploration activities and do so on acceptable terms, problems or delays in permitting or other government approvals. These statements are likely to address our growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward looking statement can be guaranteed and actual future results may vary materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures 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.
With respect to the quarterly period ended March 31, 2012, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, the Company’s management has concluded that certain disclosure controls and procedures were not effective as of March 31, 2012 and that the failure to have multiple levels of transaction review due to limited personnel constitutes a significant deficiency in internal controls. However, to the extent possible, we plan to implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals. We believe that the foregoing steps will remediate the significant deficiency identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
Changes in Internal Controls.
There have been no changes in the Company’s internal control over financial reporting during the nine months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 7, 2012, the Company obtained a copy of a complaint filed in the United States District Court for the Southern District of New York (the “Complaint”) entitled Relief Gold Group, Inc., v Sagebrush Gold Ltd, Gold Acquisition Corp., Barry C. Honig, and David S. Rector (12 civ 0952). Relief Gold alleges various causes of action including breach of contract, intentional interference with contract, intentional interference with prospective business relationship/economic relations, misappropriation of trade secrets and unjust enrichment, related to the Company’s acquisition on August 30, 2011 of the assets of the Relief Canyon Mine pursuant to Chapter 11 of the Bankruptcy Code. The Company disputes the allegations in the Complaint and believes the Complaint to be wholly without merit and intends vigorously to defend the claims. Plaintiff served an amended complaint on May 10, 2012. The Company’s time to answer or move with respect to the amended complaint expires on May 24, 2012.
Further, on or about February 29, 2012, Gold Acquisition Corp. (“GAC”) commenced an adversary proceeding in the United States Bankruptcy Court for the District of Nevada against Firstgold, Terence Lynch and Relief Gold Group Case No. 12-05013-GWZ. Through the adversary proceeding, GAC is seeking confirmation that all information, intellectual property and know how related to Relief Canyon was property of Firstgold that was sold to GAC. In addition, GAC moved for a preliminary injunction and temporary restraining order staying the prosecution of the above-referenced action pending in the Southern District. The motion for a preliminary injunction was denied on or about March 15, 2012. Firstgold filed a motion to dismiss the complaint on April 23, 2012; GAC’s response is due by June 6, 2012. GAC has attempted to start the discovery process and filed a motion to compel on May 11, 2012. A hearing date has not yet been set, but GAC has requested that it be heard on shortened time. A scheduling conference in this matter has been set for June 13, 2012.
GAC also filed a Motion for Order to Show Cause in Firstgold’s main bankruptcy action Case No. 10-50215-GWZ requesting that the court require Firstgold to complete documentation for conveyance of property. That motion was granted on or about February 28, 2012.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 11, 2012, the Company issued 100,000 shares of common stock upon the conversion of 100,000 shares of Series B Preferred Stock. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On January 27, 2012, the Company sold an aggregate of 1,376,250 Units with gross proceeds to the Company of $550,500. Each Unit was sold for a purchase price of $0.40 per Unit and consists of: (i) one share of Common Stock and (ii) a two-year warrant to purchase fifty (50%) percent of the number of shares of Common Stock purchased at an exercise price of $0.60 per share, subject to adjustment upon the occurrence of certain events. On February 7, 2012, the Company sold an additional 1,500,000 Units for gross proceeds to the Company of $49,500. On February 21, 2012, the Company sold an additional 437,500 Units with gross proceeds to the Company of $175,000. The Warrants may be exercised at any time on a cashless basis at 100% of the closing price for the Common Stock on the business day immediately prior to the date of exercise. The Company paid placement agent fees of $30,000 cash in connection with the sale of the Units. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On February 1, 2012, the Company issued an aggregate of 4,400,000 shares of common stock upon the conversion of 4,400,000 shares of Series B Preferred Stock. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On February 9, 2012, the Company entered into an employment agreement with its Chief Executive Officer, Stephen Alfers, pursuant to which Mr. Alfers shall serve as the Chief Executive Officer of the Company until December 31, 2015, subject to renewal. Pursuant to the terms of his Employment Agreement, Mr. Alfers was issued (i) 12,000,000 shares of the Company’s restricted common stock and (ii) an option to purchase 10,000,000 shares of the Company’s common stock with a term of ten years and an exercise price equal to the closing price of the Company’s common stock on the trading day immediately prior to the date of issuance of such grant. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On February 23, 2012, the Company entered into a Stock Purchase Agreement with two subscribers and sold 1,000,000 shares of its Series D Preferred Stock and an aggregate of 8,750,000 warrants to acquire shares of Common Stock at an exercise price of $0.40 per share for an aggregate purchase price of $1,000,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On February 23, 2012, the Company entered into a Note Modification Agreement with certain noteholders to extend the maturity date of such notes. In consideration for entering into the Modification Agreements, the Company issued (i) warrants to purchase an aggregate of 5,180,400 shares of common stock at an exercise price of $0.40 per share and (ii) an aggregate of 2,000,000 shares of common stock to the noteholders. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 6, 2012, the Company authorized the issuance of options to purchase an aggregate of 1,100,000 shares of the Company’s common stock pursuant to the 2012 Equity Incentive Plan. Such grants of restricted stock shall vest as follows: 25% on the date of issuance and 25% on December 31 of each of 2012, 2013 and 2014. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 7, 2012, the Company issued an aggregate of 500,000 shares of common stock upon the conversion of 500,000 shares of Series B Preferred Stock. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 6, 2012, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock at an exercise price equal to the market price of the Company’s common stock on the date of issuance to a consultant in consideration for services rendered. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 20, 2012, the Company issued 250,000 shares of common stock to a third party in consideration for legal services rendered. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 30, 2012, the Company issued an aggregate of 10,768,331 shares of common stock upon conversion of outstanding convertible promissory notes. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 30, 2012, the Company issued an aggregate of 2,072,758 shares of common stock to holders of certain convertible promissory notes in consideration for the full conversion of such notes. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 30, 2012, the Company issued 1,153,143 shares of common stock in consideration for the conversion of Series D Preferred Stock and all accrued but unpaid dividends thereon. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
On March 30, 2012, the Company issued an aggregate of 5,892,744 shares of common stock upon exercise of outstanding warrants. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
| 10.1 | Form of Note Purchase Agreement |
| 10.2 | Form of Note |
| 10.3 | Form of Security Agreement |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.ins | XBRL Instance Document |
| 101.sch | XBRL Taxonomy Schema Document |
| 101.cal | XBRL Taxonomy Calculation Document |
| 101.def | XBRL Taxonomy Linkbase Document |
| 101.lab | XBRL Taxonomy Label Linkbase Document |
| 101.pre | XBRL Taxonomy Presentation Linkbase Document |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Pershing Gold Corporation | |
| | | | |
| Date: May 15, 2012 | By: | /s/ Stephen Alfers | |
| | | Stephen Alfers | |
| | | President and Chief Executive Officer (Principal Executive Officer) | |
| Date: May 15, 2012 | By: | /s/ Adam Wasserman | |
| | | Adam Wasserman | |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) | |
