UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F


      .    

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF

1934


 X .   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2013


      .   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____________ to ____________


      .   

SHELL COMPANY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Date of event requiring this shell company report __________________


Commission file number: 000-29922


TOMBSTONE EXPLORATION CORPORATION

(Exact name of Registrant as specified in its charter)


Not Applicable

(Translation of Registrant's name into English)


Canada

(Jurisdiction of incorporation or organization)


6529 E. Friess Drive

Scottsdale, AZ 85254

(Address of principal executive offices)


Alan Brown

6529 E. Friess Drive

Scottsdale, AZ 85254

(480) 588-8920

(Name, address and telephone of Company contact person)


Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of Class

Name of exchange on which registered

Not Applicable

Not Applicable


Securities registered or to be registered pursuant to Section 12(g) of the Act


Common Shares Without Par Value

(Title of Class)


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.


Not Applicable

(Title of Class)


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.


There were 125,407,408 Common Shares without par value issued and outstanding as at May 13, 2014.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       . YES     X . NO


If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    X . YES         . NO


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.  X . YES         . NO


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  X . YES         . NO (Not Applicable)


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


Large accelerated filer       . Accelerated filer       . Non-accelerated filer  X .


Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP    X . International Financial Reporting Standards as issued by the International Accounting Standards Board       . Other       .


If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         . YES    X . NO



2



TABLE OF CONTENTS

 

 

 

Page

Forward-Looking Statements

5

PART I

 

 

 

Financial Information And Accounting Principles

6

Item 1

Identity of Directors, Senior Management and Advisers

6

Item 2

Offer Statistics and Expected Timetable

6

Item 3

Key Information

6

 

A.

Selected Financial Data

6

 

B.

Capitalization and Indebtedness

6

 

C.

Reasons for the Offer and Use of Proceeds

6

 

D.

Risk Factors

7

Item 4

Information on the Company

11

 

A.

History and Development of the Company

11

 

B.

Business Overview

12

 

C.

Organizational Structure

22

 

D.

Property, Plants and Equipment

22

Item 4A

Unresolved Staff Comments

26

Item 5

Operating and Financial Review and Prospects

26

 

A.

Operating Results

26

 

B.

Liquidity and Capital Resources

27

 

C.

Research and Development, Patents and Licenses, etc.

27

 

D.

Trend Information

27

 

E.

Off-Balance Sheet Arrangements

27

 

F.

Tabular Disclosure of Contractual Obligations

27

Item 6

Directors, Senior Management and Employees

29

 

A.

Directors and Senior Management

29

 

B.

Compensation

29

 

C.

Board Practices

30

 

D.

Employees

31

 

E.

Share Ownership

31

Item 7

Major Shareholders and Related Party Transactions

31

 

A.

Major Shareholders

31

 

B.

Related Party Transactions

32

 

C.

Interests of Experts and Counsel

32

Item 8

Financial Information

32

 

A.

Consolidated Statements and Other Financial Information

32

 

B.

Significant Changes

32

Item 9

The Offer and Listing

33

Item 10

Additional Information

33

 

A.

Share Capital

33

 

B.

Articles of Incorporation and By-laws

33

 

C.

Material Contracts

36

 

D.

Exchange Controls

37

 

E.

Taxation

38

 

F.

Dividends and Paying Agents

41

 

G.

Statement by Experts

42

 

H.

Documents on Display

42

 

I.

Subsidiary Information

42

Item 11

Quantitative and Qualitative Disclosures About Market Risk

42

Item 12

Description of Securities Other than Equity Securities

42



3




PART II

 

42

Item 13

Defaults, Dividend Arrearages and Delinquencies

42

Item 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

42

Item 15

Controls and Procedures

42

Item 16

[Reserved]

43

Item 16A

Audit Committee Financial Expert

43

Item 16B

Code of Ethics

44

Item 16C

Principal Accountant Fees and Services

44

Item 16D

Exemptions from the Listing Standards for Audit Committees

44

Item 16E

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

44

Item 16F

Changes in Registrant’s Certifying Accountant

44

Item 16G

Corporate Governance

45

Item 16H

Mine Safety Disclosure

45

PART III

 

45

Item 17

Financial Statements

45

Item 18

Not Applicable

45

Item 19

Exhibits

45

 SIGNATURES

47




4



GENERAL


We use the U.S. dollar as our reporting currency. All references in this Annual Report to “dollars” or “$” are expressed in U.S. dollars, unless otherwise indicated. See also “Item 3. Key Information” for more detailed currency and conversion information. Our consolidated financial statements which form part of this Report are presented in U.S. dollars and are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).


FORWARD-LOOKING STATEMENTS


Except for the statements of historical fact contained herein, some information presented in this Report constitutes forward-looking statements. When used in this Report, the words “estimate”, “project”, “believe”, “anticipate”, “intend”, “expect”, “predict”, “may”, “should”, the negative thereof or other variations thereon or comparable terminology are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, changes in project parameters as plans continue to be refined, future prices of silver, as well as those factors discussed in the section entitled “Risk Factors”. Although our Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause actual results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, prospective investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Report speak only as to the date hereof. Our Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.


Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.


As used in this report, the terms “we”, “us”, “our”, “Tombstone”, “Tombstone Exploration”, and “TMBXF” mean Tombstone Exploration Corporation, unless otherwise indicated.



5



PART I


FINANCIAL INFORMATION AND ACCOUNTING PRINCIPLES


The consolidated financial statements and summaries of financial information contained in this document are reported in U.S. dollars (“$”) unless otherwise stated. All such consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles.


The consolidated financial statements of the Company for the year ended December 31, 2013 has been audited by De Joya Griffith, 2580 Anthem Village Drive, Henderson, NV, 89052 and the financial statements for the year ended December 31, 2012 have been audited by M&K CPAS, PLLC, 4100 N. Sam Houston Freeway W., Suite 200-B, Houston, TX, 77086.


ITEM 1.

Identity of Directors, Senior Management and Advisers


Not Required.


ITEM 2.

Offer Statistics and Expected Timetable


Not Required.


ITEM 3.

Key Information


A.

Selected Financial Data


The following tables set forth the data of our fiscal years ended December 31, 2009 to December 31, 2013. We derived all figures from our financial statements as prepared by our management, approved by our audit committee and audited by our independent auditor. This information should be read in conjunction with our financial statements included in this annual report.


Our financial statements included in this Report have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States (“US”). All amounts are expressed in United States dollars.


SUMMARY OF FINANCIAL INFORMATION IN THE COMPANY'S FINANCIAL STATEMENTS


 

December 31,

2009

$

December 31,

2010

$

December 31, 2011

$

December 31, 2012

$

December 31, 2013

$

OPERATING DATA:

 

 

 

 

 

Revenue

-

-

-

-

-

Gross Profit

-

-

-

-

-

Net Income (Loss)

(1,574,304)

(1,447,030)

(580,330)

(368,707)

(441,973)

Earnings (Loss) Per Share

(0.03)

(0.02)

(0.01)

(0.00)

(0.00)

 

 

 

 

 

 

BALANCE SHEET DATA:

 

 

 

 

 

Cash

1,525

779

379,014

578

43,560

Total Assets

62,604

24,433

402,825

15,713

60,552

Total Liabilities

414,045

281,100

221,897

192,017

380,587

Shareholders’ Equity (Deficit)

(351,441)

(256,667)

180,928

(176,304)

(320,035)


B.

Capitalization and Indebtedness


Not required.


C.

Reasons for the Offer and Use of Proceeds


Not required.



6




D.

Risk Factors


This Report contains forward-looking statements which relate to future events or our future performance, including our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, or “potential” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks enumerated in this section entitled “Risk Factors”, that may cause our Company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.


While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Report. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.


An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this Report in evaluating our Company and our business before purchasing shares of our Company’s common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are not the only ones facing our Company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.


Risks Associated With Mining


Our mining properties are in the exploration stage. There is no assurance that our properties contain any mineral resources in commercially exploitable quantities. If we do not discover any mineral resource in a commercially exploitable quantity, our business will fail and investors may lose all of their investment in our Company.


Despite our acquisition of mineral claims and rights, we have not established that any of them contain any commercially exploitable mineral reserves, nor can there be any assurance that we will ever find commercially exploitable mineral reserves. The probability of an individual prospect ever having a commercially exploitable mineral reserve is extremely remote; in all probability our mineral resource claims do not contain any reserves and any funds that we spend on exploration will probably be lost. The search for valuable minerals as a business is extremely risky. We can provide investors with no assurance that any exploration on our properties will establish that commercially exploitable reserves of minerals exist on our mining claims. Additional potential problems that may prevent us from discovering any reserves of minerals on our properties include, but are not limited to, unanticipated problems relating to exploration and additional costs and expenses that may exceed current estimates. Most of these factors are beyond our control, and any of them could increase costs and make extraction of any identified mineral resource unprofitable.


If we are unable to establish the presence of commercially exploitable reserves of minerals on our properties, our ability to fund future exploration activities will be impeded, we will not be able to operate profitably and investors may lose all of their investment in our Company.

 

We face intense competition in the mineral exploration and exploitation industry and we compete with our competitors for financing, for new mineral resource properties and for qualified managerial and technical employees.


Our competition includes large established mining companies with substantial capabilities and with greater financial and technical resources than those available to us. As a result of this competition, we may have to compete for financing and be unable to acquire financing on terms we consider acceptable. This competition could adversely affect our ability to acquire suitable prospects for exploration in the future. We may also have to compete with the other mining companies in the recruitment and retention of qualified managerial and technical employees. If we are unable to successfully compete for financing or for qualified employees, our exploration programs may be slowed down or suspended. If we are unable to successfully compete for the acquisition of suitable prospects for exploration in the future, there can be no assurance that we will acquire any interest in additional mineral resource properties. The occurrence of any of these things may cause us to cease operations as a company.


Because of the inherent dangers involved in mineral exploration and exploitation, there is a risk that we may incur liability or damages as we conduct our business.


The search for valuable minerals involves numerous hazards that may subject us to liability including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure. At the present time we have no coverage to insure against these hazards. The payment of such liabilities may have a material adverse effect on our financial position.



7




Title to our resource properties may be challenged by third parties which could result in the loss of substantial amounts of money and resources and could cause our interests in our properties to expire or be forfeit.


We have investigated the status of our titles to our mineral resource properties and we are satisfied that the title to these properties is properly registered in the name of our Company, but we cannot guarantee that the rights to explore our claims will not be revoked or altered to our detriment. The ownership and validity of mining claims and concessions are often uncertain and may be contested. Should such a challenge to the boundaries or registration of ownership arise, the resolution of disputes or the process of clarifying the accuracy of our mining license registration could take substantial time and money. Further, the preservation of our title to our mineral claims requires that we continue to expend money or work the claims. If we fail to expend the necessary amount of money or if we fail to work our mineral claims, then our title to our mineral claims could expire or be forfeit.


Mineral prices are subject to dramatic and unpredictable fluctuations.


The market price of precious metals and other minerals is volatile and has fluctuated widely, particularly in recent years. The prices of various metals are affected by numerous factors beyond our control, including international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved mining and production methods. The supply of and demand for metals are affected by various factors, including political events, economic conditions and production casts in major mineral producing regions. Variations in the market prices of metals may impact on our ability to raise funding to continue exploration of our claims. In addition, any significant fluctuations in metal prices will impact our decision to accelerate or reduce our exploration activities. If the price of precious metals and other minerals should drop significantly, the cost of mineral extraction may be higher than is economically feasible. The marketability of minerals is also affected by numerous other factors beyond our control, including government regulations relating to royalties, allowable production and importing and exporting of minerals, the effect of which cannot be accurately predicted.


Mineral operations are subject to government regulations which could have the effect of reducing or preventing us from exploiting any possible mineral reserves on our claims.


Exploration activities are subject to national and local laws and regulations governing prospects, taxes, labor standards, occupational health, land use, environmental protection, mine safety and others which may in the future have a substantial adverse impact on our Company’s prospects. In order to comply with applicable laws, we may be required to make capital expenditures until a particular problem is remedied. Existing and possible future environmental legislation, regulation and action could cause additional expense, capital expenditure, restriction and delay in the activities of our Company, the extent of which cannot be reasonably predicted. If we violate any applicable law or regulation, we could be forced to stop work and we could be fined. If we are forced to suspend our activities or if we are required to pay a large fine for a violation of these applicable laws and regulations, our business could be adversely affected.


Our operations may be subject to environmental regulations which may result in the imposition of fines and penalties.


Our operations may be subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certain mining industry operations, such as seepage from tailings disposal areas, which would result in environmental pollution. A breach of such legislation may result in the imposition of fines and penalties. Environmental legislation is evolving in a manner which means stricter standards, and enforcement; fines and penalties for non-compliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of operations.


Risks Related To Our Company


The fact that we have not generated any operating revenues for the last eight years raises substantial doubt about our ability to continue as a going concern.


We have not generated any operating revenues for the last eight years and we will, in all likelihood, continue to incur operating expenses without revenues until our mining claims are fully developed and in commercial production.  As a result, we need to generate significant revenues from our operations or obtain financing. We cannot assure that we will be able to successfully explore and develop our mining claims or assure that viable reserves exist on the claims for extraction. These circumstances raise substantial doubt about our ability to continue as a going concern. It is unlikely that we will generate any funds internally until we discover commercially viable quantities of precious metals and other minerals. If we are unable to generate revenue from our business in the next twelve months, we may be forced to delay, scale back, or eliminate our exploration activities. If any of these actions were to become necessary, we may not be able to continue to explore our properties or operate our business and if either of those events happen, then there is a substantial risk our business would fail.



8




We have a limited operating history on which to base an evaluation of our business and prospects.


As of the date of this Report, we have not yet located any mineral reserve. As a result, we have never had any revenues from our operations. In addition, we have no operating history related to the acquisition and exploration of our mineral properties. We have no way to evaluate the likelihood of whether our mineral claims contain any mineral reserve or, if they do that we will be able to build or operate a mine successfully. We anticipate that we will continue to incur operating costs without realizing any revenues during the period when we are exploring our claims. We expect to continue to incur significant losses into the foreseeable future. We recognize that if we are unable to generate significant revenues from mining operations and any dispositions of our claims, we will not be able to earn profits or continue operations. At this early stage of our operation in this industry, we also expect to face the risks, uncertainties, expenses and difficulties frequently encountered by companies at the start up stage of their business development. We cannot be sure that we will be successful in addressing these risks and uncertainties and our failure to do so could have a material adverse effect on our financial condition. There is no history upon which to base any assumption as to the likelihood that we will prove successful and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations.


We have not generated any revenue from our business and we may need to raise additional funds in the near future. If we are not able to obtain future financing when required, we might be forced to discontinue our business.


Because we have not generated any revenue from our business and we cannot anticipate when we will be able to generate revenue from our business, we will need to raise additional funds for the further exploration and future development of our mining claims and to respond to unanticipated requirements or expenses.  During the year ended December 31, 2013, we received $261,588 in financing.  However, if our expenses exceed these funds, we will need to secure additional financing for further exploration and development of our projects or to fulfill our obligations under any applicable agreements. Although we have been successful in the past in obtaining financing, there can be no assurance that we will be able to obtain adequate financing in the future or that the terms of such financing will be favorable. Failure to obtain such additional financing could result in a delay or indefinite postponement of further exploration and development of our projects with the possible loss of such properties.


Canada Business Corporations Act provides for the indemnification of our officers and directors against all costs, charges and expenses incurred by them in respect of any civil, criminal, administrative, investigative or other proceeding.


The Canada Business Corporations Act contains provisions limiting the liability of our officers and directors for their acts and failures to act and for any loss, damage or expense incurred by our Company which shall happen in the execution of their duties of such officers or directors, unless the officers or directors did not act honestly and in good faith with a view to the best interests of our Company. Such limitations on liability may reduce the likelihood of derivative litigation against our officers and directors and may discourage or deter our shareholders from suing our officers and directors based upon breaches of their duties to our Company, though such an action, if successful, might otherwise benefit our Company and our shareholders.


Risks Relating to our Securities


Investors’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities.


We are currently without a source of revenue and will most likely be required to issue additional shares to finance our operations and, depending on the outcome of our exploration programs, may issue additional shares to finance additional exploration programs of any or all of our projects or to acquire additional properties. If we are required to issue additional shares to raise financing, your interests in our Company will be diluted and you may suffer dilution in your net book value per share depending on the price at which such securities are sold. Further, if we issue any share purchase warrants or share purchase options, and they are exercised, there will be a reduction in the proportionate ownership and voting power of all other shareholders. The dilution may result in a decline in the market price of our common shares.


Investors’ interests in our Company will be diluted and investors will suffer dilution in their net book value per share if we issue employee/director/consultant options.

 

We may in the future grant to some or all of our directors, officers, insiders, and key employees, options to purchase our common shares as non-cash incentives to those persons. Such options may be granted at exercise prices equal to market prices, or at such other price as may be permitted under the policies of any stock exchange upon which our securities are traded (currently, our common shares are listed for trading on the OTCBB), when the public market is depressed. The issuance of additional shares will cause our existing shareholders to experience dilution of their ownership interests.



9




We do not plan to pay any Dividends in the foreseeable future.


The Company has never paid a dividend and it is unlikely that the Company will declare or pay a dividend until warranted based on the factors outlined below. The declaration, amount and date of distribution of any dividends in the future will be decided by the Board of Directors from time-to-time, based upon, and subject to, the Company’s earnings, financial requirements and other conditions prevailing at the time.


In the event that key employees leave the Company, the Company would be harmed since we are heavily dependent upon them for all aspects of our activities.


The Company is heavily dependent on our officers and directors, key employees and contractors, the loss of whom could have, in the short-term, a negative impact on our ability to conduct our activities and could cause a decline in profitability of our properties or additional costs from a delay in development or exploration of properties. The Company has consulting agreements with key employees and contractors, and an employment agreement with our President.


We face exposure to fluctuations in the price of our common stock due to the very limited cash resources we have.


The Company has very limited resources to pay its professionals. If we are unable to pay professionals in order to perform various professional services for the Company, it may be difficult, if not impossible, for the Company to maintain its reporting status under the Exchange Act. If the Company felt that it was likely that it would not be able to maintain its reporting status, it would make a disclosure by filing a Form 6-K with the SEC. In any case, if the Company was not able to maintain its reporting status, it would become “delisted” and this would potentially cause an investor or an existing shareholder to lose all or part of his investment.


The Company does not anticipate any contingency upon which it would voluntarily cease filing reports with the SEC, even though it may cease to be required to do so.


It is in the compelling interest of the Company to report its affairs annually and currently, as the case may be, generally to provide accessible public information to interested parties, and also specifically to maintain its qualification for the OTCBB, if and when the Company’s intended application for submission is effective.


The success of the Company will depend on the developments of an active trading market.


While the Company's common shares are included on Over the Counter Bulletin Board, there can be no assurance that an active trading market for the common shares will develop. In the absence of such a market, investors may be unable to readily liquidate their investment in the common shares. The market for equity securities in general has been volatile and the trading price of the common shares could be subject to wide fluctuations in response to general market trends, changes in general conditions in the economy, the financial markets and other factors that may be unrelated to the Company's performance.


Low-Priced Stocks are subject to greater Disclosure Requirements.


The Securities and Exchange Commission adopted rules (“Penny Stock Rules”) that regulate broker-dealer practices in connection with transactions in penny stocks. The common shares of the Company fall within the Commission's definition of a penny stock. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current prices and volume information with respect to transactions in such securities is provided by the exchange or system). The Penny Stock Rules require a broker-dealer, prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the Penny Stock Rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to the Penny Stock Rules. At any time when the Company's common stock is subject to the Penny Stock Rules, shareholders may find it more difficult to sell their shares.



10




ITEM 4.

Information on the Company


A.

History and Development of the Company


The Company was incorporated as a federal company pursuant to the laws of Canada under the Canada Business Corporations Act (the “Act”) on October 30, 1997, under the name 3430502 Canada Ltd. In December 1997, the Company changed its name to Four Crown Foods Inc. At the time, the Company was involved in the food and beverage retail business. Then in June, 2000, the Company changed its name to Universal Domains Incorporated and operated in the domain registration business upon the acquisition of the license rights to a domain registration agreement for the “.cc” internet registration domain.


In November 2003, the Company ceased all operations and in September, 2004, the Company changed its name to Pure Capital Incorporated. From that time until November 1, 2006, the Company’s goals were to continue to reduce the liabilities of the Company in an effort to obtain additional financing and explore the possibilities of starting a new operating business, and/or merge with or become acquired by another company or entity.


On November 27, 2006, the Company acquired full rights and title to certain mining and exploration claims located in the State of Arizona along with other equipment and properties from Redhawk Exploration & Development, Inc., a Texas corporation.


Then on February 6, 2007, the Company changed its name to Tombstone Exploration Corporation to reflect its current operations in the mining and exploration industry. Since that time we have been operating in the mineral resource business and the primary focus of operations has been to generate revenue from the production of silver, gold and manganese as well as additional base minerals such as copper, lead and zinc. The goal is to produce metals and minerals at or below standard industry costs. The historical nature of mining activities of our present holdings and the acceptance of governmental agencies will enable easier startup here than in non-mining oriented locations.


Following identification of suitable areas during our drilling programs, which we anticipate will continue in the future, the Company may initiate mineral extraction if sufficient funding and permitting are secured. These efforts will provide an operating financial base from which to expand. Continuing geological research, testing and drilling is planned based on the initial geological report. This will assist in the identification of key target areas, as well as establish reserve categories.


Discussions with precious metal processing and consulting companies to assist in the design of the overall operation of our mining claims have been initiated. Relationships have already been established with refineries, assay companies and engineering firms supporting worldwide mineral processing operations.


The Company holds the mineral rights to approximately 7,116 acres in the historical western Tombstone silver mining district.   Our property area lies within the historic Tombstone Mining District, in Township 20 and 21 South, Ranges 22 and 23 East, Gila and Salt River Meridian and Base Line, Cochise County, Arizona. The town of Tombstone, Arizona is approximately 70 miles (mi, 110 kilometers (km)) southeast of Tucson and 24 mi (40 km) northwest of Bisbee, Arizona. The San Pedro River lies about 2 mi (3 km) west of the property’s westernmost boundary.  


Our acquired mineral rights make the Company the largest landholder in the Tombstone mining district.  The Tombstone mining district is one of 12 mining districts in Cochise County, Arizona. Copper, lead, zinc, silver, and gold were the principal metals produced from the different mines in the County. Management has structured and positioned the Company to capitalize on today's increasing demand and prices for precious metals and base metals such as copper, lead and zinc.


The Tombstone property is composed of three non-contiguous parcels totaling approximately 7,116 acres. The parcels consist of 8 patented lode claims totaling 145.6 acres (58.9 ha), 202 unpatented lode claims totaling 4,040 acres (1,635 ha) administered by the U.S. Bureau of Land Management (BLM), and 8 Arizona State Land Department (ASLD) exploration permits totaling 2,930 acres (1,186 ha).  On November 14, 2013, the Company announced that it filed additional Arizona State Land Department permits for 2,000 acres associated with the Zebra Prospect located at the eastern edge of the Tombstone Mining District.  The Company owns the mineral rights to the patented claims; the surface rights are owned by various individuals. The unpatented federal BLM mining claims grant the Company the exclusive rights to explore for and potentially mine minerals, and Arizona state trust lands exploration permits grant the Company the exclusive exploration rights for up to 5 years from the date the exploration applications were filed. Surface and mineral rights are variously owned by the U.S. federal government, the State of Arizona, and individual persons.


In addition to continuing to explore our current mineral rights, we will seek out and attempt to acquire new properties.



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B.

Business Overview


This business generally consists of three stages: exploration, development and production. We are a mineral resource company in the exploration stage because we have not yet found mineral resources in commercially exploitable quantities, and are engaged in exploring land in an effort to discover them. Mineral resource companies that have located a mineral resource in commercially exploitable quantities and are preparing to extract that resource are in the development stage, while those engaged in the extraction of a known mineral resource are in the production stage.


Mineral resource exploration can consist of several stages. The earliest stage usually consists of the identification of a potential prospect through either the discovery of a mineralized showing on that property or as the result of a property being in proximity to another property on which exploitable resources have been identified, whether or not they are or have in the past been extracted.


After the identification of a property as a potential prospect, the next stage would usually be the acquisition of a right to explore the area for mineral resources. This can consist of the outright acquisition of the land or the acquisition of specific, but limited, rights to the land (e.g., a license, lease or concession). After acquisition, exploration would probably begin with a surface examination by a prospector or professional geologist with the aim of identifying areas of potential mineralization, followed by detailed geological sampling and mapping of this showing with possible geophysical and geochemical grid surveys to establish whether a known trend of mineralization continues underground, possibly trenching in these covered areas to allow sampling of the underlying rock. Exploration also commonly includes systematic regularly spaced drilling in order to determine the extent and grade of the mineralized system at depth and over a given area, as well as gaining underground access by ramping or shafting in order to obtain bulk samples that would allow one to determine the ability to recover various commodities from the rock. If minerals are found, exploration might culminate in a feasibility study to ascertain if the mining of the minerals would be economic. A feasibility study is a study that reaches a conclusion with respect to the economics of bringing a mineral resource to the production stage.


Operations


The Company has conducted several drilling programs on the Tombstone property, as described in greater detail below.


2007 Drilling Program


In early March 2007, we commenced our reverse circulation (RC) drill program. On or about March 21, 2007, we completed the first reverse circulation drill hole (RT-1) to a depth of 500 feet and intercepted silver/gold mineralization when it hit its target at the Tombstone property.


The 2007 Drill Program consisted of distinct drill sites that were designed to intercept extensions of the State of Maine mine, Merrimac zone, Bonanza-Solstice mines and the Ace-in-the-Hole-Black Horse mine sub-parallel trends. These zones are north-easterly trending. Core holes were HQ size and were drilled using triple tube core technology to assure that the most complete core recovery was achieved. Drill hole spacing was approximately 100 meters between drill hole sites. The four mineralized zones were tested over strike lengths ranging from 200 meters to 500 meters. All available historical data indicates that there were no historical mining activities conducted below the water level in the areas covered by the 2007 Drill Program.


Following the 2007 Drill Program, in January 2008, the Company received assay results for 115 samples taken from its Tombstone Project property within T20S R22E Sections 16 and 17.  It was determined that more detailed sampling would be required to further assess the Santa Ana Mine workings.


2008 Drill Program – Phase 1


On or about April 1, 2008, the Company began to conduct geological mapping and sampling that, combined with historical data, provided the basis for the 2008 core drilling program.


On May 29, 2008, the Company engaged Layne Christensen Company (NASDAQ: LAYN) of Mission Woods, Kansas to conduct its 2008 drilling program, which commenced on June 17, 2008 and continued through September 2008.


On October 9, 2008, the Company announced the completion of its 2008 Drill Program which consisted of 2,593 feet of core drilling at its silver project in Tombstone. Six diamond drill holes (DDH) were drilled, TEMC 101,102,103,104,105 and 106, to test the extension of the mineralization zones of the Bonanza and Santa Ana structures, both of which possess historical data from within the mining district. Both structures exhibit open ends at the south and north, as well down dip.


Holes were drilled as HQ diameter and using triple-tube technology, yielding a recovery over 90% in most instances. RQD is estimated at 45%, average.



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Five out of the six DD holes intersected the projected targets at different levels at the south, central and north of the structures, while DDH TEMC 101 provided a great deal of information regarding the Bonanza structure which seems to be bent in an opposite direction in depth. This particular piece of information has been physically confirmed in the Bonanza mine workings where the structure becoming sub-vertical at 200 feet approximately, and then switches the dip to east, rather than dipping west as observed at the upper sectors of the shafts.


The 2008 Drill Program revealed a new mineralized structural corridor between the State of Maine and Merrimac veins at the southern portion of the property. The corridor extends for over one mile, and locally exhibits 80-100' width with some feldspar porphyry dikes in between.


The results of this Phase 1 drill program have resulted in identifying a mineral zone that the Company’s management believes is a significant precious metals and base metals discovery. The Company intends to carry out an aggressive exploration and comprehensive drilling program.


Following the completion of the Phase 1 Drill Program in 2008, the Company received assay results from rock chip samples on its Tombstone properties. Outcrop samples taken from horizontal projections of mineralized structures away from historical mine workings indicate continuity of silver, gold, lead, zinc, copper and manganese minerals along these structural corridors through the property package. Samples from two structures were collected and taken to Copper States Analytical Lab in Prescott, Arizona for gold, silver, lead, zinc, copper and manganese assays.


2008 Technical Report


In May 2008, we filed our initial Technical Report regarding the Tombstone property. SRK Consulting (“SRK”) of Tucson, Arizona completed the Technical Report. SRK is an independent, international consulting group, employing leading specialists in environmental science and mineral engineering. Its seamless integration of services, and global base, has made the company a significant international practice in due diligence, feasibility studies and confidential internal reviews. SRK's global experience and reputation for excellence is widely recognized among the major financial institutions and are repeatedly called upon to advise on and evaluate projects for all types of market transactions. Formed in 1974, SRK employs more than 600 professionals internationally in 31 permanent offices on 6 continents.


SRK made the following recommendations:


An extended program of vertical and inclined core drilling was recommended for the Tombstone Property. Drilling would be aimed at determining mineralization grades and fissure vein characteristics such as horizontal and vertical extent, relationships to other veins, widths and depths below the water table. It would also provide geotechnical information, samples for bulk density measurements, and samples for preliminary metallurgical testing. It is difficult to say how many drill holes would be indicated. A program is suggested that would include a minimum of five 1000-foot core holes along existing mineralized structural zones to define depth potential below the water table. A program of twenty 500-ft drill holes (RC) can be used to explore along strike of mapped extensions to known structures.


1.

Conduct additional inclined and vertical drilling for the following purposes:


·

Evaluate the width of structural targets such as dikes, fissures, and veins;

·

Confirm silver mineralization across the targets;

·

Evaluate potential mineralization below the water table in the target areas;

·

Provide fresh samples for mineralogical and metallurgical testing; and,

·

Conduct in-fill and/or extension drilling where necessary.


Any additional drilling should be by the core drilling methods with HQ size core. The drilling should include some oriented drillcore, targeting the northeast-trending fissures, to intercept the greatest possible thickness and depth of mineralized rock. Additional drilling should be directed toward evaluating mineralization below the water table.


The recommended drilling will provide additional structural and assay information to allow for possible delineation of mineralized zones, and will provide additional geotechnical information. Closer spaced drillhole definition of higher grade and thicker mineralization should be the goal.


2.

Conduct down-hole surveys to measure drill-hole deviation, particularly for drill holes in excess of 100 m.


3.

Devise a suitable numerical drill log that will allow inclusion of detailed lithology, alteration and mineralization information, in numeric form, in addition to assay data, to allow for digital drill logs.



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4.

Convert historical hard copy drill logs to digital format logs.


2009/2010 Drill Program - Phase II


 

In February 2009, the Company extracted six additional samples from the Tombstone property which were sent to Copper State Analytical for assay for gold, silver, manganese, copper, lead and zinc. Three of the samples were taken from the State of Maine Mine and three from Randolph Mine, both located on the Tombstone property. The Company suspended the 2009 Drill Program due to general economic factors leading to difficulty in obtaining the requisite financing to fund the program.

 

In April 2010, the Company resumed the 2009 Drill Program, with the two targets drilled and both having intersected mineralized zones. The Company utilized a portable x-ray diffraction (XRF) machine to get on-site reading of metal levels in the drill cuttings. The results helped the exploration team manage the drilling program. Tombstone's property is underlain by Uncle Sam porphyry and units of the Bisbee Group. Mineralized fissures strike consistently northeast, and many of the fissures exhibit consistent orientation for hundreds of feet along strike. Many fissures have parallel orientations, forming fissure sets. The main mines in this area occur along these northeast-striking fissures. The State of Maine mine occurs in fissures that cut both Bisbee sediments and Uncle Sam porphyry. These structural mineralized fissures are the primary focus of the current exploration program.


As of June 30, 2010, 4,080 feet of drilling had been completed. Also during this period, additional geologist investigation was undertaken to further assess the potential for porphyry copper exploration targets on the Tombstone property. The Company has been in contact with geophysical contractors to develop a plan, budget and timeline for this phase of the project. Planning is ongoing and work may include geochemical surveys as well.  


The Company has not conducted further drilling on the Tombstone Property since June 2010.


2010 Report on a Helicopter-Borne Z-Axis Tipper Electromagnetic (ZTEM) and Aero Magnetic Geophysical Survey


From June 29, 2010 to July 4, 2010, Geotech Ltd. carried out a helicopter-borne geophysical survey for the Company over the Tombstone project area. Principal geophysical sensors included a Z-Axis Tipper electromagnetic (ZTEM) system, and a caesium magnetometer. Ancillary equipment included a GPS navigation system and a radar altimeter.  ZTEM was selected for its ability to achieve unparalleled resolution and depth of investigation. The system is well suited to imaging buried porphyry deposits and is capable of gathering data over 6,000 feet (1.25 miles) below ground surface.


The airborne ZTEM survey covered over 200 line miles and most of the Tombstone Mining District.  A total of 373.5 line kilometers of geophysical data were acquired during the survey.  In a ZTEM survey, a single vertical-dipole air-core receiver coil is flown over the survey area in a grid pattern, similar to regional airborne EM surveys. Two orthogonal, air-core horizontal axis coils are placed close to the survey site to measure the horizontal EM reference fields. Data from the three coils are used to obtain the Z/X and Z/Y Tipper (Vozoff, 1972) components at six frequencies in the 30 to 720 Hz band. The ZTEM was used to map geology using resistivity contrasts and magnetometer data were also collected to help map geology using magnetic susceptibility contrasts.


The crew was based in Tombstone, Arizona for the acquisition phase of the survey. Survey flying started on June 29, 2010 and was completed on July 4, 2010.   Data quality control and quality assurance, and preliminary data processing were carried out on a daily basis during the acquisition phase of the project. Final reporting, data presentation and archiving were completed from the Aurora office of Geotech Ltd. in October, 2010.  A quality control step consisted of re-examining all data in order to validate the preliminary data processing and to allow for final adjustments to the data.  Attitude corrections were re-evaluated, and re-applied, on component by component, flight by flight, and frequency by frequency bases. Any remaining line to line system noise was removed by applying a mild additional levelling correction.


As a result of the survey, Geotech identified a number of conductive structures across the property that resemble known porphyry deposits and reported that the magnetic results also contained worthwhile information in support of exploration targets of interest. Based on the geophysical results obtained, Geotech recommended a more detailed interpretation of the available geophysical data, including Versatile Time-Domain Electromagnetic survey (VTEM), in conjunction with the geology, prior to ground follow up and drill testing.



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In November 2010, upon review of the ZTEM data, at least four to five porphyry targets were identified on the Company's Tombstone property, and there is still a very large land position to review.  Of the targets that have been identified so far, two have precious metal (gold and silver) occurrences as "halos" around the properties, which are significant characteristics of porphyry systems. One identified structure has been compared by Geotech to the Mount Milligan deposits that were recently sold and have total measured and indicated resources of 417.1 million tons grading 0.21% copper, 0.41 g/t gold for 1,934 million pounds copper and 5.5 million ounces gold.  Three of the identified targets have coincident magnetic and resistivity high which are very promising geophysical signatures. One target is adjacent to a porphyry system that is currently being drilled by a major international mining company.  As of the date of this Report, the Company is continuing to work with the geophysical data acquired from the ZTEM survey of the Tombstone Project.


2012 Technical Report

 

In January 2012, SRK completed a Technical Report on the Tombstone property.


SRK made the following conclusions in the Report:


The Tombstone property represents a beginning exploration project with a limited amount of historical and current data. The data are insufficient to take the property to resource classification by current industry standards at this time.


The historic silver deposits in the central mining district are well documented through various reports in the literature and several master- and doctoral-level theses. Although west of the largest historical ore deposits, the Tombstone West Area property nonetheless represents an opportunity to target a resource by current methodologies of mapping, drilling, and geophysical surveys that may be successfully extracted with present-day mining techniques. In light of silver commodity price increases in recent years, the recent emphasis on potential porphyry copper and gold targets in the Tombstone area, and recent gold and copper commodity prices, the Tombstone Project warrants a current evaluation.


SRK made the following recommendations in the Report:


·  Compile and analyze all available district-wide data and use that analysis to define and prioritize future targets.

·  Convert historical and current drill logs to digital format logs, re-logging holes that have incomplete logs.

·  Digitize all geochemical data.

·  Use industry-standard software for mapping and record-keeping.

·  Conduct surface geophysical surveys over targets identified by the ZTEM airborne survey.

·  Compile all data in a GIS database, and analyze coincident anomalies to define drill targets.

·  Define a drill program and budget.



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Summary of Exploration Activities


SUMMARY OF EXPLORATION HISTORY AND FUTURE EXPLORATION PLANS FOR TOMBSTONE PROPERTY

Year

Expenditures / Budget

Source of Funding

Exploration Activities

Persons Conducting Exploration and Qualifications

2007

$1.4 million

Private Placement Agreement with Eurogas, Inc. and other private investors

Geological prospecting


R/C Drilling Program


Completed 5000 feet of R/C drilling

Dennis Dalton

Chief Geologist

Mr. Dalton received a B.S. in Geology from the University of California Long Beach and a M.S. in Mining Engineering from McKay School of Mines at the University of Nevada. Dating back to 1976, Mr. Dalton has widespread experience in mining geology. Mr. Dalton was an environmental engineer prior.

2008

$1.2 million

Private Placement with Haywood Securities, Cannacord Capital and other private investors

Geological prospecting


Assaying and evaluation of information


Core Drill Program  


Completed 5000 feet of core drilling

Francisco P. Montecinos

Former VP of Exploration

Francisco has worked as an exploration geologist for over 40 years in some 20 countries. Of these, the last 25 years has been spent throughout North and Central America as project manager and regional exploration manager for a number of multi-national mining companies. He has degrees from and has also completed studies at numerous universities including Harvard, University of Chile, California-Berkeley and Colorado School of Mines.

2009

$500,000

Private Placements with private investors

Mapping of historical zones


Reviewing core samples from prior years


Reviewing historical data and drillings from prior years

Lane A. Griffin

Mr. Griffin has more than 30 years experience as a geological consultant exploring for precious metals and uranium.  He spent 4 years in the Army as an officer in the Corps of Engineers.  He is currently the President of Diversified Development Company, the operator of the Lone Jack Gold Mine in Bellingham, Washington.  He received a B.S. in Geology from Washington State University as well as a B.A. in Zoology and D.D.S. from the University of Washington.



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2010

$500,000

Private Placement Agreement with Eurogas, Inc. and other private investors

Mapping of historical zones


Reviewing core samples from prior years


Reviewing historical data and drillings from prior years


ZTem Geophysical Program conducted and completed by Geotech Inc.

Steve Radvak, P.E.

Mr. Radvak, P.E., P.Eng., has a B.A.Sc. in Mining and Mineral Processing Engineering from the University of British Columbia. He is a Director and the Vice President of Exploration of the Company. He has been the President, Chief Executive Officer, and Director of Compliance Management Inc., an environmental service company, since its inception in 1998. Mr. Radvak is also a managing member of RM Fencing, LLC (“RM Fencing”), a company that offers professional installation of fences, gates and other products throughout Arizona. Mr. Radvak has extensive experience in managing mineral exploration projects in the United States, Canada, Africa and Europe and will be a valuable asset to the Company.

2011

$700,000

Private Placement Agreements with private investors.

Began exploration activities in April 2011 and continued such activities until December 2011 including:


Geophysical and gravity survey


Review of core samples from prior years


Review of historical data and drillings from prior years


Review and follow-up of ZTEM Geophysical Program conducted and completed by Geotech Inc.


Execute core drilling program


Update SRK Technical Report

Various Professional Engineers and Geologists from the State of Arizona



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2012/13

$2,000,000

Private Placement Agreements with private investors.

Continue review of geophysical data and ZTEM Report.


Compile and analyze all available district-wide data and use that analysis to define and prioritize future targets.


Convert historical and current drill logs to digital format logs, re-logging holes that have incomplete logs.


Digitize all geochemical data.


Use industry-standard software for mapping and record-keeping.


Conduct surface geophysical surveys over targets identified by the ZTEM airborne survey.


Compile all data in a GIS database, and analyze coincident anomalies to define drill


Define a drill program and budget.

Steve Radvak, P.E. (see qualifications above)


Various Professional Engineers and Geologists from the State of Arizona

2014

$2,000,000 (1)

Private Placement Agreement with Eurogas AG, Asher Enterprises, and other private investors (2)

Continue review of geophysical data and ZTEM Report.


Compile and analyze all available district-wide data and use that analysis to define and prioritize future targets.


Convert historical and current drill logs to digital format logs, re-logging holes that have incomplete logs.


Digitize all geochemical data.


Use industry-standard software for mapping and record-keeping.


Conduct surface geophysical surveys over targets identified by the ZTEM airborne survey.


Compile all data in a GIS database, and analyze coincident anomalies to define drill


Define a drill program and budget.

Steve Radvak, P.E. (see qualifications above)


Various Professional Engineers and Geologists from the State of Arizona

 

 

 

 

 

(1)

Our budget for 2014 consists of the following expenses for a total of $2,000,000:


·

Direct Drilling Expense:  $1,100,000;

·

Assay:  $50,000;

·

Road Building and Reclamation:  $50,000;

·

Updated Geological Report and property mapping: $120,000;

·

Additional Geophysical work incl. IP and Gravity Survey:  $100,000;

·

Management, Office and Employee Expenses:  $320,000;

·

Office, Travel, Misc. Expenses:  $80,000;

·

Professional Service Expenses: Legal, Accounting, Audits: $100,000;

·

BLM Claims and Permit Expenses: $80,000



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(2)

We have raised $nil as of December 31, 2013 and require an additional $2,000,000 for our proposed 2014 activities.


On December 10, 2013, the Company announced a Strategic Corporate and Financing Investment that includes the acquisition of a 26% interest in EuroGas AG of Zurich, Switzerland, an international Natural Resources Holding Company with European assets in industrial minerals, oil and gas interests as well as base metal and precious metal assets located in the USA.  Under the Strategic Corporate and Financing Investment in EuroGas AG, the Company will also receive from EuroGas Inc., a US company, a committed financing in the amount of $5 million USD for extensive drilling of the Tombstone property.  On January 14, 2014, the Company announced the receipt of an entitlement of a 20% direct interest in EuroGas Inc.’s potential award from its pending damage lawsuit against the Slovak Republic.  This is in addition to the 26% direct interest in EuroGas AG.


Revenues


To date we have not generated any revenues from the Tombstone Property.


Principal Market


We do not currently have any market, as we have not yet identified any mineral resource on the Tombstone Property that is of a commercially exploitable quantity. If we succeed in identifying a mineral resource in commercially exploitable quantities, our principal markets should consist of metal refineries and base metal traders and dealers.


Seasonality of our Business


Our mineral exploration activities are not subject to extreme seasonal variation since the Tombstone Property is located in Arizona. Field work, however, is best carried out in temperatures averaging 10 to 15 degrees Celsius. Our other operations, such as metallurgical review and analysis of geochemical survey results, can be carried out all year round.   

 

Local Resources


Tombstone, Arizona is the nearest town to the Tombstone Project. The U.S. Census Bureau reports a year-2010 population of 1,380 people. Services at Tombstone are marginally adequate to support the requirements of a mining exploration and development project, but other nearby towns (2010 U.S. Census Bureau populations: Wilcox, 3,757; Benson, 4,700; Bisbee, 5,105; and Sierra Vista, 43,888) have services such as drilling contractors, equipment rental and services, engineering services, and a labor force that are more able to support our drilling program. Sierra Vista is about 18 miles from the project area. The nearest large city, Tucson—located 70 miles northwest of Tombstone along Interstate 10—has a population of more than 520,116 (2010 Census) and has company, service, and contractor resources that may not be available locally. Other cities at a greater distance (Phoenix, Arizona; Las Cruces and Albuquerque, New Mexico) also are able to provide services to support exploration and mining in the area.


Surface water is scarce and groundwater supplies are somewhat limited. Walnut Gulch to the north is an ephemeral stream, as is the San Pedro River to the west. In 1882 a pipeline was constructed to bring drinking water to Tombstone from the Huachuca Mountains, 27 miles to the west. The town has municipal wells that supply the needs of the town population.  Ranchers in outlying areas obtain domestic and stock water from private wells.  Water supplies for development and mining would come from groundwater sources in the area.  Arizona Department of Water Resources (ADWR) well records for the area indicate the water table is generally shallow, 200 to 400 feet below ground surface.


Telephone and electric power are available to the area, providing service to local ranchers and small service companies located outside of the town. Telephone service is provided by Qwest. Internet and television services also are available locally. Electric power is supplied through Sulphur Springs Valley Electric Cooperative, with 440V, three-phase lines nearby. One-ten and 220 power lines cross the property. Postal services are available by post offices boxes and ground delivery. UPS, DHL, and Federal Express also are available locally.


Gas and diesel stations are 2 miles from the property, and major fuel supply stations are 15 miles away in Sierra Vista. El Paso Gas has a gas line that crosses the northeast corner of Sec. 7, T20S-R22E.  Section 7 is held by Arizona State Exploration Permit 08-111864. The Southern Pacific railroad line parallels the San Pedro River.


Patents and Licenses; Industrial, Commercial and Financial Contracts; and New Manufacturing Processes


In conducting our business operations, we are not dependent on any patented or licensed processes, technology, industrial, commercial or financial contract or new manufacturing processes.



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Competitive Conditions


We compete with other mining companies, some of which have greater financial resources and technical facilities, for the acquisition of mineral interests, as well as for the recruitment and retention of qualified employees.


The mineral property exploration business, in general, is intensely competitive and there is not any assurance that even if commercial quantities of ore are discovered, a ready market will exist for sale of the same. Numerous factors beyond our control may affect the marketability of any substances discovered. These factors include market fluctuations; the proximity and capacity of natural resource markets and processing equipment; and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of mineral and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may make it difficult for us to receive an adequate return on investment.


We compete with many companies possessing greater financial resources and technical facilities for the acquisition of mineral concessions, claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees. Low metal prices and an instable market, even among competition, leads us to assume that we will not face any difficulties retaining geologists or other consultants compared to our competition.


Competition in the usual context, and as experienced by manufacturers of automobiles, durable goods, clothing, electronics, and the providers of most services simply is not a factor in the minerals market. The demand for minerals always exceeds supply, and historically prices have consistently risen. The only major factor for competition is the cost of production.


Although competition over cost of production exists, there is little competition in the marketplace for the Company’s products. The market absorbs all precious metals and most base metals produced at prevailing prices. Larger producers can hedge future production to enable easier management of expected revenue in times of price fluctuation, whereas junior companies usually sell at market prices. In today’s market larger producers have pulled back from hedging.


The primary competition in the precious metals market is for talent in the workforce. As prices have risen many new companies have started operations or are in the midst of exploration and proving of reserves. It is in this area that competition exists for experienced geologists, project managers, and mining executives. In many areas there also is a shortage of mining labor.


The Company believes it can overcome this competition due to its location in a historical mining area, year-round working conditions and nearness to major population centers of Tucson and Phoenix, Arizona. Additionally, experienced mining professionals have assisted in developing the corporation and have many contacts in the industry.


In the local area of Tombstone, there is essentially no competition. Several small companies and a junior Canadian firm (Southern Silver Exploration) hold small parcels of land. To our knowledge, we are the largest individual holder of land. The Company controls land from approximately the city limits to the protected San Pedro River Basin area.


Environmental Regulations


Mineral property exploration in Arizona is governed by the State of Arizona Office of Mine Inspector as well as Title 30 of the Code of Federal Regulations, both seek to regulate and promote the development of safe and environmentally conscious mining operations.  

 

Governmental Regulations


Mining operations are subject to a wide range of government regulations such as restrictions on production, price controls, tax increases, expropriation of property, environmental protection, protection of agricultural territory or changes in conditions under which minerals may be marketed. Mining operations may also be affected by claims of native peoples, any of which could have the effect of reducing or preventing us from exploiting any of our properties.  We will be required to comply with all regulations, rules and directives of governmental authorities and agencies applicable to the exploration of minerals in the State of Arizona and in the United States generally.  Our mineral claims entitle our Company to continue exploration activities on our properties, subject to our compliance with various United States federal and state laws governing land use, the protection of the environment and related matters.



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The Company holds 8 patented mining claims, 202 unpatented mining claims, and 8 state mineral exploration permits.  All are current and valid as of the date of this Report.  The unpatented claims and state exploration permits are administered by the BLM and State of Arizona, respectively, and have different requirements to maintain the claims/permits in good standing.  To maintain unpatented claims in good standing, a claim holder must pay a $189-per-claim annual maintenance fee to the BLM, in lieu of annual assessment work, plus a $10.00-per-claim recording fee to Conchise County where the claims are located. [Note: Initial BLM claim fees and filing costs for new claims total $189 per claim; that total includes an initial $34.00 claim location fee, plus the annual maintenance fee of $180.00 and a processing fee of $15.00.] The BLM requires that all claims use an assessment year from September 1 through August 31. The fees for the current assessment year were paid by the Company upon filing; all claim assessment fees for the next year are due on August 31, 2014.


To maintain state mineral exploration permits in good standing, the permit holder must renew each permit annually (up to four times, for 5 years total) for a fee of $500.00 per application for renewal.  A maximum of 640 acres or one whole section is allowed per application.  Additionally, an initial rental fee of $2.00 per acre is due within thirty days upon notification of the intent to issue the permit. The $2.00 rental fee is for the first and second year of the permit. However, although the rent is prepaid for the second year, the permit must still be renewed for that year. Rental fees for years three thru five are $1.00 per acre per year and due annually when the permit is renewed. A bond (typically in the amount of $3,000 for a single permit or a blanket bond of $15,000 for five or more permits held by an individual or company) is also due within thirty days upon notification of the intent to issue the permit. Bond amounts may be increased during the life of the permit as determined by the Arizona State Land Department (“ASLD”) upon review of the proposed exploration activities as detailed in the Exploration Plan of Operation that must be submitted and approved by the ASLD prior to the startup of any exploration activities.  


The state lands are covered by Arizona State Mineral Exploration Permits, which are administered by the ASLD.  Permits to conduct drilling in Arizona are administered by the Arizona Department of Water Resources (ADWR). Permits to conduct exploration drilling on BLM lands require either a Notice of Intent or a Plan of Operations, depending upon the amount of new surface disturbance that is planned. A Notice of Intent is for planned surface activities that anticipate less than 5.0 acres of surface disturbance, and usually can be obtained within a 30 to 60 day time period. A Plan of Operations will be required if there is greater than 5.0 acres of new surface disturbance involved with the planned exploration work. A Plan of Operations can take several months to be approved, depending on the nature of the intended work, the level of reclamation bonding required, the need for archeological surveys, and other factors as may be determined by the BLM. No other permits are required for exploration drilling.


The Company has a Notice of Intent – Mineral Exploration Drilling AZA33591 to conduct drilling on BLM claims in Secs. 9 and 10, T20S-R22E. The permitted drilling was partially completed in 2007 with the drilling of holes TEM 1, TEM 2, and TEM 3. The Company also has received conditional approval, upon completion of archaeological and cultural resource surveys, to drill in Sec. 16, T20SR22E under Arizona State Exploration Permit 08-111868.


Quality Control Procedures (QA/QC)


Bagged and sealed sample splits from the RC drill holes are transported to a secure storage shed at the office site by Company employees. The dry samples are further reduced by crushing them to 3/4 inch-minus with a “chipmunk” jaw crusher and splitting the crushed sample with a riffle splitter.  The crusher and the splitter are then both cleaned with a brush and compressed air after preparation of each sample. The sample splits for the laboratory are reduced to approximately 10 lbs or less prior to submission to the laboratory.  The prepared samples are bagged, labeled, and sealed and taken to the analytical laboratory, Mountains States R&D International, Inc. (MSRDI), an Arizona certified assay laboratory, in Vail, Arizona for analyses by fire assay (gold and silver) and by atomic absorption (AA) (all other analyses). The splits that are not shipped for assay are reduced to approximately 1 lb to be retained for reference at the project site and they are stored in a secure steel shipping storage container.


Laboratory rejects are discarded during the process of reducing sample splits to approximately 1 lb samples for retention. The retained sample splits are derived from the original samples and kept in storage while another split is sent for analysis. The pulps are retained and stored in a locked onsite office building.


Samples collected from other locations in the project area (surface outcrops, mine dumps, trenches, and underground workings) are collected, bagged, labeled, sealed, logged, and transported. The samples are prepared for storage or for shipment to the analytical laboratory in the following manner: Dry samples are reduced by first crushing them to 3/4 inch-minus with a “chipmunk” jaw crusher and then splitting the crushed sample using a riffle splitter. The crusher and splitter are then both cleaned with a brush and compressed air after preparation of each sample. Wet samples are dried and then processed in the same manner. The prepared samples are bagged, labeled, and sealed and taken to MSRDI for analysis. The splits that are not shipped for assay are retained for reference at the project site in a secure storage container.



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All sampling and sample preparation of coarse crushed (3/4 inch-minus) are conducted by the Company’s employees. Sample pulp preparation is conducted at MSRDI.  All samples are shipped to MSRDI.   All gold and silver analyses are obtained by fire assay. All other analyses (Cu, Pb, and Zn) are obtained by atomic absorption (AA) with standard digestion.


Samples collected from surface sites, trenches, underground workings, and the 2007 drilling program (prior to November 2007) did not include blanks, duplicates, reference standards, or other industry standard QA/QC procedures.  


Quality control procedures began at the Tombstone Project approximately November 2007. Ten samples collected underground from the Santa Ana mine (NE¼ NE¼ Sec. 16, T20S-R22E) on October 30, 2007 were submitted to the laboratory (MSRDI) with blanks and reference standards. The reference samples were obtained from Minerals Exploration and Environmental Chemistry, Reno, Nevada. Blanks were prepared by crushing and bagging cinder blocks. Results received for these samples are used to assess the accuracy of the MSRDI analyses. Check samples on the order of 5 to 10 percent of the number of samples were sent to ALS Chemex, Reno, Nevada and from there were forwarded to their laboratory in Canada for analysis. The pulps that were returned from the primary laboratory were used as the check-sample materials.


Samples are stored at the Company office site in a secure storage container or in the Company laboratory, which is locked during nonworking hours.


As of the date of our Technical Report, April 18, 2008, SRK concluded that the sampling procedures were acceptable and within industry standards with the exception of initial sample preparation by the Company. Coarse crushed sample preparation onsite by the property owner is not common industry standard practice unless logistics and distance from the labs are a major factor. It may be acceptable going forward, if the newly implemented QA/QC procedures incorporate sufficient checks to demonstrate that the initial sample preparation imparts no contamination or bias.


C.

Organizational Structure


We have one wholly owned subsidiary, Tombstone Exploration and Mining Corporation, a Nevada corporation (“TEMC”) that is qualified to do business in the State of Arizona.  All of our operations are conducted through TEMC.  


D.

Property, Plants and Equipment


Our principal executive office is located at 6529 E. Friess Drive, Scottsdale, AZ 85254.  Additionally, we share this space with our wholly owned subsidiary, TEMC. We believe that this existing space is adequate for our current needs. Should we require additional space, we believe that such space can be secured on commercially reasonable terms.


The Company has the mineral rights to approximately 7,116 acres of historical mining land in areas around Tombstone, Arizona. We control one of the largest mining properties in Arizona. The Tombstone Project is located on patented mining claims, unpatented mining claims and state lands administered by the ASLD. The property consists of three non-contiguous parcels situated in Sections 7 and 18, Township 20 South, Range 23 East; Sections 7–10 and 15–20, Township 20 South, Range 22 East; Sections 24–26 and 36, Township 20 South, Range 22 East; Sections 19, 30, and 31, Township 20 South, Range 23 East; and Sections 20 and 21, Township 21 South, Range 23 East.  The largest parcel is in the western part of the mining district, on which are located many of the smaller historic mines with confirmed silver mineralization. The largest historic mines of the late 1800s and early 1900s are located principally to the east, in the central part of the district.



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Our Properties


SUMMARY OF THE COMPANY’S MINING CLAIMS

Number / Type of Claims

Ownership / Interest in Property

Duration of Interest

Location

Acreage

Agreements / Royalties

Annual Fees / Maintenance / Permits

202 Unpatented Lode Claims

Fully controlled by the Company except 24 claims (Silver Bullet 5-14 and 31-34, staked over a Stock Raising  Homestead Entry (SRHE)).


Company has the right to enter for exploration purposes.


No surface rights.

These claims are valid and each must be renewed each year.


U.S. federal lands administered by U.S. Bureau of Land Management (BLM).  

4,040acres

No royalty agreements on federal mining claims.

Annual maintenance fees for the claims, as follows:  $189 / claim annual maintenance fee to the BLM, in lieu of annual assessment work, plus a $10.00 / claim recording fee to Cochise County, Arizona where the claims are located.  To be paid by the Company.

8 Patented Lode Claims

Undivided 100 percent mineral interest in the claims as both the record mineral owner and the assessed mineral owner


No surface rights

Claims are valid as long as the Company continues to hold title.

Private Land

145.58 acres

1.5% net smelter revenue royalty, payable upon production.

None

8 State of Arizona Mineral Exploration Permits

Exclusive right to explore for and develop minerals on the lands.

State of Arizona is the record surface and mineral owner of land.


Company is the record permittee of the state lands.

These permits are valid and each must be renewed every three years.

Arizona state lands

2,930

acres

State mineral exploration permits, if converted to mining leases, will have royalties assigned to them by the State of Arizona.

Must be renewed each year, for up to 5 years, for a fee of $500.00 / permit. Additionally, an initial rental fee of $2.00 / acre is due within 30 days upon notification of the intent to issue the permit, for the 1st and 2nd year.  Rental fees for the 3rd thru 5th years are $1.00/acre/year and due annually when the permit is renewed. A bond (typically $3,000 for a single permit or a blanket bond of $15,000 for 5 or more permits) is due within 30 days upon notification of the intent to issue the permit.   To be paid by the Company.




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THE COMPANY’S PATENTED MINING CLAIMS

CLAIM NAME

MINERAL SURVEY NO.

CLAIM ACREAGE

Maine

M.S. # 579

18.33

Merrimac

M.S. # 175

20.61

Clipper

M.S. # 273

13.41

Triple X

M.S. # 577

15.27

Brother Jonathan

M.S. # 578

17.28

Lowell

M.S. # 797

20.59

May

M.S. # 317

19.43

Red Top

M.S. # 190

20.66

TOTAL ACREAGE OF PATENTED MINING CLAIMS:

145.58


Industry of Interest


The precious metals and base metals industry produces over $100B in metal production per year. The industry is essentially two sectors: the major producers and the junior exploration and mining companies.


The major producers such as Freeport McMoran, Rio Tinto, and BHP Billiton produce the majority of precious and base metals from large scale, geologically scattered operations. Property expansion by the majors typically comes from joint venture, consolidation or acquisition with junior exploration and mining companies. This occurs usually because a junior finds it difficult to initiate full scale operations due to the significant front end development costs. The majors can absorb and develop the newly discovered fields with little impact to overhead operations and can fund direct operations through forward sale of metals.


Juniors typically spend the majority of their money locating new potential areas, proving up a portion of reserves through geological studies, analyses and drilling, and then initialing small scale operations. During that period most successful juniors draw the attention of and team up in some way with a major producer.


Cost of operations/production is the driver in the industry. All product produced, particularly in the precious metals industry, is absorbed by the market. Demand exceeds supply. The most profitable companies have the lowest per ounce/pound cost of production. The highest return to investors, however, comes from junior companies, when successful, where per share prices are lower until a viable project is proven. Risk, though, is often higher with junior companies, unless and until they locate and acquire viable projects and adequate funding.


The prime customers for the precious metals sector of the industry are the refiners such as Englehart, Johnson Maffey, etc. These companies serve as the distributor of product between the producers and the consumers. The majority of precious metals produced are utilized by the industrial and electronics industry, the automotive industry, the jewelry industry and the investment community.


As metals prices have risen, so too has the interest in new areas for exploration and eventual production. The past two decades have seen a significant expansion of interest into Central and South America, as well as developing third world countries. Today’s price levels combined with the political uncertainties of many foreign projects, and the inability for year-round operations in portions of Alaska and northern Canada, have produced a resurgence of junior companies in the mainland United States. However, many juniors target only one or two categories of metals. This model of operation limits their chance of success for production or buyout.


The keys to success for today’s junior exploration and mining companies are four: 1. Property holdings and potential; 2. location; 3. metal diversity; and 4. cost of development and operation.


The Tombstone Property


Most of the historic mines in the Tombstone Mining District were polymetallic, with the principal ores produced being silver from bonanza grade deposits. However, anomalous copper, lead, zinc, manganese, and gold have been identified, and some of these metals have been produced from different mines in Cochise County (i.e., copper from Bisbee, lead from the Charleston Mining District, and silver and manganese from the Tombstone Mining District).


The principal exploration concept pursued by the Company since 2010 is for low-grade, large tonnage porphyry copper mineralization, largely buried beneath basin fill. The concept is based upon the regional geology that includes the Tombstone caldera complex with related intrusives and complex fault systems; porphyry copper mineralization intersected at depths greater than 3,000 ft by Asarco and other major mining companies that drilled the area in the 1970s, 1980s, and 1990s; and geochemically anomalous values and zoning patterns of Cu, Ag, Pb, and Zn ratios in rock chip samples from mine dumps in the western part of the district that broadly coincide with the Lowell and Guilbert (1970) porphyry copper model.



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Silver mineralization also is an exploration target, in particular in the western area of the Company’s landholdings. The silver exploration concept is seeking to tie together the northeast-striking mineralized fissures into silver deposits that are projected to connect historic deposits and prospects along strike and to extend the depths of mineralization to perhaps hundreds of feet beneath the water table; the exploration potential below the water table was minimally explored and/or mined in the past. The horizontal and vertical extensions of the fissure veins are expected to be more definable by current exploration methods and would be amenable to underground or open pit mining methods.


Gold exploration is a concept based upon historic geochemical and geophysical exploration, shallow drilling, and reported gold grades in the Zebra area from the 1960s intermittently through the 1980s and 1990s. The Zebra Property is an epithermal disseminated gold property. It is believed that the prospect lies within the metallogenic zonation halo of the Tombstone District. The shallow ores of the central district were known to be high in silver and lower in gold. Conversely, and in accordance with zonational patterns, the Zebra Property has high gold, and relatively moderate silver values.  During a detailed mapping program during the 1980s, thirty-three samples were collected of jasperoid, jasperoid breccia, silica vein material, hematitically altered silty limestone, dolomite and silicified rhyolite porphyry. Seven of these samples assayed >.20 ounces per ton gold and another three assayed >.10 ounces per ton gold. The highest assay was 1.0268 ounces per ton gold collected from an outcrop of black to red jasperoid breccia. These historical assays strongly support previous assay data from the property and suggest the occurrence of a large bulk tonnage disseminated gold deposit on the property. Geophysical surveys conducted on the property in the 1980s also suggest the possibility of a gold skarn deposit at depth.  Confirmation exploration has not been conducted by the Company.


On November 14, 2013, the Company announced that it filed Arizona State Land Department permits for 2,000 acres associated with the Zebra Prospect located at the eastern edge of the Tombstone Mining District.  


Stratigraphy


Rocks in the Tombstone area range from Precambrian to Quaternary in age. The oldest rock is fine- grained, grayish Precambrian Pinal schist, intruded by Precambrian granitic and porphyritic rocks, and unconformably overlain by a thick sequence of Paleozoic sedimentary rocks that change from mainly limestone to mainly sandstone and shale. The uppermost unit, the Naco limestone is an erosion surface unconformably overlain by the Mesozoic Bisbee group, a series of conglomerate, sandstone, quartzite, shale, and limestone with two or three lenses of soft, bluish-gray limestone.


The deposition of the Mesozoic sedimentary rocks was followed by a period of deformation and igneous activity. Late Cretaceous time was marked by eruptive and intrusive activity associated with the Tombstone volcanic center that probably formed within a continental-margin arc. The Tombstone volcanic center erupted the Uncle Sam Tuff at 73.5 +/- 2.8 Ma, and an irregularly shaped caldera formed as a consequence of collapse into the evacuated magma chamber. These event were accompanied by emplacement of the Schieffelin granodiorite, diorite stocks and plugs, and andesite dikes. Silver mineralization is directly associated with the folding, faulting, igneous intrusions, and fissuring of this period: north-south (dike) fissures, faults, anticlines and rolls, and—in the western area in particular—with the north-south trending dikes and cross-cutting northeast-trending fissures. Most of the silver deposits are associated with at least two structural features, often at their intersection. Rocks of the Tombstone volcanic center postdate Laramide thrust faulting and are little deformed.


The Basin and Range province was formed during the Cenozoic Era when east-west crustal extension resulted in vertical movement on generally north-south trending faults. Extension gave rise to the emplacement of extensive granitic stocks and batholiths with associated volcanic activity. Locally steep tilting and minor normal faulting occurred during Basin and Range block faulting.


Bromeyerite is the main supergene silver mineral; the main hypogene silver-bearing minerals are hessite, tetrahedrite, and galena. Base metal mineralization, often oxidized, occurs in fault and fracture zones in Laramide volcanics and the Uncle Sam tuff. The most common base minerals are sphalerite, galena, and chalcopyrite. Chalcopyrite is widespread, most commonly as exsolution blebs in sphalerite. Manganese mineralization is widespread throughout the Tombstone district and has occurred in various amounts with most of the oxidized silver-lead mineralization. The manganiferous mineralization exists as replacements in limestone.


The Company’s target concept is initially seeking northeast-striking fissure-vein deposits that are projected to connect historic deposits and prospects along strike and to extend for a substantial depth beneath the water table. The horizontal and vertical extensions of the fissure veins are expected to be more definable by current exploration and mining methods.


Development Strategy & Plan of Operations for the Next Twelve Months


The Company’s development strategy is to focus on the fundamental keys to success for a junior exploration and mining concern. These keys were identified in the Industry discussion.



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1.

Property holdings and potential.


Plan: Continue geological analyses including mapping, and identification of drill targets. Focus on these targets for drilling, sampling and identifying potential reserves. Expand target areas as drilling progresses and studies expand knowledge of properties.


2.

Location


Plan: The Company’s Tombstone property is located in a known metal and mineral area with easy access, historical production, mining friendly community and ease of permitting puts the Company in a position for success. The Company will continue to identify areas on the properties for mill site operation, improve off-road access and work closely with the community at large to offer employment opportunities. The Company will also interface with the state level in Arizona to establish itself as a significant contributor to the state economy.


3.

Metal diversity


Plan: A significant number of metals and minerals have already been identified on the Tombstone property including silver and gold. The Company, with the help of consulting organizations, will further explore the range of metals and minerals, and the ability to extract/produce product for market. In the non precious metals areas, the Company will likely seek joint venture partners who will add to the success and financial returns for our shareholders.


4.

Cost of development and operation


Plan: The Company may establish a small production operation, subject to permitting, financing and sufficient resources, to begin silver and gold production with material from existing known sites. As drill targets identify key areas for drilling, the operation will be expanded to two large scale mill sites. The Company firmly believes from the sampling and historical production in the area, that a low cost / high profit operation will be developed.


ITEM 4A.

Unresolved Staff Comments


Not required.


ITEM 5.

Operating and Financial Review and Prospects


The following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2013 and 2012 should be read in conjunction with our financial statements and related notes included in this Report. Our financial statements included in this Report were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).


A.

Operating Results


Our results of operations have been, and may continue to be, affected by many factors of a global nature, including economic and market conditions, the availability of capital, the level and volatility of prices and interest rates, currency values, commodities prices and other market indices, technological changes, the availability of credit, inflation and legislative and regulatory developments. Factors of a local nature, which include the political, social, financial and economic stability, the availability of capital, technology, workers, engineers and management, geological factors and weather conditions, also affect our results of operations. See “Key Information – Risk Factors”. As a result of the economic and competitive factors discussed above, our results of operations may vary significantly from period to period.


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012


For the years ended December 31, 2013 and 2012, we did not receive any revenue from various mining claims and properties.


During the year ended December 31, 2013, we had a net loss of $441,973 and a loss per share of $0.00 per share compared to a net loss of $368,707 and a loss per share of $0.00 per share for the year ended December 31, 2012. The net loss for the year ended December 31, 2013 was attributed to $48,269 of general and administrative expenses, $120,000 of management and directors fees, $22,000 of consulting expense, professional fees of $32,609 and mineral property exploration costs of $4,445. Furthermore, the Company recorded a $100,824 loss on the fair value of the derivative liabilities and accretion and interest expense of $113,826.  The Company’s net loss increased compared to the prior year as the Company had more accretion expense and loss on fair value of derivative liabilities.



26




B.

Liquidity and Capital Resources


Since our incorporation, we have financed our operations almost exclusively through the sale of our common shares to investors. As we are now focusing on mining exploration with no producing resource properties, we do not generate operating income or cash flow from our business operations. Until a significant body of ore is found, our working capital requirements are not significant, and we expect to continue to finance operations through the sale of equity in fiscal 2014. There is no guarantee that we will be successful in arranging financing on acceptable terms.


To a significant extent, our ability to raise capital is affected by trends and uncertainties beyond our control. These include the market prices for base and precious metals and results from our exploration programs. Our ability to attain our business objectives may be significantly impaired if prices for metals such as gold and uranium fall or if results from our intended exploration programs on our properties are unsuccessful.


At December 31, 2013, we had cash on hand of $43,560 compared with $578 as at December 31, 2012. Liabilities consisted of accounts payable and accrued liabilities totaling $64,664 (2012 - $67,324), amounts due to related parties of $25,654 (2012 - $98,066), convertible debt of $162,818 (2012 - $nil) and fair value of derivative liability of $127,451 (2012 - $26,627).   The overall increase in liabilities is due to the increase in the balance of derivative liabilities as the fair value of the repricing of the outstanding share purchase warrants with reset provisions increased due to a reset of the potential exercise price to a lower value, and the issuance of convertible debt which was used as financing for the Company’s operations.  


Application of Critical Accounting Policies


The preparation of financial statements in conformity with applicable generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.


Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Our significant accounting policies are disclosed in the Notes to our financial statements included in this Report.


C.

Research and Development, Patents and Licenses, etc.


We do not currently, and did not previously, have research and development policies in place. Over the past three fiscal years, we have not expended any material amounts on research or development.


D.

Trend Information


Our business is the exploration for and development of mineral deposits.  The market price of precious metals and other minerals is volatile and has fluctuated widely, particularly in recent years. The prices of various metals are affected by numerous factors beyond our control, including international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved mining and production methods.  The commodity price of precious metals has a direct impact on our revenue prospects and our ability to raise capital. Although there is no assurance that this trend will continue, management is optimistic that the current price level will continue for the foreseeable future.


E.

Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resource that is material to investors.


F.

Tabular Disclosure of Contractual Obligations


We do not have any contractual obligations and commitments as of December 31, 2013 that will require significant cash outlays in the future.



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G.

Safe Harbor.


Forward Looking Statements

 

This annual report contains forward-looking statements that reflect our current expectations and views of future events. These forward-looking statements can be identified by words or phrases such as “shall,” “may,” “will,” “expect,” “should,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. These forward looking statements include, among other things, statements relating to our goals and strategies, our competitive strengths, our expectations and targets for our results of operations, our business prospects and our expansion strategy.  Those statements appear in a number of places and include statements regarding our intent, belief or current expectations with respect to:


• our direction and future operation;


• the implementation of our principal operating strategies, including our potential participation in acquisition, divestiture or joint venture transactions or other investment opportunities;


• the implementation of our financing strategy and capital expenditure plans;


• the exploration of mineral reserves and development of mining facilities;


• trends in commodity prices and demand for commodities;


• the future impact of competition and regulation;


• the payment of dividends or interest on shareholders' equity;


• industry trends, including the direction of prices and expected levels of supply and demand; and


• other factors or trends affecting our financial condition or results of operations.


We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that we have a reasonable basis for each forward looking statement contained in this annual report, we caution shareholders that these statements are based on our projections of the future that are subject to known and unknown risks and uncertainties and other factors that may cause our actual results to differ materially from those in the forward looking statements.


The forward looking statements included in the annual report are subject to risks, uncertainties and assumptions about our company. Our actual results of operations may differ materially from the forward looking statements as a result of risk factors described under “Risk Factors” and elsewhere in this annual report.  These risks are not exhaustive. It is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward looking statement.  An investor in our Company should not rely upon forward looking statements as predictions of future events. Unless required by law, we undertake no obligation to update or revise any forward looking statements to reflect new information or future events or otherwise.



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ITEM 6.

Directors, Senior Management and Employees


A.

Directors and Senior Management


The following table sets forth the names, business experience and function/areas of expertise of each of our directors and officers:


Name, Office Held, Age

Area of Experience and Functions in Our Company

Alan M. Brown

CEO, CFO,

Director & President

Age 46

As President, Chief Executive Officer, Chief Financial Officer, and a Director, Mr. Brown is responsible for the development of our strategic direction and the management and supervision of our overall business.

Steve Radvak, P.E.

Vice President of Exploration & Director

Age 53

As Vice President of Exploration and Director of the Company, Mr. Radvak is responsible for managing the exploration activities on the Tombstone Property.


Alan M. Brown - Mr. Brown has invested many years in the development and success of the Company.  Mr. Brown is to be accredited with steering the Company to being the largest mineral rights land holder in the Tombstone Mining District and is now focused on developing its huge resource potential. His extensive background in financial accounting is credited for the success of the Company. Mr. Brown is very experienced in corporate mergers & acquisitions, real estate acquisitions and real estate development. Prior to working for the Company, Mr. Brown was the controller of a real estate development company involving multi-million dollar projects. Mr. Brown spent many years with a chartered accounting firm on Vancouver Island preparing year end reports and tax planning for a range of companies.  Mr. Brown has a great understanding of the Tombstone Mining District area and geography.  


Steve Radvak - Mr. Radvak, P.E., P.Eng., has a B.A.Sc. in Mining and Mineral Processing Engineering from the University of British Columbia. He is a Director and the Vice President of Exploration of the Company. He has been the President, Chief Executive Officer, and Director of Compliance Management Inc., an environmental service company, since its inception in 1998. Mr. Radvak is also a managing member of RM Fencing, LLC (“RM Fencing”), a company that offers professional installation of fences, gates and other products throughout Arizona. Mr. Radvak has extensive experience in managing mineral exploration projects in the United States, Canada, Africa and Europe and will be a valuable asset to the Company.


Additional Information


There are no familial relationships between our officers and directors.  


The above listed officers and directors were not selected as directors or members of senior management pursuant to any arrangement or understanding with major shareholders, customers, suppliers or others.


B.

Compensation


During the fiscal year ended December 31, 2013, the aggregate remuneration paid to directors in their capacity as directors of our Company was $Nil. Management fees totaling $120,000 was paid to directors and officers.



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Executive Compensation


The following table provides a summary of compensation paid by us during the fiscal years ended December 31, 2013 and 2012 to our executive officers who received a salary:


  SUMMARY COMPENSATION TABLE

Name and Principal Position

Year

Annual Compensation

Long Term Compensation

All other Compensation

Salary

Bonus

Other Annual Compen-sation

Securities
Under Options/ SARs Granted

Shares or units subject to resale restrictions

Alan M. Brown (1)

President, CEO, CFO and Director

2013

$120,000

NIL

NIL

NIL

NIL

NIL

2012

$120,000

NIL

NIL

NIL

NIL

NIL

Steve Radvak

Vice President of Exploration

and Director

2013

NIL

NIL

NIL

NIL

NIL

NIL

2012

NIL

NIL

$82,600

NIL

NIL

NIL

Laird Cagan

Former Director

2013

NIL

NIL

NIL

NIL

NIL

NIL

2012

NIL

NIL

11,475

NIL

NIL

NIL


(1)  

On November 15, 2013, the Company entered into an Employment Agreement (the “Agreement”) with Alan Brown, which amends and supersedes the January 1, 2009 Employment Agreement between the Company and Mr. Brown.  Pursuant to the Agreement, Mr. Brown shall continue to be employed as President, Chief Executive Officer and Chief Financial Officer of the Company and to continue to perform any and all duties relevant to such positions.  The initial term of the Agreement is for five (5) years (the “Term”) which shall continue thereafter until terminated.  In exchange for his services, Mr. Brown shall receive a base salary of $10,000 per month during the first two (2) years of the Term and $15,000 per month for the remaining three (3) years of the Term and each additional year after the Term until the Agreement is terminated.  Under the Agreement, Mr. Brown may also receive additional compensation of five million (5,000,000) shares of the Company’s common stock per year during the Term and thereafter until the Agreement is terminated.  A true and correct copy of the Agreement is attached hereto as Exhibit 4.04 and is incorporated herein by reference.


C.

Board Practices


All of the directors of the Company are elected annually by the shareholders and hold office until the next annual meeting of shareholders or until their successors are duly elected and qualified, unless they sooner resign or cease to be directors in accordance with our Certificate of Incorporation and Bylaws.   Our incumbent directors continue their service, in their current capacity, until they either resign or are removed and until their successors are elected.  The Company's last annual regular general meeting was held on September 6, 2001, at which time Alan Brown was elected as a Director. Mr. Brown has continued in his office as Director since his election in 2001. Director vacancies may be filled by a majority of the remaining directors or by a sole remaining director.  On January 28, 2010, Steven Radvak was elected to serve as a member of the Board of Directors by the sole remaining director, Alan Brown.  On May 18, 2011, Laird Cagan was elected as a Director to the Company.  On December 31, 2012, Laird Cagan resigned as a Director of the Company.


Members of the Board of Directors are elected by the holders of the Company's shares to represent the interests of all shareholders. The Board of Directors meets periodically to review significant developments affecting the Company and to act on matters requiring Board approval. Although the Board of Directors delegates many matters to others, it reserves certain powers and functions to itself. The only standing committee of the Board of Directors of the Company is the Audit Committee. The Audit Committee of the Company's Board of Directors currently consists of Steve Radvak and Alan Brown. This committee is directed to review the scope, cost and results of the independent audit of the Company's books and records, the results of the annual audit with management and the adequacy of the Company's accounting, financial and operating controls; to recommend annually to the Board of Directors the selection of the independent auditors; to consider proposals made by the Company's independent auditors for consulting work; and to report to the Board of Directors, when so requested, on any accounting or financial matters. The Company does not have an Executive Committee.


The Company's executive officers are appointed by and serve at the pleasure of the Board of Directors.



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D.

Employees


As of December 31, 2013, we had 3 employees including Alan Brown, Steve Radvak and Scott Davis. The Company engages various consultants as independent contractors to assist the Company with its drilling programs.  The Company has no relationship with any labor/trade unions.


Scott Davis, Vice President Project Manager


A member of the 5th generation of a mining family in Tombstone, Arizona, Mr. Davis has been exposed to various aspects of mining all of his life.  Mr. Davis has worked for the Company since 2005 and has brought to our business over ten years of experience in underground mining and three years of experience as a cyanide recovery plant supervisor for PBR Minerals.  He has also built, or assisted in building, various small mills and plants.  He has worked for the State of Maine Mining Company, assisting in the manufacturing of Merrill Crowe Cyanide precipitation plants.  Holding an Associate’s Degree as an Environmental Facilities Technician, he has studied electrical controls, HVAC, and mechanical engineering. In addition, Mr. Davis has another 15 years of experience working with heavy equipment and has held numerous supervisory positions in the construction industry.


E.

Share Ownership


There were 125,407,408 common shares issued and outstanding as of May 12, 2014. Of the shares issued and outstanding, our directors and officers owned the following common shares:


Name and Position

Number of Common Shares Beneficially Owned as of March 18, 2014

Percentage

Alan M. Brown

President, CEO, CFO and Director

12,437,834

10.05%

Steve Radvak

Vice President of Exploration

and Director

1,000,000

0.80%

Laird Cagan

Former Director

1,675,000

1.35%


The voting rights attached to the common shares owned by our officers and directors do not differ from those voting rights attached to shares owned by people who are not officers or directors of our Company.


Stock Option Plan


In January 2007, the Company adopted a stock option plan, which was approved by majority written consent of its shareholders and Board of Directors. Under the plan, options of the Company may be granted to directors, officers, employees and consultants of the Company. Please refer to the Company’s Form S-8 filed on February 2, 2007, which is incorporated by reference herein.


ITEM 7.

Major Shareholders and Related Party Transactions


A.

Major Shareholders


As of May 9, 2014, the following are known to us to be the beneficial owner of more than five (5%) of our common shares:


Name of Shareholder

No. of Common Shares Owned

Percentage of Outstanding Common Shares

Eurogas Inc.

12,500,000

10.10%

Alan M. Brown

12,437,834

10.05%

Tom Reid

7,990,000

6.45%




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The voting rights of our major shareholders do not differ from the voting rights of holders of our common shares who are not major shareholders.




B.

Related Party Transactions

As at December 31, 2013, the Company owed $10,654 (2012 - $83,066) to the President of the Company for management fees and financing of day-to-day operations.  The amounts owing are unsecured, non-interest bearing, and due on demand.  


C.

Interests of Experts and Counsel


Not required.


ITEM 8.

FINANCIAL INFORMATION


A.

Financial Statements And Other Financial Information


The Company's financial statements, included as an exhibit to this Report, are incorporated into this Report by reference.


Legal Proceedings


We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.


Dividends


The Company has not and does not currently intend to pay any dividends on any of its shares. The Company intends to follow a policy of retained earnings to finance the growth of the business. Any future determination to pay dividends will be at the discretion of the Board of Directors of the basis of earnings, financial requirements and other relevant factors.


B.

Significant Changes


Except as otherwise disclosed in this annual report or in the reports filed on Form 6-K filed to date, no significant changes have occurred since December 31, 2013.



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ITEM 9.

The Offer and Listing


The following table lists the high and low closing sale prices for the Company's common stock for the periods indicated as reported by the Over the Counter Bulletin Board:


YEAR/PERIOD

HIGH

LOW

Q1 2008

.43

.20

Q2 2008

.48

.15

Q3 2008

.43

.10

Q4 2008

.19

.05

Q1 2009

.26

.06

Q2 2009

.11

.05

Q3 2009

.08

.05

Q4 2009

.08

.04

Q1 2010

.11

.02

Q2 2010

.16

.06

Q3 2010

.09

.03

Q4 2010

.14

.04

Q1 2011

.13

.06

Q2 2011

.11

.03

Q3 2011

.08

.05

Q4 2011

.07

.02

Q1 2012

.055

.027

Q2 2012

.05

.023

Q3 2012

.04

.023

Q4 2012

.03

.017

Q1 2013

.04

.011

Q2 2013

.09

.01

Q3 2013

.05

.01

Q4 2013

.05

.021


The shares of the Company commenced trading on the Over the Counter Bulletin Board on July 14, 1999.


Markets


The Company's common shares are listed for trading on the Over the Counter Bulletin Board.


ITEM 10.

Additional Information


A.

Share Capital

 

Not Applicable.


B.

Articles of Incorporation & By-Laws

 

Directors


A director who is, in any way, directly or indirectly interested in a proposed contract or transaction, shall disclose the nature and extent of his interest at a meeting of the directors in accordance with the provisions of the Canada Business Corporations Act (“CBCA”). A director shall not vote in respect of any contract or transaction with our Company in which he is interested, and any such proposed contract or transaction shall be referred to the Board of Directors or shareholders for approval even if such contract or transaction is one that the ordinary course of the Company's business would not require approval by the Board of Directors or shareholders.


(1)

Subject to the provisions of any unanimous shareholder agreement, the remuneration of the directors may from time to time be determined by the directors themselves, and such remuneration may be in addition to any reimbursement for travel and other expenses.



33




 

 

(2)

The directors may, at their discretion and subject to the provisions of any unanimous shareholder agreement or By-Laws or the CBCA, authorize the Company to borrow any sum of money or incur indebtedness for the purpose of the Company and may raise or secure the repayment of such sum of money in such manner and upon such terms and conditions as the directors think fit.

 

 

 (3)

There are no provisions with respect to the retirement of a director or the non-retirement of a director under an age requirement.

 

 

(4)

A director is not required to hold a share in the capital of our Company as qualification for his office.


With respect to the above noted matters, there are generally no significant differences between Canadian and U.S. law.


Objects and Purposes of the Company


Our Certificate of Incorporation place no restrictions upon our objects and purposes.


Rights, Preference and Restrictions


Common Shares


All of the authorized common shares of the Company, once issued, rank equally as to dividends, voting powers, and participation in assets. Holders of common shares are entitled to one vote for each common share held of record on all matters to be acted upon by the shareholders. Holders of common shares are entitled to receive such dividends as may be declared from time to time by the board of directors, in its discretion, out of funds legally available therefore. The Company's By-Laws do not provide for cumulative voting.


Upon liquidation, dissolution or winding up of the Company, holders of common shares are entitled to receive pro rata our assets, if any, remaining after payments of all debts and liabilities. No common shares have been issued subject to call or assessment. There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds. There are no restrictions on the repurchase or redemption of common shares by our Company while there is any arrearage in the payment of dividends or sinking fund installments.


With respect to the rights, preferences and restrictions attaching to the Company's common shares, there are generally no significant differences between Canadian and United States law as the board of directors, or the applicable corporate statute, will determine the rights, preferences and restrictions attaching to each class of a Company's shares.


Changes to Common Shares


Provisions as to the modification, amendment or variation of the rights attaching to the common shares are contained in the CBCA. The CBCA requires approval by a special resolution (i.e. approved by at least two-thirds of the votes cast at a meeting of the shareholders of our Company or consented to in writing by each of our shareholders) of our Company's shareholders in order to effect any of the following changes:


(1)

change any maximum number of shares that the Company is authorized to issue;


(2)

create new classes of shares;


(3)

reduce or increase its stated capital, if its stated capital is set out in the articles;


(4)

change the designation of all or any of its shares and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;


(5)

change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series;


(6)

divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;



34




(7)

authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;


(8)

authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series;


(9)

revoke, diminish or enlarge any authority conferred under paragraphs (7) and (8); and,


(10)

add, change or remove restrictions on the issue, transfer or ownership of shares.


Generally, there are no significant differences between Canadian and United States law with respect to changing the rights of shareholders as most state corporation statutes require shareholder approval (usually a majority) for any such changes that affect the rights of shareholders.


Annual General Meetings and Extraordinary General Meetings


Annual General Meetings (an “AGM”) must be held once every fiscal year, within 15 months of the previous AGM. If the Company fails to hold an AGM, the Supreme Court of British Columbia may, on the application of a director or shareholder of the Company, call or direct an AGM. Under the CBCA, we must give our shareholders written notice of an AGM not less than 21 days before the AGM is to be held.


Our directors may, whenever they think fit, convene an Extraordinary General Meeting (an “EGM”).


An AGM or EGM may also be requisitioned by one or more shareholders of our Company so long as such shareholders own not less than 5% of the issued and outstanding shares at the date such shareholders requisition an EGM. After receiving such requisition, our directors must within 21 days call the meeting.


All shareholders entitled to attend and vote at an AGM or an EGM will be admitted to the meeting.


Most state corporation statutes require a public company to hold an annual meeting for the election of directors and for the consideration of other appropriate matters. The state statutes also include general provisions relating to shareholder voting and meetings. Apart from the timing of when an AGM must be held and the percentage of shareholders required to call a AGM or EGM, there are generally no material differences between Canadian and United States law respecting AGMs and EGMs.


Rights to Own Securities


There are no limitations on the rights of non-resident or foreign shareholders to hold or exercise voting rights.


Except as provided in the Investment Canada Act, there are no limitations under the applicable laws of Canada or by the Company's charter or other constituent documents of the Company on the right of foreigners to hold or vote common shares or other securities of the Company.


The Investment Canada Act will prohibit implementation, or if necessary, require divestiture of an investment deemed “reviewable” under the Investment Canada Act by an investor that is not a “Canadian” as defined in the Investment Canada Act (a “non-Canadian”), unless after review the Minister responsible for the Investment Canada Act (“the Minister”) is satisfied that the “reviewable” investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian would be reviewable under the Investment Canada Act if it was an investment to acquire control of our Company and the value of our assets was $5 million or more. A non-Canadian would be deemed to acquire control of our Company for the purposes of the Investment Canada Act if the non-Canadian acquired a majority of our outstanding common shares (or less than a majority but controlled our Company in fact through the ownership of one-third or more of our outstanding common shares) unless it could be established that, on the acquisition, our Company was not controlled in fact by the acquirer through the ownership of such common shares. Certain transactions in relation to our common shares would be exempt from review under the Investment Canada Act, including, among others, the following:



35




 

(1)

acquisition of common shares by a person in the ordinary course of that person's business as a trader or dealer in securities;

 

 

 

 

(2)

acquisition of control of our Company in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Canada Act; and


 

(3)

acquisition of control of our Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control of our Company, through the ownership of voting interests, remains unchanged.


The Investment Canada Act was amended with the World Trade Organization Agreement to provide for special review thresholds for “WTO Investors” of countries belonging to the World Trade Organization, among others, nationals and permanent residents (including “WTO Investor controlled entities” as defined in the Investment Canada Act). Under the Investment Canada Act, as amended, an investment in our common shares by WTO Investors would be reviewable only if it was an investment to acquire control of our Company and the value of our assets was equal to or greater than a specified amount (the “Review Threshold”), which published by the Minister after its determination for any particular year. The Review Threshold is currently $344 million for the year 2013.


Change in Control


There are no provisions in the Company's By-Laws that would have the effect of delaying, deferring or preventing a change in control of our Company, and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company.


The CBCA does not contain any provisions that would have the effect of delaying, deferring or preventing a change of control of the Company. Generally, there are no significant differences between Canadian and United States law in this regard, as many state corporation statutes also do not contain such provisions and only empower a company's board of directors to adopt such provisions.


Ownership Threshold


There are no provisions in our Certificate of Incorporation or Bylaws or in the CBCA governing the threshold above which shareholder ownership must be disclosed. The Securities Act (British Columbia) requires that the Company disclose, in its annual general meeting proxy statement, holders who beneficially own more than 10% of the Company's issued and outstanding shares. Most state corporation statutes do not contain provisions governing the threshold above which shareholder ownership must be disclosed. United States federal securities laws require a company to disclose, in its Annual Report on Form 20-F, holders who own more than 5% of a company's issued and outstanding shares.


Changes in the Capital of our Company


There are no conditions imposed by our By-Laws which are more stringent than those required by the CBCA.


C.

Material Contracts


With the exception of the contracts listed below, or those described elsewhere in this Form 20-F or in the Company’s Form 6-K filings, we have not entered into any material contracts during the last twenty-four months other than those in the ordinary course of business.


On November 15, 2013, the Company entered into an Employment Agreement (the “Agreement”) with Alan Brown, which amends and supersedes the January 1, 2009 Employment Agreement between the Company and Mr. Brown.  Pursuant to the Agreement, Mr. Brown shall continue to be employed as President, Chief Executive Officer and Chief Financial Officer of the Company and to continue to perform any and all duties relevant to such positions.  The initial term of the Agreement is for five (5) years (the “Term”) which shall continue thereafter until terminated.  In exchange for his services, Mr. Brown shall receive a base salary of $10,000 per year during the first two (2) years of the Term and $15,000 per year for the remaining three (3) years of the Term and each additional year after the Term until the Agreement is terminated.  Under the Agreement, Mr. Brown may also receive additional compensation of five million (5,000,000) shares of the Company’s common stock per year during the Term and thereafter until the Agreement is terminated.  A true and correct copy of the Agreement is attached hereto as Exhibit 4.04 and is incorporated herein by reference.



36




On December 10, 2013, the Company entered into a Stock-for-Stock Exchange Agreement (the “Agreement”) with EuroGas, Inc., a Utah corporation (“EuroGas Utah”), and EuroGas AG, a Swiss stock corporation (“EuroGas Swiss”).  Pursuant to the Agreement, EuroGas Utah shall exchange two hundred forty million (240,000,000) shares of EuroGas Swiss’ common stock representing approximately twenty six percent (26%) of EuroGas Swiss’ total issued and outstanding shares of common stock, in exchange for three hundred forty eight million (348,000,000) shares of Tombstone’s common stock.  Additionally, EuroGas Utah shall finance Tombstone’s exploration efforts in the USA in the amount of five million dollars ($5,000,000) over a nine (9) month period.  The Agreement was filed as Exhibit 4.1 to our Current Report on Form 6-K with the SEC on December 16, 2013 and is incorporated herein by reference.


On January 13, 2014, the Company entered into a First Amendment to the Stock-for-Stock Exchange Agreement (the “Amendment”) with EuroGas Utah and EuroGas Swiss, which is retroactively made effective as of December 10, 2013, the date of the original Agreement.  Pursuant to the Amendment, EuroGas Utah shall exchange two hundred forty million (240,000,000) shares of EuroGas Swiss’ common stock representing approximately twenty six percent (26%) of EuroGas Swiss’ total issued and outstanding shares of common stock, in exchange for three hundred forty eight million (348,000,000) shares of Tombstone’s common stock.  Additionally, EuroGas Utah shall finance Tombstone’s exploration efforts in the USA in the amount of five million dollars ($5,000,000) over a nine (9) month period.  Further, EuroGas Utah shall grant to the Company twenty percent (20%) of any award granted to EuroGas Utah or EuroGas Swiss relating to that certain lawsuit filed by EuroGas Swiss and EuroGas Utah against the Slovak Republic.   A true and correct copy of the Amendment is attached hereto as Exhibit 4.06 and is incorporated herein by reference.


D.

Exchange Controls


Except as discussed in Item E below, the Company is not aware of any Canadian federal or provincial laws, decrees, or regulations that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-Canadian holders of common shares. The Company is not aware of any limitations on the right of non-Canadian owners to hold or vote common shares imposed by Canadian federal or provincial law or by the Company.


The Investment Canada Act (the “Act”) governs acquisitions of Canadian business by a non-Canadian person or entity. The Act provides, among other things, for a review of an investment in the event of acquisition of control in certain Canadian businesses in the following circumstances:


 

(1)

if the investor is a non-Canadian and is not a resident of a World Trade Organization (“WTO”) country, any direct acquisition having an asset value exceeding $5,000,000 and any indirect acquisition having an asset value exceeding $50,000,000;


 

(2)

if the investor is a non-Canadian and is a resident of a WTO member, any direct acquisition having an asset value exceeding $168,000,000, unless the business is involved in uranium production, financial services, transportation services or a cultural business.


An indirect acquisition of control by an investor who is a resident of a WTO country is not reviewable unless the value of the assets of the business located in Canada represents more than 50% of the asset value of the transaction, or the business is involved in uranium production, financial services, transportation services or a cultural business. The United States has been a member of the WTO since January 1, 1995.


The Act provides that a non-Canadian investor can hold up to 1/3 of the issued and outstanding capital of a Canadian corporation without being deemed a “control person”, and that a non-Canadian investor holding greater than 1/3 but less than 2 of the issued and outstanding capital of a Canadian corporation is deemed to be a control person subject to a reputable presumption to the contrary (i.e. providing evidence of another control person or control group holding a greater number of shares).


The Act requires notification where a non-Canadian acquires control, directly or indirectly, of a Canadian business with assets under the thresholds for reviewable transaction. The notification process consists of filing a notification within 30 days following the implementation of an investment.



37




E.

Taxation


Canadian Federal Income Taxation


We consider that the following summary fairly describes the principal Canadian federal income tax consequences applicable to a holder of our common shares who at all material times deals at arm’s length with our Company, who holds all common shares as capital property, who is resident in the United States, who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his common shares of our Company in connection with carrying on a business in Canada (a “non-resident holder”). It is assumed that the common shares will at all material times be listed on a stock exchange that is prescribed for purposes of the Income Tax Act (Canada) (the “ITA”) and regulations thereunder. Investors should be aware that the Canadian federal income tax consequences applicable to holders of our common shares will change if, for any reason, we cease to be listed on a prescribed stock exchange. Accordingly, holders and prospective holders of our common shares should consult with their own tax advisors with respect to the income tax consequences of them purchasing, owing and disposing of our common shares should we cease to be listed on a prescribed stock exchange.


This summary is based upon the current provisions of the ITA, the regulations thereunder, the Canada-United States Tax Convention as amended by the Protocols thereto (the “Treaty”) as at the date of this Report and the currently publicly announced administrative and assessing policies of the Canada Customs and Revenue Agency (the “CCRA”). This summary does not take into account Canadian provincial income tax consequences. This description is not exhaustive of all possible Canadian federal income tax consequences and does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action. This summary does, however, take into account all specific proposals to amend the ITA and regulations thereunder, publicly announced by the Government of Canada to the date hereof.


This summary does not address potential tax effects relevant to our Company or those tax considerations that depend upon circumstances specific to each investor. Accordingly, holders and prospective holders of our common shares should consult with their own tax advisors with respect to the income tax consequences to them of purchasing, owning and disposing of common shares in our Company.


Dividends


The ITA provides that dividends and other distributions deemed to be dividends paid or deemed to be paid by a Canadian resident corporation (such as our Company) to a non-resident of Canada shall be subject to a non-resident withholding tax equal to 25% of the gross amount of the dividend of deemed dividend. Provisions in the ITA relating to dividend and deemed dividend payments to and gains realized by non-residents of Canada, who are residents of the United States, are subject to the Treaty. The Treaty may reduce the withholding tax rate on dividends as discussed below.


Article X of the Treaty as amended by the US-Canada Protocol ratified on November 9, 1995 provides a 5% withholding tax on gross dividends or deemed dividends paid to a United States corporation which beneficially owns at least 10% of the voting stock of the company paying the dividend. In cases where dividends or deemed dividends are paid to a United States resident (other than a corporation) or a United States corporation which beneficially owns less than 10% of the voting stock of a company, a withholding tax of 15% is imposed on the gross amount of the dividend or deemed dividend paid. We would be required to withhold any such tax from the dividend and remit the tax directly to CCRA for the account of the investor.


The reduction in withholding tax from 25%, pursuant to the Treaty, will not be available:


(a)

if the shares in respect of which the dividends are paid formed part of the business property or were otherwise effectively connected with a permanent establishment or fixed base that the holder has or had in Canada within the 12 months preceding the disposition, or


(b)

the holder is a U.S. LLC which is not subject to tax in the U.S.


The Treaty generally exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization exclusively administering a pension, retirement or employee benefit fund or plan, if the organization is resident in the U.S. and is exempt from income tax under the laws of the U.S.


Capital Gains


A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of one of our shares unless the share represents “taxable Canadian property” to the holder thereof. Our common shares will be considered taxable Canadian property to a non-resident holder only if:



38




 

(a)

the non-resident holder;

 

 

 

 

(b)

persons with whom the non-resident holder did not deal at arm’s length; or

 

 

 

 

(c)

the non-resident holder and persons with whom he did not deal at arm’s length,


owned not less than 25% of the issued shares of any class or series of our Company at any time during the five year period preceding the disposition. In the case of a non-resident holder to whom shares of our Company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will generally be payable on a capital gain realized on such shares by reason of the Treaty unless:


 

(a)

the value of such shares is derived principally from real property (including resource property) situated in Canada,

 

 

 

 

(b)

the holder was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he ceased to be a resident of Canada,

 

(c)

they formed part of the business property or were otherwise effectively connected with a permanent establishment or fixed base that the holder has or bad in Canada within the 12 months preceding the disposition, or

 

 

 

 

(d)

the holder is a U.S. LLC which is not subject to tax in the U.S.


If subject to Canadian tax on such a disposition, the taxpayer’s capital gain (or capital loss) from a disposition is the amount by which the taxpayer’s proceeds of disposition exceed (or are exceeded by) the aggregate of the taxpayer’s adjusted cost base of the shares and reasonable expenses of disposition. For Canadian income tax purposes, the “taxable capital gain” is equal to one-half of the capital gain.


United States Federal Income Taxation


The following is a discussion of the material United States Federal income tax consequences, under current law, applicable to a U.S. Holder (as defined below) of our common shares who holds such shares as capital assets. This discussion does not address all potentially relevant Federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of Federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local, or foreign tax consequences. (See “Canadian Federal Income Tax Consequences” above.)


The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, published Internal Revenue Service (“IRS”) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.


The discussion below does not address potential tax effects relevant to our Company or those tax considerations that depend upon circumstances specific to each investor. In addition, this discussion does not address the tax consequences that may be relevant to particular investors subject to special treatment under certain U.S. Federal income tax laws, such as, dealers in securities, tax-exempt entities, banks, insurance companies and non-U.S. Holders. Purchasers of the common stock should therefore satisfy themselves as to the overall tax consequences of their ownership of the common stock, including the State, local and foreign tax consequences thereof (which are not reviewed herein), and should consult their own tax advisors with respect to their particular circumstances.



39




U.S. Holders


As used herein, a “U.S. Holder” includes a beneficial holder of common shares of our Company who is a citizen or resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof, any trust if a US court is able to exercise primary supervision over the administration of the trust and one or more US persons have the authority to control all substantial decisions of the trust, any entity created or organized in the United States which is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of common shares of our Company is effectively connected with the conduct of a trade or business in the United States. A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of our common shares is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation.


Dividend Distribution on Shares of our Company


U.S. Holders receiving dividend distributions (including constructive dividends) with respect to the common shares of our Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that we have current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be deducted or may be credited against actual tax payable, subject to certain limitations and other complex rules, against the U.S. Holder’s United States Federal taxable income. See “Foreign Tax Credit” below. To the extent that distributions exceed our current or accumulated earnings and profits, they will be treated first as a return of capital to the extent of the shareholder’s basis in the common shares of our Company and thereafter as gain from the sale or exchange of the common shares of our Company. Preferential tax rates for net long term capital gains may be applicable to a U.S. Holder which is an individual, estate or trust.


In general, dividends paid on our common shares will not be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations.


Foreign Tax Credit


A U.S. Holder who pays (or who has had withheld from distributions) Canadian income tax with respect to the ownership of our common shares may be entitled, at the election of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. This election is made on a year-by-year basis and generally applies to all foreign income taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder’s United States income tax liability that the U.S. Holder’s foreign source income bears to his or its world-wide taxable income. In determining the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern income such as “passive income”, “high withholding tax interest”, “financial services income”, “shipping income” and certain other classifications of income. A U.S. Holder who is treated as a domestic U.S. corporation owning 10% or more of our voting stock is also entitled to a deemed paid foreign tax credit in certain circumstances for the underlying foreign tax of our Company related to dividends received or Subpart F income received from us. (See the discussion below of Controlled Foreign Corporations). The availability of the foreign tax credit and the application of the limitations on the foreign tax credit are fact specific and holders and prospective holders of our common shares should consult their own tax advisors regarding their individual circumstances.


Disposition of Common Shares


If a “U.S. Holder” is holding shares as a capital asset, a gain or loss realized on a sale of our common shares will generally be a capital gain or loss, and will be long-term if the shareholder has a holding period of more than one year. However, gains realized upon sale of our common shares may, under certain circumstances, be treated as ordinary income, if we were determined to be a “collapsible corporation” within the meaning of Code Section 341 based on the facts in existence on the date of the sale (See below for definition of “collapsible corporation”). The amount of gain or loss recognized by a selling U.S. Holder will be measured by the difference between (i) the amount realized on the sale and (ii) his tax basis in our common shares. Capital losses are deductible only to the extent of capital gains. However, in the case of taxpayers other than corporations (U.S.) $3,000 ($1,500 for married individuals filing separately) of capital losses are deductible against ordinary income annually. In the case of individuals and other non-corporate taxpayers, capital losses that are not currently deductible may be carried forward to other years. In the case of corporations, capital losses that are not currently deductible are carried back to each of the three years preceding the loss year and forward to each of the five years succeeding the loss year.



40




A “collapsible corporation” is a corporation that is formed or availed principally to manufacture, construct, produce, or purchase prescribed types of property that the corporation holds for less than three years and that generally would produce ordinary income on its disposition, with a view to the stockholders selling or exchanging their stock and thus realizing gain before the corporation realizes two thirds of the taxable income to be derived from prescribed property. Prescribed property includes: stock in trade and inventory; property held primarily for sale to customers in the ordinary course of business; unrealized receivables or fees, consisting of rights to payment for noncapital assets delivered or to be delivered, or services rendered or to be rendered to the extent not previously included in income, but excluding receivables from selling property that is not prescribed; and property gain on the sale of which is subject to the capital gain/ordinary loss rule. Generally, a shareholder who owns directly or indirectly 5 percent or less of the outstanding stock of the corporation may treat gain on the sale of his shares as capital gain.


Other Considerations for U.S. Holders


In the following circumstances, the above sections of this discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of common shares of the Company. Our management is of the opinion that there is little, if not, any likelihood that we will be deemed a “Foreign Personal Holding Company”, a “Foreign Investment Company” or a “Controlled Foreign Corporation” (each as defined below) under current and anticipated conditions.


Foreign Personal Holding Company


If at any time during a taxable year more than 50% of the total combined voting power or the total value of our outstanding shares is owned, actually or constructively, by five or fewer individuals who are citizens or residents of the United States and 60% or more of our gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), we would be treated as a “foreign personal holding company.” In that event, U.S. Holders that hold common shares in our capital would be required to include in income for such year their allocable portion of our passive income which would have been treated as a dividend had that passive income actually been distributed.


Foreign Investment Company


If 50% or more of the combined voting power or total value of our outstanding shares are held, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and we are found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that we might be treated as a “foreign investment company” as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging our common shares to be treated as ordinary income rather than capital gains.

 

Controlled Foreign Corporation Status


If more than 50% of the voting power of all classes of stock or the total value of the stock of our Company is owned, directly or indirectly, by U.S. Holders, each of whom own after applying rules of attribution 10% or more of the total combined voting power of all classes of stock of our Company, we would be treated as a “controlled foreign corporation” or “CFC” under Subpart F of the Code. This classification would bring into effect many complex results including the required inclusion by such 10% U.S. Holders in income of their pro rata shares of “Subpart F income” (as defined by the Code) of our Company and our earnings invested in “U.S. property” (as defined by Section 956 of the Code). In addition, under Section 1248 of the Code if we are considered a CFC at any time during the five year period ending with the sale or exchange of its stock, gain from the sale or exchange of common shares of our Company by such a 10% U.S. Holder of our common stock at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of our earnings and profits attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because we may never be a CFC, a more detailed review of these rules is beyond of the scope of this discussion.


ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES OF OUR COMPANY.


F.

Dividends and Paying Agents


Not required.



41




G.

Statement By Experts

 

The financial statements of our Company as of December 31, 2013 included in this report has been audited by De Joya Griffith and the financial statements for year ended December 31, 2012 has been audited by, M&K CPAS, PLLC as stated in their reports appearing in this filing and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.


H.

Documents on Display

 

We are subject to the informational requirements of the Securities Exchange Act of 1934 , as amended, and, as such, we file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC located at 100 F Street, N.E., Washington, DC 20549. You can also access these reports and other filings electronically on the SEC’s web site, www.sec.gov .  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.


We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us in writing at our address.


I.

Subsidiary Information


We conduct all operations through our wholly owned subsidiary, Tombstone Exploration and Mining Corporation, a Nevada corporation.


Item 11.

Quantitative and Qualitative Disclosures About Market Risk


Our Tombstone property is located within the United States, currently at the exploration stage and our operations are limited to exploring this property. Therefore, our market risks are minimal. We may, however, have future property exploration requirements due in currencies other than United States dollars. As a Canadian company, our cash balances are kept in Canadian funds, and then converted to United States funds for accounting purposes. Therefore, we may become exposed to some interest rate risks. We consider the amount of risk to be manageable and do not currently, nor will we likely in the foreseeable future, conduct hedging to reduce our market risks.


Furthermore, changes in the regulatory environment in the U.S. may affect the costs of operating, mineral exploration and other factors having a material impact upon the business. The Company works diligently and in good faith to meet or exceed all applicable permitting requirements, reclamation obligations, and other regulations, but is subject to the authoritative changes.


Item 12.

Description of Securities Other Than Equity Securities


Not Applicable.


PART II

 

Item 13

Defaults, Dividend Arrearages and Delinquencies.


None.


Item 14

 Material Modifications to the Rights of Security Holders and Use of Proceeds.


Not Applicable.


Item 15

Controls and Procedures


Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Exchange Act, our management, including Alan Brown, our Chief Executive Officer, Chief Financial Officer, and Director, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013.



42




Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.


Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, we concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2013.

 

Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2013, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.


1.

Certain entity level controls establishing a “tone at the top” were considered material weaknesses. The Company does not have an audit committee financial expert serving on its audit committee. A whistleblower policy is not necessary given the small size of the organization.


2.

Due to the significant number and magnitude of adjustments identified during the year-end closing process, management has concluded that the controls over the period-end financial reporting process were not operating effectively. Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis.


Management is currently evaluating remediation plans for the above control deficiencies.

 

Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.


As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control—Integrated Framework issued by COSO.


Changes in Internal Controls. During the year ended December 31, 2013, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report


Item 16.

[Reserved]


Item 16A.

Audit Committee Financial Expert


The Company does not have an audit committee financial expert serving on its audit committee due to its inability to attract such a person.



43




Item 16B.

Code of Ethics


The Company has a Code of Business Conduct and Ethics that was approved by the Company’s Board of Directors on June 1, 2007.  A written copy of the Code is available on written request to the Company and was filed with the SEC on August 10, 2007 as part of the Company’s Amended Annual Report on Form 20-F/A and is incorporated herein by reference.


Item 16C.

Principal Accountant Fees and Services


The aggregate fees billed by the Company’s external auditors in each of the last two fiscal years for audit fees are as follows:


Financial Year Ending

 

Audit Fees (1)

 

Audit Related Fees (2)

 

Tax Fees (3)

 

All Other Fees (4)

2013

$

7,500

$

0

$

0

$

0

2012

$

8,500

$

0

$

0

$

0


 

(1)

The aggregate audit fees billed.


(2)

The aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements which are not included under the heading ‘‘Audit Fees’’.


(3)

The aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning.


(4)

The aggregate fees billed for products and services other than as set out under the headings ‘‘Audit Fees’’, ‘‘Audit Related Fees’’ and ‘‘Tax Fees’’.


The Board of Directors must approve in advance any non-audit related services provided by the auditor to the Company, and the fees for such services, with a view to ensure independence of the Auditor, and in accordance with applicable regulatory standards, including applicable stock exchange requirements with respect to approval of non-audit related services performed by the auditors; and as necessary, taking or recommending appropriate action to oversee the independence of the auditors.


Item 16D.

Exemptions from the Listing Standards for Audit Committees.


Not Applicable.


Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.


Not Applicable.


Item 16F.

Change in Registrant’s Certifying Accountant.


On March 13, 2014, De Joya Griffith, LLC (“DJG”) was engaged as the registered independent public accountant for Tombstone Exploration Corporation, a Nevada corporation (the “Company”) and M&K CPAS, PLLC (“M&K”) was dismissed as the registered independent public accountant for the Company.  The decisions to appoint DJG and dismiss M&K were approved by the Board of Directors of the Company on March 13, 2014.


Other than the disclosure of uncertainty regarding the ability for us to continue as a going concern which was included in our accountant’s report on the financial statements for the years ended December 31, 2013 and 2012, M&K’s reports on the financial statements of the Company for the years ended December 31, 2013 and 2012 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. For the two most recent fiscal years and any subsequent interim period through M&K's termination on March 13, 2014, M&K disclosed the uncertainty regarding the ability of the Company to continue as a going concern in its accountant’s report on the financial statements.


In connection with the audit and review of the financial statements of the Company through March 13, 2014, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with M&K's opinion to the subject matter of the disagreement.


In connection with the audited financial statements of the Company for the years ended December 31, 2013 and 2012 and interim unaudited financial statements through March 13, 2014, there have been no reportable events with the Company as set forth in Item 304(a)(1)(v) of Regulation S-K.



44




Prior to March 13, 2014, the Company did not consult with DJG regarding (1) the application of accounting principles to specified transactions, (2) the type of audit opinion that might be rendered on the Company’s financial statements, (3) written or oral advice was provided that would be an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.


Item 16G.

Corporate Governance.


Currently, our common shares are listed for trading on the OTCBB.  In the opinion of management, the Company’s corporate governance practices do not differ in any significant way from those followed by U.S. domestic companies listed on the OTCBB.


Item 16H.

Mine Safety Disclosures.


Not Applicable.

PART III

 

Item 17.

Financial Statements


Balance sheets of the Company as at December 31, 2013 and 2012, and the Statements of Operations and Stockholders Equity (Deficit) and Cash Flows for each of the years ended December 31, 2013 and 2012, and for the period from re-entry into the Development Stage, January 1, 2006 to December 31, 2013.


Item 18.

Financial Statements


Not Applicable.


Item 19.

Exhibits


Exhibits Required by Form 20-F.


Exhibit

 

 

Number

Description of Exhibit

Filing

1.01

Certificate of Incorporation under the Canada Business Corporations Act dated October 30, 1997.

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on August 19, 2002.

1.02

Bylaws

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on August 19, 2002.

1.03

Certificate of Name Change dated June 5, 2000.

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on August 19, 2002.

1.04

Certificate of Name Change dated September 20, 2004.

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on August 15, 2005.

1.05

Certificate of Name Change dated February 6, 2007.

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on February 8, 2007.

2.01

Form of U.S. Private Placement Subscription Agreement and Common Stock Purchase Warrant

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on July 19, 2011.

2.02

Form of Non-U.S. Private Placement Subscription Agreement and Common Stock Purchase Warrant

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on July 15, 2011.

4.01

Employment Agreement by and between the Company and Alan Brown dated January 1, 2009.

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on July 10, 2009.

4.02

Director Service Agreement between the Company and Laird Cagan dated May 18, 2011.

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on May 25, 2011.

4.03

Settlement Agreement by and among the Company, RedStone Communications, LLC and Marlin Molinaro dated August 16, 2011

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on August 29, 2011.

4.04

Employment Agreement by and between the Company and Alan Brown dated November 15, 2013.

Filed herewith.

4.05

Stock-for-Stock Exchange Agreement by and among the Company, EuroGas, Inc. and EuroGas AG dated December 10, 2013  

Incorporated herein by reference to our Current Report on Form 6-K filed with the SEC on December 16, 2013.

4.06

First Amendment to the Stock-for-Stock Exchange Agreement by and among the Company, EuroGas, Inc. and EuroGas AG dated January 13, 2014

Filed herewith.



45




8.01

Subsidiaries of the Company

Incorporated herein by reference to our Annual Report on Form 20-F filed with the SEC on July 19, 2011.

11.01

Code of Ethics

Incorporated herein by reference to our Amended Annual Report on Form 20-F/A filed with the SEC on August 10, 2007.

12.01

Certification of Chief Executive Officer of the Company required by rule 13A-14(A) or rule 15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

12.02

Certification of Chief Financial Officer of the Company required by rule 13A-14(A) or rule 15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

13.01

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith.

101.INS*

XBRL Instance Document

Filed herewith.

101.SCH*

XBRL Taxonomy Extension Schema Document

Filed herewith.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.


*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.



46




SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.



TOMBSTONE EXPLORATION CORPORATION



Date:  May 16,  2014

/s/ Alan Brown       

Alan Brown

President, Principal Financial and Accounting Officer, Principal Executive Officer, and Director



Date:  May 16, 2014

/s/ Steve Radvak       

Steve Radvak

Vice President of Exploration and Director



47



Tombstone Exploration Corporation

(An Exploration Stage Company)


December 31, 2013


Index


Reports of Independent Registered Public Accounting Firms

F-1


Consolidated Balance Sheets

F-3


Consolidated Statements of Operations

F-4


Consolidated Statements of Cash Flows

F-5


Consolidated Statement of Stockholders’ Equity (Deficit)

F-6


Notes to the Consolidated Financial Statements

F-8











[F20F123113_20F001.JPG]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors

Tombstone Exploration Corporation

 (An Exploration Stage Company)



We have audited the accompanying consolidated balance sheets of Tombstone Exploration Corporation (an exploration stage company) as of December 31, 2012 and 2011 and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tombstone Exploration Corporation as of December 31, 2012 and 2011, and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has suffered recurring losses and negative cash flows from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  These consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.  See note 1 to the consolidated financial statements for further information regarding this uncertainty.



/s/ M&K CPAS, PLLC


www.mkacpas.com

Houston, Texas

April 12, 2013




F-2



Tombstone Exploration Corporation

(An Exploration Stage Company)

Consolidated Balance Sheets

(expressed in U.S. dollars)

(Audited)


 

December 31,

2013

$

December 31,

2012

$

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

  43,560

        578

 

 

 

Total Current Assets

43,560

578

 

 

 

   Property and equipment, net of accumulated amortization

9,914

15,135

 

 

 

Deferred financing costs

7,078

 

 

 

Total Assets

  60,552

  15,713

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

  54,899

  56,324

 

 

 

Accrued liabilities

9,765

11,000

 

 

 

Due to related parties

25,654

98,066

 

 

 

Convertible debenture, net of unamortized discount of $71,119

162,818

 

 

 

Derivative liability

127,451

26,627

Total Current Liabilities

380,587

192,017

 

 

 

 

 

 

Total Liabilities

380,587

192,017

 

 

 

Stockholders’ Deficit

 

 

 

 

 

Common stock

Authorized: unlimited common shares, with no par value

Issued and outstanding: 122,414,114 and 103,660,905 common shares, respectively

17,956,297

17,646,580

 

 

 

Common stock subscribed

50,000

61,475

 

 

 

Additional paid-in capital

4,965,842

4,965,842

 

 

 

Accumulated deficit

(8,538,759)

(8,538,759)

 

 

 

Accumulated deficit during the exploration stage

(14,753,415)

(14,311,442)

 

 

 

Total Stockholders’ Deficit

(320,035)

(176,304)

 

 

 

Total Liabilities and Stockholders’ Deficit

   60,552

   15,713

 

 

 






(The accompanying notes are an integral part of these consolidated financial statements)


F-3




Tombstone Exploration Corporation

(An Exploration Stage Company)

Consolidated Statements of Operations

(expressed in U.S. dollars)

(Audited)



 

 

 



Year Ended  December 31,

2013



Year Ended  December 31,

2012

Accumulated from January 1, 2006 (Date of Entering Exploration Stage) to December 31,

2013

 

 

 

$

$

$

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Consulting services

 

 

      22,000

        7,346

      3,420,464

General and administrative

 

 

48,269

130,867

7,408,993

Impairment of property and equipment

 

 

8,033

Management and directors fees

 

 

120,000

214,075

1,404,075

Mineral properties

 

 

4,445

7,315

1,342,478

Professional fees

 

 

32,609

31,206

1,263,722

 

 

 

 

 

 

Total operating expenses

 

 

227,323

390,809

14,847,765

 

 

 

 

 

 

Operating loss

 

 

  (227,323)

 (390,809)

(14,847,765)

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

Gain on forgiveness of debt

 

 

415,089

Gain (loss) on fair value of derivatives

 

 

(100,824)

22,102

(127,451)

Accretion and interest expense

 

 

(113,826)

(165,133)

Gain (loss) on sale of assets

 

 

(11,809)

Write-off of investment

 

 

(16,346)

 

 

 

 

 

 

Total other income (expenses)

 

 

(214,650)

22,102

94,350

 

 

 

 

 

 

Net loss  

 

 

  (441,973)

 (368,707)

(14,753,415)

 

 

 

 

 

 

Net loss per share – Basic

Net Loss Per Share – Basic and Diluted

 

 

        (0.00)

      (0.00)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

111,722,313

103,660,905

 

 

 

 

 

 

 

 

 

 

 

 




(The accompanying notes are an integral part of these consolidated financial statements)


F-4






Tombstone Exploration Corporation

(An Exploration Stage Company)

Consolidated Statements of Cash Flows

(expressed in U.S. dollars)

 

 

 

For the Year Ended December 31,

2013

For the Year Ended December 31,

2012

Accumulated from January 1, 2006 (Date of Entering Exploration Stage) to December 31,

2013

(Unaudited)

 

 

 

$

$

$

Operating Activities

 

 

 

 

 

Net loss

 

 

 (441,973)

 (368,707)

 (14,753,415)

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Amortization expense

 

 

 5,221

 8,676

 84,412

Accretion expense

 

 

 107,460

 –

 155,460

Common stock issued for services

 

 

 –

 –

 3,112,893

Common stock subscribed for services

 

 

 –

 11,475

 1,478,975

Impairment of mineral properties

 

 

 –

 –

 910,000

Impairment of property and equipment

 

 

 –

 –

 8,033

Loss (gain) on sale of property and equipment

 

 

 –

 –

 8,675

Loss (gain) on forgiveness of debt

 

 

 –

 –

 (390,029)

Loss (gain) on fair value of derivatives

 

 

 100,824

 (22,102)

 127,451

Stock-based compensation

 

 

 –

 –

 4,952,286

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Amounts receivable

 

 

 –

 –

 –

Prepaid expenses

 

 

 –

 –

 76,222

Deferred financing costs

 

 

 (7,078)

 

 (7,078)

Accounts payable and accrued liabilities

 

 

 1,440

 (778)

 (96,099)

Net cash used in operating activities

 

 

 (234,106)

 (371,436)

 (4,332,214)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Acquisition of mineral properties

 

 

 –

 –

 (110,000)

Proceeds from sale of assets

 

 

 –

 –

 24,000

Purchase of property and equipment

 

 

 –

 –

 (135,034)

Net cash used in investing activities

 

 

 

 

 (221,034)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of common shares and share subscriptions

 

 

 65,000

 –

 3,455,500

Proceeds from  issuance of convertible debt

 

 

 232,500

 –

 232,500

Proceeds from loans payable

 

 

 –

 –

 59,810

Proceeds from (repayments to) related parties, net

 

 

 (35,912)

 (52,000)

 788,382

Due to related party

 

 

 15,500

 45,000

 60,500

Net cash provided by financing activities

 

 

 277,088

 (7,000)

 4,596,692

 

 

 

 

 

 

Increase (Decrease) in cash

 

 

 42,982

 (378,436)

 43,444

 

 

 

 

 

 

Cash – Beginning of Period

 

 

 578

 379,014

  116

 

 

 

 

 

 

Cash – End of Period

 

 

   43,560

           578

             43,560

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Interest paid

 

 

 –

 –

 –

Income tax paid

 

 

 –

 –

 –

 

 

 

 

 

 

Non-Cash Investing and Financing Activities

 

 

 

 

 

Cancellation of common shares

 

 

 –

 –

 (860,231)

Common shares issued to acquire mineral properties

 

 

 –

 –

 800,000

Common shares issued to settle debt

 

 

 125,142

 –

 1,446,936

Common shares issued to settle related party debt

 

 

 52,000

 –

 52,000

Common shares issued for finders’ fees

 

 

 –

 –

 112,000

Common shares issued for prepaid services

 

 

 –

 –

 476,222

Subscribed common stock issued for services

 

 

 –

 11,475

 67,475

Subscribed common stock issued (cash received in prior period)

 

 

 –

 –

 250,000




(The accompanying notes are an integral part of these consolidated financial statements)


F-5






Tombstone Exploration Corporation

(An Exploration Stage Company)

Consolidated Statement of Stockholders’ Equity (Deficit)

From January 1, 2006 to December 31, 2013

(expressed in U.S. dollars)


 



Common Stock

 

Additional

Paid-In Capital

 

Common Stock Subscribed

Accumulated Deficit

 

Accumulated Deficit During the Exploration

Stage

 

Total

Shares

 

Par Value

 

 

 

#

 

$

 

$

 

$

$

 

$

 

$

Balance – January 1, 2006 (Date of Entering  Exploration Stage)

1,568,324

 

7,468,288

 

    56,800

 

(8,538,759)

 

 

(1,013,671)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common shares

(207,562)

 

(20,756)

 

20,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash

1,000,000

 

100,000

 

 

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for acquisition of mineral properties

8,000,000

 

800,000

 

 

 

 

800,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

8,017,103

 

809,018

 

 

 

 

809,018

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of share purchase warrants

 

 

4,952,286

 

 

 

4,952,286

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(4,292,648)

 

(4,292,648)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31, 2006

18,377,865

 

9,156,550

 

5,029,842

 

(8,538,759)

 

(4,292,648)

 

1,354,985

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common shares

(4,000,000)

 

(400,000)

 

 

 

 

(400,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

15,743,000

 

1,574,300

 

 

 

 

1,574,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash at $0.10 per common share

3,850,000

 

385,000

 


 



 

 

385,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash at $0.20 per common share

2,500,000

 

500,000

 

 

 

 

500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for finders’ fee

175,000

 

35,000

 

(35,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(3,352,421)

 

(3,352,421)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31, 2007

36,645,865

 

11,250,850

 

4,994,842

 

(8,538,759)

 

(7,645,069)

 

61,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

1,025,000

 

149,000

 

 

 

 

149,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash at $0.20 per common share

4,000,000

 

800,000

 

 


 

 

800,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for finders’ fees

140,000

 

28,000

 

(28,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

 

 

 

1,403,500

 

 

1,403,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(2,696,001)

 

(2,696,001)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31, 2008

41,810,865

 

12,227,850

 

4,966,842

 

1,403,500

(8,538,759)

 

(10,341,070)

 

(281,637)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

13,400,000

 

2,525,500

 

 

(1,403,500)

 

 

1,122,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash

4,076,668

 

270,500

 

 

 

 

270,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

 

 

 

64,000

 

 

64,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion expense

 

 

48,000

 

 

 

48,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(1,574,304)

 

(1,574,304)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31, 2009

59,287,533

 

15,023,850

 

5,014,842

 

64,000

(8,538,759)

 

(11,915,374)

 

(351,441)

 

 

 

 

 

 

 

 

 

 

 

 

 




(The accompanying notes are an integral part of these consolidated financial statements)


F-6






Tombstone Exploration Corporation

(An Exploration Stage Company)

Consolidated Statement of Stockholders’ Equity (Deficit)

From January 1, 2006 to December 31, 2013

(expressed in U.S. dollars)



 



Common Stock

 

Additional

Paid-In Capital

 

Common Stock Subscribed

Accumulated Deficit

 

Accumulated Deficit During the Exploration

Stage

 

Total

Shares

 

Par Value

 

 

 

#

 

$

 

$

 

$

$

 

$

 

$

Balance – December 31, 2009

59,287,533

 

15,023,850

 

5,014,842

 

64,000

(8,538,759)

 

(11,915,374)

 

(351,441)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

4,240,000

 

335,250

 

 

(64,000)

 

 

271,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash

7,000,000

 

275,000

 

 

 

 

275,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares to settle debt

7,093,372

 

689,555

 

 

 

 

689,555

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

 

 

 

306,000

 

 

306,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(1,447,031)

 

(1,447,031)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – December 31,  2010

77,620,905

 

16,323,655

 

5,014,842

 

306,000

(8,538,759)

 

(13,362,405)

 

(256,667)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for services

3,140,000

 

263,925

 

 

(56,000)

 

 

207,925

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash

22,200,000

 

1,010,000

 

 

(250,000)

 

 

760,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for finders’ fee

700,000

 

49,000

 

(49,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

 

 

 

50,000

 

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(580,330)

 

(580,330)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2011

103,660,905

 

17,646,580

 

4,965,842

 

50,000

(8,538,759)

 

(13,942,735)

 

180,928

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

 

 

 

11,475

 

 

11,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(368,707)

 

(368,707)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2012

103,660,905

 

17,646,580

 

4,965,842

 

61,475

(8,538,759)

 

(14,311,442)

 

(176,304)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash

6,500,000

 

65,000

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares for settlement of related party payable

5,200,000

 

52,000

 

 

 

 

52,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares on conversion of debt

6,378,209

 

181,242

 

 

 

 

181,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subscribed

675,000

 

11,475

 

 

(11,475)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

(441,973)

 

(441,973)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2013

122,414,114

 

17,956,297

 

4,965,842

 

50,000

(8,538,759)

 

(14,753,415)

 

(320,035)



(The accompanying notes are an integral part of these consolidated financial statements)


F-7




Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



1.

Nature of Operations and Continuance of Business


Tombstone Exploration Corporation (the “Company”) was incorporated under the Canada Business Corporations Act on October 30, 1997 as 3430502 Canada Ltd.  On December 4, 1997, the Company changed its name to Four Crown Foods Inc., with its principal operations focused on the food and beverage retail business.  In April 2000, upon acquisition of the license rights to a domain registration, the Company discontinued its operations in the food and beverage retail industry and formally changed its name to Universal Domains Incorporated on June 5, 2000.  In 2001, the Company withdrew from the domain registration business and acquired 100% of the issued and outstanding common shares of VCL Communications Corp. (“VCL”), a teleconferencing services company that targeted clients throughout North America.  In November 2003, given the Company’s liabilities and the lack of profitability, the Company ceased all operations.


On September 20, 2004, the Company focused its operations on the exploration, development, production, and acquisition of crude oil and natural gas properties, changing its name to Pure Capital Incorporated.  On November 1, 2006, the Company commenced negotiations to acquire several mining and mineral right claims which was closed on December 4, 2006 where the Company acquired 100% of the mineral claims located in Tombstone, Arizona in exchange for $100,000 and the issuance of 8,000,000 common shares of the Company.  Effectively, on February 6, 2007, the Company changed its name to Tombstone Exploration Corporation to better reflect the Company’s current business objective and strategies.  The Company is an Exploration Stage Company, as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities.  


These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has generated no revenues to date and has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future.  As at December 31, 2013, the Company did not record any revenues, had a working capital deficit of $337,027 and an accumulated deficit of $23,292,174. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's future business. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 


The Company’s plan of action over the next twelve months is to raise capital financing to conduct exploration and drilling on its mineral property claims held in Tombstone, Arizona as well as exploring for new mineral property claims in the United States.  



2.

Summary of Significant Accounting Policies


a)

Basis of Presentation and Principles of Consolidation


These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The consolidated financial statements include the accounts of the Company and its subsidiary, Tombstone Mining and Exploration Corporation.  All inter-company accounts and transactions have been eliminated.  The Company’s fiscal year-end is December 31.


b)

Use of Estimates


The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long lived assets, stock-based compensation, valuation of convertible debentures and derivative liabilities, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.



F-8



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



2.

Summary of Significant Accounting Policies (continued)


c)

Cash and Cash Equivalents


The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As at December 31, 2013 and 2012, the Company had no cash equivalents.


d)

Property and Equipment


Property and equipment are recorded at the lower of cost or net book value, and are amortized based on the following rates:


Equipment

 

5 years straight-line


e)

Impairment of Long-Lived Assets


In accordance with ASC 360, Property Plant and Equipment , management tests long-lived assets to be held and used for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.


f)

Mineral Properties

 

The Company has been in the exploration stage since January 1, 2006 and has not yet realized any revenues from its planned operations. Mineral property acquisition and exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs incurred to develop such property are capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the probable reserve. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.


g)

Stock-Based Compensation


The Company records stock-based compensation in accordance with ASC 718, Share-Based Payments , using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.


h)

Revenue Recognition


The Company recognizes revenue from online advertising sales in accordance with Securities and Exchange Commission ASC 605, Revenue Recognition. The Company accounts for revenue as a principal using the guidance in ASC 605. Revenue consists of the sale of online advertising and is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the product is shipped, and collectibility is reasonably assured.


i)

Income Taxes


Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740, Accounting for Income Taxes, as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.


j)

Comprehensive Loss


ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at December 31, 2013 and 2012, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.




F-9



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



2.

Summary of Significant Accounting Policies (continued)


k)

Derivative Liability


From time to time, the Company may issue equity instruments that may contain an embedded derivative instrument which may result in a derivative liability. A derivative liability exists on the date the equity instrument is issued when there is a contingent exercise provision. The derivative liability is recorded at its fair value calculated by using an option pricing model such as a multi-nominal lattice model or Black-Scholes model. The fair value of the derivative liability is then calculated on each balance sheet date with the corresponding gains and losses recorded in the consolidated statement of operations.   


l)

Basic and Diluted Net Income (Loss) Per Share


The Company computes net income (loss) per share in accordance with ASC 260, Earning per Share .  ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. At December 31, 2013, the Company had 16,000,000 (2012 – 18,500,000) potentially dilutive shares from outstanding share purchase warrants.


m)

Financial Instruments


Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments , an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritizes the inputs into three levels that may be used to measure fair value:


Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.


Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.


Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.


The Company’s financial instruments consist principally of cash, accounts payable and accrued liabilities, amounts due to related parties, and convertible debentures. Pursuant to ASC 820 and 825, the fair value of our cash and cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.



F-10



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



2.

Summary of Significant Accounting Policies (continued)


m)

Financial Instruments (continued)


The Company’s operations are in Canada, which results in exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.


The following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2013 and 2012 on a recurring basis:


December 31, 2012

Description

 

Level 1

 

Level 2

 

Level 3

 

Total Gains and (Losses)

Derivative liability

 

 

-

 

 

-

 

 

(26,627)

 

 

22,102

Total

 

$

-

 

$

-

 

$

(26,627)

 

$

22,102



December 31, 2013

Description

 

Level 1

 

Level 2

 

Level 3

 

Total Gains and (Losses)

Derivative liability

 

 

-

 

 

-

 

 

(127,451)

 

 

(100,824)

Total

 

$

-

 

$

-

 

$

(127,451)

 

$

(100.824)


n)

Foreign Currency Translation


The Company’s functional and reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated in accordance with ASC 830 Foreign Currency Translation Matters, using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian dollars. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.


o)

Recent Accounting Pronouncements


The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.


3.

Property and Equipment


 

 

 

 

Net Book Value

 


Cost

$

Accumulated Amortization

$

 

December 31,

2013

$

December 31,

2012

$

 

 

 

 

 

 

Equipment

47,861

37,947

 

9,914

15,135

 

 

 

 

 

 




F-11



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



4.    Convertible Debentures


a)

In February 2013, the Company issued a convertible debenture to a non-related party for $37,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on November 15, 2013. The note is convertible into shares of common stock 180 days after the date of issuance (August 14, 2013) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $28,810. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $37,500. During the year ended December 31, 2013, the Company issued 2,349,367 shares of common stock for the conversion of $37,500 of the note and $1,500 of accrued interest. During the year ended December 31, 2013, $28,810 (2012 - $nil) of accretion expense had been recorded and the note has been fully converted. The Company paid financing costs of $2,500 relating to the issuance of the note.


b)

In April 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on January 15, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (October 7, 2013) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,979. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, the Company issued 1,716,573 shares of common stock for the conversion of $32,500 of the note and $1,300 of accrued interest. During the year ended December 31, 2013, $24,979 (2012 - $nil) of accretion expense had been recorded and the note has been fully converted. The Company paid financing costs of $2,500 relating to the issuance of the note.


c)

In June 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on March 5, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (November 30, 2013) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,953. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, the Company issued 2,312,268 shares of common stock for the conversion of $32,500 of the note and $1,300 of accrued interest. During the year ended December 31, 2013, $24,953 (2012 - $nil) of accretion expense had been recorded and the note has been fully converted. The Company paid financing costs of $2,500 relating to the issuance of the note.


d)

In August 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on May 5, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (January 28, 2014) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,963. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, $13,698 (2012 - $nil) of accretion expense had been recorded.


The Company has assessed the derivative liability based on guidance from ASC 480 and 815 and noted that no derivative liability exists.



F-12



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



4.    Convertible Debentures (continued)


e)

In October 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on July 5, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (March 30, 2014) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,953. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, $8,257 (2012 - $nil) of accretion expense had been recorded.


The Company has assessed the derivative liability based on guidance from ASC 480 and 815 and noted that no derivative liability exists.

f)

In October 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on August 4, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (April 29, 2014) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,963. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, $5,497 (2012 - $nil) of accretion expense had been recorded.


The Company has assessed the derivative liability based on guidance from ASC 480 and 815 and noted that no derivative liability exists.


g)

In December 2013, the Company issued a convertible debenture to a non-related party for $32,500.  Under the terms of the note, the amount owing is unsecured, due interest of 8% per annum, and matures on September 19, 2014. The note is convertible into shares of common stock 180 days after the date of issuance (June 15, 2014) at a conversion rate of 58% of the average of the three lowest bid prices of the Company’s common stock for the ten trading days ending one trading day prior to the date of the conversion notice is sent by the holder of the Company.


Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The fair value of the derivative liability resulted in a full discount to the note payable of $24,958. The carrying value of the convertible note will be accreted over the term of the convertible note up to the value of $32,500. During the year ended December 31, 2013, $1,266 (2012 - $nil) of accretion expense had been recorded.


The Company has assessed the derivative liability based on guidance from ASC 480 and 815 and noted that no derivative liability exists.


5.   Derivative Liability


The Company records the fair value of the reset provision of its exercise price of share purchase warrants in accordance with ASC 815, Derivatives and Hedging . The fair value of the derivative liability is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations.


During the year ended December 31, 2011, the Company issued warrants with an exercise price of $0.10 per share until July 14, 2014, and the reset provision allows for the exercise price to be reset to a value equal to a future issuance of common shares, stock options, warrants, or other equity instrument if the issuance or exercise price is less than $0.10 per share. Prior to December 31, 2013, the Company used a multi-nominal lattice model and changed its valuation approach to a Black-Scholes model for the year ended December 31, 2013 as it better reflects the changes in the fair value given the nature of the Company’s business.  The impact of the change in valuation approach resulted in an increase in the derivative liability of $54,266 for the year ended December 31, 2012, which has been applied on a prospective basis.  As at December 31, 2013, the Company recorded a derivative liability of $127,451 giving effect to change in the valuation method. During the year ended December 31, 2013, the Company recorded a gain on fair value of derivatives of $100,824 (2012 - $22,102).



F-13



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



5.   Derivative Liability (continued)


The following inputs and assumptions were used to value the secured convertible notes and warrants outstanding during the year ended December 31, 2013:


 

Expected Volatility

Risk-free Interest Rate

Expected Dividend Yield

Expected Life

(in years)

 

 

 

 

 

As at July 14, 2011 (issuance date)

270%

1.0%

0%

3.00

As at December 31, 2012

288%

1.0%

0%

1.53

As at December 31, 2013

316%

1.0%

0%

0.53


A summary of the activity of the derivative liability is shown below:


 

 

 

 

 

$

Balance at December 31, 2011

 

 

 

48,728

Derivative due to mark to market adjustment

 

 

  (22,102)

Balance at December 31, 2012

 

 

 

26,627

Derivative due to mark to market adjustment

 

 

100,824

Balance at December 31, 2013

 

 

 

127,451


6.

Common Shares


Year Ended December 31, 2013


a)

On January 7, 2013, the Company issued 675,000 common shares with a fair value of $11,475 for director services. Fair value of the common shares was determined by using the end of day trading price on the date of authorization.


b)

On June 20, 2013, the Company issued 6,500,000 common shares at $0.01 per share for total cash proceeds of $65,000.


c)

On June 20, 2013, the Company issued 5,200,000 common shares with a fair value of $52,000 for settlement of related party payables. Fair value of the common shares was determined using the share prices of shares issued for cash proceeds on the same date.


d)

On August 23, 2013, the Company issued an aggregate of 6,378,208 common shares upon the conversion of $181,242 of convertible notes payable and accrued interest.


Year Ended December 31, 2012


a)

As at December 31, 2012, the Company authorized the issuance of 675,000 common shares with a fair value of $11,475 for director services. Fair value of the common shares was determined by using the end of day trading price on the date of authorization. These common shares were subsequently issued on January 7, 2013


7.

Share Purchase Warrants


The following table summarizes the continuity schedule for share purchase warrants:


 

 

Number of Warrants

Exercise Price

Balance – December 31, 2011 and 2012

18,500,000

$0.10

Expired

(2,500,000)

$0.40

Balance – December 31, 2013

16,000,000

$0.10


As at December 31, 2013, the following share purchase warrants were outstanding:


Number of Warrants

Exercise Price

Expiry Date

16,000,000

$0.10

July 14, 2014

 

 

 




F-14



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



8.

Related Party Transactions


a)

As at December 31, 2013, the Company owed $15,000 (2012 - $15,000) to a director of the Company for consulting fees incurred.  The amounts owing are unsecured, non-interest bearing, and due on demand.  


b)

As at December 31, 2013, the Company owed $10,654 (2012 - $83,066) to the President of the Company for management fees incurred and financing of day-to-day operations.  The amounts owing are unsecured, non-interest bearing, and due on demand. During the year ended December 31, 2013, the Company incurred $120,000 (2012 - $120,000) to the President of the Company for management fees.


c)

During the year ended December 31, 2013, the Company issued 675,000 common shares (2012 – nil) with a fair value of $11,475 to a director of the Company for directors’ fees.


9.

Income Taxes


The Company has $8,983,000 of net operating losses to carryforward to offset taxable income in future years which expire through fiscal 2033. For the years ended December 31, 2013 and 2012, the valuation allowance established against the deferred tax assets increased by $82,201 and $133,257, respectively.


The components of the net deferred tax asset at December 31, 2013 and 2012, the statutory tax rate, the effective tax rate and the amount of the valuation allowance are indicated below:


 

 

 

2013

$

2012

$

 

 

 

 

 

Income (Loss) Before Taxes

 

 

(441,973)

(368,707)

Statutory rate

 

 

34%

34%

 

 

 

 

 

Computed expected tax recovery

 

 

(150,271)

(125,360)

Non-deductible expenses

 

 

67,573

(7,897)

Change in valuation allowance

 

 

82,698

133,257

 

 

 

 

 

Reported income taxes

 

 


 

 

2013

$

2012

$

 

 

 

 

Deferred tax asset

 

 

 

 - Cumulative net operating losses

 

3,073,840

2,991,142

 - Less valuation allowance

 

(3,073,840)

(2,991,142)

 

 

 

 

Net deferred tax asset

 


The following table lists the fiscal year in which the loss was incurred and the expiration date of the operating:


 

 

 

Expiration

 

Net

 

Date of

 

Loss

 

Operating

Period Incurred

$

 

Losses

 

 

 

 

December 31, 2006

159,600

 

2026

December 31, 2007

2,310,000

 

2027

December 31, 2008

2,638,800

 

2028

December 31, 2009

1,665,000

 

2029

December 31, 2010

944,400

 

2030

December 31, 2011

631,600

 

2031

December 31, 2012

391,900

 

2032

December 31, 2013

243,200

 

2033

 

 

 

 

 

8,983,000

 

 

 

 

 

 

 



F-15



Tombstone Exploration Corporation

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)



10.

Subsequent Events


a)

On December 13, 2013, the Company entered into a share exchange agreement (the “Agreement”) with EuroGas, Inc., a company incorporated in the state of Utah, and EuroGas AG, a company incorporated in Switzerland.  Under the terms of the Agreement, the Company would acquire 240,000,000 common shares of EuroGas AG, representing approximately 26% of the issued and outstanding common shares, and pay $5,000,000 within 9 months of the closing date of the Agreement, in exchange for the issuance of 348,000,000 common shares of the Company.  The transaction would result in a reverse merger, as the shareholders of EuroGas Inc. and EuroGas AG will hold more than 50% of the issued and outstanding common shares of the Company.


On January 13, 2014, the Company amended the terms of the December 13, 2013 agreement to include proceeds of 20% of any settlement liability EuroGas Inc. and EuroGas AG receives in its current litigation against the Slovak Republic.


On May 13, 2014, the Company amended the terms of the December 13, 2013 agreement whereby the Company would receive $100,000 in exchange for the issuance of 69,000,000 common shares of the Company and the remaining 279,000,000 common shares of the Company to be issued by June 13, 2014 in exchange for 240,000,000 common shares of EuroGas AG and $400,000, with further payments to the Company of $500,000 on or before August 30, 2014, and the final payment of $4,000,000 on or before October 31, 2014.  


As of the date of the filing, the Agreement has not been closed.


b)

On February 10, 2014, the Company issued 787,402 common shares upon the conversion of $20,000 of convertible notes payable.


c)

On February 18, 2014, the Company issued 518,797 common shares upon the conversion of $13,800 of convertible notes payable and accrued interest.


d)

On April 8, 2014, the Company issued 956,938 common shares upon the conversion of $20,000 of convertible notes payable.


e)

On April 17, 2014, the Company issued 730,159 common shares upon the conversion of $13,800 of convertible notes payable and accrued interest.





F-16


EMPLOYMENT AGREEMENT


THIS EMPLOYMENT AGREEMENT (the “Agreement”), effective as of November 15, 2013, is entered into by and between Alan M. Brown (“Employee”), and Tombstone Exploration Corporation, a Canadian Corporation (“Company”).


RECITALS


WHEREAS , the Employee has been serving as President, Chief Executive Officer and Chief Financial Officer of the Company and the parties hereto desire for the Employee to continue serving in such capacity; and


WHEREAS , on January 1, 2009, the Company and Employee executed an agreement memorializing the terms and conditions of the Employee’s service with the Company; and


WHEREAS , the Company and Employee now wish to execute a document amending and superseding the January 1, 2009 agreement in its entirety; and


NOW, THEREFORE , in consideration of the mutual agreements hereinafter set forth, Employee and the Company have agreed and do hereby agree as follows:


AGREEMENT


1. Duties. The Company hereby agrees to continue to employ and engage Employee as President, Chief Executive Officer and Chief Financial Officer of the Company, and Employee hereby accepts and agrees to such engagement and continued employment. Employee agrees to perform any and all duties and to assume any and all responsibilities that may be assigned to him from time to time by the Board of Directors of the Company or as may be required by the Bylaws, Articles of Incorporation or other governing documents of the Company. During the duration of his employment with the Company, Employee will devote sufficient time, energy, and skill to the performance of his duties for the Company and for the benefit of the Company. Employee shall render such services to the Company and perform his duties at such place or places as the Company shall require in accordance with its best interests, needs, business and opportunities. Employee will also exercise due diligence and care in the performance of Employee’s duties to the Company under this Agreement. Employee is freely permitted to engage in any other endeavors, pursue other investments and/or business opportunities, including but not limited to Employee’s status as a licensed real estate broker.


2. Employment Period. Employee’s employment with the Company shall be for an initial term of five (5) years (the “Initial Term”), commencing on the date hereof and shall continue thereafter until ended in accordance with this Agreement.  During the Initial Term, Employee shall not be removed from his positions as President, Chief Executive Officer, and Chief Financial Officer of the Company unless and until Employee has received the Base Salary as set forth in Section 3 for the full five (5) years of the Initial Term, regardless of whether Employee actually served in those positions for the entire Initial Term.  After the Initial Term, Employee’s employment will be “at will,” meaning that either Employee or the Company will be entitled to terminate the employment at any time and for any reason, with or without cause prior to the expiration of this Agreement. Any contrary representations which may have been made to Employee are superseded by this Agreement. The “at will” nature of the employment after the Initial Term may only be changed in an express written agreement signed by Employee and a duly authorized officer of the Company.


3. Compensation.


(a) Base Salary. The Company shall pay Employee, and Employee agrees to accept from the Company in full payment for Employee’s services and promises to the Company (specifically including the covenants set forth in Section 7), a base salary at the rate of $10,000 per year during the first two (2) years of the Initial Term and at the rate of $15,000 per year for the remaining three (3) years of the Initial Term and thereafter until this Agreement is terminated (“Base Salary”), payable in equal monthly installments or otherwise in accordance with the Company’s normal pay practices as the same may be altered from time to time by Company.


(b) Share Issuances.  At the sole discretion of the Employee, Employee may receive additional compensation of five million (5,000,000) shares of the Company’s common stock per year (the “Bonus Shares”) during the Initial Term and thereafter until this Agreement is terminated.  The Bonus Shares shall accumulate each year and be issued on such date as determined by the Employee in his sole discretion.



1




(c) Bonus. At the discretion of the Board of Directors, and subject to the satisfaction of such conditions or performance criteria as may be established from time to time at the sole discretion of the Board of Directors, Employee may, from time to time, receive a bonus. This bonus may consist of, without limitation, either equity interests of the Company or cash.


(d) Taxes.  The Company shall not be responsible for withholding taxes with respect to the Employee’s compensation hereunder.  Employee shall have no claim against the Company hereunder or otherwise for vacation pay, sick leave, retirement benefits, social security, worker’s compensation, health or disability benefits, unemployment insurance benefits, or employee benefits of any kind.  Employee will receive an IRS 1099 statement and related tax statements, and will be required to file corporate and/or individual tax returns and to pay taxes in accordance with all provisions of applicable Federal and State law.  


(e) Reimbursement for Business Expenses. Employee shall receive reasonable and customary reimbursement for business expenses incurred on behalf of the Company; provided, however, that Employee shall provide appropriate receipts and documentation for any such expenses.


(f) Vacation. Employee shall be entitled to vacation on the terms and subject to the conditions established by the Board of Directors of the Company.


(g) Health Care Benefits. In addition to Employee’s Base Salary during the duration of the Employee’s employment, Company shall pay $1,000 per month on behalf of Employee for health care benefits.


4. Resignation; Termination for Cause; Other Terminations.


(a) Resignation. Employee shall have the right to terminate this Agreement at any time upon thirty (30) days prior written notice to the Company of any such termination. In the event that such resignation is for Good Reason (as that term is defined below), all of Employee’s rights and all of the Company’s obligations hereunder shall terminate effective on the date of Employee’s resignation and Employee shall be entitled to receive the unpaid portion of the Base Salary and the Bonus Shares for the full five (5) years of the Initial Term, regardless of whether Employee actually served in those positions for the entire Initial Term, and all benefits payable to Employee as a result of such termination under the terms of the Company’s employee benefit plans. In the event Employee shall resign for other than Good Reason, Employee’s obligations and the Company’s rights under Sections 4, 5, 6, 7 and 8 shall survive the termination of this Agreement for a period of one (1) year. The Employee may terminate the Employee’s employment with the Company at any time for “Good Reason”, if any of the following have occurred without the Employee’s consent:


(i) the material reduction of the Employee’s authority, duties and responsibilities, or the assignment to the Employee of duties materially inconsistent with the Employee’s position or positions with the Company and its subsidiaries, except that the Company shall have thirty (30) days from the date on which the Employee gives the notice thereof to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder;


(ii) a reduction of the Annual Salary of the Employee, except that a reduction of the Employee’s Base Salary shall not constitute Good Reason for termination if the Company cures such reduction no later than thirty (30) days from the date on which the Employee gives the Company notice that the reduction constitutes Good Reason for termination hereunder;


(iii) the failure by the Company to obtain an agreement in form and substance reasonably satisfactory to the Employee from any successor to the business of the Company to assume and agree to perform this Agreement;


(iv) the Company’s material and willful breach of this Agreement, except that the Company shall have thirty (30) days from the date on which the Employee gives the notice thereof to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder;


(v) a requirement by the Company that Employee’s work location be moved more than fifty (50) miles of the Company’s principal place of business in Phoenix, AZ; or



2




(vi) the occurrence of a change of control, which for purposes of this Agreement shall mean the sale to an independent third party or group of independent third parties of either (i) more than fifty percent (50%) of the issued and outstanding equity securities of the Company and the voting power under normal circumstances to elect a majority of the Company’s Board of Directors (whether by merger, consolidation, sale or transfer of the Company’s equity securities); or (ii) all or substantially all of the Company’s assets determined on a consolidated basis.


(b) Termination for Cause. The Company may terminate Employee’s employment at any time for Cause (as defined below) with thirty (30) days written notice and opportunity to cure the violation. Such opportunity to cure will only be available if the violation is contained in one of the following paragraphs (contained below in this Subsection 4(b)): (iv), (viii), (ix), (x) or (xi). If Employee’s employment is terminated pursuant to this Subsection 4(b), all of Employee’s rights and all of the Company’s obligations hereunder shall immediately terminate. As used in this section, “for Cause” shall mean any of the following:


(i) Willfully damaging the Company’s property, business, reputation or goodwill;


(ii) Committing a felony;


(iii) Death, theft, dishonesty, fraud or embezzlement;


(iv) Using alcohol, narcotics or other controlled substances to the extent that it prevents the Employee from efficiently performing services for the Company;


(v) Willfully injuring any other employee of the Company;


(vi) Willfully injuring any person in the course of performance of services for the Company;


(vii) Disclosing to a competitor or other unauthorized persons confidential or proprietary information or secrets of the Company;


(viii) Soliciting business on behalf of a competitor or a potential competitor;


(ix) Sexually harassing any other employee of the Company or committing any act which otherwise creates an offensive work environment for other employees of the Company;


(x) Failing to comply with any provision of the Company’s policy manual as it applies to Employee; or


(xi) Breaching this Agreement.


The Company shall not be limited to termination as a remedy for any improper or illegal act of Employee, but may also seek damages, injunction or such other remedy as it may deem appropriate under the circumstances. Upon the termination of the Employee for Cause, Employee’s obligations and the Company’s rights under Sections 5, 6, 7, 8, 9 and 10 shall survive the termination of this Agreement for a period of one (1) year.


(c) Termination Without Cause. The Company may terminate Employee’s employment at any time without Cause pursuant to written notice provided to Employee not less than thirty (30) days in advance of such termination date. If Employee’s employment is terminated pursuant to this Section 4(c), all of Employee’s rights and all of the Company’s obligations hereunder shall terminate effective on the date of termination as stated in the written notice and Employee shall be entitled to receive the unpaid portion of the Base Salary and Bonus Shares for the full five (5) years of the Initial Term, regardless of whether Employee actually served in those positions for the entire Initial Term. Notwithstanding a termination of this Agreement pursuant to this Section 4(c), Employee’s obligations and the Company’s rights under Sections 4, 5, 6, 7 and 8 shall survive the termination of this Agreement for a period of one (1) year.



3




5. Non-solicitation; Non-competition.


(a) Employee agrees that he will not at any time during the Employee’s employment or the Restriction Period (“Restriction Period” shall mean the one (1) year subsequent to the end of Employee’s employment by the Company for any reason, which ending of employment shall be referred to as the “Termination Date”), whether voluntarily or involuntarily, directly or indirectly for himself or any other person or entity solicit, interfere with or endeavor to entice away from the Company or any of its affiliates any other employee of the Company or any of its affiliates. Additionally, Employee agrees that during the Restriction Period any employment by Employee or any entity in which he has an interest, directly or indirectly (other than a publicly traded company in which he has less than a 1% interest) of any person who was in the employ of the Company or any of its affiliates within the preceding year, shall be a violation of this Section. For the purposes of this Agreement indirect interests shall include interests held by Employee’s family members or any partner in a partnership, limited liability company or other entity in which he has a 10% or greater ownership interest.


(b) Employee further agrees that he will not at any time during the Restriction Period, whether voluntarily or involuntarily, directly or indirectly, for himself or any other person or entity:


(i) engage, directly or indirectly (either as an employee, officer, director, partner, shareholder, consultant or independent contractor), in any business substantially similar to that carried on by the Company, or any of its affiliates, or in providing services or products or offering to provide products or services of the kind provided by the Company or any of its affiliates as of the Termination Date within those areas in the United States, US Territories, Mexico, Central America and the Caribbean (the “Non-Competition Area”) which the Company or any of its affiliates is doing business as of the Termination Date or in which, at the time of the Termination Date, the Company or any of its affiliates contemplates doing business, or, for those customers of the Company or any of its affiliates for whom the Company or any of its affiliates: (A) is engaged in providing services or products as of the Termination Date, or (B) has either provided services or products within the twenty four month (24) period prior to the Termination Date, or (C) has contacted at any time during the twelve (12) months prior to the Termination Date, for the purpose of offering to provide services or products (all of which are hereinafter referred to as the “Clients”);


(ii) Solicit or attempt to solicit those Clients for the purposes of providing or offering to provide any services or products of a type which the Company or any of its affiliates provides or contemplates providing as of the Termination Date, on behalf of those Clients, whether directly or through any other persons, partnerships, corporations, companies or other entities; or


(iii) Take any other action which would impair the value of the business or assets of the Company or any of its affiliates, including, without limitation, any action which would tend to disparage or diminish the reputation of the Company or any of its affiliates.


(c) If in any judicial proceeding, a court shall refuse to enforce this Agreement, whether because the time limit is too long or because the restrictions contained herein are more extensive (whether as to geographic area, scope of business or otherwise) than is necessary to protect the business and goodwill of the Company, it is expressly understood and agreed between the parties hereto that this Agreement is deemed modified to the extent necessary to permit this Agreement to be enforced in any such proceedings.


(d) If the Company or its successors in interest shall make application to a court of competent jurisdiction for injunctive relief, then the Restriction Period specified herein shall be tolled from the time of application for injunctive relief until the date of final adjudication of the claim for injunctive relief. Additionally, Employee waives, to the greatest extent permissible, any requirement that the Company post bond or other security as a precondition to an injunction, whether temporary or permanent.



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(e) Employee agrees that compliance with this Section is necessary to protect the goodwill and other proprietary interests of the Company and that a breach of this Section will give rise to irreparable and continuing injury to the Company which is not adequately compensable in monetary damages or at law. Accordingly, Employee agrees that the Company, its successors and assigns may obtain injunctive relief against the breach or threatened breach of the foregoing provisions, in addition to any other legal remedies which may be available to it under this Agreement. Employee further acknowledges that in the event of his termination or expiration of employment with the Company, his knowledge, experience and capabilities are such that Employee can obtain employment in business activities which are of a different or noncompeting nature than those performed in the course of employment with the Company; and that the enforcement of a remedy hereunder by way of injunction will not prevent Employee from earning a reasonable livelihood.


6. Accounting for Profits. Employee covenants and agrees that if he violates the provisions of Sections 5, 7, 9, or 10 the Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration or other benefits that Employee has realized and/or may realize as a result of or in connection with any such violation. These remedies shall be in addition and not in limitation of any injunctive relief or other rights or remedies to which the Company is or may be entitled at law, in equity or under this Agreement.


7. Assignment of Proprietary Information. Except as may be required in the course of employment by the Company, Employee agrees that any and all Proprietary Information, as hereinafter defined, which Employee has made, conceived of, developed or originated, either individually or jointly with any other person or persons at any time during the period of employment by the Company, or during a period of five (5) years after termination or expiration of said employment, whether during working hours or any other time, which relate in any way to the business or the type of business now or hereafter engaged in or contemplated by the Company during the period of Employee’s employment or which result from or may be suggested by any work Employee does for the Company or at the Company’s request, shall be the property of the Company. As used herein, “Proprietary Information” shall mean any and all proprietary property including but not limited to all techniques, processes, devices, charts, manuals, payroll, and improvements thereto together with the names and identities of all clients and prospective clients, price lists, suppliers and all other information or materials which the Company may from time to time designate and treat as confidential and proprietary or as a trade secret.


Employee shall promptly disclose and assign such Proprietary Information to the Company’s representatives and do all such acts, and execute and deliver all such documents, as may be necessary to vest in the Company the title to all such Proprietary Information and enable the Company to properly prepare and prosecute any and all applications for patents, trademarks or copyrights thereon as well as all reissues, renewals and extensions thereof, so that the Company shall be the sole and absolute owner of all right, title and interest in said proprietary property. It is understood and agreed that the words “which relate in any way to the business or the type of business now or hereafter carried on or contemplated by the Company” shall properly cover any reasonable development or extension of the Company’s field of operation. These obligations shall continue beyond the termination or expiration of Employee’s employment with respect to inventions, discoveries and developments conceived or made by Employee during the period of employment and shall be binding on Employee’s assigns, executors, heirs, administrators and other legal representatives. Employee agrees that all correspondence, drawings, reports, ideas, blueprints, manuals, letters, notes, analyses, notebooks, reports, charts, programs, proposals or any other documents concerning the Company’s customers or products or processes, whether or not prepared by and in the course of employment, alone or in conjunction with others, is the property of the Company and upon termination or expiration of employment for any reason, Employee shall promptly return to the Company any such documents in his possession, custody or control.


8. Information and Testimony. Employee will, without expense to himself, give such true information and testimony under oath if requested, as may be requested of him by the Company relative to any Proprietary Information that is subject to disclosure to the Company under the terms hereof.


9. Proprietary Information. Employee agrees that he will not at any time during or after the termination or expiration of his employment, except as authorized or directed in writing by the Company, use for Employee’s own benefit, copy, reveal, divulge or make known in any manner to any person, firm or the Company the contents of any methods, inventions, systems, processes, concepts, techniques, and devices related to such matters used or developed by the Company, whether or not owned by the Company, or the methods, processes or manner of the creation and sale of products or services provided by, sold or leased by the Company, all sometimes referred to as “Trade Secrets,” as defined below.



5




Employee further agrees that he will not at any time during or after the termination or expiration of said employment, except as authorized or directed in writing by the Company, sell, exchange or give away or otherwise dispose of any methods, inventions, systems, processes, concepts, techniques and devices related to the business now or hereafter owned and operated by the Company, whether the same shall or may have been originated, discovered or otherwise created by Employee. Employee further agrees not to reveal, divulge or make known to any person, firm or the Company the name of any of the Company’s clients, price lists, suppliers or any secret, trade secret or other Proprietary Information whatsoever in connection with the Company, its business or its clients or anything pertaining thereto.


Employee understands that if, either during employment or thereafter, he discloses to others, uses for his own benefit or for the benefit of any person or entity other than the Company, copies or makes notes of any such Trade Secrets, information or facilities, such conduct will constitute a breach of the confidence and trust bestowed upon Employee by the Company and will be a breach of this Agreement.


“Trade Secret” shall mean the whole or any portion of any formula, pattern, device, combination of devices, or compilation of information which is for use, or is used in the operation of the Company’s business and which provides the business an advantage, or an opportunity to obtain an advantage, over those who do not know or use it. Trade Secret includes any scientific, technical or commercial information, including any design, process, procedure, list of suppliers, list of customers, business code, sales or installation technique, or improvement thereof. For purposes of interpretation hereunder the following shall apply:


(a) Irrespective of novelty, invention, patentability, the state of the prior art, and the level of skill in the business, art, or field to which the subject matter pertains, when the owner thereof takes measures to prevent it from becoming available to persons other than those selected by the owner to have access thereto for limited purposes, a trade secret is considered to be secret, of value, for use or in use by the business, and of advantage to the business, or providing an opportunity to obtain an advantage, over those who do not know or use it.


(b) In addition, a “Trade Secret” shall include information (not readily compiled from publicly available sources) which has been made available to Employee during the course of his employment, including but not limited to the names, addresses, telephone number, qualifications, education, accomplishments, experience and resumes of all persons who have applied or been recruited for employment, for either or both permanent and temporary jobs, job order specifications and the particular characteristics and requirements of persons generally hired by the Company, as well as specific job listings from companies with whom the Company does, or attempts to do business, as well as mailing lists, computer runoffs, financial or other information not generally available to others, and all information defined as a trade secret by applicable Nevada law.


(c) Employee further agrees that he is under no obligation to any former company which is in any way inconsistent with this Agreement or which imposes any restriction on behalf of the Company. The Employee also acknowledges that he has been instructed that during the term of employment by the Company, he is not to divulge to the Company, its employees or its consultants any confidential information obtained from any previous employers or any other person.


10. Return of Records. On termination of employment, Employee shall deliver all records, notes, data, memoranda, models, and equipment of any nature that are in Employee’s possession or under his control and that are the property of the Company or relate to the employment or to the business of the Company.


11. No Slander. Employee agrees not to in any way slander or injure the business reputation or goodwill of the Company, including, by way of illustration, through any contact with Clients, prospective clients, vendors, suppliers, employees or agents of the Company which could slander or injure the business reputation or goodwill of the Company.


12. Waiver or Modification. No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the party to be charged therewith. Furthermore, no evidence of any modification or waiver shall be offered or received as evidence in any proceeding, arbitration or litigation between the parties arising out of or affecting this Agreement or the rights or obligations of any party hereunder, unless such waiver or modification is in writing, duly executed as aforesaid. The provisions of this Section may not be waived except as herein set forth.



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13. Choice of Law; Waiver of Jury Trial. This Agreement and the performance hereunder and all suits and special proceedings hereunder shall be construed in accordance with the laws of Nevada. In any action, special proceeding or other proceeding that may be brought arising out of, in connection with, or by reason of this Agreement, the laws of Nevada shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which the action or special proceeding may be instituted. All actions under this Agreement shall be taken in a court of competent jurisdiction within the State of Nevada in which the Company’s principal place of business is located and Employee hereby waives and agrees that he shall not assert that such forum is inconvenient.


EACH PARTY HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO DEMAND A TRIAL BY JURY FOR ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE RELATIONSHIP OF THE PARTIES. THIS WAIVER EXTENDS TO ANY AND ALL RIGHTS TO DEMAND A TRIAL BY JURY ARISING FROM ANY SOURCE, INCLUDING BUT NOT LIMITED TO THE CONSTITUTION OF THE UNITED STATES, THE CONSTITUTION OF ANY STATE, COMMON LAW OR ANY APPLICABLE STATUTE OR REGULATION. EACH PARTY HEREBY ACKNOWLEDGES THAT IT IS KNOWINGLY AND VOLUNTARILY WAIVING THE RIGHT TO DEMAND TRIAL BY JURY.


14. Binding Effect of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and legal representatives.


15. Life Insurance. Inasmuch as the services of Employee are important to the success or failure of the Company, the Company may, by its sole discretion, purchase disability insurance or insurance on the life of the Employee during the term hereof in such amounts as the Company shall determine appropriate. Such insurance shall be owned by the Company, the Company shall be the sole beneficiary, and all premiums therefor shall be paid by the Company. The Employee agrees to cooperate with the reasonable requirements of the Company and/or its insurance carriers as necessary to obtain such insurance, including submitting to any and all necessary medical examinations.


16. Invalid Provision. The invalidity or unenforceability of a particular provision of this Agreement shall not effect the other provisions hereto, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.


17. Costs of Enforcement. In the event either party initiates action to enforce his, her or its rights hereunder, the substantially prevailing party shall recover from the substantially non-prevailing party its reasonable expenses, court costs, including taxed and untaxed costs, and reasonable attorneys’ fees, whether suit be brought or not (jointly referred as to “Expenses”). As used herein, Expenses include expenses incurred in any appellate or bankruptcy proceeding. All such Expenses shall bear interest at the highest rate allowable under the laws of the State of Nevada from the date the substantially prevailing party pays such Expenses until the date the substantially non-prevailing party repays such Expenses. Expenses incurred in enforcing this Section shall be covered by this Section. For this purpose, the court is requested by the parties to award actual costs and attorneys’ fees incurred by the substantially prevailing party, it being the intention of the parties that the substantially prevailing party be completely reimbursed for all such costs and fees. The parties request that inquiry by the court as to the fees and costs shall be limited to a review of whether the fees charged and hourly rates for such fees are consistent with the fees and hourly rates routinely charged by the attorneys for the substantially prevailing party.


18. Assignment. This Agreement shall be construed as a contract for personal services by Employee to the Company and shall not be assignable by Employee. This Agreement may be assigned by the Company.


19. Strict Construction. This Agreement was the joint, negotiated product of the parties. Therefore, neither party shall advance a position that any provision hereof should be more strictly construed against the other party on the basis that such other party prepared such provision.


20. Cumulative Rights. Unless otherwise provided herein, all rights, powers and privileges conferred upon the parties by law, this Agreement or otherwise shall be cumulative.


21. Waiver. No failure of any party to exercise any power given such party hereunder or to insist upon strict compliance by any party with its obligations hereunder, and no custom or practice of the parties in variance with the terms hereof shall constitute a waiver of the parties’ right to demand exact compliance with the terms hereof.


22. Survival. The provisions of this Agreement shall continue and survive the closing hereof unless or until there is a completion and fulfillment of all the conditions, covenants and warranties herein.



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23. Time. Time is of the essence of this Agreement.


24. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by certified registered mail, return receipt requested, with postage prepaid to their current address or to such other address as they request in writing.

 

25. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute the same instrument.


26. Singular/Plural Feminine/Masculine, Successors or Assigns. All references as used herein shall include male and female, singular and plural, and successors or assigns in the use of a corporation, partnership, individual or entity in any place or places herein in which the context may require or permit such substitution, substitutions or designations.


27. Complete Agreement. This written Agreement contains the sole and entire agreement between the parties as to the matters contained herein, and supersedes any and all other agreements between them. The parties acknowledge and agree that neither of them has made any representation with respect to such matters of this Agreement or any representations except as are specifically set forth herein, and each party acknowledges that he or it has relied on his or its own judgment in entering into this Agreement. The parties further acknowledge that statements or representations that may have been heretofore made by either of them to the other are void and of no effect and that neither of them has relied thereon in connection with his or its dealing with the other.


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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first set forth above.

 

 

 

TOMBSTONE EXPLORATION CORPORATION

 

 

 

 

 


/s/ Alan Brown

By:  Alan Brown – President & CEO

 

 

 



ALAN M. BROWN

 

/s/ Alan Brown

 

By: Alan Brown







9


FIRST AMENDMENT TO STOCK-FOR-STOCK EXCHANGE AGREEMENT


THIS FIRST AMENDMENT TO THE STOCK-FOR-STOCK EXCHANGE AGREEMENT (the “ First Amendment ”) is made as of this 13th day of January, 2014, by an among EuroGas, Inc., a Utah corporation (“Seller” ), Tombstone Exploration Corp., a Canadian federal corporation (“ Purchaser ”), and EuroGas, A.G., a Swiss stock corporation (the “Company”).  Seller, Purchaser and the Company are sometimes referred to herein as the “Party” or, collectively, the “Parties.”


RECITALS


WHEREAS , the Parties entered into a Stock-for-Stock Exchange Agreement dated December 10, 2013, (the “ Original Exchange Agreement ”), attached hereto as “Exhibit A” and incorporated herein by reference;


WHEREAS, the Parties now wish to formally amend and modify the Original Exchange Agreement by this First Amendment;


WHEREAS , this First Amendment has been signed by all of the Parties for their mutual benefit and to accurately reflect the proper terms and conditions of the Original Exchange Agreement;


WHEREAS , by this First Amendment, the Parties intend for this First Amendment to properly amend the underlying relevant section(s) of the Original Exchange Agreement so that the same supersedes and replaces all prior and contemporaneous agreements and understandings, oral and written, with regard to such provisions amended by this First Amendment;


WHEREAS , the Parties intend for the amendments made in this First Amendment to the Original Exchange Agreement to be retroactively effective as of December 10, 2013, the date on which the parties entered into the Original Exchange Agreement (the “ Effective Date ”); and


WHEREAS , the Parties have proposed the following First Amendment which both Parties’ deem to be fair and equitable.


AGREEMENT


NOW THEREFORE , in consideration of the foregoing recitals and the mutual covenants and representations contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:


1.

Recitals . The foregoing recitals are true and correct in all material respects and are hereby incorporated herein as a material part of this First Amendment.


2.

Amendment to Section 2 . Section 2(a) of the Original Exchange Agreement provides:


“2.

Stock-for-Stock Exchange and Exchange Ratio .  


(a)

General .  Seller shall exchange 240,000,000 of the Company’s Shares for the receipt of a total of 348,000,000 restricted shares of Purchaser’s stock, an exchange representing a 1 for 1.45 share exchange ratio, payable as specified in this Section 2, subject to the other terms and conditions of this Agreement.  Sellers committed funding for the exploration work of the buyer is to be advanced at the following stages, $500,000 on closing, $500,000 on or before April 30 th 2014, and $4,000,000 on or before September 30 th 2014.”


Section 2(a) of the Original Exchange Agreement is hereby revoked, repealed, and replaced in its entirety with the following:


“2.

Stock-for-Stock Exchange; Exchange Ratio & Direct Interest in Company’s Litigation .  





(a)

General .  Seller shall exchange 240,000,000 of the Company’s Shares for the receipt of a total of 348,000,000 restricted shares of Purchaser’s stock, an exchange representing a 1 for 1.45 share exchange ratio, payable as specified in this Section 2, subject to the other terms and conditions of this Agreement.  Sellers committed funding for the exploration work of the buyer is to be advanced at the following stages, $500,000 on closing, $500,000 on or before April 30 th 2014, and $4,000,000 on or before September 30 th 2014.  Additionally, Seller shall grant Purchaser an amount equal to twenty percent (20%) of any award granted to Seller or the Company relating to the certain lawsuit filed by the Company and Seller against the Slovak Republic, such amount shall be tendered to Purchaser in cash within 5 days of receipt of the same by either the Company or Seller.”


3.

Full Force and Effect of Other Terms . The Parties hereby confirm that all other terms and conditions of the Original Exchange Agreement are in full force and effect and are un-amended except as expressly provided in this First Amendment.


4.

Counterparts . This First Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.


5.

Electronic Signatures . The Parties agree that any form of electronic signature, including but not limited to signatures via facsimile, scanning, or electronic mail, may substitute for the original signature and shall have the same legal effect as the original signature.


SIGNATURES


IN WITNESS WHEREOF, the parties hereto have executed this First Amendment of Consulting and Operating Services Agreement on this 13th day of January, 2014.


EUROGAS, INC.

EUROGAS, A.G.

 

 

By: /s/ Harald Schmidt                         

By: /s/ Wolfgang Rauball                             

       Harald Schmidt - CFO & Director

      Wolfgang Rauball –

 

      Chairman of the Administration Board  

 

 

By: /s/ Alexander Danieek                         

 

       Alexander Danieek - EVP &Director

 

 

 

TOMBSTONE EXPLORATION CORP.

 

 

 

By: /s/ Alan Brown                                  

 

       Alan Brown – President & Director

 




Exhibit 12.01

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14

 

I, Alan Brown, certify that:

 

 

1.

I have reviewed this Annual Report on Form 20-F of Tombstone Exploration Corporation;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial 66 reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 


5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 




Date: May 16, 2014

/s/ Alan Brown                        

By: Alan Brown

Its: Chief Executive Officer

 

 

 




Exhibit 12.02

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14

 

I, Alan Brown, certify that:

 

 

1.

I have reviewed this Annual Report on Form 20-F of Tombstone Exploration Corporation;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial 66 reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 


5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 




Date: May 16, 2014

/s/ Alan Brown                       

By: Alan Brown

Its: Chief Financial Officer

 

 

 




Exhibit 13.01




CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report of Tombstone Exploration Corporation (the “Company”) on Form 20-F for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan Brown, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

 

(1)        The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)        The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

 


/s/ Alan Brown                       

By: Alan Brown

Chief Executive Officer and Chief Financial Officer

 

Dated: May 16, 2014

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.