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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For The Quarterly Period Ended June 30, 2015
     
¨   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________

 

Commission file number:  333-56262

 

 EL CAPITAN PRECIOUS METALS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

  88-0482413
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

8390 Via de Ventura, Suite F-110, #215

Scottsdale, AZ

  85258
(Address of principal executive offices)   (Zip Code)

 

(928) 515-1942

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

  Large accelerated filer    ¨ Accelerated filer    ¨  
  Non-accelerated filer    ¨ Smaller reporting company þ    
  (Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 282,548,195 shares of common stock par value $0.001, of the issuer were issued and outstanding as of August 14, 2015. 

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EL CAPITAN PRECIOUS METALS, INC.

 

Table of Contents

 

    Page
   
Cautionary Note Regarding Exploration Stage Status   3
SEC Industry Guide 7 Definitions   4
Cautionary Statement on Forward-Looking Statements   5
     
PART I.  FINANCIAL INFORMATION
       
Item 1. Financial Statements   6
  Consolidated Balance Sheets – June 30, 2015 and September 30, 2014 (Unaudited)   6
  Consolidated Statements of Expenses – Three and Nine months ended June 30, 2015 and 2014 (Unaudited)   7
  Consolidated Statements of Cash Flows – Nine months ended June 30, 2015 and 2014 (Unaudited)   8
  Notes to the Consolidated Financial Statements (Unaudited)   10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
Item 3. Quantitative and Qualitative Disclosures About Market Risk   23
Item 4. Controls and Procedures   24
       
PART II.  OTHER INFORMATION    
       
Item 1. Legal Proceedings   25
Item 1A. Risk Factors   25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   25
Item 3. Defaults Upon Senior Securities   25
Item 4. Mine Safety Disclosures   25
Item 5. Other Information   25
Item 6. Exhibits   26
       
SIGNATURES   27

 

 

 

 

 

 

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CAUTIONARY NOTE REGARDING EXPLORATION STAGE STATUS

 

 

We are considered an “exploration stage” company under the U.S. Securities and Exchange Commission (“SEC”) Industry Guide 7, Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations (“Industry Guide 7”), because we do not have reserves as defined under Industry Guide 7.  Reserves are defined in Guide 7 as that part of a mineral deposit which can be economically and legally extracted or produced at the time of the reserve determination.  The establishment of reserves under Guide 7 requires, among other things, certain spacing of exploratory drill holes to establish the required continuity of mineralization and the completion of a detailed cost or feasibility study.

 

Because we have no reserves as defined in Industry Guide 7, we have not exited the exploration stage and continue to report our financial information as an exploration stage entity as required under Generally Accepted Accounting Principles (“GAAP”).  Although for purposes of FASB Accounting Standards Codification Topic 915, Development Stage Entities, we have exited the development stage and no longer report inception to date results of operations, cash flows and other financial information, we will remain an exploration stage company under Industry Guide 7 until such time as we demonstrate reserves in accordance with the criteria in Industry Guide 7.

 

Because we have no reserves, we have and will continue to expense all mine construction costs, even though these expenditures are expected to have a future economic benefit in excess of one year.  We also expense our reclamation and remediation costs at the time the obligation is incurred.  Companies that have reserves and have exited the exploration stage typically capitalize these costs, and subsequently amortize them on a units-of-production basis as reserves are mined, with the resulting depletion charge allocated to inventory, and then to cost of sales as the inventory is sold.  As a result of these and other differences, our financial statements will not be comparable to the financial statements of mining companies that have established reserves and have exited the exploration stage.

 

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SEC INDUSTRY GUIDE 7 DEFINITIONS

 

 

The following definitions are taken from the mining industry guide entitled “Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations” contained in the Securities Act Industry Guides published by the United States Securities and Exchange Commission, as amended.

 

Exploration State  The term “exploration state” (or “exploration stage”) includes all issuers engaged in the search for mineral deposits (reserves) which are not in either the development or production stage.
    
Development Stage  The term “development stage” includes all issuers engaged in the preparation of an established commercially mineable deposit (reserves) for its extraction which are not in the production stage. This stage occurs after completion of a feasibility study.
    
Mineralized Material  The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.
    
Probable (Indicated) Reserve  The term “probable reserve” or “indicated reserve” refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
    
Production Stage  The term “production stage” includes all issuers engaged in the exploitation of a mineral deposit (reserve).
    
Proven (Measured) Reserve  The term “proven reserve” or “measured reserve” refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
    
Reserve  The term “reserve” refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility study done to bankable standards that demonstrates the economic extraction. (“Bankable standards” implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in-situ tons and grade to include diluting materials and allowances for losses that might occur when the material is mined.

 

 

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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

 

 

This Quarterly Report on Form 10-Q may contain certain “forward-looking” statements as such term is defined by the SEC in its rules, regulations and releases, which represent the registrant’s expectations or beliefs, including but not limited to, statements concerning the registrant’s operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “might,” “plan,” “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the registrant’s control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the operations of the Company and its subsidiaries, volatility of stock price, commercial viability of any mineral deposits and any other factors discussed in this and other registrant filings with the SEC.  The Company does not intend or undertake to update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate. 

 

 

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PART I. FINANCIAL INFORMATION
   
Item 1. Financial Statements

 

 EL CAPITAN PRECIOUS METALS, INC.

 

CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

 

   June 30,   September 30, 
   2015   2014 
ASSETS          
           
CURRENT ASSETS:          
Cash and cash equivalents  $8,097   $218,513 
Prepaid expense and other current assets   138,839    99,086 
 Inventory   33,254     
Total Current Assets   180,190    317,599 
           
 Property and equipment, net of accumulated depreciation of $47,021 and $3,017, respectively   604,516    567,566 
Exploration property   1,864,608    1,864,608 
Restricted cash   74,497    15,000 
 Deposits   22,440    22,440 
Total Assets  $2,746,251   $2,787,213 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $474,897   $132,580 
Notes payable, net of unamortized discounts of $110,213 and $158,559, respectively   969,975    491,441 
Note payable to related party, net of unamortized discount of $7,058   22,942     
Accrued liabilities   186,222    149,314 
Total Current Liabilities   1,654,036    773,335 
           
STOCKHOLDERS’ EQUITY:          
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 51 and 51 shares issued and outstanding, respectively        
Common stock, $0.001 par value; 400,000,000 shares authorized; 282,548,195 and 278,053,877 shares issued and outstanding, respectively   282,548    278,054 
Additional paid-in capital   207,259,704    206,411,222 
Accumulated deficit   (206,450,037)   (204,675,398)
Total Stockholders’ Equity   1,092,215    2,013,878 
     Total Liabilities and Stockholders’ Equity  $2,746,251   $2,787,213 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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EL CAPITAN PRECIOUS METALS, INC.

 

CONSOLIDATED STATEMENTS OF EXPENSES

(Unaudited)

 

 

  

Three Months Ended

June 30,

  

Nine Months Ended

June 30,

 
   2015   2014   2015   2014 
                 
OPERATING EXPENSES:                    
Professional fees  $56,090   $53,947   $161,720   $293,585 
Administrative consulting fees   65,000    65,000    195,000    195,000 
Legal and accounting fees   18,239    27,562    87,975    113,056 
Exploration costs   102,693    162,383    294,506    1,215,976 
Other general and administrative   146,757    68,640    765,327    555,197 
Total Operating Expenses   388,779    377,532    1,504,528    2,372,814 
                     
LOSS FROM OPERATIONS   (388,779)   (377,532)   (1,504,528)   (2,372,814)
                     
OTHER INCOME (EXPENSE):                    
Interest income   2    12    19    85 
Interest expense:                    
Related parties   (1,332)       (2,160)    
Other   (17,979)   (38,106)   (47,612)   (39,957)
Amortization of debt discounts   (88,293)       (220,358)    
Total Other Income (Expense)   (107,602)   (38,094)   (270,111)   (39,872)
                     
NET LOSS  $(496,381)  $(415,626)  $(1,774,639)  $(2,412,686)
                     
Basic and Diluted Per Share Data:                    
Net Loss Per Share - basic and diluted  $(0.00)  $(0.00)  $(0.01)  $(0.01)
                     
Weighted Average Common Shares Outstanding:                    
Basic and diluted   281,751,392    275,491,711    279,514,937    269,845,559 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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 EL CAPITAN PRECIOUS METALS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

  

Nine Months Ended

June 30,

 
   2015   2014 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,774,639)  $(2,412,686)
Adjustments to reconcile net loss to net cash used in operating activities:          
Warrant and option expense   525,703    499,869 
Stock-based compensation   67,550    849,625 
Amortization of debt discounts   204,312    33,503 
Amortization of deferred financing costs   16,046     
Depreciation   44,004    887 
Net change in operating assets and liabilities:          
Prepaid expenses and other current assets   (9,100)   (19,200)
Inventory   (33,254)    
Deferred costs       100,000 
Accounts payable   342,317    59,183 
Accrued liabilities   10,300    3,550 
Interest payable   26,608    6,016 
Net Cash Used in Operating Activities   (580,153)   (879,253)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of furniture and equipment   (80,954)   (118,381)
Restricted cash   (59,497)    
Net Cash Used in Investing Activities   (140,451)   (118,381)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from the sale of common stock   50,000    715,000 
Proceeds from options exercised       21,500 
Proceeds from notes payable   408,000     
Proceeds from notes payable to related party   30,000     
Increase in finance contracts   38,084    17,439 
Payments on finance contracts   (15,896)   (17,439)
Net Cash Provided by Financing Activities   510,188    736,500 
           
NET (DECREASE) IN CASH AND CASH EQUIVALENTS   (210,416)   (261,134)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   218,513    373,692 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $8,097   $112,558 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for interest  $23,044   $ 
Cash paid for income taxes        

(Continued)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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EL CAPITAN PRECIOUS METALS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 

 

  

Nine Months Ended

June 30,

 
   2015   2014 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Warrants issued with debt  $73,053   $ 
Warrants issued for deferred financing costs   17,111     
Common stock issued with debt   119,559     
Reversal of common stock granted for deferred costs       20,476 
Common stock issued with equipment note payable       222,222 
Debt issued for purchase of equipment       400,000 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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EL CAPITAN PRECIOUS METALS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 – BASIS OF PRESENTATION

 

Business, Operations and Organization

 

The accompanying unaudited interim financial statements of El Capitan Precious Metals, Inc. (“El Capitan” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, the financial statements do not include all information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed interim financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending September 30, 2015, or for any subsequent period. These interim financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2014, included in the Company’s Annual Report on Form 10-K, filed with the SEC on December 29, 2014. The consolidated balance sheet at September 30, 2014, has been derived from the audited financial statements included in the 2014 Annual Report.

 

Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2014 as reported in the Form 10-K have been omitted. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

El Capitan is an exploration stage company as defined by the SEC’s Industry Guide 7 as the Company has no established reserves as required under Industry Guide 7. We are principally engaged in the exploration of precious metals and other minerals on the El Capitan property located near Capitan, New Mexico (the “El Capitan Property”). The Company is in mineral exploration state activities and has expanded its permitting with the State of New Mexico Minerals and Mining Division to expand the Company’s mineral exploration activities.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries El Capitan Precious Metals, Inc., a Delaware corporation; Gold and Minerals Company, Inc., a Nevada corporation; and EL Capitan, Ltd., an Arizona corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation and Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company currently has no source of revenue to cover its costs.  The Company has incurred a net loss of $1,774,639 for the nine months ended June 30, 2015, and has a total accumulated deficit of $206,450,037 and a working capital deficit of $1,473,846 at June 30, 2015. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

To continue as a going concern, the Company is dependent on achievement of cash flow and profits from entering the production stage of operations. The Company does not have adequate liquidity to fund its current operations, meet its obligations and continue as a going concern. In April 2015, the Company secured a $200,000 working capital loan to assist bridging into mining operations. The Company is also pursuing other short operational strategic financing alternatives or equity infusion.

 

 

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The Company’s consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

Management Estimates and Assumptions

 

The preparation of El Capitan’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.

 

Inventory

 

Inventories include mineralized material stockpile, concentrate and iron ore inventories, as described below. Inventories are carried at the lower of average cost or net realizable value, in the case of mineralized material stockpile and concentrate inventories and minimal cost is attributable to the iron ore inventories. The net realizable value of mineralized material stockpile inventories represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Concentrate inventories are carried at the lower of full cost of production or net realizable value based on current metals prices. Write-downs of inventory will be reported as a component of production costs applicable to sales.

 

Mineralized Material Stockpile Inventories

 

 Mineralized material stockpile inventories represent mineralized materials that have been mined and are available for further processing. Costs are allocated to mineralized material stockpile inventories based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the mineralized material.

 

Concentrates

 

Concentrates inventory include metal concentrates located either at the Company’s mine site or in transit to a customer’s port. Inventories consist of mineralized material that contains gold and silver mineralization.

 

Iron Ore

 

The high grade iron ore material is inventoried until the market prices are reestablished at a higher market demand and are valued at five percent of the market price. Any proceeds from the sale of iron ore will offset the cost of mining the mineralized ore.

 

Stock-Based Compensation

 

El Capitan recognized stock-based administrative compensation aggregating $593,253 and $1,349,494 for common stock options and common stock issued to administrative personnel and consultants during the nine months ended June 30, 2015 and 2014, respectively.

 

Restricted Cash

 

Restricted cash consists of two certificates of deposits in favor of the New Mexico Minerals and Mining Division for a total of $74,497. The amount was increased $59,497 with the issuance of the Company’s expanded mining permit and is posted as a financial assurance for required reclamation work to be completed on mined acreage.

 

Exploration Property Costs

 

Exploration property costs are expensed as incurred until such time as economic reserves are quantified. To date El Capitan has not established any proven or probable reserves on the El Capitan Property. The Company has capitalized $1,864,608 of exploration property acquisition costs reflecting its investment in the El Capitan Property.

 

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Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers,” which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of fiscal 2018. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which is effective for financial statements issued for interim and annual periods beginning on or after December 15, 2015. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. This standard is not expected to have an effect on the Company’s reported financial position or results of operations.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is effective for financial statements issued for interim and annual periods beginning on or after December 15, 2016. This update contains amendments that clarify the principles for management’s assessment of an entity’s ability to continue as a going concern. This standard is not expected to have an effect on the Company’s reported financial position or results of operations.

 

In April 2015, the FASB issued ASU No. 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU No. 2015-03 provides that an entity: (1) present debt issuance costs in the balance sheet as a direct deduction from the carrying value of the associated debt liability rather than as an asset; and (2) report amortization of debt issuance costs as interest expense. ASU No. 2015-03 will become effective for the Company in the first quarter of fiscal 2017. The Company does not expect the adoption of this update will have a material impact on its consolidated financial statements.

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period did not, or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

NOTE 2 – RELATED PARTY TRANSACTIONS

 

Effective May 1, 2009, El Capitan has informal arrangements with two individuals, one of whom is an officer and is also director of El Capitan, pursuant to which such individuals serve as support staff for the functioning of the home office and all related corporate activities and projects. Effective June 1, 2010, El Capitan amended the aggregate monthly payments with these two individuals under the arrangements to $16,667. Effective August 1, 2013, the monthly compensation was increased to $21,667. There are no written agreements with these individuals. Total administrative consulting fees expensed under these informal agreements for the nine months ended June 30, 2015 and 2014 was $195,000.

 

In January 2012, the Company retained Management Resource Initiatives, Inc., a company controlled by the Chief Financial Officer and a Director of El Capitan, for services with a monthly consulting fee of $10,000, which monthly fee was increased to $15,000 effective August 1, 2013. Total consulting fees expensed to Management Resource Initiatives, Inc. for the nine months ended June 30, 2015 and 2014 was $135,000.

 

On February 4, 2015, the Company signed a note payable with Management Resource Initiatives, Inc. for $30,000 at 18% interest per annum and due February 4, 2016. The note provides an incentive for the issuance of 200,000 shares of restricted common stock of the Company for the loan (see Note 3).

 

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NOTE 3 – noteS payable

 

Under an agreement with Logistica U.S. Terminals, LLC (“Logistica”) dated February 28, 2014, Logistica agreed to remit a $400,000 payment on the Company’s behalf that represented the remaining balance of the Company’s purchase price for a heavy ore trailing separation line to be used for processing of mineralized material at the El Capitan mine site. The Company previously remitted $100,000 toward the purchase of such equipment. In consideration for Logistica remitting such payment, the Company agreed to deliver a $400,000 promissory note to Logistica and issued 2,500,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock Incentive Plan. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of the Company’s proceeds from sale of iron extracted from mineralized material as part of the Company’s exploration activities. The relative fair value of the common stock was determined to be $222,222 and was recorded as a discount to the promissory note that is being amortized to interest expense over the expected life of the note through October 31, 2015. During the nine months ended June 30, 2015, amortization expense of $122,202 was recognized. The outstanding balance under this note payable was $400,000 and the unamortized discount on the note payable was $36,357 as of June 30, 2015. Accrued interest on the note at June 30, 2015 was $24,016.

 

On September 8, 2014, the Company received an advance of $250,000 under a $500,000 Note and Warrant Purchase Agreement entered into on October 17, 2014 (the “2014 Note”). The 2014 Note is secured by the net proceeds received by the Company from its sale of tailings separated from iron recovered by the Company at the El Capitan Property, carries an interest rate of 8% per annum, and matures on July 17, 2015. The remaining $250,000 was advanced to the Company on October 17, 2014. On October 17, 2014, the Company also issued warrants to purchase an aggregate of 882,352 shares of common stock in connection with the 2014 Note of which 735,294 were issued to the lender and 147,058 were issued to a third party at a purchase price equal to $0.17 per share. The relative fair value of the 735,294 warrants was determined to be $73,053 and was recorded as a discount to the promissory note and is being amortized to interest expense over the life of the note through July 17, 2015. During the nine months ended June 30, 2015, amortization expense of $68,503 was recognized. The outstanding balance under the 2014 Note is $500,000 and the unamortized discount on the 2014 Note is $4,550 as of June 30, 2015. The fair value of the 147,058 warrants was determined to be $17,111 and was recorded as deferred financing costs and is being amortized to interest expense over the life of the note through July 17, 2015. During the nine months ended June 30, 2015, amortized expense of $16,046 was recognized and the unamortized deferred financing costs balance was $1,065 as of June 30, 2015. Accrued interest on this note at June 30, 2015 was $8,109.

 

On November 20, 2014, the Company entered into an agreement to finance a portion of its insurance premiums in the amount of $22,968 at an interest rate of 9.0% with equal payments of $2,392.65 including interest, due monthly beginning December 21, 2014 and continuing through September 21, 2015. As of June 30, 2015, the outstanding balance under this note payable was $7,072.

 

On February 4, 2015, the Company signed two notes with different investors for $63,000 at 18% interest per annum and due February 4, 2016. Each note provides an incentive for the issuance of 200,000 shares of restricted common stock of the Company for the loan. One maker of the loans is affiliated with the Company and provided $30,000 (see Note 2). Accrued interest on these notes at June 30, 2015 was $4,536. The relative fair value of the common stock was determined to be $21,211 and was recorded as discounts to the promissory notes that are being amortized to interest expense over the life of the notes. During the nine months ended June 30, 2015, amortization expense of $6,907 was recognized. The outstanding balance under these notes payable was $63,000 and the unamortized discounts on the notes payable was $14,034 as of June 30, 2015.

 

On April 16, 2015, the Company entered into an agreement with a third party financing source pursuant to which the lender has committed to loan the Company a total of $200,000 in installments. The first installment of $50,000 was advanced on April 17, 2015, the second installment of $50,000 was advanced on May 15, 2015, the third installment of $25,000 was advanced on June 16, 2015 and the fourth installment of $25,000 was advanced on July 20, 2015. Two additional advances of $25,000 each are scheduled to be made on the 15th day of August and September, 2015. The loan accrues interest at 10% per year, with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the lender a security interest in the AuraSource Heavy Metals Separation System located on the El Capitan Property. As additional consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the note holder. The relative fair value of the common stock was determined to be $98,348 and is recorded as discounts to the promissory note tranches as they are made and are being amortized to interest expense over the life of the note tranches. During the nine months ended June 30, 2015, amortization expense of $6,700 was recognized. The outstanding balance under these notes payable was $125,000 and the allocated unamortized discounts on the notes payable was $62,060 as of June 30, 2015. Accrued interest on these notes at June 30, 2015 was $1,760.

 

 

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On June 16, 2015, the Company entered into an agreement to finance a portion of its insurance premiums in the amount of $15,116 at an interest rate of 8.75% with equal payments of $1,572.84 including interest, due monthly beginning July 14, 2015 and continuing through April 14, 2016. As of June 30, 2015, the outstanding balance under this note payable was $15,116.

 

The components of the notes payable including the note payable to related party at June 30, 2015 are as follows:

 

    Principal     Unamortized        
    Amount     Discount     Net  
                   
Notes payable   $ 1,110,188     $ (117,271 )   $ 992,917  
                         

 

The components of the notes payable at September 30, 2014 are as follows:

 

    Principal     Unamortized        
    Amount     Discount     Net  
                   
Notes payable   $ 650,000     $ (158,559 )   $ 491,441  
                         

 

NOTE 4 – FAIR VALUE MEASUREMENTS

 

U.S. accounting standards require disclosure of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. In September 2006, the FASB issued new accounting guidance, which establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. The Company previously partially adopted this guidance for all instruments recorded at fair value on a recurring basis. In the second quarter of fiscal 2010, the Company adopted the remaining provisions of the guidance for all non-financial assets and liabilities that are not re-measured at fair value on a recurring basis. The adoption of these provisions did not have an impact on the Company’s consolidated financial statements.

 

Fair value standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the standards establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair-value hierarchy are described as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on June 30, 2015 and September 30, 2014:

 

June 30, 2015:   Level 1     Level 2     Level 3     Total  
                         
Assets                                
Exploration property   $     $     $ 1,864,608     $ 1,864,608  
Liabilities                                
None   $     $     $     $  

 

 

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September 30, 2014:   Level 1     Level 2     Level 3     Total  
                         
Assets                                
Exploration property   $     $     $ 1,864,608     $ 1,864,608  
Liabilities                                
None   $     $     $     $  

 

The exploration property associated with the El Capitan Property, which the Company is intending to continue to market for sale to a major mining company, is classified as Level 3. The fair value of the exploration property is determined based upon the cost basis of El Capitan’s investment in the exploration property under U.S. GAAP. A qualified independent third party appraisal has been done on the property. The appraised value was established based upon comparable sales of similar assets, certain assumptions regarding market demand for this asset and detailed property data input as supplied by the Company’s consulting geologist. As this valuation was based upon unobservable inputs, El Capitan classified the exploration property as Level 3. There was no change in the carrying valuation of the exploration property during the year ended September 30, 2014 or the quarter ended June 30, 2015.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

Related Party

 

In January 2012, the Company retained Management Resource Initiatives, Inc. (“MRI”) for managing and overseeing the process of marketing and selling the El Capitan Property and performing other services aimed at furthering the Company's strategic goals pursuant to an unwritten consulting arrangement. Under this arrangement, the Company pays MRI a current monthly consulting fee of $15,000. The Company made or accrued aggregate payments of $135,000 to MRI during the nine months ended June 30, 2015 and 2014, respectively. MRI is a related party because it is a corporation that is wholly-owned by John F. Stapleton who is the Company’s Chief Financial Officer and a Director.

 

Purchase Contract with Glencore AG

 

On March 10, 2014, the Company entered into a life-of-mine off take agreement with Glencore AG (“Glencore”) for the sale of iron extracted from mineralized material at the El Capitan Property (such agreement is referred to herein as the “Glencore Purchase Contract”). Under the terms of the Glencore Purchase Contract, the Company agreed to sell to Glencore, and Glencore agreed to purchase from the Company, iron that meets the applicable specifications from the El Capitan mine. Payment for the iron is to be made pursuant an irrevocable letter of credit in favor of the Company. The purchase price is based on an index price less an applicable discount. Either party may terminate the Glencore Purchase Contract following a breach by the other party that remains uncured for a specified period after receipt of written notice.

 

Agreements with Logistica U.S. Terminals, LLC

 

In anticipation of, and in conjunction with, the Glencore Purchase Contract, the Company entered into a Master Services Agreement (the “Master Agreement”) and corresponding Iron Ore Processing Agreement (the “Processing Agreement”) with Logistica U.S. Terminals, LLC (“Logistica”), each effective as of February 28, 2014. Pursuant to these agreements, Logistica agreed to, among other things, provide the logistics required for the Company to fulfill its obligations under the Glencore Purchase Contract, to assist the Company in financing the costs of processing and delivering iron under the Glencore Purchase Contract, and to provide and/or manage the processing that iron.

 

Master Agreement with Logistica

 

Under the Master Agreement, the Company agreed that Logistica will be the exclusive logistics agent for the purpose of moving iron extracted from mineralized material at the El Capitan Property from the El Capitan Property to Glencore’s designated exporting port or final destination. Logistics services include operational supplement chain management and supervision of all logistics providers and operations from the El Capitan mine to the vessel loading port. Logistics services do not include obtaining and maintaining operating, environmental and mining permits, and land and mineral rights, which are the responsibility of the Company. Also under the Master Agreement, Logistica is required to use its best efforts to establish an operating credit line capable of funding all processing and delivery costs and, upon opening and funding such a credit line, will disburse as needed all operating costs contemplated under the Glencore Purchase Contract. The Company is required to reimburse Logistica for all such amounts, without interest, out of payments received from Glencore in respect of the purchase of the iron.

 

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In consideration for Logistica’s funding and logistic services, the Company will pay Logistica a percentage of the Company’s profits from the sale of iron under the Glencore Purchase Contract. If any sale of iron under the Glencore Purchase Contract results in a loss instead of a profit, as a result of a decrease in index pricing of iron or otherwise, then the Company is required to make up the shortfall out of profits from any precious metals processing and refining business, to the extent of available profits therefrom, or otherwise. If iron index prices drop below the price in place at inception of the Glencore Purchase Contract by more than 5%, then the Company will be required to provide Logistica with a greater percentage of profits commensurate with and equivalent to Logistica’s loss of profit share due to the reduction in iron index prices. At inception of the Glencore Purchase Contract, the Platts 62% FE CFR China iron index price was $121.24. In the event of a future sale of the El Capitan Property, the Company must either ensure that its agreements with Logistica are assumed by the purchaser or pay Logistica a termination fee.

 

Either party may terminate the Master Agreement following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Master Agreement will otherwise continue indefinitely.

 

Processing Agreement with Logistica

 

Under the Processing Agreement, Logistica has agreed to deliver iron processing equipment to the El Capitan Property and to use it best efforts to process, to contract specification, stock pile and load for delivery iron that the Company has contracted to sell to Glencore under the Glencore Purchase Contract. In order to do so, Logistica will act as the Company’s turn-key contractor for all of the Company’s iron processing and delivery activities at the El Capitan Property. In consideration for such services, the Company will pay Logistica a set price per metric ton of iron that is processed in accordance with the Glencore Purchase Contract specifications and purchased by Glencore. As additional compensation for entering into the Processing Agreement, the Company issued 4,000,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock Incentive Plan valued at $800,000. The shares vested immediately upon grant and the $800,000 was expensed in full during the year ended September 30, 2014.

 

Either party may terminate the Processing Agreement following a breach by the other party that remains uncured for 60 days after receipt of written notice. The Processing Agreement will otherwise continue indefinitely.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Equity Purchase Agreement

 

On July 11, 2011, the Company entered into an Equity Purchase Agreement (the “2011 Agreement”) with Southridge Partners II, LP (“Southridge”). Under the 2011 Agreement, we had the right, but not an obligation, to sell newly-issued shares of our common stock to Southridge. Southridge had no obligation to purchase shares under the 2011 Agreement to the extent that such purchase would cause Southridge to own more than 9.99% of El Capitan’s common stock. The original term of the 2011 Agreement was two years, subject to the Company’s right to terminate at any time.  The purchase commitment of Southridge under the 2011 Agreement was scheduled to expire on the earlier of July 11, 2013, or the date on which aggregate purchases by Southridge under the 2011 Agreement totaled $5,000,000. On April 3, 2013, we entered into an amendment (the “Amendment”) to the 2011 Agreement pursuant to which the parties agreed to extend the purchase commitment of Southridge under the 2011 Agreement for an additional year, expiring July 11, 2014. The maximum amount of Southridge’s aggregate purchase commitment under the 2011 Agreement remained unchanged at $5,000,000. On July 11, 2014, the 2011 Agreement expired.  

 

For each share of the Company’s common stock purchased under the 2011 Agreement, Southridge paid 94.0% of the Market Price, which is defined as the average of the two lowest closing bid prices on the Over-the-Counter Bulletin Board, as reported by Bloomberg Finance L.P., during the five trading days following the date on which the Company notified Southridge of a pending sale (the “Valuation Period”).  After the expiration of the Valuation Period, Southridge purchased the applicable number of shares subject to customary closing conditions.

 

The offering of shares under the 2011 Agreement were made pursuant to a registration statement on Form S-3 (Registration Statement No. 333-175038) previously filed by the Company with the Securities and Exchange Commission, and prospectus supplements thereto. The S-3 registration statement utilized a “shelf” registration process. Under this shelf registration process, from time to time, the Company sold any combination of the securities described in a prospectus supplement in one or more offerings, up to a total dollar amount of $5,000,000.

 

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On July 30, 2014, we entered into a new Equity Purchase Agreement (the “2014 Agreement”) with Southridge, pursuant to which the Company may from time to time, in its discretion, sell newly-issued shares of its common stock to Southridge for aggregate gross proceeds of up to $1,900,000. Southridge will have no obligation to purchase shares under the 2014 Agreement to the extent that such purchase would cause Southridge to own more than 9.99% of the Company’s common stock. Unless terminated earlier, Southridge’s purchase commitment will automatically terminate on the earlier of July 30, 2016, or the date on which aggregate purchases by Southridge under the 2014 Agreement total $1,900,000. The Company has no obligation to sell any shares under the 2014 Agreement.

 

As provided in the 2014 Agreement, the Company may require Southridge to purchase shares of our common stock from time to time by delivering a put notice to Southridge specifying the total purchase price for the shares to be purchased (the “Investment Amount”). The Company may determine the Investment Amount, provided that such amount may not be more than the lesser of (a) $500,000, or (b) 250% of the average daily trading dollar volume of the Company’s common stock for the 20 trading days preceding the date on which the Company delivers the applicable put notice. For this purpose, the trading dollar volume for each day is determined by multiplying the closing bid price of the Company’s common stock on the Over-the-Counter Bulletin Board (or such other principal market on which the Company’s stock trades) on such date by the trading volume of the Company’s common stock on the Over-the-Counter Bulletin Board (or such other principal market on which the Company’s stock trades) on such date. The number of shares issuable in connection with each put notice will be computed by dividing the applicable Investment Amount by the purchase price for such common stock.

 

For each share of our common stock purchased under the 2014 Agreement, Southridge will pay a purchase price equal to 94.0% of the Market Price, which is defined as the average of the two lowest closing bid prices on the Over-the-Counter Bulletin Board, as reported by Bloomberg Finance L.P., during the five trading days following delivery of the put notice (the “Valuation Period”). After the expiration of the Valuation Period, Southridge will purchase the applicable number of shares subject to customary closing conditions.

 

The 2014 Agreement contains covenants, representations and warranties of the Company and Southridge that are typical for transactions of this type. In addition, the Company and Southridge have granted each other customary indemnification rights in connection with the 2014 Agreement. The 2014 Agreement may be terminated by the Company at any time.

 

The offering of shares under the 2014 Agreement has been made pursuant to a registration statement on Form S-3 (Registration Statement No. 333-193208) previously filed by the Company with the Securities and Exchange Commission, and prospectus supplements thereto. The benefits and representations and warranties set forth in the 2014 Agreement are not intended to and do not constitute continuing representations and warranties of the Company or any other party to persons not a party thereto, including without limitation, any future or other investor.

 

As of June 30, 2015, we have sold shares of common stock to Southridge under the 2011 and 2014 Agreements for aggregate proceeds of $4,300,000, and have the right, subject to certain conditions, to sell to Southridge $1,600,000 of newly-issued shares of El Capitan common stock pursuant to the 2014 Agreement, subject to the satisfaction of applicable closing conditions. However, because the Company’s public float was less than $75 million upon the December 29, 2014 filing of its Annual Report on Form 10-K, the Company is no longer eligible to utilize Form S-3 registration statements on a primary basis. As a result, the Company will be required to amend the structure of the 2014 Agreement in order to continue to obtain financing from Southridge.

 

Preferred Stock Issuances

 

During the nine months ended June 30, 2015, the Company did not issue any shares of preferred stock.

 

Common Stock Issuances

 

During the nine months ended June 30, 2015, the Company issued 594,318 shares of common stock under the 2014 Agreement and received cash proceeds of $50,000.

 

The Company issued 400,000 shares of restricted common stock, as provided for in two loan agreements entered into in February 2015. The relative fair value of the stock under GAAP accounting was determined to be $21,211 and was accounted for as a discount to the loans and will be amortized over the life of the loans.

 

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The Company issued 3,000,000 shares of restricted common stock, as provided for in a working capital loan entered into in April 2015. The relative fair value of the stock under GAAP accounting was determined to be $98,348 and $68,760 was accounted for as a discount to the loan and will be amortized over the life of the loan. The remaining $29,588 was accounted for as deferred debt issuance costs to be recognized as a discount to the loan upon receipt of the loan proceeds.

 

The Company issued 500,000 shares of restricted common stock to a creditor for carrying a significant balance. The market value of the shares issued was $67,550 and was classified as non-cash financing costs in the quarter ended June 30, 2015.

 

Warrants

 

During the nine months ended June 30, 2015, the Company:

 

  (i) Issued to an investor 735,294 three year fully vested warrants at an exercise price of $0.17 per share as related to the $500,000 2014 Note. The relative fair value of the warrants was determined to be $73,053 using the Black-Scholes option pricing model and was recorded as a discount to the 2014 Note and is being amortized to interest expense over the expected life of the note through July 17, 2015. During the nine months ended June 30, 2015, amortization expense of $68,504 was recognized and the unamortized discount was $4,550 as of June 30, 2015.

 

  (ii) Issued 147,058 three year fully vested warrants at an exercise price of $0.17 per share as placement fees related to the $500,000 2014 Note. The fair value of the warrants was determined to be $17,111 using the Black-Scholes option pricing model and was recorded as deferred financing costs to be amortized over the expected life of the note through July 17, 2015. During the nine months ended June 30, 2015, amortization expense of $16,046 was recognized and the unamortized deferred financing costs balance was $1,065 as of June 30, 2015.

 

Options

 

Aggregate options expense recognized was $525,703 for the nine months ended June 30, 2015. As of June 30, 2015, there was no unamortized option expense.

 

During the nine months ended June 30, 2015, the Company:

 

  (i) Granted, pursuant to the 2005 Stock Incentive Plan, (a) to two directors of the Company each a ten-year stock option to purchase 500,000 shares of the Company’s common stock, (b) to two directors  of the Company each a ten-year stock option to purchase 250,000 shares of the Company’s common stock, and (c) to the controller a ten-year stock option to purchase 250,000 shares of the Company’s common stock, all of which vested immediately, at an exercise price of $0.15 per share. The fair value of the options was determined to be $218,471 using the Black-Scholes option pricing model and was expensed as warrant and option costs during the nine months ended June 30, 2015. 

 

  (ii) Granted to a consultant a ten-year stock option to purchase an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $0.15 per share with the options vesting on the date of grant. The fair value of the options was determined to be $73,158 using the Black-Scholes option pricing model and was expensed as warrant and option costs during the nine months ended June 30, 2015. 

 

  (iii) Granted to a consultant a ten-year stock option to purchase an aggregate of 1,500,000 shares of the Company’s common stock at an exercise price of $0.15 per share with the options vesting equally over a six-month period from the date of the grant. The fair value of the options was determined to be $219,473 using the Black-Scholes option pricing model and $219,473 was expensed as warrant and option costs during the nine months ended June 30, 2015.

 

The Company utilizes the Black-Scholes option pricing model to estimate the fair value of its warrant and option awards. The following table summarizes the significant assumptions used in the model during the nine months ended June 30, 2015:

 

Exercise prices   $0.15 - $0.17 
Expected volatilities   115.01% - 139.28% 
Risk free interest rates   0.79% - 2.36% 
Expected terms   5.0 - 10.0 years 
Expected dividends    

 

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Stock option activity, both within and outside the 2005 Stock Incentive Plan and warrant activity, for the nine months ended June 30, 2015, are as follows:

 

      Stock Options       Stock Warrants
              Weighted               Weighted
              Average               Exercise
      Shares       Price       Shares       Price
                               
Outstanding at September 30, 2014     7,900,000     $ 0.38           $
   Granted     3,750,000       0.15       882,352       0.17
   Canceled     (312,500 )     0.345            
   Expired                      
   Exercised                      
                               
Outstanding at June 30, 2015     11,337,500     $ 0.30       882,352     $ 0.17
                               
Exercisable at June 30, 2015     11,337,500     $ 0.30       882,352     $ 0.17

 

The range of exercise prices and remaining weighted average life of the options outstanding at June 30, 2015 were $0.13 to $1.02 and 5.32 years, respectively. The aggregate intrinsic value of the outstanding options at June 30, 2015 was $0.

 

The range of exercise prices and remaining weighted average life of the warrants outstanding at June 30, 2015 were $0.17 and 2.3 years, respectively. The aggregate intrinsic value of the outstanding warrants at June 30, 2015 was $0.

 

The Company adopted its 2005 Stock Incentive Plan (the “2005 Plan”) pursuant to which the Company reserved and registered 30,000,000 shares for stock and option grants. As of June 30, 2015, there were 1,786,969 shares available for grant under the 2005 Plan, excluding the 11,337,500 options outstanding.

 

NOTE 7 – SUBSEQUENT EVENTS

 

On August 4, 2015, the Company entered into a six month Agreement with a sub-contractor for the purpose of initiating the processing and concentrating of the ore at the El Capitan Property. The sub-contractor will provide the necessary equipment and manpower under the Agreement. The processed and concentrated ore will be stockpiled at the El Capitan Property site for loading and shipping. The sub-contractor was issued 2,000,000 shares of common stock under the Agreement and the Company will pay the sub-contractor Twenty Dollars ($20) per ton of head ore processed and/or concentrated, which payment shall be made when the Company receives payment from the sale of the processed ore.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with our audited financial statements and the “Risk Factors” section included in our Form 10-K for the year ended September 30, 2014, filed with the U.S. Securities and Exchange Commission (“SEC”) on December 29, 2014, as amended by Amendment Nos. 1 and 2 filed on February 18, 2015 and March 6, 2015, respectively.

 

Company Overview; Recent Developments

 

The Company is an exploration stage company as defined by the SEC’s Industry Guide 7 as the Company has no established reserves as required under Industry Guide 7. We have owned interests in several properties located in the southwestern United States in the past. We are principally engaged in the exploration of precious metals and other minerals on the El Capitan property located near Capitan, New Mexico (the “El Capitan Property”). We have not engaged in any revenue-producing operations. We accomplished significant steps in our strategic business plan in our fiscal year ended September 30, 2014. 

 

On November 25, 2014, we received our Air Quality Permit from the New Mexico Environment Department. On March 25, 2015, the Modification 14-1 to our mine Permit No. LIOO5ME was issued by the Director of the Mining and Minerals Division of the New Mexico Energy, Minerals and Natural Resources Department, and we posted an additional $59,495 financial assurance bond for the reclamation close out of the mined areas. We expected to commence planned mineral exploration activity in the quarter ended June 30, 2015. However, we have not yet demonstrated the existence of proven or probable reserves at our El Capitan Property.  As a result, and in accordance with accounting principles generally accepted in the United States for exploration stage companies, all expenditures for exploration and evaluation of our properties are expensed as incurred. 

 

Basis of Presentation and Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company currently has no source of revenue to cover its costs.  The Company has incurred a loss of $1,774,639 for the nine months ended June 30, 2015, and has a total accumulated deficit of $206,450,037 and a working capital deficit of $1,473,846 at June 30, 2015. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

To continue as a going concern, the Company is dependent on achievement of cash flow and profits from entering the production stage of operations. The Company does not have adequate liquidity to fund its current operations, meet its obligations and continue as a going concern. The Company secured a $200,000 working capital loan in April 2015 to assist bridging into mining operations. The Company is pursuing other short operational strategic financing alternatives or equity infusion.

 

The Company’s consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Revenues

 

We did not realize any revenue from exploration activities during the three months ended June 30, 2015 or during the comparable prior year period.

 

Expenses and Net Loss

 

Our operating expenses increased $11,247 from $377,532 for the three months ended June 30, 2014, to $388,779 for the three months ended June 30, 2015. The increase is mainly attributable to an increase in general and administrative of $78,117, offsetting decreases in legal and accounting of $9,323, and exploration costs of $59,696. 

 

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The increase in general and administrative is mainly attributable to increases in depreciation of $16,409 and non-cash financing fees of $67,550.

 

Our net loss for the three months ended June 30, 2015 increased to $496,381 from a net loss of $415,626 incurred for the comparable three month period ended June 30, 2014. The increase in net loss of $80,755 for the current period is attributable to the increases in net operating expenses and by an increase in other expenses of $69,508, comprised of increased amortization of debt discounts of $88,293 and offset by a decrease in interest expense of $18,795.

 

Nine Months Ended June 30, 2015 Compared to Nine Months Ended June 30, 2014

 

Revenues

 

We did not realize any revenue from exploration activities during the nine months ended June 30, 2015 or during the comparable prior year period.

 

Expenses and Net Loss

 

Our operating expenses decreased $868,286 from $2,372,814 for the nine months ended June 30, 2014 to $1,504,528 for the nine months ended June 30, 2015. The decrease is mainly attributable to reductions in professional fees of $131,865, legal and accounting of $25,084, exploration costs of $921,470 and offset by an increase in other general and administrative of $210,130.

 

The decrease in exploration costs consists mainly of a non-cash charge of stock compensation for services of $800,000 in the prior year period. The increase in general and administrative is mainly attributable to an increase in depreciation of $43,117, an increase in non-cash financing costs of $83,596, and increased option expense of $99,429.

 

Our net loss for the nine months ended June 30, 2015 decreased to $1,774,639 from a net loss of $2,412,686 incurred for the comparable nine month period ended June 30, 2014. The decrease in net loss of $638,047 for the period is attributable to the aforementioned net decrease in operating expenses and offset by an increase in other expenses of $230,154 comprised of increased interest expense of $9,815, amortization of debt discounts aggregating $220,358 and a decrease in interest income of $66.

 

Financial Condition, Liquidity and Capital Resources

 

As of June 30, 2015, we had cash on hand of $8,097 and an accumulated deficit of $206,450,037. Based upon our budgeted burn rate, we currently have operating capital for only a fraction of month, excluding any cash that would be received by the Company under the financing arrangements referred to below.

 

Historically we have relied on equity and debt financing to finance our ongoing operations.  

 

During the fiscal year 2014, we entered into agreements with Logistica U.S. Terminals, LLC (“Logistica”) and Glencore AG (“Glencore”) to govern the sale to Glencore of iron extracted from mineralized material at the El Capitan Property. We expect to commence these activities, and begin generating revenue from them, which we expect to occur in the fourth quarter of fiscal 2015. However, there is no assurance that we will generate revenue on this timeframe, or at all. For a summary of our agreements with Logistica and Glencore, see “Note 5 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

 

Separately, we are in the process of negotiating a prospective contract with a Hong Kong based trading company for the purchase of mineralized materials mined at the El Capitan Property. This agreement contemplates that the Hong Kong based trading company will provide a letter of credit in favor of the Company on which we would be able to drawn down to cover various upfront contract costs and to cover final settlement of the shipments to China when the mineralized material arrives at the Chinese port. Finalizing the prospective contract and arranging for the letter of credit required to accommodate its terms and conditions have taken longer to complete than we anticipated. We currently expect to enter into the contract and commence shipment of mineralized materials thereunder in the quarter ending September 30, 2015. However, there is no assurance that we will finalize the contract and commence shipments on this timeframe, or at all.

 

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Currently we anticipate funding our future operations from a revolving credit line associated with the Logistica agreements, sales to Glencore of iron extracted from mineralized material at the El Capitan Property, and sales of mineralized materials under our prospective contract with the Hong Kong based trading company and other purchasers of mineralized material with whom we may contract in the future. However, unless and until we commence sales to Glencore, finalize our prospective contract with the Hong Kong based trading company and commence shipments thereunder and/or enter similar agreements for the purchase of mineralized material, and produce sufficient cash flow from future revenues, we will continue to rely on equity and/or debt financing to fund our operations. Our current financing arrangements are summarized below. 

 

On July 30, 2014, we entered into an Equity Purchase Agreement (the “2014 Agreement”) with Southridge Partners, LP (“Southridge”), pursuant to which the Company may from time to time, in its discretion, sell newly-issued shares of its common stock to Southridge for aggregate gross proceeds of up to $1,900,000. Unless terminated earlier, Southridge’s purchase commitment will automatically terminate on the earlier of July 30, 2016, or the date on which aggregate purchases by Southridge under the 2014 Agreement total $1,900,000. The Company has no obligation to sell any shares under the 2014 Agreement. We entered into the 2014 Agreement upon the expiration of a similar Equity Purchase Agreement that we previously entered into with Southridge in 2011. The offering of shares under the 2014 Agreement has been made pursuant to a registration statement on Form S-3 (Registration Statement No. 333-193208) previously filed by the Company with the Securities and Exchange Commission, and prospectus supplements thereto. For a summary of the 2014 Agreement, see “Note 6 – Stockholders’ Equity – Equity Purchase Agreement” of the Notes to Consolidated Financial Statements. Because our public float was less than $75 million upon the December 29, 2014 filing of our Annual Report on Form 10-K, we are no longer eligible to utilize Form S-3 registration statements for the primary offering of securities. As a result, we will be required to amend the structure of the 2014 Agreement in order to continue to obtain financing from Southridge. We cannot predict with certainty if, or on what timeframe, we will be able to do so.

 

On October 17, 2014, we entered into a private Note and Warrant Purchase Agreement with an accredited investor pursuant to which the Company borrowed $500,000 against delivery of a promissory note in such amount and issued warrants to purchase 882,352 shares of our common stock pursuant to the Note and Warrant Purchase Agreement. The promissory note carries an interest rate of 8% per annum, is due July 17, 2015 and is secured by a first priority security interest in all right, title and interest of the Company in and to the net proceeds received by the Company from its sale of tailings separated from iron recovered by the Company at the El Capitan Property.

 

 On February 4, 2015, the Company issued unsecured promissory notes in the aggregate principal amount of $63,000. Outstanding amounts under these notes accrue interest at 18% per year, with all principal and accrued interest being due and payable on February 4, 2016. The Company’s obligations under both notes were personally guaranteed by the Company’s director and Chief Executive Officer. As additional consideration for the loan, the Company issued a total of 400,000 shares of restricted common stock of the Company to the lenders.

 

On April 16, 2015, the Company entered into an agreement with a third party financing source pursuant to which the lender has committed to loan the Company a total of $200,000 in installments. The first installment of $50,000 was advanced on April 17, 2015, the second installment of $50,000 was advanced on May 15, 2015, the third installment of $25,000 was advanced on June 16, 2015 and the fourth installment of $25,000 was advanced on July 20, 2015. Two additional advances of $25,000 each are scheduled to be made on the 15th day of August and September, 2015. The loan accrues interest at 10% per year, with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the lender a security interest in the AuraSource Heavy Metals Separation System located on the El Capitan Property. As additional consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the note holder.

 

Our only committed sources of financing are pursuant to the 2014 Agreement with Southridge (which, as set forth above, we cannot currently utilize) and the aforementioned April 16, 2015 agreement. To the extent that we are required to raise additional capital, we do not know whether it will be available on terms favorable or acceptable to us when needed, if at all. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. In addition, we may grant future investors rights superior to those of our existing stockholders. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business. If adequate additional capital is not available when required, we may be forced to reduce or eliminate our exploration activities and our marketing efforts for the sale of the El Capitan Property, or suspend our operations entirely.

 

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Factors Affecting Future Mineral Exploration Results

 

We have generated no revenues, other than interest income and miscellaneous revenue from the sale of two dore’ bars, since inception. As a result, we have only a limited history upon which to evaluate our future potential performance. Our potential must be considered by evaluation of all risks and difficulties encountered by exploration companies which have not yet established business operations and anticipated results and situations of entering active exploration activities.

 

The price of gold and silver has experienced an increase in value over the past five years. Beginning in April 2013, the price of gold and silver has experienced a downward swing. A significant permanent drop in the price of gold, silver or other precious metals may have a materially adverse effect on the future results of potential exploration activities and the opportunity to market the sale of the El Capitan Property. The costs associated with the recovery of precious metals may also cause a material adverse effect on the financial success of the Company and our ability to market the sale of the El Capitan Property.

 

Off-Balance Sheet Arrangements

 

During the nine months ended June 30, 2015, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.

 

Contractual Obligations

 

As of June 30, 2015, we had no contractual obligations (including long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations and other long-term liabilities reflected on our balance sheet under GAAP) that are expected to have an adverse effect on our liquidity and cash flows in future periods.

 

Critical Accounting Policies

 

Our unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Note 1, “Business, Basis of Presentation and Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 30, 2014 , filed with the SEC on December 29, 2014, describes our significant accounting policies which are reviewed by management on a regular basis.

 

New Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. 

 

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Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in its periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by it in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  In addition, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.   OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any material pending legal proceedings and to our knowledge, no such proceedings by or against the Company have been threatened.

 

Item 1A.   Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended September 30, 2014, filed with the U.S. Securities and Exchange Commission on December 29, 2014, as amended by Amendment Nos. 1 and 2 filed on February 18, 2015 and March 6, 2015, respectively, in addition to the other information included in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time prior to investing in our common stock.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 16, 2015, the Company entered into an agreement with a third party financing source pursuant to which the lender has committed to loan the Company a total of $200,000 in installments over nine months. The loan accrues interest at 10% per year, with all principal and accrued interest being due and payable on April 17, 2016. To secure the loan, the Company has granted the lender a security interest in the AuraSource Heavy Metals Separation System located on the El Capitan Property. As additional consideration for the loan, the Company issued 3,000,000 shares of restricted common stock of the Company to the lender. The loan and related issuance of shares was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof because such issuance did not involve a public offering.

 

On May 20, 2015, the Company issued 500,000 shares of restricted common stock of the Company to a creditor for carrying a significant balance. The issuance of shares was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof because such issuance did not involve a public offering.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

 

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Item 6.   Exhibits

 

(a)    Exhibits

 

Exhibit

Number

  Description
     
2.1   Agreement and Plan of Merger between the Company, Gold and Minerals Company, Inc. and MergerCo, dated June 28, 2010 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 7, 2010).
3.1   Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010).
3.2   Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 1, 2014).
3.3   Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 31, 2011).
3.4   Certificate of Designation of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 1, 2014).
3.5   Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010).
4.1   Rights Agreement dated August 25, 2011 between the Company and OTR, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 31, 2011).
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document** 
101.SCH*   XBRL Extension Schema Document**
101.CAL*   XBRL Extension Calculation Linkbase Document**
101.DEF*   XBRL Extension Definition Linkbase Document**
101.LAB*   XBRL Extension Labels Linkbase Document**
101.PRE*   XBRL Extension Presentation Linkbase Document**

_________________

 

Filed herewith.
** In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  EL CAPITAN PRECIOUS METALS, INC.  
       
       
Dated:   August 14, 2015 By: /s/  Charles C. Mottley  
   

Charles C. Mottley

Chief Executive Officer, President and Director

(Principal Executive Officer)

 
       

 

Dated:   August 14, 2015 By: /s/  John F. Stapleton  
   

John F. Stapleton

Chief Financial Officer and Director

(Principal Financial Officer)

 
       

 

 

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