UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2016

 

OR

 

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

 

Commission File No. 333-147056

 

INCEPTION MINING, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   35-2302128
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
     
5330 South 900 East, Suite 280
Murray, UT
  84117
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code (801) 312-8113

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class registered: Name of each exchange on which registered:
None None

 

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

 

Common Stock, $0.00001 par value.

(Title of Class)

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]
    (Do not check if a smaller
reporting company)
 

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of the last business day of the registrant’s most recently completed second fiscal quarter: $13,913,830.

 

The number of shares of registrant’s common stock outstanding as of April 17, 2017 was 51,353,780 shares. The number of shares of registrant’s preferred stock outstanding as of April 17, 2017 was 51 shares.

 

 

 

     
 

 

TABLE OF CONTENTS

 

    GLOSSARY OF MINING TERMS 3
PART I      
       
ITEM 1.   BUSINESS 5
ITEM 1A.   RISK FACTORS 8
ITEM 1B.   UNRESOLVED STAFF COMMENTS 16
ITEM 2.   PROPERTIES 16
ITEM 3.   LEGAL PROCEEDINGS 20
ITEM 4.   MINE SAFETY DISCLOSURES 20
       
PART II      
       
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 21
ITEM 6.   SELECTED FINANCIAL DATA 22
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 29
ITEM 8.   FINANCIAL STATEMENTS 29
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 29
ITEM 9A(T).   CONTROLS AND PROCEDURES 29
ITEM 9B.   OTHER INFORMATION 30
       
PART III      
       
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 30
ITEM 11.   EXECUTIVE COMPENSATION 33
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 34
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 35
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES 36
       
PART IV      
       
ITEM 15.   EXHIBITS 36
    SIGNATURES 38

 

2
   

 

GLOSSARY OF MINING TERMS

 

Exploration Stage

 

An “exploration stage” prospect is one which is not in either the development or production stage.

 

Development Stage

 

A “development stage” project is one which is undergoing preparation of an established commercially mineable deposit for its extraction but which is not yet in production. This stage occurs after completion of a feasibility study.

 

Mineralized

 

The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.

 

Probable Reserve

 

The term “probable reserve” refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

 

Production Stage

 

A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product.

 

Proven Reserve

 

The term “proven reserve” refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

 

The term “reserve” refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility study done to bankable standards that demonstrates the economic extraction. (“Bankable standards” implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in-situ tons and grade to include diluting materials and allowances for losses that might occur when the material is mined.

 

Additional definitions for terms currently or previously used in the Company’s Annual Reports filed on Form 10-K:

 

Assay – a measure of the valuable mineral content.

 

Block model – The representation of geologic units using three-dimensional blocks of pre-determined sizes.

 

Cut-off grade – When determining economically viable mineral reserves, the lowest grade of mineralized material that qualifies as ore, i.e. that can be mined at a profit.

 

Diamond drill – A type of rotary drill in which the cutting is done by abrasion rather than by percussion. The drill cuts a core of rock which is recovered in long cylindrical sections.

 

Fault - A fracture in the earth’s crust caused by tectonic forces with displacement along the fracture.

 

Feasibility study – A study or group of studies that determine the economic viability of a given mineral occurrence.

 

g/t or gpt – Grams per metric ton.

 

Grade – A term used to assign metal value to resources and reserves, such as gram per ton (g/t) or troy ounces per ton (oz/ton).

 

Gravity – A methodology using instrumentation allowing the accurate measuring of the difference between densities of various geological units in situ.

 

Heap leaching – A process which uses dilute sodium-cyanide solutions to percolate through run-of-mine or crushed ore heaped on lined pad to dissolve gold and/or silver.

 

in-situ – in its natural position.

 

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Mineral – A naturally formed chemical element or compound having a definite chemical composition and, usually, a characteristic crystal form.

 

Mineralization – A natural occurrence in rocks or soil of one or more metal yielding minerals.

 

Mineral deposit – A mineralized body, which has been intersected by a sufficient number of drill holes or by underground workings to give an estimate of grade(s) of metal(s) and thus to warrant further exploration or development. A mineral deposit does not qualify as a commercially viable mineral deposit with reserves under standards set by the U.S. Securities and Exchange Commission until a final, comprehensive, economic, technical and legal feasibility study has been completed.

 

Mining – The process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized.

 

NSR – A net smelter returns royalty, which is customarily calculated by subtracting from gross revenues a deduction for calculated mill recoveries, transport costs of any concentrates to a smelter, treatment and refining charges, and other deductions at the smelter and multiplying that result by the prescribed rate.

 

Open pit – Surface mining in which the ore is extracted from a pit or quarry, the geometry of the pit may vary with the characteristics of the ore body.

 

Ore - A natural aggregate of one or more minerals which, at a specified time and place, may be mined and processed and the product(s) sold at a profit or from which some part may be profitably separated.

 

Ore body – a mostly solid and fairly continuous mass of mineralization estimated to be economically mineable.

 

Ore grade – the average weight of the valuable metal or mineral contained in a specific weight of ore i.e. grams per ton of ore .

 

Oxide – gold bearing ore which results from the oxidation of near surface sulfide ore .

 

Quartz – a mineral composed of silicon dioxide, SiO2 (silica).

 

Reclamation – The process by which lands disturbed as a result of mining activity are modified to support beneficial land use. Reclamation activity may include the removal of buildings, equipment, machinery and other physical remnants of mining, closure of tailings storage facilities, leach pads and other mine features, and contouring, covering and re-vegetation of waste rock and other disturbed areas.

 

Rock – indurated naturally occurring mineral matter of various compositions.

 

Sampling and analytical variance/precision – an estimate of the total error induced by sampling, sample preparation and analysis.

 

SEC Industry Guide 7 – U.S. reporting guidelines that apply to registrants engaged or to be engaged in significant mining operations.

 

Sediment – particles transported by water, wind, gravity or ice.

 

Sedimentary rock – rock formed at the earth’s surface from solid particles, whether mineral or organic, which have been moved from their position of origin and re-deposited.

 

Strike – the direction or trend that a structural surface, e.g. a bedding or fault plane, takes as it intersects the horizontal

 

Strip – to remove barren rock or overburden in order to expose ore.

 

Vein – a thin, sheet like crosscutting body of hydrothermal mineralization, principally quartz.

 

4
   

 

PART I

 

ITEM 1. BUSINESS

 

As used in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,” “us,” “our” and “the Company” refer to Inception Mining, Inc., a Nevada corporation.

 

Forward-Looking Statements and Associated Risks. This Annual Report on Form 10-K contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (1) discussions about mineral resources and mineralized material, (2) our projected sales and profitability, (3) our growth strategies, (4) anticipated trends in our industry, (5) our future financing plans, (6) our anticipated needs for working capital, (7) our lack of operational experience and (8) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These statements constitute forward-looking statements. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in this filing generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under Item 1A below and other risks and matters described in this filing and in our other SEC filings. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur as projected. We do not undertake any obligation to update any forward-looking statements.

 

The Company

 

Overview

 

We are a mining company that was formed in Nevada on July 2, 2007. As a mining company, we are engaged in the production of precious metals. Our activities are not limited to production and they also include production, acquisition, exploration, and development of mineral properties, primarily for gold, from owned mining properties. Inception Mining has acquired two projects, as described below. Our target properties are those that have been the subject of historical exploration. We have generated revenue from mining operations.

 

On January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock with a record date of January 11, 2016. On May 25, 2016, FINRA approved the Reverse Split, with a market effective date of May 26, 2016.

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. and holds other mining concessions. Its workings include several historical underground mining operations dating back to the early Mayan and Spanish occupation.

 

On February 25, 2013, the Company acquired certain real property and the associated exploration permits and mineral rights commonly known as the U.P. and Burlington Gold Mine (“UP and Burlington”) pursuant to that certain asset purchase agreement entered between the Company, its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”) on one hand, and Inception Resources on the other hand, dated February 25, 2013 (the “Asset Purchase Agreement”). We are presently in the exploration stage at UP and Burlington. UP and Burlington contains two Federal patented mining claims which Inception Resources acquired for the purpose of the exploration and potential development of gold on the 40 acres which comprises UP and Burlington.

 

As part of our initial Plan of Operations for UP and Burlington, we have two-phases. During Phase I, we have obtained the necessary permitting to make an additional access road and surface improvements. We have implemented a bulk sample project on the surface of a 2,500 foot per day-lighted vein to depths of 40-60 feet. We plan to implement a Confirmatory Core Drilling Program that will be (NI43-101) compliant, with Vein Definition and Valuations. In Phase II, we plan to contract with an underground miner or mining company, develop an operational plan, expand portal development leveraging existing underground access and implement underground mining to a depth based on optimizing costs versus processed ore value. There is no guarantee that we will be successful in implementing either Phase I or Phase II.

 

The Company and its independent consultants are developing a detailed exploration-drilling program to confirm and expand mineralized zones in these mines and collect additional environmental and technical data. The first phase of confirmation and expansion was initiated in 2015 and the Company continued evaluation of the project, metallurgical testing, engineering, environmental programs and studies during 2016. The Company plans to continue to update the historic feasibility study and environmental permit applications.

 

We also plan to review opportunities and acquire additional mineral properties with current or historic precious and base metal mineralization with meaningful exploration potential.

 

5
   

 

Competition and Mineral Prices

 

We compete with many companies in the mining business, including larger, more established mining companies with substantial capabilities, personnel and financial resources. There is a limited supply of desirable mineral lands available for claim-staking, lease or acquisition in the United States and other areas where we may conduct exploration activities. Because we compete with individuals and companies that have greater financial resources and larger technical staffs, we may be at a competitive disadvantage in acquiring desirable mineral properties. From time to time, specific properties or areas that would otherwise be attractive to us for exploration or acquisition are unavailable due to their previous acquisition by other companies or our lack of financial resources. Competition in the mining industry is not limited to the acquisition of mineral properties but also extends to the technical expertise to find, advance, and operate such properties; the labor to operate the properties; and the capital needed to fund the acquisition and operation of such properties. Competition may result in our company being unable not only to acquire desired properties, but to recruit or retain qualified employees, to obtain equipment and personnel to assist in our exploration activities or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation and business. The mineral exploration industry is highly fragmented, and we are a very small participant in this sector. Many of our competitors explore for a variety of minerals and control many different properties around the world. Many of them have been in business longer than we have and have established strategic partnerships and relationships and have greater financial resources than we do.

 

There is significant competition for properties suitable for gold exploration. As a result, we may be unable to continue to acquire interests in attractive properties on terms that we consider acceptable. We will be subject to competition and unforeseen limited sources of supplies in the industry in the event spot shortages arise for supplies such as dynamite, and certain equipment such as drill rigs, bulldozers and excavators that we will need to conduct exploration. If we are unsuccessful in securing the products, equipment and services we need we may have to suspend our exploration plans until we are able to secure them.

 

Market for Gold

 

In the event that gold is produced from our property, we believe that wholesale purchasers for the gold would be readily available, as many purchasers of precious metals exist in the United States and abroad. Among the largest are Handy & Harman, Engelhard Industries and Johnson Matthey, Ltd. Historically, these markets are liquid and volatile. Wholesale purchase prices for precious metals can be affected by a number of factors, all of which are beyond our control, including but not limited to:

 

fluctuation in the supply of, demand, and market price for gold;
mining activities of our competitors;
sale or purchase of gold by central banks and for investment purposes by individuals and financial institutions;
interest rates;
currency exchange rates;
inflation or deflation;
fluctuation in the value of the United States dollar and other currencies; and
political and economic conditions of major gold or other mineral-producing countries.

 

If we find gold that is deemed of economic grade and in sufficient quantities to justify removal, we may seek additional capital through equity or debt financing to build a mine and processing facility, or enter into joint venture or other arrangements with large and more experienced companies better able to fund ongoing exploration and development work, or find some other entity to mine our property on our behalf, or sell or lease our rights to mine the gold. Upon mining, the ore would be processed through a series of steps that produces a rough concentrate. This rough concentrate is then sold to refiners and smelters for the value of the minerals that it contains, less the cost of further concentrating, refining and smelting. Refiners and smelters then sell the gold on the open market through brokers who work for wholesalers including the major wholesalers listed above.

 

Compliance with Government Regulation

 

Mining Operations

 

UP and BURLINGTON (Lemhi County, Idaho)

 

Mine operation is governed by both federal and state law. 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 United States generally. Federal laws, such as those governing the purchase, transport or storage of explosives, and those governing mine safety and health, also apply. The Company plans to obtain a Lemhi County Conditional Use Permit, an Idaho Department of Lands Surface Reclamation Bond and permitting for the U.S. Forest Service Access Road.

 

When this mine comes into production we will also be subject to the rules and regulations of the Mine Safety and Health Administration, a Division of the United States Department of Labor.

 

CLAVO RICO (Honduras, Central America)

 

The mining operations in Honduras are governed by the national entities Honduran Institute of Geology and Mines (INHGEOMIN) and Ministry of Natural Resources and Environment (SERNA). The Clavo Rico mine has operated under a grandfathered concession granted many years ago and has now complied with all regulatory requirements of the above agencies and the recently adopted Honduran Mining laws (The General Mining Law was approved by Legislative Decree No. 238-2012, dated January 23, 2013), including employee health and safety regulations, Environmental requirements, water discharge requirements, and potential reclamation requirements. As the above ministries have only limited operational experience and the new mining law has only recently been adopted, the interpretation, adoption and enforcement of many regulations are evolving. Other local ordinances (municipality of El Corpus) minor and most regulatory efforts are as a result of interaction between the mine and the local populace, (examples include use of the mine haul road for local traffic, restricting mine operations to daylight hours for noise considerations, watering for dust control, etc.) where no regulation or law exists, we have attempted to duplicate best practices as required in other business climates.

 

6
   

 

These laws and regulations are continually changing and, as a general matter, are becoming more restrictive. The Company’s policy is to conduct our business in a manner that safeguards public health and mitigates the environmental effects of our business activities. To comply with these laws and regulations, we have made, and in the future may be required to make, capital and operating expenditures.

 

Environmental Laws

 

Mining activities at the Company’s properties are also subject to various environmental laws, both federal and state, including but not limited to the federal National Environmental Policy Act, CERCLA (as defined below), the Resource Recovery and Conservation Act, the Clean Water Act, the Clean Air Act and the Endangered Species Act, and certain Idaho state laws governing the discharge of pollutants and the use and discharge of water. Various permits from federal and state agencies are required under many of these laws. Local laws and ordinances may also apply to such activities as construction of facilities, land use, waste disposal, road use and noise levels.

 

These laws and regulations are continually changing and, as a general matter, are becoming more restrictive. The Company’s policy is to conduct our business in a manner that safeguards public health and mitigates the environmental effects of our business activities. To comply with these laws and regulations, we have made, and in the future may be required to make, capital and operating expenditures.

 

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), imposes strict, joint, and several liabilities on parties associated with releases or threats of releases of hazardous substances. Liable parties include, among others, the current owners and operators of facilities at which hazardous substances were disposed or released into the environment and past owners and operators of properties who owned such properties at the time of such disposal or release. This liability could include response costs for removing or remediating the release and damages to natural resources. Our properties, because of past mining activities, could give rise to potential liability under CERCLA.

 

Under the Resource Conservation and Recovery Act (RCRA) and related state laws, mining companies may incur costs for generating, transporting, treating, storing, or disposing of hazardous or solid wastes associated with certain mining-related activities. RCRA costs may also include corrective action or cleanup costs.

 

Mining operations may produce air emissions, including fugitive dust and other air pollutants, from stationary equipment, such as crushers and storage facilities, and from mobile sources such as trucks and heavy construction equipment. All of these sources are subject to review, monitoring, permitting, and/or control requirements under the federal Clean Air Act and related state air quality laws. Air quality permitting rules may impose limitations on our production levels or create additional capital expenditures in order to comply with the permitting conditions.

 

Under the federal Clean Water Act and the delegated Colorado water-quality program, point-source discharges into waters of the State are regulated by the National Pollution Discharge Elimination System (NPDES) program. Storm water discharges also are regulated and permitted under that statute. Section 404 of the Clean Water Act regulates the discharge of dredge and fill material into Waters of the United States, including wetlands. All of those programs may impose permitting and other requirements on our operations.

 

The National Environmental Policy Act (NEPA) requires an assessment of the environmental impacts of major federal actions. The federal action requirement must be satisfied if the project involves federal land or if the federal government provides financing or permitting approvals. NEPA does not establish any substantive standards, but requires the analysis of any potential impacts. The scope of the assessment process depends on the size of the project. An Environmental Assessment (EA) may be adequate for smaller projects. An Environmental Impact Statement (EIS), which is much more detailed and broader in scope than an EA, is required for larger projects. NEPA compliance requirements for any of our proposed projects could result in additional costs or delays.

 

The Endangered Species Act (ESA) is administered by the U.S. Fish and Wildlife Service of the U.S. Department of Interior. The purpose of the ESA is to conserve and recover listed endangered and threatened species and their habitat. Under the ESA, endangered means that a species is in danger of extinction throughout all or a significant portion of its range. The term threatened under such statute means that a species is likely to become endangered within the foreseeable future. Under the ESA, it is unlawful to take a listed species, which can include harassing or harming members of such species or significantly modifying their habitat. Future identification of endangered species or habitat in our project areas may delay or adversely affect our operations.

 

U.S. federal and state reclamation requirements often mandate concurrent reclamation and require permitting in addition to the posting of reclamation bonds, letters of credit or other financial assurance sufficient to guarantee the cost of reclamation. If reclamation obligations are not met, the designated agency could draw on these bonds or letters of credit to fund expenditures for reclamation requirements. Reclamation requirements generally include stabilizing, contouring and re-vegetating disturbed lands, controlling drainage from portals and waste rock dumps, removing roads and structures, neutralizing or removing process solutions, monitoring groundwater at the mining site, and maintaining visual aesthetics.

 

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Capital Equipment and Research & Development Expenditures

 

During the year ended December 31, 2016, we did not incur any expense related to research and development. Additionally, we are not currently conducting any research and development activities other than those relating to the possible acquisition of new gold and/or silver properties or projects of which there is no guarantee. As we proceed with our exploration programs, we may need to engage additional contractors and consider the possibility of adding additional permanent employees, as well as the possible purchase or lease of equipment.

 

Employees

 

As of the date of this filing, we currently employ ninety-five (95) full-time employees and generally around twenty-seven (27) temporary employees in the United States and Honduras. We have contracts with various independent contractors and consultants to fulfill additional needs, including investor relations, exploration, development, permitting, and other administrative functions, and may staff further with employees as we expand activities and bring new projects on line.

 

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts

 

We do not currently own any patents or trademarks. Also, we are not a party to any license or franchise agreements, concessions, or labor contracts arising from any patents or trademarks. As part of our purchase of UP and Burlington, we granted a net smelter royalty (“NSR”) of 3% of production in the UP and Burlington mine. Additionally, our Clavo Rico project has a NSR of 5% in addition to a refinery royalty of 3% of production in the Clavo Rico mine.

 

Company Information

 

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov. Further information about the Company may be found at its website: www.inceptionmining.com. The Company makes available its filings to investors, free of charge, on this website.

 

RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should consider carefully the following risks, along with all of the other information included in this report, before deciding to buy our common stock. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business operations. If we are unable to prevent events that have a negative effect from occurring, then our business may suffer.

 

Risks Relating to Our Company

 

We have incurred losses since our inception in 2007 and may never be profitable, which raises doubt about our ability to continue as a going concern.

 

Since our inception in 2007 and until the Merger in 2015, we had nominal operations and incurred operating losses. Although we had net income in 2016, as of December 31, 2016, our accumulated deficit since inception was $12,919,113. We have substantial current obligations and at December 31, 2016, we had $12,589,217 of current liabilities compared to only $1,714,321of current assets. Since inception, we have been able to raise only minimal additional capital, and we have minimal cash on hand. Accordingly, the Company does not have sufficient cash resources or current assets to pay its current obligations, and we have been meeting many of our obligations through the issuance of our common stock to our employees, consultants and advisors as payment for the goods and services.

 

Our management continues to search for additional financing; however, considering the difficult U.S. and global economic conditions along with the substantial turmoil in the capital and credit markets, there is a significant possibility that we will be unable to obtain financing to continue our operations.

 

As we are in the beginning stages of our exploration activities on UP and Burlington, and such property has not generated revenue in the recent past, we expect to incur additional losses in the foreseeable future, and such losses may continue to be significant. To become profitable, we must be successful in raising capital to continue with our mining efforts, exploration activities, meet the work commitment requirements on UP and Burlington and Clavo Rico, discover economically feasible mineralization deposits and establish reserves, successfully develop the properties and finally realize adequate prices on our minerals in the marketplace. Thus, we may never be profitable.

 

These circumstances raise substantial doubt about our ability to continue as a going concern as described in an explanatory paragraph to our independent registered public accounting firm’s report on our audited financial statements as of and for the year ended December 31, 2016. If we are unable to continue as a going concern, investors will likely lose all of their investment in our company.

 

8
   

 

We have a limited operating history.

 

As an early stage company that has recently made acquisitions, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications, and delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment. Our business is dependent upon the implementation of our business plan. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability. Additionally, the Company’s recent merger with the operating foreign entity was based on a review of all historical data and potential revenue streams and resources as could be ascertained from the submission of documents and a thorough review of all data made available. We believe the materials to be accurate and have attempted to discount the valuations due to perceived risks of foreign operations and the tasks of incorporating a non-public entity into Inception Mining Inc.

 

The feasibility of mineral extraction from UP and Burlington has not yet been established, as we have not completed exploration or other work necessary to determine if it is commercially feasible to develop the properties.

 

UP and Burlington does not have any proven or probable reserves. A “reserve,” as defined by the SEC, is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. A reserve requires a feasibility study demonstrating with reasonable certainty that the deposit can be economically extracted and produced. We have not yet completed our feasibility study with regard to UP and Burlington. As a result, we currently have no reserves and there are no assurances that we will be able to prove that there are reserves on UP and Burlington.

 

Exploring for gold is an inherently speculative business.

 

Natural resource exploration, and exploring for gold in particular, is a business that by its nature is very speculative. There is a strong possibility that we will not discover gold or any other resources that can be mined or extracted at a profit at our UP and Burlington project. Even if we do discover gold or other deposits, the deposit may not be of the quality or size necessary for us to make a profit after extracting it. Few properties that are explored are ultimately developed into producing mines. Unusual or unexpected geological formations, geological formation pressures, fires, power outages, labor disruptions, flooding, explosions, cave-ins, landslides, and the inability to obtain suitable or adequate machinery, equipment or labor are just some of the many risks involved in mineral exploration programs and the subsequent development of gold deposits. At our Clavo Rico mine, the resources may become scarce or more difficult to obtain.

 

We will require significant additional capital to continue our exploration activities, and, if warranted, to develop mining operations.

 

We will be required to raise significantly more capital in order to develop UP and Burlington for mining production, assuming economically viable reserves exist. There is no assurance that our investments in UP and Burlington will be financially productive. We will also be required to raise significantly more capital in order to fund our Clavo Rico operations. Our ability to obtain necessary funding depends upon a number of factors, including the price of gold, base metals, and other minerals we are able to mine, the status of the national and worldwide economy, and the availability of funds in the capital markets. If we are unable to obtain the required financing in the near future for these or other purposes, our exploration activities would be delayed or indefinitely postponed, we would likely may lose our lease and options to acquire an ownership interest in UP and Burlington and be unable to fund our operations at the Clavo Rico mine in Honduras. This would likely lead to failure of our Company. Even if financing is available, it may be on terms that are not favorable to us, in which case, our ability to become profitable or to continue operating would be adversely affected. If we are unable to raise funds, the market value of our securities will likely decline, and our investors may lose some or all of their investment.

 

The global financial conditions may have an impact on our business and financial condition in ways that we currently cannot predict.

 

The continued pressure on commodities markets and related turmoil in the global financial system may have an impact on our business and financial position. The recent high costs of consumables may negatively impact costs of our operations. In addition, current financial market conditions may limit our ability to raise capital through credit and equity markets. As discussed further below, the prices of the metals that we may produce are affected by a number of factors, and it is unknown how these factors will be impacted by a continuation of the financial crisis.

 

Fluctuating gold and mineral prices could negatively impact our business plan.

 

The potential for profitability of our gold and mineral mining operations and the value of any mining properties we may acquire will be directly related to the market price of gold and minerals that we mine. Historically, gold and other mineral prices have widely fluctuated, and are influenced by a wide variety of factors, including inflation, currency fluctuations, regional and global demand, and political and economic conditions. Fluctuations in the price of gold and other minerals that we mine may have a significant influence on the market price of our common stock and a prolonged decline in these prices will have a negative effect on our results of operations and financial condition.

 

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Our business is subject to extensive environmental regulations which may make exploring for or mining prohibitively expensive, and which may change at any time.

 

All of our operations are subject to extensive environmental regulations, which could make exploration expensive or prohibit it altogether. We may be subject to potential liabilities associated with the pollution of the environment and the disposal of waste products that may occur as the result of exploring and other related activities on our properties. We may have to pay to remedy environmental pollution, which may reduce the amount of money that we have available to use for exploration. This may adversely affect our financial position, which may cause you to lose your investment. If we are unable to fully remedy an environmental problem, we might be required to suspend operations or to enter into interim compliance measures pending the completion of the required remedy. If a decision is made to mine our properties and we retain any operational responsibility for doing so, our potential exposure for remediation may be significant, and this may have a material adverse effect upon our business and financial position. We have not yet purchased insurance for potential environmental risks (including potential liability for pollution or other hazards associated with the disposal of waste products from our exploration activities). However, if we mine one or more of our properties and retain operational responsibility for mining, then such insurance may not be available to us on reasonable terms or at a reasonable price. All of our exploration and, if warranted, development activities may be subject to regulation under one or more local, state and federal environmental impact analyses and public review processes. It is possible that future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have significant impact on some portion of our business, which may require our business to be economically re-evaluated from time to time. These risks include, but are not limited to, the risk that regulatory authorities may increase bonding requirements beyond our financial capability. Inasmuch as posting of bonding in accordance with regulatory determinations is a condition to the right to operate under all material operating permits, increases in bonding requirements could prevent operations even if we are in full compliance with all substantive environmental laws.

 

We may be denied the government licenses and permits which we need to explore on our properties. In the event that we discover commercially exploitable deposits, we may be denied the additional government licenses and permits which we will need to mine our properties.

 

Exploration activities usually require the granting of permits from various governmental agencies. For example, exploration drilling on unpatented mineral claims requires a permit to be obtained from the United States Bureau of Land Management, which may take several months or longer to grant the requested permit. Depending on the size, location and scope of the exploration program, additional permits may also be required before exploration activities can be undertaken. Prehistoric or Indian grave yards, threatened or endangered species, archeological sites or the possibility thereof, difficult access, excessive dust and important nearby water resources may all result in the need for additional permits before exploration activities can commence. As with all permitting processes, there is the risk that unexpected delays and excessive costs may be experienced in obtaining required permits. The needed permits may not be granted at all. Delays in or our inability to obtain necessary permits will result in unanticipated costs, which may result in serious adverse effects upon our business.

 

The values of our properties are subject to volatility in the price of gold and any other deposits we may seek or locate.

 

Our ability to obtain additional and continuing funding, and our profitability in the event we ever commence mining operations or sell our rights to mine, will be significantly affected by changes in the market price of gold. Further, the gold deposits that are recovered from our Clavo Rico mine with also be subject to the volatility in the price of gold. Gold prices fluctuate widely and are affected by numerous factors, all of which are beyond our control. Some of these factors include the sale or purchase of gold by central banks and financial institutions; interest rates; currency exchange rates; inflation or deflation; fluctuation in the value of the United States dollar and other currencies; speculation; global and regional supply and demand, including investment, industrial and jewelry demand; and the political and economic conditions of major gold or other mineral producing countries throughout the world, such as Russia and South Africa. The price of gold or other minerals have fluctuated widely in recent years, and a decline in the price of gold could cause a significant decrease in the value of our properties, limit our ability to raise money, and render continued exploration and development of our properties impracticable. If that happens, then we could lose our rights to our properties and be compelled to sell some or all of these rights. Additionally, the future development of our properties beyond the exploration stage is heavily dependent upon the level of gold prices remaining sufficiently high to make the development of our properties economically viable. You may lose your investment if the price of gold decreases. The greater the decrease in the price of gold, the more likely it is that you will lose money.

 

Our property titles may be challenged. We are not insured against any challenges, impairments or defects to our mineral claims or property titles. We have not fully verified title to our properties.

 

Our future unpatented claims will be created and maintained in accordance with the federal General Mining Law of 1872. Unpatented claims are unique U.S. property interests and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations under the General Mining Law. Defending any challenges to our future property titles may be costly, and may divert funds that could otherwise be used for exploration activities and other purposes. In addition, unpatented claims are always subject to possible challenges by third parties or contests by the federal government, which, if successful, may prevent us from exploiting our discovery of commercially extractable gold. Challenges to our title may increase our costs of operation or limit our ability to explore on certain portions of our properties. We are not insured against challenges, impairments or defects to our property titles, nor do we intend to carry extensive title insurance in the future. Potential conflicts to our mineral claims are discussed in detail elsewhere herein.

 

Honduran mining operations have increased exposure.

 

Sustaining foreign mining operations, such as those in Honduras, comes with increased uncertainty, due to less stable governments, political interruptions, volatility in taxes and fees, implementation of new laws and regulations, and more. The effect of this exposure can lead to closure of operations, nationalization, and strikes, all of which are beyond the company’s control. Granting and maintaining concessions is highly subject to political whim and maintaining the concessions is subject to a number of factors and variables beyond the company’s control. We do not currently insure against these interruptions but have chosen to structure our operations to minimize exposure to capital assets by subcontracting major areas of work, and to otherwise keep our financial exposure limited even at the expense of operation costs and our bottom line.

 

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Foreign operations involve numerous risks associated with fluctuating exchange rates and other financial risks.

 

Foreign operations involve numerous risks associated with fluctuating exchange rates and with increasing taxes and fees associated with importing of necessary goods, equipment and services not adequately found in country and with exporting of the finished gold doré. Recent enactment of the Honduran mining laws has helped stabilize the fees, but continual review by the various government operations, and central bank subject the historical operations to review and could impact our ability to export on a timely basis and/or face possible fines etc. associated with repatriation of past revenues, etc.

 

Possible amendments to the General Mining Law could make it more difficult or impossible for us to execute our business plan.

 

The U.S. Congress has considered proposals to amend the General Mining Law of 1872 that would have, among other things, permanently banned the sale of public land for mining. The proposed amendment would have expanded the environmental regulations to which we might be subject and would have given Indian tribes the ability to hinder or prohibit mining operations near tribal lands. The proposed amendment would also have imposed a royalty of 8% of gross revenue on new mining operations located on federal public land, which might have applied to our future properties. The proposed amendment would have made it more expensive or perhaps too expensive to recover any otherwise commercially exploitable gold deposits which we might find on our future properties. While at this time the proposed amendment is no longer pending, this or similar changes to the law in the future could have a significant impact on our business model.

 

Market forces or unforeseen developments may prevent us from obtaining the supplies and equipment necessary to explore for gold and other resources.

 

Gold exploration, and resource exploration in general, demands contractors available for such work, and unforeseen shortages of supplies and/or equipment could result in the disruption of our planned exploration activities. Current demand for exploration drilling services, equipment and supplies is robust and could result in suitable equipment and skilled manpower being unavailable at scheduled times for our exploration program. Fuel prices are extremely volatile as well. We will attempt to locate suitable equipment, materials, manpower and fuel if sufficient funds are available. If we cannot find the equipment and supplies needed for our various exploration programs, we may have to suspend some or all of them until equipment, supplies, funds and/or skilled manpower become available. Any such disruption in our activities may adversely affect our exploration activities and financial condition.

 

We may not be able to maintain the infrastructure necessary to conduct exploration activities.

 

Our exploration activities depend upon adequate infrastructure. Reliable roads, bridges, power sources, and water supply are important factors that affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect our exploration activities and financial condition.

 

Our exploration activities may be adversely affected by the local climates, which could prevent or impair us from exploring our properties year round.

 

The local climate in our area of operations may impair or prevent us from conducting exploration activities on our properties year round. Because of its rural location and limited infrastructure in this area, our property is generally impassible for several days each year as a result of significant rain or snow events. Earthquakes, heavy rains, snowstorms, and floods could result in serious damage to or the destruction of facilities, equipment or means of access to our properties, or may otherwise prevent us from conducting exploration activities on our properties.

 

We do not currently carry any property or casualty insurance.

 

Our business is subject to a number of risks and hazards generally, including but not limited to, adverse environmental conditions, industrial accidents, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment, and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to our properties, equipment, infrastructure, personal injury or death, environmental damage, delays, monetary losses and possible legal liability. You could lose all or part of your investment if any such catastrophic event occurs. We do not carry any property or casualty insurance at this time (but we will carry all insurances that we are required to by law, such as motor vehicle and workers’ compensation, plus other coverage that may be in the best interest of the Company). Even if we do obtain insurance, it may not cover all of the risks associated with our operations. Insurance against risks such as environmental pollution or other hazards as a result of exploration and operations are often not available to us or to other companies in our business on acceptable terms. Should any events against which we are not insured actually occur, we may become subject to substantial losses, costs and liabilities, which will adversely affect our financial condition.

 

Reclamation obligations could require significant additional expenditures.

 

We are responsible for the reclamation obligations related to any exploratory and mining activities. The satisfaction of current and future bonding requirements and reclamation obligations will require a significant amount of capital. There is a risk we will be unable to fund these additional bonding requirements, and further, increases to our bonding requirements or excessive actual reclamation costs will negatively affect our financial position and results of operation.

 

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Title to mineral properties can be uncertain, and we are at risk of loss of ownership of our property.

 

Our ability to explore and mine future leased and optioned properties depends on the validity of title to that property. These uncertainties relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, failure to meet statutory guidelines, assessment work and possible conflicts with other claims not determinable from descriptions of record. Since a substantial portion of all mineral exploration, development and mining in the United States now occurs on unpatented mining claims, this uncertainty is inherent in the mining industry. Thus, there may be challenges to the title to future properties, which, if successful, could impair development and/or operations.

 

The probability of a mining claim having the necessary quantity and quality to result in a profitable mining operation is uncertain, and our claims, even with large investments by us, may never generate a profit.

 

We are dependent upon the successful exploration of our mining property and the discovery of valuable mineralization on the property. All anticipated future revenues would come directly or indirectly from the UP and Burlington and Clavo Rico projects. Should we fail to locate economically extractable mineralization on our property, or enter into an agreement to option and sell our interests to some other mining operation, we will have no revenue and our business will fail.

 

Our ongoing operations and past mining activities of others are subject to environmental risks, which could expose us to significant liability and delay, suspension or termination of our operations.

 

Mining exploration and exploitation activities are subject to federal, state and local laws, regulations and policies, including laws regulating the removal of natural resources from the ground and the discharge of materials into the environment. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Exploration and exploitation activities are also subject to federal, state and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of exploration methods and equipment.

 

Environmental and other legal standards imposed by federal, state or local authorities are constantly evolving, and typically in a manner which will require stricter standards and enforcement, and increased fines and penalties for non-compliance. Such changes may prevent us from conducting planned activities or increase our costs of doing so, which would have material adverse effects on our business. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages that we may not be able to or elect not to insure against due to prohibitive premium costs and other reasons. Unknown environmental hazards may exist on UP and Burlington and/or on Clavo Rico, or we may acquire properties in the future that have unknown environmental issues caused by previous owners or operators, or that may have occurred naturally.

 

We could be exposed to significant liability for violations of hazardous substances laws because of the use or presence of such substances at our project.

 

Our mining operations are subject to numerous federal, state, and local statutory and regulatory standards relating to the use, storage, and disposal of hazardous substances. We use cyanide, propane and industrial lubricants and other substances at our mining locations, which are or could become classified as hazardous substances. If it is discovered that any hazardous substances have been released into the environment at or by the project in concentrations that exceed regulatory limits, we could become liable for the investigation and removal of those substances, regardless of their source and time of release. If we fail to comply with these laws, ordinances or regulations (or any change thereto), we could be subject to civil or criminal liability, the imposition of liens or fines, and large expenditures to bring the project into compliance. Furthermore, we may be held liable for the cleanup of releases of hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release at that location. The cost of any remediation activities in connection with a spill or other release of such substances could be significant.

 

UP and Burlington and Clavo Rico are subject to royalties on production.

 

As part of our purchase of UP and Burlington, we granted a Net Smelter Royalty (“NSR”) of 3%. Additionally, our Clavo Rico project has a NSR of 5% in addition to a refinery royalty of 3%. In addition, claims made by currently-unknown third parties for historical royalties may be asserted against us.

 

Our industry is highly competitive, attractive mineral lands are scarce, and we may not be able to obtain quality properties.

 

We compete with many companies in the mining industry, including large, established mining companies with capabilities, personnel and financial resources that far exceed our limited resources. In addition, there is a limited supply of desirable mineral lands available for claim-staking, lease or acquisition in the United States, and other areas where we may conduct exploration activities. We are at a competitive disadvantage in acquiring mineral properties, since we compete with these larger individuals and companies, many of which have greater financial resources and larger technical staffs. Likewise, our competition extends to locating and employing competent personnel and contractors to prospect, develop and operate mining properties. Many of our competitors can offer attractive compensation packages that we may not be able to meet. Such competition may result in our company being unable not only to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation and business.

 

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We depend on our Chief Executive Officer and Chief Financial Officer and the loss of these individuals could adversely affect our business.

 

Our company is completely dependent on Trent D’Ambrosio, our Chief Executive Officer and Chief Financial Officer. Mr. D’Ambrosio is also a member of our Board of Directors. The loss of Mr. D’Ambrosio could significantly and adversely affect our business, and could even result in a complete failure of the Company. We do not carry any life insurance on the life of Mr. D’Ambrosio.

 

The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses that could materially and adversely affect our operations.

 

Exploration for minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of economically feasible mineralization. Few properties that are explored are ultimately advanced to the stage of producing mines. We are subject to all of the operating hazards and risks normally incident to exploring for and developing mineral properties such as, but not limited to:

 

economically insufficient mineralized material;
fluctuations in production costs that may make mining uneconomical;
labor disputes;
unanticipated variations in grade and other geologic problems;
environmental hazards;
water conditions;
difficult surface or underground conditions;
industrial accidents, such as personal injury, fire, flooding, cave-ins, and landslides;
metallurgical and other processing problems;
mechanical and equipment performance problems; and
decreases in revenues and reserves due to lower gold and mineral prices.

 

Any of these risks can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures and production commencement dates. We currently have no insurance to guard against any of these risks. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write-down of our investment in these interests. All of these factors may result in losses in relation to amounts spent that are not recoverable.

 

Our operations are subject to permitting requirements that could require us to delay, suspend or terminate our operations on our mining property.

 

Our operations and exploration activities require permits from the local, state and federal governments. We may be unable to obtain these permits in a timely manner, on reasonable terms or at all. If we cannot obtain or maintain the necessary permits, or if there is a delay in receiving these permits, our timetable and business plan for Inception will be adversely affected.

 

We may never find commercially viable gold or other reserves on UP and Burlington.

 

Mineral exploration and development involve a high degree of risk and few properties that are explored are ultimately developed into producing mines. We cannot assure you that any future mineral exploration and development activities will result in any discoveries of proven or probable reserves as defined by the SEC since such discoveries are remote. Nor can we provide any assurance that, even if we discover commercial quantities of mineralization, a mineral property will be brought into commercial production. Development of our mineral properties will follow only upon obtaining sufficient funding and satisfactory exploration results.

 

Mineral deposit estimates are imprecise and subject to error.

 

Mineral deposit estimation calculations may prove unreliable. Assumptions made regarding the supporting data may prove inaccurate and unforeseen events may lead to further inaccuracies. Sample variability, mining and processing adjustments, environmental changes, metal price fluctuations, and law and regulation changes are all factors that could lead to deviances from any original estimations. Despite future investment in exploration activities, there is no guarantee we will locate additional commercially viable ore deposits or reserves. Most exploration projects do not result in discovery of commercially viable and mineable ore deposits. With little capital available, we will have to limit our exploration, which decreases the chances of finding a commercially viable ore body. Even if potentially promising mineralization is identified at UP and Burlington, we may choose to not begin production due to high extraction costs, low gold prices, or inadequate amount and reduced recovery rates. Further, we may cease our production operations at Clavo Rico due to high extraction costs, low gold prices, or inadequate amount and reduced recovery rates. If exploration activities do not suggest a commercially successful prospect, then we may altogether abandon plans to pursue efforts to further develop these properties.

 

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Historical production of gold at UP and Burlington and Clavo Rico may not be indicative of the potential for future development or revenue.

 

Historical production of gold and minerals from UP and Burlington and Clavo Rico cannot be relied upon as an indication that these mines will have commercially feasible reserves. Investors in our securities should not rely on historical operations of UP and Burlington and Clavo Rico as an indication that we will be able to place them into commercial production again. We expect to incur losses unless and until such time as the properties enter into commercial production and generate sufficient revenue to fund our continuing operations.

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

 

In their audit opinion issued in connection with our consolidated balance sheets as of December 31, 2016 and our related consolidated statements of operations, deficiency in stockholders’ deficit, and cash flows for the year ended December 31, 2016, our auditors have expressed substantial doubt about our ability to continue as a going concern given our recurring net losses, negative cash flows from operations and the limited amount of funds on our balance sheet. We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue in existence. This could make it more difficult to raise capital in the future.

 

Risks Associated with Our Common Stock

 

Trading on the Over the Counter markets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

 

Our common stock is quoted on the OTCQB tier of the over-the-counter markets administered by OTC Markets Group, Inc. under the symbol “IMII”. Trading in stock quoted on over the counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NASDAQ Stock Market, New York Stock Exchange or American Stock Exchange. Accordingly, our shareholders may have difficulty reselling any of their shares.

 

Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations and the FINRA’s sales practice requirements, which may limit a stockholders’ ability to buy and sell our stock.

 

Our stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term accredited investor refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also 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 customers’ 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 these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and 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 the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability or willingness of broker-dealers to trade our securities. We believe that the penny stock rules discourage broker-dealer and investor interest in, and limit the marketability of, our common stock.

 

Our common stock may be affected by limited trading volume and price fluctuation which could adversely impact the value of our common stock.

 

There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

 

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FINRA sales practice requirements may also limit a stockholders’ ability to buy and sell our stock.

 

In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.

 

Because the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment to decline.

 

Our shares are classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) which imposes additional sales practice requirements on broker-dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement prior from you to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline.

 

A decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our ability to continue operations and we may go out of business.

 

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities, or convertible debt instruments, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to go out of business.

 

Our stock price may be volatile.

 

The stock market in general has experienced volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

changes in our industry;
competitive pricing pressures;
our ability to obtain working capital financing;
additions or departures of key personnel;
limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market prices of our common stock;
sales of our common stock;
our ability to execute our business plan;
operating results that fall below expectations;
loss of any strategic relationship;
regulatory developments;
economic and other external factors; and
period-to-period fluctuations in our financial results.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

We have never paid a cash dividend on our common stock and we do not anticipate paying any in the foreseeable future.

 

We have not paid a cash dividend on our common stock to date, and we do not intend to pay cash dividends in the foreseeable future. Our ability to pay dividends will depend on our ability to successfully develop one or more properties and generate revenue from operations. Notwithstanding, we will likely elect to retain any earnings, if any, to finance our growth. Future dividends may also be limited by bank loan agreements or other financing instruments that we may enter into in the future. The declaration and payment of dividends will be at the discretion of our Board of Directors.

 

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We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.

 

Recent federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors’ independence, audit committee oversight and the adoption of a code of ethics. While our Board of Directors has adopted a Code of Ethics and Business Conduct, we have not yet adopted any of these corporate governance measures and, since our securities are not listed on a national securities exchange or NASDAQ, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

 

Difficulties we may encounter managing our growth could adversely affect our results of operations.

 

As our business needs expand, we may need to hire a significant number of employees. This expansion may place a significant strain on our managerial and financial resources. To manage the potential growth of our operations and personnel, we will be required to:

 

improve existing, and implement new, operational, financial and management controls, reporting systems and procedures;
install enhanced management information systems; and
train, motivate, and manage our employees.

 

We may not be able to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage growth effectively, our business would be seriously harmed.

 

If we lose key personnel or are unable to attract and retain additional qualified personnel, we may not be able to successfully manage our business and achieve our objectives.

 

We believe our future success will depend upon our ability to retain our key management, Mr. D’Ambrosio, our Chief Executive Officer and Chief Financial Officer, Mr. Michael Alhin and Mr. Cluff Consulting Directors. We may not be successful in attracting, assimilating and retaining our employees in the future.

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period, under Rule 144, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity related securities in the future at a time and price that we deem reasonable or appropriate.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

UP and Burlington Gold Mine, Salmon, Lemhi County, Idaho

 

On February 25, 2013, the Company acquired certain real property and mineral rights commonly known as the UP and Burlington Gold Mine (“UP and Burlington”) pursuant to an asset purchase agreement. We are presently in the exploration stage at UP and Burlington. The UP and Burlington project consists of two federal patented mining claims, which Inception Resources Mining acquired for the purpose of the exploration and potential development of gold on the 40 acres that comprise this property.

 

Discovered in 1892, UP and Burlington is a private gold property that has been held unused for the past 75 years. UP and Burlington is located in Lemhi County, northwest of Salmon, Idaho, at an elevation of 3,994 feet. The UP and Burlington site is located six miles from the city of Salmon; 0.6 miles from the closest major road (Ridge Rd.); and 1.56 miles from the closest major power line. We believe Salmon, along with the surrounding County of Lemhi, provides an excellent infrastructure for our mine. Salmon has a population of 3,122 and Lemhi County has a population of 7,806.

 

UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres. Subsequently, in 1989, a U.S. Forest Survey was performed on the UP and Burlington site confirming that the patented claims cover an area that is six hundred feet by three thousand feet (600’ x 3000’). The Mine’s patented claims remove the challenges associated when working on U.S. Forest lands, Bureau of Land Management (“BLM”), state or other property types. With our purchase of UP and Burlington, we have the benefit of working on private land, which requires only a hauling/road permit to commence significant operations.

 

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The Company has obtained the necessary permitting, cut additional access roads, made surface improvements, and initiated surface mining on a 2,500 foot per day lighted vein for bulk sampling, vein definition and material evaluation. In Phase II, we plan to contract with an underground mining contractor to expand portal development leveraging existing underground access, and implement an underground mining operation. There is no guarantee that we will be successful in implementing any stage of our plans.

 

Our plan includes the continuation of obtaining a Lemhi County Conditional Use Permit and an Idaho Department of Lands Surface Reclamation Bond. Since receiving the permitting for the U.S. Forest Service Access Road, the access road is now complete. In addition, we have contracts such as geotechnical contracts, mining contracts, toll processing contracts, and underground mine plan contracts.

 

 

 

UP and Burlington as located in Idaho.

 

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Clavo Rico Gold Mine, Honduras, Central America

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiary Compañía Minera Cerros del Sur, S.A de C.V. Its workings include several historical underground mining operations dating back to the early Mayan and Spanish occupation.

 

The Company’s primary mine is a surface operation, located on the 200-hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía Minera Cerros del Sur, S.A. de C.V as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.5%. This company has since invested over five million dollars in the expansion and development of the mine and surrounding properties. Today, the Company operates this mine through exploration of surface-level material.

 

Prior to the expansion of the Mine, the mine had only been processing approximately less than500 tons of extracted material per day. The current recovery operational increase has been sized to handle from 500 to 1,000 tons of extracted material per day on a recovery bed that has the capacity to receive up to 500,000 tons of material. The Company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the recovery bed to capacity by the end of June 30, 2020.

 

At this property and during the period covered under this Annual Report, the Company extracted 113,999 tons of material through surface operations, with an average grade of 2.86 grams of gold per ton and 2.67 grams of silver per ton. After processing this material using the on-site leach pad, the Company produced 5482 ounces of gold for a gold recovery percentage of 50% and 5389 ounces of silver for refining, for a silver recovery percentage of 55%.

 

The Company utilizes four distinct properties located at the Clavo Rico Concession: the main Clavo Rico property, where extraction, leaching, and processing occurs, and the Modesto, Loli, and Juan Carlos Williams properties, which are used as extraction sites. The Modesto location was acquired by the Company pursuant to a real estate purchase agreement in March 2016. The Company is permitted access to the Loli and Juan Carlos Williams properties pursuant to informal oral agreements.

 

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Clavo Rico as located in Honduras.

 

 

The Clavo Rico Concession in relation to the town of El Corpus.

 

19
   

 

 

Parcels of the Clavo Rico Concession that are currently explored or otherwise used by the Company.

 

The current water supply utilized at the mine is from rain water. During the rainy season (October through February), the Company captures and stores water in on-site collection ponds. The power supply is from the Honduran power grid, although the Company maintains generators on site in the event of loss of power supply or inconsistent power supply.

 

Other Projects

 

The Company had previously disclosed exploration in the Northern Nevada Rift through a partner. Any exploration in these areas has ceased and the Company has no plans to pursue exploration in this area at this time.

 

Corporate Headquarters

 

We currently maintain our corporate offices at 5330 South 900 East, Suite 280, Murray, Utah 84117. During the year ended December 31, 2016, we paid monthly rent of approximately $1,000 for use of a corporate office, which we anticipate will be sufficient until we commence full operations.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such pending or threatened legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

On January 26, 2017, the Company, was served a copy of a complaint filed by Danzig Ltd. (“Danzig”) and Brett Bertolami (“Bertolami”) in the Western District of North Carolina, Statesville Division District Court. The complaint alleges fraud, breach of contract, state securities fraud, federal securities fraud, breach of fiduciary duty, unjust enrichment, and negligent misrepresentation against the Company and two of its officers and directors (Trent D’Ambrosio and Michael Ahlin). The allegations arise from the change of control transaction in February 2013 and other documents related to that transaction. The Company has retained counsel to vigorously defend the allegations. The Company has filed a request for jurisdictional ruling in the lawsuit.

 

One of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., has been served with notice of a labor dispute brought in Honduras by one of the Company’s former employees. The complaint alleges that the former employee was terminated from his position with the Company’s subsidiary and is entitled to certain statutory compensation. The Company has responded with its assertion that the employee voluntarily resigned and was not involuntarily terminated. The case will be heard in a labor court in Honduras and a labor judge will make the final decision regarding the case. The next hearing in this case is scheduled for April 18, 2017.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable as the Company conducts no active mining operations in the U.S. or its territories.

 

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PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is not traded on any exchange. Our common stock is quoted on the OTCQB tier of the over-the-counter markets administered by OTC Markets Group, Inc. under the trading symbol “IMII.” We cannot assure you that there will be a market in the future for our common stock.

 

OTC securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC securities transactions are conducted through a telephone and computer network connecting dealers. OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a national or regional stock exchange.

 

The following table reflects the high and low bid information for our common stock and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

 

The high and low bid prices of our common stock for the periods indicated below are as follows:

 

OTC Markets
Quarter Ended     High       Low  
2016                
March 31, 2016*   $ 1.2650     $ 0.4400  
June 30, 2016*   $ 1.9250     $ 0.4955  
September 30, 2016   $ 0.8000     $ 0.5000  
December 31, 2016   $ 0.7199     $ 0.2500  
                 
2015                
March 31, 2015*   $ 2.2000     $ 0.4950  
June 30, 2015*   $ 1.5400     $ 0.4950  
September 30, 2015*   $ 1.3750     $ 0.4400  
December 31, 2015*   $ 1.9250     $ 0.7150  

 

* On May 25, 2016, FINRA approved a reverse split in the amount of 1:5.5 shares, with a market effective date of May 26, 2016. These share amounts incorporate the reverse split retroactively to consistency of presentation.

 

Classes of Stock

 

We have two classes of stock: common stock and Series A Preferred Stock. On August 30, 2016, the Board of Directors of the Company, pursuant to Article II of the Company’s Articles of Incorporation, approved the designation of fifty-one (51) shares of its authorized capital stock as “Series A Preferred Stock”. The Certificate of Designation for the Series A Preferred Stock was filed on August 31, 2016. These shares have preferential voting rights and no conversion rights.

 

Holders

 

As of April 17, 2017 there were 1,482 holders of record of our common stock and one holder of record for our preferred stock.

 

Dividends

 

To date, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our Board of Directors.

 

Equity Compensation Plans

 

As of the date of this Annual Report, we have an equity compensation plan: the 2013 Incentive Stock Plan.

 

Recent Sales of Unregistered Securities

 

On October 3, 2016, the Company issued 150,000 shares of common stock per the consulting agreement with Red Rock Marketing Media, Inc. These shares were valued at $0.57 per share for a value of $85,500. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

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On December 30, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at $0.63 per share for a total of $315,000. The amount of the debt converted was $100,000 and the Company recognized a loss on the extinguishment of debt of $215,000. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On December 30, 2016, 615,000 shares of common stock were issued to officers, former officers and members of the board of directors of the Company as payment for consulting services performed. These shares were valued at $0.4353 per share for a value of $267,791. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On December 30, 2016, the Company issued 51 shares of preferred Series A stock to the chief executive officer for services rendered.

 

On January 20, 2017, 15,000 shares of common stock were issued to Brunson Chandler & Jones PLLC as payment for legal services performed for the Company in December 2016. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On March 9, 2017, 127,910 shares of common stock were issued to Labrys Fund LP as a refundable security deposit for funds loaned to the Company. These shares will be returned to the Company if the Company does not default on the loan. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

Repurchases and Cancellations of Securities

 

On December 15, 2015, the Company entered into a Settlement Agreement with Brian Brewer through which he agreed to return up to 90,912 shares of common stock in the Company. Pursuant to the terms of that Settlement Agreement on January 15, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on February 17, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on March 15, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on April 26, 2016, 15,152 shares of the Company were returned to the Company for cancellation, and on May 18, 2016, the remaining 15,152 shares of the Company were returned to the Company for cancellation.

 

On September 13, 2016, the Company entered into a Settlement Agreement with a consultant through which the consultant agreed to return 177,540 shares of common stock to the Company. The 177,540 shares were returned to the Company and were immediately cancelled.

 

On March 29, 2017, a shareholder voluntarily cancelled 3,120 shares of common stock to the Company’s treasury. On April 6, 2017, 15,600 shares of the Company’s common stock were cancelled to the Company’s treasury following the discovery of a clerical error.

 

ITEM 6. SELECTED FINANCIAL DATA

 

This information is not required because we are a smaller reporting company.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) discussions about mineral resources and mineralized material, (b) our projected sales and profitability, (c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

 

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Overview

 

On February 25, 2013, Inception Mining, Inc. (“Inception” or the “Company”) and its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Inception Resources, LLC, a Utah corporation (“Inception Resources”), pursuant to which Inception purchased the UP and Burlington Gold Mine in consideration of 16,000,000 shares of common stock of Inception, the assumption of promissory notes in the amount of $950,000 and the assignment of a 3% net smelter royalty, which may increase or decrease depending on the amount of gold produced. Inception Resources was an entity owned by and under the control of a shareholder. This transaction is deemed an asset purchase by entities under common control. The Asset Purchase Agreement closed on February 25, 2013 (the “Closing”). We were a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of the gold mine pursuant to the terms of the Assert Purchase Agreement. As a result of such acquisition, our operations are now focused on the ownership and operation of the mine acquired from Inception Resources. Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

 

We are a mining company engaged in the production, acquisition, exploration, and development of mineral properties, primarily for gold, from owned mining properties. Inception Resources has acquired two projects, as described below. Our target properties are those that have been the subject of historical exploration.

 

UP and Burlington Gold Mine

 

On February 25, 2013, the Company acquired certain real property and the associated exploration permits and mineral rights commonly known as the UP and Burlington Gold Mine (“UP and Burlington” or the “Mine”) pursuant to that certain asset purchase agreement entered between the Company, its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”) on one hand, and Inception Resources on the other hand, dated February 25, 2013 (the “Asset Purchase Agreement”). Accordingly, the Company owns and controls this property exclusively; there are no third parties who impose conditions of any kind on operations at this location. We are presently in the exploration stage at UP and Burlington. UP and Burlington contains two federal patented mining claims which Inception Resources acquired for the purpose of the exploration and potential development of gold on the 40 acres which comprises UP and Burlington. Production at this mine is subject to a 3% net smelter royalty, which may increase or decrease depending on the amount of gold produced.

 

Discovered in 1892, UP and Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP and Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 7,994 feet. The UP and Burlington site is located six miles from the city of Salmon; is 0.6 miles away from the closest major road (Ridge Rd.); and is 1.56 miles away from the closest major power line. We believe Salmon, along with the surrounding County of Lemhi, provides an excellent infrastructure for our mine. Salmon has a population of 3,122 and Lemhi County has a population of 7,806. In September 2011, heavy maintenance and right-of-way repair was completed and a new road to UP and Burlington was constructed.

 

UP and Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres. Subsequently, in 1989, a U.S. Forest Survey was performed on the UP and Burlington site confirming that the patented claims cover an area which is six hundred feet by three thousand feet (600’x3000’). The Mine’s patented claims remove the challenges associated when working on U.S. Forest lands, Bureau of Land Management (“BLM”), state or other property types. With our purchase of UP and Burlington, we have the benefit of working on private land, which requires only a hauling / road permit to commence significant operations.

 

The Company has obtained the necessary permitting, cut additional access roads, made surface improvements, and initiated surface mining on a 2,500 foot per day lighted vein for bulk sampling, vein definition and ore valuation. In Phase II, we plan to contract an underground mining and operations plan, expand portal development leveraging existing underground access, and implement underground mining to a depth based on optimizing costs versus processed ore value. There is no guarantee that we will be successful in implementing any stage of our plans.

 

Our plan includes the continuation of obtaining a Lemhi County Conditional Use Permit and an Idaho Department of Lands Surface Reclamation Bond. Since receiving the permitting for the U.S. Forest Service Access Road, the access road is now complete. In addition, we have contracts such as geotechnical contracts, mining contracts, toll processing contracts, and underground mine plan contracts.

 

The Company and its independent consultants are in the process of developing a detailed exploration-drilling program to confirm and expand mineralized zones in the Mine and collect additional environmental and technical data. The first phase began in 2013. The Company intends to continue drilling, metallurgical testing, engineering and environmental programs and studies and has updated the historic feasibility study and environmental permit applications.

 

We also plan to review opportunities and acquire additional mineral properties with current or historic precious and base metal mineralization with meaningful exploration potential.

 

Clavo Rico Mine

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. and holds other mining concessions. Its workings include several historical underground mining operations dating back to the early Mayan and Spanish occupation.

 

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The Company’s primary mine is located on the 200-hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía Minera Cerros del Sur, S. de R.L. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%. This company has since invested over five million dollars in the expansion and development of the mine and surrounding properties. Today, the Company operates this mine through exploration of surface-level material.

 

Mining operations begin by crushing extracted material to approximately 3/8-inch size pebbles, which is then mixed with additional material and loaded on the recovery pad for processing. The pebble material is sprinkled with a solution that leaches the gold from the rock, and the solution is collected and processed on-site at Clavo Rico’s own ADR plant. The doré bars that result from this process are shipped to the USA for refining.

 

Prior to the expansion, the mine had only been processing approximately less than500 tons of extracted material per day. The current recovery operational increase has been sized to handle from 500 to 1,000 tons of extracted material per day on a recovery bed that has the capacity to receive up to 500,000 tons of material. The Company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the recovery bed to capacity by the end of June 30, 2020.

 

The Company has engaged in preliminary drilling of this area and the resulting assays of samples indicate that the material should have grades in the range of 0-5 grams of gold per ton.

 

Results of Operations

 

Year ended December 31, 2016 compared to the year ended December 31, 2015

 

We had net income of $17,354,795 for the year ended December 31, 2016, which was $44,520,139 more than the net loss of $27,165,344 for the year ended December 31, 2015. This change in our results over the two periods is primarily the result of an increase in precious metals sales of $2,430,123, an increase of $3,441,084 in general and administrative expenses, a decrease of $ 23,188,300 in interest expenses due to beneficial conversion features, a change of $10,236,840 in derivative liabilities, and an increase of $12,204,079 on extinguishment of debt. The following table summarizes key items of comparison and their related increase (decrease) for the years ended December 31, 2016 and 2015:

 

    Year Ended December 31,     Increase/  
    2016     2015     (Decrease)  
Revenues   $ 5,954,562     $ 3,524,439     $ 2,430,123  
Cost of Sales     3,895,962       3,742,110       153,852  
General and Administrative     4,887,048       1,445,964       3,441,084  
Depreciation and Amortization Expenses     141,897       98,243       43,654  
Total Operating Expenses     8,924,907       5,286,317       3,638,590  
Income (Loss) from Operations     (2,970,345 )     (1,761,878 )     1,208,467  
Other Income (expense)     8,853       28,578       19,725  
Change in Derivative Liabilities     13,092,760       2,855,920       (10,236,840 )
Loss on Extinguishment of Debt     (16,338 )     -       16,338  
Change in Consignment Gold     12,173,498       (30,581 )     (12,204,079 )
Loss on Impairment of Mining Claim     -       (135,450 )     (135,450 )
Interest Expense     (4,933,633 )     (28,121,933 )     (23,188,300 )
Income (Loss) from Operations Before Taxes     17,354,795       (27,165,344 )     (44,520,139 )
Net Income (Loss)   $ 17,354,795     $ (27,165,344 )   $ (44,520,139 )

 

Liquidity and Capital Resources

 

Our balance sheet as of December 31, 2016, reflects assets of $2,976,891. As we had cash in the amount of $194,652 and a working capital deficit in the amount of $10,954,896 as of December 31, 2016, we do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.

 

Working Capital

    December 31, 2016     December 31, 2015  
Current assets   $ 1,714,321     $ 1,140,777  
Current liabilities     12,669,217       34,886,375  
Working capital deficit   $ (10,954,896 )   $ (33,745,598 )

 

We anticipate generating losses and, therefore, may be unable to continue operations in the future. If we require additional capital, we would have to issue debt or equity or enter into a strategic arrangement with a third party.

 

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Going Concern Consideration

 

As reflected in the accompanying financial statements, the Company has a net loss since inception of $12,919,113. In addition, there is a working capital deficiency of $10,874,896 and a stockholder’s deficiency of $9,860,884 as of December 31, 2016. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

On March 5, 2010, the Company changed its intended business purpose to that of precious metals mineral exploration, development and production. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.

 

Cash Flows

    Year Ended December 31,  
    2016     2015  
Net Cash Provided by Operating Activities   $ 693,612     $ 34,933  
Net Cash Used in Investing Activities     (893,237 )     (377,975 )
Net Cash Provided by Financing Activities     257,389       304,459  
Effects of Exchange Rate Changes on Cash     (751 )     (2,746 )
Net Increase (Decrease) in Cash   $ 57,013     $ (41,329 )

 

Operating Activities

 

Net cash flow provided by operating activities during the year ended December 31, 2016 was $693,612, an increase of $658,679 from the $34,933 net cash provided by during the year ended December 31, 2015. This increase is mostly due to an increase in accounts payable.

 

Investing Activities

 

Cash used in investing activities during the year ended December 31, 2016 was $893,237, an increase of $515,262 from the $377,975 net cash outflow during the year ended December 31, 2015. This increase was due to the purchase of fixed assets of approximately $312,000 and advances to related parties of approximately $582,000.

 

Financing Activities

 

Financing activities during the year ended December 31, 2016, provided $257,389 to us, a decrease of $47,070 from the $304,459 provided by financing activities during the year ended December 31, 2015. During the year ended December 31, 2016, the company received $1,145,000 from notes payable, $990,000 in notes payable from related parties, made payments of $1,062,000 in cash on notes payable and $227,500 in cash on convertible notes.

 

Critical Accounting Policies

 

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during year ended December 31, 2016, the Company recorded a net income of $17,434,795 and provided $693,612 in cash from operating activities. However, the Company has a net loss since inception of $12,919,113. In addition, there is a working capital deficiency of $10,874,896 and a stockholder’s deficiency of $9,860,884 as of December 31, 2016. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

Management is currently working to make changes that will result in profitable operations and to obtain additional funding sources to meet the Company’s need for cash during the next twelve months and beyond.

 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Inception Mining, Inc. and its wholly owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compañía Minera Cerros del Río, S.A. de C.V., and its controlling interest subsidiaries, Compañía Minera Cerros del Sur, S.A. de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been eliminated upon consolidation.

 

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Basis of Presentation - The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

 

Cash and Cash Equivalents - The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 2016 and December 31, 2015, the Company had no cash equivalents. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has never experienced any losses in such accounts.

 

Inventories, Stockpiles and Mineralized Material on Leach Pads - Inventories, including stockpiles and mineralized material on leach pads are carried at the lower of cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, mineralized material on leach pads and inventories to net realizable value are reported as a component of costs applicable to mining revenue. Cost is comprised of production costs for mineralized material produced and processed. Production costs include the costs of materials, costs of processing, direct labor, mine site and processing facility overhead costs, and depreciation, amortization and depletion.

 

Stockpiles - Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile. Stockpile tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the material, including applicable overhead, depreciation, and depletion relating to mining operations, and removed at each stockpile’s average cost per ton.

 

Mineralized Material on Leach Pads - The Company utilizes a heap leaching process to recover gold from its mineralized material. Under this method, the mineralized material is placed on leach pads where it is treated with a chemical solution that dissolves the gold contained in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered. Costs are added to mineralized material on leach pads based on current mining and processing costs, including applicable depreciation relating to mining and processing operations. Costs are transferred from mineralized material on leach pads to subsequent stages of in-process inventories as the gold-bearing solution is processed. The value of such transferred costs of mineralized material on leach pads is based on the average cost per estimated recoverable ounce of gold on the leach pad.

 

The estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured tons added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.

 

Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material placed on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis.

 

In-process Inventories - In-process inventories represent mineralized materials that are currently in the process of being converted to a saleable product through the absorption, desorption, recovery (ADR) process. The value of in-process material is measured based on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Finished Goods Inventories - Finished goods inventories include gold that has been processed through the Company’s ADR facility and are valued at the average cost of their production.

 

Exploration and Development Costs - Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially mineable property in accordance with FASB ASC 930, Extractive Activities- Mining . Mine development costs incurred either to develop new gold and silver deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable value and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value.

 

The Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the prospects for economic productions are reasonably certain.

 

Capitalized costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.

 

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Mineral Rights and Properties - We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration expenditures are expensed as incurred. We expense care and maintenance costs as incurred.

 

We review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties and possibly require future asset impairment write-downs.

 

Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and properties.

 

Fair Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

 

Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.

 

Long-Lived Assets - We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.

 

Properties, Plant and Equipment - We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Building   7 to 15 years
Vehicles and equipment   3 to 7 years
Processing and laboratory   5 to 15 years
Furniture and fixtures   2 to 3 years

 

Reclamation Liabilities and Asset Retirement Obligations - Minimum standards for site reclamation and closure have been established for us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site.

 

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Revenue Recognition - Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are credited to costs applicable to mining revenue.

 

All accounts receivable amounts are due from a single customer. Substantially all mining revenues recorded in the current period also related to the same customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product.

 

Stock Issued For Goods and Services - Common and preferred shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.

 

Stock-Based Compensation - For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.

 

Income (Loss) per Common Share - Basic net income (loss) per common share is computed by dividing net income (loss), less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income (loss) per share includes any additional dilution from common stock equivalents, such as stock options and warrants, and convertible instruments, if the impact is not antidilutive. Since the Company incurred a net loss for the year ended December 31, 2015, all equity-linked instruments are considered anti-dilutive. The Company recorded a net income for the year ended December 31, 2016, so all dilutive shares should be included in the weighted average number of common shares outstanding. However, all equity linked instruments were eliminated during the year and all warrants are considered out of the money. Therefore, there are not dilutive shares included in the weighted average number of common shares.

 

Comprehensive Loss - Comprehensive loss is made up of the exchange differences arising on translating foreign operations and the net income (loss) for the years ended December 31, 2016 and 2015.

 

Derivative Liabilities - Derivatives liabilities are recorded at fair value when issued and the subsequent change in fair value each period is recorded in other income (expense) in the consolidated statements of operations. We do not hold or issue any derivative financial instruments for speculative trading purposes.

 

Income Taxes - The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets for which the Company does not consider realization of such deferred tax assets to be more likely than not.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

 

Business Segments – The Company operates in one segment and therefore segment information is not presented.

 

Use of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, we are required 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 revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized material on leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.

 

Non-Controlling Interest Policy – Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest and consolidates the subsidiary’s financial results with its own. The amount of equity relating to the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of the net income (loss) relating to the non-controlling interest is separately identified on the statement of operations.

 

Reclassifications - Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

 

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Recent Accounting Pronouncements

 

For recent accounting pronouncements, please refer to the notes to the financial statements section of this Annual Report.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We are not required to provide disclosure under this item because we are a smaller reporting company.

 

ITEM 8. FINANCIAL STATEMENTS

 

The financial statements of the Company required by Article 8 of Regulation S-X are attached to this report, beginning at page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure 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. We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were not effective as of December 31, 2016.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

 

With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation and the material weaknesses described below, management concluded that the Company’s internal controls were not effective based on financial reporting as of December 31, 2016 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties, tax compliance issues and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s management and accounting staff and reliance on outside consultants for external reporting. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.

 

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and outside accounting consultants. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

 

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.

 

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2016 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2016 are fairly stated, in all material respects, in accordance with US GAAP.

 

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This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

Limitations on Effectiveness of Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Controls

 

During the year ended December 31, 2016, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

Our Bylaws state that our authorized number of directors shall be one or more and shall be set by resolution of our Board of Directors. We currently have three directors.

 

Our current directors and officers are as follows:

 

Name   Age   Position
         
Trent D’Ambrosio   52   Chief Executive Officer, Chief Financial Officer, President, Secretary, and Director
         
Michael Ahlin   68   Director
         
Whit Cluff   66   Director

 

Our directors will serve in that capacity until our next annual shareholder meeting or until a successor is elected and qualified. Officers hold their positions at the will of our Board of Directors. There are no arrangements, agreements or understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the management of our affairs.

 

Trent D’Ambrosio, Chief Executive Officer, Chief Financial Officer, and Director

 

Mr. D’Ambrosio has been a Director of Inception Mining Inc. since February 28, 2013. From October 2011 through March 2013, Mr. D’Ambrosio held the positions of Interim Chief Executive Officer and Chief Financial Officer of Inception Holdings LLC, a resource exploration company, and was the responsible for the overall strategic direction for the organization. His professional record includes 25 years of management and financial services experience with companies ranging from Fortune 500 companies to start ups.

 

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Michael Ahlin, Director

 

Mr. Ahlin is a seasoned executive with several decades of experience who has founded numerous startups and has held executive management positions in public and private companies in various industries. From 1985 through the present, Mr. Ahlin has served as the founder and President of WetCor, Inc., a multi-disciplined Engineering Construction Firm licensed in numerous states and performing both bid and design/build projects including minerals processing, mining, water treatment, energy, Medical (5 MRE centers), geothermal power, and renewable energy and commercial buildings. In addition, from 2004 through the present, Mr. Ahlin has served as a Managing Partner of Cactus Management Services LLC. Mr. Ahlin served as CEO of the Company from February 25, 2013 until he resigned on December 14, 2016. He still currently serves as a director of the Company. Mr. Ahlin received a Bachelor of Science degree in Mechanical Engineering and a Master of Business Administration degree from the University of Utah in 1971 and 1977, respectively.

 

Whit Cluff, Director

 

Mr. Cluff has over 35 years of experience in the commercial real estate industry. Mr. Cluff has been involved in all disciplines of real estate land development, mixed-use development, retail tenant representation, developer representation, industrial property procurement and asset management. Mr. Cluff has an extensive background in public and private businesses giving him strong analytical, planning, and organization ability with effective negotiation skills. From 2003 through the present, Mr. Cluff has served as Vice President and Associate Broker at Coldwell Banker Commercial, NRT in Salt Lake City, Utah. Mr. Cluff attended the University of Utah and served in the United States Army.

 

Other Directorships

 

Other than as set forth above, none of our directors hold any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

 

Board of Directors and Director Nominees

 

Since our Board of Directors does not include a majority of independent directors, the decisions of the Board regarding director nominees are made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, at any time not less than 90 days prior to the next annual Board meeting at which a slate of director nominees is adopted, the Board will accept written submissions from proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the security holder submitting the proposed nominee believes that the nomination would be in the best interests of our security holders. If the proposed nominee is not the same person as the security holder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee’s qualifications to serve on the Board, as well as a list of references.

 

The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual’s experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of the slate of director nominees submitted to security holders for election to the Board.

 

Some of the factors, which the Board considers when evaluating proposed nominees, include their knowledge of and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from each candidate prior to reaching a determination, and it is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.

 

Conflicts of Interest

 

Our directors are not obligated to commit their full time and attention to our business and, accordingly, they may encounter a conflict of interest in allocating their time between our operations and those of other businesses. In the course of their other business activities, they may become aware of investment and business opportunities which may be appropriate for presentation to us as well as other entities to which they owe a fiduciary duty. As a result, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. They may also in the future become affiliated with entities that are engaged in business activities similar to those we intend to conduct.

 

  In general, officers and directors of a corporation are required to present business opportunities to the corporation if:

 

the corporation could financially undertake the opportunity;
the opportunity is within the corporation’s line of business; and
it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation.

 

We plan to adopt a code of ethics that obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in such transactions without our consent.

 

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Significant Employees

 

Other than as described above, we do not expect any other individuals to make a significant contribution to our business.

 

Legal Proceedings

 

None of our directors, executive officers or control persons has been involved in any of the following events during the past five years:

 

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, where the judgment has not been reversed, suspended, or vacated.

 

No Audit Committee or Financial Expert

 

The Company does not have an audit committee or a financial expert serving on the Board of Directors. The Company plans to form and implement an audit committee as soon as practicable.

 

Family Relationships

 

There are no family relationships among our officers, directors, or persons nominated for such positions.

 

Code of Ethics

 

Due to our recent change in business strategy and objectives and our small size and limited resources, we have not yet adopted a code of ethics that applies to our principal executive officer and principal accounting officer, but intend to do so this year.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act of 1934, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash only rights) and any changes in that ownership with the Securities and Exchange Commission. The Company has evaluated all relevant Section 16(a) filings and has determined that the company is compliant with this section to the best of its knowledge.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Our Board of Directors has not established a separate compensation committee. Instead, the Board of Directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for our officer(s), decides on benefit plans, and considers other matters as may, from time to time, be referred to it. We do not currently have a Compensation Committee Charter. Our Board continues to emphasize the important link between our performance, which ultimately benefits all shareholders, and the compensation of our executives. Therefore, the primary goal of our executive compensation policy is to closely align the interests of the shareholders with the interests of the executive officer(s). In order to achieve this goal, we attempt to (i) offer compensation opportunities that attract and retain executives whose abilities and skills are critical to our long-term success and reward them for their efforts in ensuring our success and (ii) encourage executives to manage from the perspective of owners with an equity stake in us.

 

SUMMARY COMPENSATION TABLE

 

Name and       Salary     Bonus     Stock Awards     Option Awards     Non-equity Incentive Plan Compensation     Non-qualified Deferred Compensation Earnings     All Other Compensation     Total  
Principal Position     Year       ($)       ($)       ($)       ($)       ($)       ($)       ($)       ($)  
Trent D’Ambrosio, Chief Executive Officer, Chief Financial Officer, President, Secretary, and Director     2015       0       0       0       0       0       0       25,000       25,000  
      2016       0       100,000       2,995,703       0       0       0       0       3,095,703  
                                                                         
Michael Ahlin, Director     2015       0       0       0       0       0       0       0       0  
      2016       110,000       0       10,883       0       0       0       0       120,883  
                                                                         
Whit Cluff, Director     2015       0       0       0       0       0       0       0       0  
      2016       0       10,000       4,353       0       0       0       18,500       32,853  

 

Option Grants

 

As of December 31, 2016 we had not granted any options or stock appreciation rights to our named executive officers or directors.

 

Management Agreements

 

On August 1, 2015, the Company amended the previously entered into employment agreement with Michael Ahlin pursuant to which the eligibility requirements of the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC were removed.

 

On December 14, 2016, upon the resignation of Michael Ahlin as the Chief Executive Officer of the Company, Mr. Ahlin entered into a Consulting Agreement with the Company effective January 1, 2017 that memorialized his amended role with the Company. He will be compensated as a consultant at the rate of $5,000 in cash and $5,000 in stock per month.

 

33
   

 

Compensation of Directors

 

We have no formal plan for compensating our directors for their services. On December 30, 2016, we issued shares to our directors who served in 2016. These included the issuance of 500,000 shares to Trent D’Ambrosio, 25,000 shares to Michael Ahlin, 10,000 shares to Whitney Cluff, 15,000 shares to Reed Benson, and 15,000 shares to Kay Briggs. We have no formal plan to compensating our directors in the future in their capacity as directors, although such directors are expected in the future to receive options to purchase shares of our common stock as awarded by our Board of Directors or by any compensation committee that may be established.

 

Pension, Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.

 

Compensation Committee

 

We do not currently have a compensation committee of the Board of Directors or a committee performing similar functions. The Board of Directors as a whole participates in the consideration of executive officer and director compensation.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following tables set forth the ownership, as of April 17, 2017, of our common stock by each of our directors, by all of our executive officers and directors as a group, and by each person known to us who is the beneficial owner of more than 5% of any class of our securities. As of April 17, 2017, there were 51,353,780 shares of our common stock issued and outstanding. All persons named have sole or shared voting and investment control with respect to the shares, except as otherwise noted. The number of shares described below includes shares which the beneficial owner described has the right to acquire within 60 days of the date of this Form 10-K.

 

Title of Class   Name and Address of
Beneficial Owner
  Amount and
Nature of
Beneficial Ownership
    Percent of Class  
                 
Common Stock   Legends Capital Group, LLC (1)     11,685,874       22.83 %
    4049 S. Highland Drive                
    Salt Lake City, Utah 84124                
                     
Common Stock   Madison, LLC (1)     2,495,855       4.88 %
    4049 S. Highland Drive                
    Salt Lake City, Utah 84124                
                     
Common Stock    Jason Briggs (2)
4049 S. Highland Drive
Salt Lake City, Utah 84124
    1,341,523       2.61 %
                     
All 5% beneficial owners as a group         15,523,252       30.22 %

 

  (1) Beneficially controlled by Jason Briggs.
  (2) Includes additional shares beneficially owned by Jason Briggs including 311,982 shares owned personally and 1,029,541 shares owned by two separate irrevocable trust for which Jason Briggs serves as trustee.

   

34
   

 

Title of Class   Name and Address of
Beneficial Owner
  Amount and
Nature of
Beneficial Ownership
    Percent of Class  
                 
Common Stock   Trent D’Ambrosio (1)     2,102,101       4.11 %
    c/o Inception Mining, Inc.                
    5330 South 900 East, Suite 280                
    Murray, UT 84107                
                     
Common Stock   Michael Ahlin (1)     388,637       0.76 %
    c/o Inception Mining, Inc.                
    5330 South 900 East, Suite 280                
    Murray, UT 84107                
                     
Common Stock   Whit Cluff (1)     278,182       0.54 %
    c/o Inception Mining, Inc.                
    5330 South 900 East, Suite 280                
    Murray, UT 84107                
                     
All Officers and Directors as a Group         2,768,920       5.41 %

 

  (1) Executive officer and/or director of the Company.

 

Securities authorized for issuance under equity compensation plans.

 

As of December 31, 2016, we have one equity compensation plan: the 2013 Incentive Stock Plan.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

The Company has received cash advances of $1,041,000 from related parties during the fiscal year ending December 31, 2016.

 

At the Closing of the Merger on October 2, 2015, the Company assumed certain debts in Clavo Rico Ltd. that were owed to related parties as described below:

 

    12/31/2016     12/31/2015  
Claymore Management note payable   $ 185,000     $ 185,000  
GAIA Ltd note payable     1,150,000       1,150,000  
Legends Capital note payable     765,000       765,000  
LWB Irrev Trust note payable     1,101,000       1,101,000  
Silverbrook Corporation note payable     2,227,980       2,227,980  
MDL Ventures note payable     1,049,888       774,635  
Total notes payable     6,478,868       6,203,615  
Less unamortized discount     -       (4,317,657 )
Total notes payable, net of unamortized debt discount   $ 6,478,868     $ 1,885,958  

 

The total amount of these notes is $6,478,868. All of the related party transactions are further described in the notes to the Financial Statements filed with this Annual Report.

 

35
   

 

Effective October 2, 2016, the Company renegotiated the convertible notes payable containing derivative features that were assumed in the Merger that closed October 2, 2015 (including those promissory notes issued to Claymore Management, GAIA Ltd, Legends Capital, LWB Irrevocable Trust, MDL Ventures, LLC, and Silverbrook Corporation). These Note Amendment and Extension Agreements amended the terms of the original notes by removing the conversion feature entirely and extending the payment due date until December 31, 2017. All remaining characteristics of the original notes remained the same. As a result of these Note Amendments and Extension Agreements being executed, the Company has recognized a gain on extinguishment of debt and a gain in the change in derivative liability for the period ending December 31, 2016.

 

All of the related party transactions are further described in the notes to the Financial Statements filed with this Annual Report.

 

Director Independence

 

Our securities are quoted on the OTC Markets, which does not have any director independence requirements. Once we engage further directors and officers, we plan to develop a definition of independence and scrutinize our Board of Directors with regard to this definition.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees. The aggregate fees paid for the annual audit of financial statements included in our Annual Report for the year ended December 31, 2016, and the review of our quarterly reports for such years amounted to $82,396. The aggregate fees paid for the annual audit of financial statements included in our Annual Report for the year ended December 31, 2015, and the review of our quarterly reports for such year, amounted to $59,315.

 

Audit Related Fees. For the year ended December 31, 2016 and the year ended December 31, 2015, there were no fees billed for other audit related fees.

 

Tax Fees. For the year ended December 31, 2016 and the year ended December 31, 2015, we paid $0 and $0, respectively, for tax fees.

 

All Other Fees. For the year ended December 31, 2016 and the year ended December 31, 2015, there were no fees billed for services other than services described above.

 

Our Board of Directors serves as the Audit Committee and has unanimously approved all audit and non-audit services provided by the independent auditors. The independent accountants and management are required to periodically report to the Board of Directors regarding the extent of services provided by the independent accountants, and the fees for the services performed to date.

 

There have been no non-audit services provided by our independent accountant for the year ended December 31, 2016 or the year ended December 31, 2015.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)(1)(2) Financial Statements: See index to financial statements and supporting schedules.

 

(a)(3) Exhibits.

 

Exhibit No.   Description
     
3.1  

Articles of Incorporation (1)

3.2   Certificate of Amendment, effective March 5, 2010(2)
3.3   Certificate of Amendment, effective June 23, 2010(3)
3.4   Articles of Merger, effective May 17, 2013 (4)
3.5   Bylaws (1)
4.1   Form of Subscription Agreement entered by and between Inception Mining Inc. and Accredited Investors (5)
4.2   Letter Amendment dated November 1, 2013 to Promissory Note dated January 17, 2013 between Inception Resources, LLC and U.P and Burlington Development, LLC (8)
4.3   Securities Purchase Agreement with Typenex Co-Investment, LLC dated February 27, 2017*

 

36
   

 

4.4   Convertible Promissory Note issued to Typenex Co-Investment, LLC dated February 27, 2017*
4.5   Warrant to Purchase Shares of Common Stock issued to Labrys Fund LP dated March 7, 2017*
4.6   Convertible Promissory Note issued to Labrys Fund LP dated March 7, 2017*
4.7   Securities Purchase Agreement with Labrys Fund LP dated March 7, 2017
10.1   Asset Purchase Agreement dated February 25, 2013, by and between Gold American, its majority shareholder Brett Bertolami, and its wholly-owned subsidiary, Inception Development Inc. on one hand, and Inception Resources, LLC on the other hand (6)
10.2   Employment Agreement by and between the Company and Michael Ahlin dated February 25, 2013 (6)
10.3   Employment Agreement by and between the Company and Whit Cluff dated February 25, 2013 (6)

10.4

 

Employment Agreement by and between the Company and Brian Brewer dated February 25, 2013 (6)

10.5   Employment Agreement with Michael Ahlin dated August 1, 2015 (11)
10.6   Consulting Agreement by and between the Company and Michael Ahlin dated January 1, 2017 *
10.8   Debt Exchange Agreement by and between Gold American Mining Corp. and Brett Bertolami dated February 25, 2013 (6)
10.9   Agreement by and between Crawford Cattle Company LLC, as seller, and, Inception Mining Inc., as Buyer dated as of August 30, 2013 (7)
10.10   Agreement and Plan of Merger dated August 4, 2015 (11)
10.11   Addendum to Agreement and Plan of Merger (11)
10.12   List of Subsidiaries (12)
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *   Certification of Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*   Filed herewith.
(1)   Incorporated by reference from Form SB-2 filed with the SEC on October 31, 2007.
(2)   Incorporated by reference from Form 8-K filed with the SEC on March 10, 2010.
(3)   Incorporated by reference from Form 8-K filed with the SEC on June 28, 2010.
(4)   Incorporated by reference from Form 10-Q filed with the SEC on May 20, 2013.
(5)   Incorporated by reference from Form 8-K filed with the SEC on August 5, 2013.
(6)   Incorporated by reference from Form 8-K filed with the SEC on March 1, 2013.
(7)   Incorporated by reference from Form 8-K filed with the SEC on September 6, 2013.
(8)   Incorporated by reference from Form 10-Q filed with the SEC on June 20, 2014.
(9)   Incorporated by reference from Form 8-K filed with the SEC on March 12, 2014.
(10)   Incorporated by reference from Form 8-K filed with the SEC on October 7, 2014.
(11)   Incorporated by reference from Form 8-K filed with the SEC on October 7, 2015.
(12)   Incorporated by reference from the Form 10-K filed with the SEC on May 3, 2016.

 

37
   

 

SIGNATURES

 

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  INCEPTION MINING, INC.
     
Date: April 17, 2017 By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
Date: April 17, 2017 By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/ Trent D’Ambrosio        
Trent D’Ambrosio   Director   April 17, 2017
         
/s/ Michael Ahlin        
Michael Ahlin   Director   April 17, 2017
         
/s/ Whit Cluff        
Whit Cluff   Director   April 17, 2017

 

38
   

 

INCEPTION MINING, INC.

 

CONTENTS

 

PAGE F-1 REPORTS OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
     
PAGE F-4 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND DECEMBER 31, 2015
     
PAGE F-5 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
     
PAGE F-6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
     
PAGE F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
     
PAGES F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

39
   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Inception Mining, Inc.

 

We have audited the accompanying consolidated balance sheets of Inception Mining, Inc. (“the Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two year period ended December 31, 2016. 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 the 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Inception Mining, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2016, 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. As discussed in Note 2 to the consolidated financial statements, the Company has suffered net losses since inception and has accumulated a significant deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Sadler, Gibb & Associates, LLC

 

Salt Lake City, UT

April 17, 2017

 

  F- 1  

 

 

Inception Mining, Inc.

Consolidated Balance Sheets

 

    December 31, 2016     December 31, 2015  
ASSETS
Current Assets                
Cash and cash equivalents   $ 194,652     $ 137,639  
Accounts receivable     4,712       8,389  
Accounts receivable - related parties     6,382       6,706  
Inventories     1,483,830       969,986  
Prepaid expenses and other current assets     24,745       18,057  
Total Current Assets     1,714,321       1,140,777  
                 
Property, plant and equipment, net     1,236,534       1,759,673  
Other assets     26,036       24,769  
Total Assets   $ 2,976,891     $ 2,925,219  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities                
Accounts payable and accrued liabilities   $

1,077,715

    $ 1,450,830  
Accrued interest – related parties     4,681,895       3,741,948  
Secured borrowings, net    

135,739

     

-

 
Advances due to related parties     -       728,543  
Notes payable     235,000       70,000  
Notes payable - related parties     6,528,868       -  
Convertible notes payable, net of debt discount of $0 and $127,947 as of December 31, 2016 and 2015, respectively     10,000       114,553  
Convertible note payable - related party, net of debt discount of $0 and $4,357,470 as of December 31, 2016 and 2015, respectively     -       1,846,145  
Derivative liability     -       26,934,356  
Total Current Liabilities     12,669,217       34,886,375  
                 
Long-term convertible note payable, net of debt discount of $0 and $53,345 as of December 31, 2016 and 2015, respectively     -       1,655  
Mine reclamation obligation     256,070       77,716  
Total Liabilities     12,925,287       34,965,746  
                 
Commitments and Contingencies (See Note 1)     -       -  
                 
Stockholders’ Equity (Deficit)                
Preferred stock, $0.00001 par value; 10,000,000 shares authorized, 51 and 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively     1       -  
Common stock, $0.00001 par value; 500,000,000 shares authorized, 51,229,590 and 46,427,318 shares issued and outstanding as of December 31, 2016 and 2015, respectively     512       464  
Additional paid-in capital     3,607,391       (1,444,079 )
Accumulated deficit     (12,999,113 )     (30,353,270 )
Other comprehensive income - foreign currency translation     (549,675 )     (235,492 )
Total Controlling Interest     (9,940,884 )     (32,032,377 )
Non-Controlling Interest     (7,512 )     (8,150 )
Total Stockholders’ Equity (Deficit)     (9,948,396 )     (32,040,527 )
Total Liabilities and Stockholders’ Equity (Deficit)   $ 2,976,891     $ 2,925,219  

 

See accompanying notes to the consolidated financial statements.

 

  F- 2  

 

 

Inception Mining, Inc.

Consolidated Statements of Operations and Comprehensive Loss

 

    For the Year Ended  
    December 31, 2016     December 31, 2015  
Precious Metals Income   $ 5,954,562     $ 3,524,439  
                 
Operating Expenses                
Cost of sales     3,895,962       3,742,110  
General and administrative     4,887,048       1,445,964  
Depreciation and amortization     141,897       98,243  
Total Operating Expenses     8,924,907       5,286,317  
Loss from Operations     (2,970,345 )     (1,761,878 )
                 
Other Income/(Expenses)                
Other income     8,853       28,578  
Change in derivative liability     13,092,760       2,855,920  
Change in consignment gold     (16,338 )     -  
Gain (loss) on extinguishment of debt     12,173,498       (30,581 )
Loss on impairment of mining claim     -       (135,450 )
Interest expense     (4,933,633 )     (28,121,933 )
Total Other Income/(Expenses)     20,325,140       (25,403,466 )
                 
Income (Loss) from Operations before Income Taxes     17,354,795       (27,165,344 )
Provision for Income Taxes     -       -  
NET INCOME (LOSS)     17,354,795       (27,165,344 )
NET INCOME (LOSS) - Non-Controlling Interest     (638 )     3,294  
NET INCOME (LOSS) - Controlling Interest   $ 17,354,157     $ (27,162,050 )
                 
Net income (loss) per share – Basic   $ 0.35     $ (0.61 )
Net income (loss) per share - Diluted   $ 0.35     $ (0.61 )
Weighted average number of shares outstanding during the period – Basic     49,103,382       44,353,593  
Weighted average number of shares outstanding during the period - Diluted     49,103,382       44,353,593  
                 
Other Comprehensive Loss                
Exchange differences arising on translating foreign operations     (314,183 )     (192,671 )
Total Comprehensive Income (Loss)     17,040,612       (27,358,015 )
Total Comprehensive Income (Loss) - Non-Controlling Interest     (664 )     3,483  
Total Comprehensive Income (Loss) - Controlling Interest   $ 17,039,948     $ (27,354,532 )

 

See accompanying notes to the consolidated financial statements.

 

  F- 3  

 

 

Inception Mining, Inc.

Consolidated Statement of Changes in Stockholders’ Deficit

 

    Preferred Stock     Common Stock     Additional     Other                 Total  
    ($0.00001 Par)     ($0.00001 Par)     Paid-in     Comprehensive     Accumulated     Non-Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Income     Deficit     Interest     Deficiency  
Balance, December 31, 2014     -     $ -       43,677,435     $ 437     $ 1,049,430     $ (42,821 )   $ (3,191,220 )   $ (4,856 )   $ (2,189,030 )
Recapitalization     -       -       2,683,216       27       (2,572,509 )     -       -       -       (2,572,482 )
Shares issued for debt settlement     -       -       18,182       1       29,999       -       -       -       30,000  
Shares issued for cash     -       -       90,910       1       48,999       -       -       -       49,000  
Share cancellation     -       -       (42,425 )     (2 )     2       -       -       -       -  
Foreign currency translation adjustment     -       -       -       -       -       (192,671 )     -       -       (192,671 )
Net loss for the year     -       -       -       -       -       -       (27,162,050 )     (3,294 )     (27,165,344 )
Balance, December 31, 2015     -       -       46,427,318       464       (1,444,079 )     (235,492 )     (30,353,270 )     (8,150 )     (32,040,527 )
Shares issued for services     51       1       1,119,546       11       3,394,750       -       -       -       3,394,762  
Shares issued for debt settlement     -       -       1,890,147       19       1,609,264       -       -       -       1,609,283  
Shares issued for warrant exercise     -       -       2,021,769       20       37,404       -       -       -       37,424  
Share cancellation     -       -       (253,300 )     (3 )     3       -       -       -       -  
Shares issued for equipment purchase     -       -       20,100       1       10,049       -       -       -       10,050  
Rounding adjustment for stock split     -       -       4,010       -       -       -       -       -       -  
Foreign currency translation adjustment     -       -       -       -       -       (314,183 )     -       -       (314,183 )
Net loss for the year     -       -       -       -       -       -       17,354,157       638       17,354,795  
Balance, December 31, 2016     51     $ 1       51,229,590     $ 512     $ 3,607,391     $ (549,675 )   $ (12,999,113 )   $ (7,512 )   $ (9,948,396 )

 

See accompanying notes to the consolidated financial statements.

 

  F- 4  

 

 

Inception Mining, Inc.

Consolidated Statements of Cash Flows

 

    For the Year Ended  
    December 31, 2016     December 31, 2015  
Cash Flows From Operating Activities:                
Net income (loss)   $ 17,354,795     $ (27,165,344 )
Adjustments to reconcile net income (loss) to net cash used in operations                
Depreciation expense     799,474       362,172  
Impairment of mining concessions     -       135,450  
Preferred stock issued for services     2,778,053       -  
Common stock issued for services     616,709       -  
Loss on extinguishment of debt     (12,173,498 )     30,581  
Change in derivative liability     (13,092,761 )     (2,855,920 )
Change in consignment gold     16,338       -  
Amortization of debt discounts     3,480,515       1,135,132  
Initial value of derivative liabilities     -       23,195,355  
Changes in operating assets and liabilities:                
Decr (incr) in trade receivables     3,153       (3,139 )
Decr (incr) in other receivables - related parties     -       17,916  
Decr (incr) inventories     (137,502 )     733,896  
Decr (incr) prepaid expenses and other current assets     (7,446 )     613,064  
Incr (decr) accounts payable     -       (29,134 )
Incr (decr) accrued liabilities     1,055,782       3,864,904  
Net Cash Provided by Operating Activities     693,612       34,933  
                 
Cash Flows From Investing Activities:                
Advances payable - related parties     (581,690 )     (431,507 )
Purchase of fixed assets     (311,547 )     53,532  
Net Cash Used In Investing Activities     (893,237 )     (377,975 )
                 
Cash Flows From Financing Activities:                
Repayment of note payable     (1,045,000 )     (305,000 )
Repayment of convertible notes payable     (172,500 )     (134,450 )
Repayment of note payable - related parties     (1,013,000 )     -  
Repayment of convertible notes payable - related parties     (1,141,958 )     -  

Proceeds from secured borrowings

   

251,980

     

-

 
Proceeds from notes payable     1,095,000       675,000  
Proceeds from notes payable-related party     1,041,000       19,909  
Proceeds from convertible notes payable-related party     1,241,867       -  
Proceeds from issuance of common stock     -       49,000  
Net Cash Provided by Financing Activities     257,389       304,459  
Effects of exchange rate changes on cash     (751 )     (2,746 )
Net Increase / (Decrease) in Cash     57,013       (41,329 )
Cash at Beginning of Period     137,639       178,968  
Cash at End of Period   $ 194,652     $ 137,639  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 312,883     $ 84,102  
Cash paid for taxes   $ -     $ -  
                 

Supplemental disclosure of non-cash investing and financing activities:

               

Land purchased with accounts payable

 

$

225,000

   

$

-

 

Convertible note payable issued for accounts payable

 

$

27,578

   

$

-

 

Convertible note payable – related party issued for accrued liabilities

 

$

375,343

   

$

-

 

Common stock issued for conversion of note payable – related party

 

$

925,156

   

$

-

 

Common stock issued for purchase of equipment

 

$

10,050

   

$

-

 
Assets held to satisfy secured borrowings   $ 116,241     $ -  

 

See accompanying notes to the consolidated financial statements.

 

  F- 5  

 

 

Inception Mining, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2016 and 2015

 

1. Nature of Business

 

Inception Mining, Inc. (formerly known as Gold American Mining Corp.) was incorporated under the name of Golf Alliance Corporation and under the laws of the State of Nevada on July 2, 2007. Inception Mining, Inc. is a precious metal mineral acquisition, exploration and development company. Inception Development, Inc., its wholly owned subsidiary, was incorporated under the laws of the State of Idaho on January 28, 2013.

 

Golf Alliance Corporation pursued its original business plan to provide opportunities for golfers to play on private golf courses normally closed to them due to the membership requirements of the private clubs. During the year ended July 31, 2010, the Company decided to redirect its business focus toward precious metal mineral acquisition and exploration.

 

On March 5, 2010, the Company amended its articles of incorporation to (1) to change its name to Silver America, Inc. and (2) increased its authorized common stock from 100,000,000 to 500,000,000.

 

On June 23, 2010 the Company amended its articles of incorporation to change its name to Gold American Mining Corp.

 

On November 21, 2012, the Company implemented a 200 to 1 reverse stock split. Upon effectiveness of the stock split, each shareholder canceled 200 shares of common stock for every share of common stock owned as of November 21, 2012. This reverse stock split was effective on February 13, 2013. All share and per share references have been retroactively adjusted to reflect this 200 to 1 reverse stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the stock split as if it occurred on the first day of the first period presented.

 

On February 25, 2013, Gold American Mining Corp. and its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Inception Resources, LLC, a Utah corporation (“Inception Resources”), pursuant to which Inception purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock of Inception, the assumption of promissory notes in the amount of $950,000 and the assignment of a 3% net royalty. Inception Resources was an entity owned by and under the control of the majority shareholder. This transaction is deemed an asset purchase by entities under common control. The Asset Purchase Agreement closed on February 25, 2013 (the “Closing”). Inception was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of the gold mine pursuant to the terms of the Asset Purchase Agreement. As a result of such acquisition, the Company’s operations are now focused on the ownership and operation of the mine acquired from Inception Resources. Consequently, the Company believes that acquisition has caused us to cease to be a shell company as it no longer has nominal operations.

 

On May 17, 2013, the Company amended its articles of incorporation to change its name to Inception Mining, Inc. (“Inception” or the “Company”).

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. and holds other mining concessions. Pursuant to the agreement, the Company issued of 240,225,901 shares of common stock of Inception and assumed promissory notes in the amount of $5,488,980 and accrued interest of $3,434,426. Under this merger agreement, there was a change in control and it has been treated for accounting purposes as a reverse recapitalization with Clavo Rico, Ltd. being the surviving entity. Its workings include several historical underground operations dating back to the early Mayan and Spanish occupation.

 

On January 11, 2016, the Company implemented a 5.5 to 1 reverse stock split. This reverse stock split was effective on May 26, 2016. All share and per share references have been retroactively adjusted to reflect this 5.5 to 1 reverse stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the stock split as if it occurred on the first day of the first period presented. Immediately before the Reverse Split, the Company had 266,669,980 shares of common stock outstanding. Immediately after the Reverse Split, the Company had 48,485,451 shares of common stock outstanding, pending fractional-share rounding-up calculations to adjust for the Reverse Split.

 

The Company’s primary mine is located on the 200 hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compa ñí a Minera Cerros del Sur, S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%.

 

2. Summary of Significant Accounting Policies

 

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during year ended December 31, 2016, the Company recorded net income of $17,434,795 and provided $693,612 in cash for operating activities. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

 

  F- 6  

 

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

Management is currently working to make changes that will result in profitable operations and to obtain additional funding sources to meet the Company’s need for cash during the next twelve months and beyond.

 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Inception Mining, Inc. and its wholly owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compa ñí a Minera Cerros del R í o, S.A. de C.V., and its controlling interest subsidiaries, Compa ñí a Minera Cerros del Sur, S.A. de C.V. and Compa ñía Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been eliminated upon consolidation.

 

Basis of Presentation - The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

 

Cash and Cash Equivalents - The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 2016 and December 31, 2015, the Company had no cash equivalents. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has never experienced any losses in such accounts.

 

Inventories, Stockpiles and Mineralized Material on Leach Pads - Inventories, including stockpiles and mineralized material on leach pads are carried at the lower of cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, mineralized material on leach pads and inventories to net realizable value are reported as a component of costs applicable to mining revenue. Cost is comprised of production costs for mineralized material produced and processed. Production costs include the costs of materials, costs of processing, direct labor, mine site and processing facility overhead costs and depreciation, amortization and depletion.

 

Stockpiles - Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile. Stockpile tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the material, including applicable overhead, depreciation, and depletion relating to mining operations, and removed at each stockpile’s average cost per ton.

 

Mineralized Material on Leach Pads - The Company utilizes a heap leaching process to recover gold from its mineralized material. Under this method, the mineralized material is placed on leach pads where it is treated with a chemical solution that dissolves the gold contained in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered. Costs are added to mineralized material on leach pads based on current mining and processing costs, including applicable depreciation relating to mining and processing operations. Costs are transferred from mineralized material on leach pads to subsequent stages of in-process inventories as the gold-bearing solution is processed. The value of such transferred costs of mineralized material on leach pads is based on the average cost per estimated recoverable ounce of gold on the leach pad.

 

The estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured tons added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.

 

Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material placed on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis.

 

In-process Inventories - In-process inventories represent mineralized materials that are currently in the process of being converted to a saleable product through the absorption, desorption, recovery (ADR) process. The value of in-process material is measured based on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Finished Goods Inventories - Finished goods inventories include gold that has been processed through the Company’s ADR facility and are valued at the average cost of their production.

 

Exploration and Development Costs - Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially mineable property in accordance with FASB ASC 930, Extractive Activities- Mining . Mine development costs incurred either to develop new gold and silver deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable value and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value.

 

  F- 7  

 

 

The Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the prospects for economic productions are reasonably certain.

 

Capitalized costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.

 

Mineral Rights and Properties - We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration expenditures are expensed as incurred. We expense care and maintenance costs as incurred.

 

We review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties and possibly require future asset impairment write-downs.

 

Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and properties.

 

Fair Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

 

Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.

 

Long-Lived Assets - We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.

 

  F- 8  

 

 

Properties, Plant and Equipment - We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Building   7 to 15 years
Vehicles and equipment   3 to 7 years
Processing and laboratory   5 to 15 years
Furniture and fixtures   2 to 3 years

 

Reclamation Liabilities and Asset Retirement Obligations - Minimum standards for site reclamation and closure have been established for us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site.

 

Revenue Recognition - Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are credited to costs applicable to mining revenue.

 

All accounts receivable amounts are due from a single customer. Substantially all mining revenues recorded in the current period also related to the same customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product.

 

Stock Issued For Goods and Services - Common and preferred shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.

 

Stock-Based Compensation - For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.

 

Income (Loss) per Common Share - Basic net income (loss) per common share is computed by dividing net income (loss), less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income (loss) per share includes any additional dilution from common stock equivalents, such as stock options and warrants, and convertible instruments, if the impact is not antidilutive. Common share equivalents of 277,685 have been included in the diluted income per share calculation for 2016.

 

Comprehensive Loss - Comprehensive loss is made up of the exchange differences arising on translating foreign operations and the net loss for the years ended December 31, 2016 and 2015.

 

Derivative Liabilities - Derivatives liabilities are recorded at fair value when issued and the subsequent change in fair value each period is recorded in other income (expense) in the consolidated statements of operations. We do not hold or issue any derivative financial instruments for speculative trading purposes.

 

Income Taxes - The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets for which the Company does not consider realization of such deferred tax assets to be more likely than not.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

 

Business Segments – The Company operates in one segment and therefore segment information is not presented.

 

Use of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, we are required 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 revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized material on leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.

 

  F- 9  

 

 

Non-Controlling Interest Policy – Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest and consolidates the subsidiary’s financial results with its own. The amount of equity relating to the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of the net income (loss) relating to the non-controlling interest is separately identified on the statement of operations.

 

Reclassifications - Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

 

Recently Issued Accounting Pronouncements –

 

3. Inventories, Stockpiles and Mineralized Materials on Leach Pads

 

Inventories, stockpiles and mineralized materials on leach pads at December 31, 2016 and 2015 consisted of the following:

 

    December 31, 2016     December 31, 2015  
Supplies   $ 95,860     $ 124,598  
Mineralized Material on Leach Pads     891,198       315,954  
ADR Plant     330,592       206,105  
Finished Ore     166,180       323,329  
Total Inventories   $ 1,483,830     $ 969,986  

 

There were no stockpiles at December 31, 2016 and 2015.

 

During 2015, the Company evaluated the mineralized material on the leach pad and determined that all ore placed on the pad prior to January 1, 2015 had dropped below the economically viable level to recover materials. It was determined that the value of this mineralized material should be written to zero. The Company recognized a write-down of this mineralized material on the leach pad in the amount of $1,518,497 from its inventory-in-process amounts.

 

4. Derivative Financial Instruments

 

The Company adopted the provisions of ASC subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The derivative liability as of December 31, 2016, in the amount of $0 has a level 3 classification under ASC 825-10.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2016 and 2015:

 

    Debt Derivative Liabilities     Warrant Derivative Liabilities     Total  
Balance, December 31, 2014   $ -     $ -     $ -  
Transfers in upon initial fair value of derivative liabilities     29,683,472       106,804       29,790,276  
Change in fair value of derivative liabilities and warrant liability     (2,868,971 )     13,051       (2,855,920 )
Transfers to permanent equity upon conversion of note     -       -       -  
Balance, December 31, 2015     26,814,501       119,855       26,934,356  
Transfers in upon initial fair value of derivative liabilities     133,615       131,183       264,798  
Change in fair value of derivative liabilities and warrant liability     (12,879,146 )     (213,614 )     (13,092,760 )
Change attributed to loss on extinguishment of debt     (13,707,114 )     -       (13,707,114 )
Transfers to permanent equity upon exercise of warrants     (361,856 )     (37,424 )     (399,280 )
Balance, December 31, 2016   $ -     $ -     $ -  

 

  F- 10  

 

 

Debt derivatives – The Company issued convertible promissory notes which are convertible into common stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives related to these notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

 

At December 31, 2016, the Company had no debt derivatives. On October 2, 2016, the Company renegotiated the convertible notes and eliminated all debt derivatives. The Company recorded a gain from change in fair value of debt derivatives of $13,092,760 for the year ended December 31, 2016.

 

At December 31, 2015, the Company marked to market the fair value of the debt derivatives and determined a fair value of $26,814,501. The Company recorded a gain from change in fair value of debt derivatives of $2,855,920 for the year ended December 31, 2015. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 213.00% to 309.45%, (3) weighted average risk-free interest rate of 0.14% to 1.06% (4) expected life of 0.10 to 1.94 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.

 

Warrant liabilities – The Company issued warrants in conjunction with the issuance with the Typenex, JMJ Financial and Firstfire Global Convertible and Jonathan Shane Promissory Notes. These warrants contain certain reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date (issuance date) and to fair value as of each subsequent reporting date.

 

At December 31, 2016, the Company had no warrant liability. The Company recorded a gain from change in fair value of warrant liability of $213,614 for the year ended December 31, 2016.

 

At December 31, 2015, the Company marked to market the fair value of the warrant liability and determined a fair value of $119,855. The Company recorded a loss from change in fair value of warrant liability of $13,051 for the year ended December 31, 2015. The fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 339.39% to 377.99%, (3) weighted average risk-free interest rate of 1.31% to 1.76% (4) expected life of 3.75 to 4.59 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

5. Properties, Plant and Equipment, Net

 

Properties, plant and equipment at December 31, 2016 and 2015 consisted of the following:

 

    December 31, 2016     December 31, 2015  
Land   $ 253,313     $ 11,562  
Buildings     2,179,254       2,289,865  
Machinery and Equipment     985,535       964,651  
Office Equipment and Furniture     43,757       42,289  
Vehicles     83,901       88,160  
      3,545,760       3,396,527  
Less Accumulated Depreciation     (2,309,226 )     (1,636,854 )
Total Property, Plant and Equipment   $ 1,236,534     $ 1,759,673  

 

  F- 11  

 

 

In December 2016, the Company determined that the leach pad at the Clavo Rico mine was reaching its capacity. It was determined that the depreciation of the leach pad should be accelerated to fully depreciate the leach pad by March 31, 2017. This constitutes a change in management estimates. During the years ended December 31, 2016 and 2015, the Company recognized depreciation expense of $799,474 and $328,408, respectively. The following table summarizes the allocation of depreciation expense between cost of goods sold and general and administrative expenses.

 

    December 31, 2016     December 31, 2015  
Cost of Goods Sold   $ 657,577     $ 230,165  
Operating Expenses     141,897       98,243  
Total Depreciation Expense   $ 799,474     $ 328,408  

 

6. Mineral Rights and Properties

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiary, Compa ñí a Minera Cerros del Sur, S.A. de C.V. and holds other mining concessions. Its workings include several historical underground operations dating back to the early Mayan and Spanish occupation. The Company’s primary mine is located on the 200 hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compa ñí a Minera Cerros del Sur, S.A. de C.V. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%. The Company has released its claim on some of the concessions and wrote-off the remaining balance of the mining rights for these concessions during the year ended December 31, 2015. The Company recognized an impairment of mining rights of $135,450,

 

    Mining Rights  
Balance, December 31, 2014   $ 216,126  
Accretion of Mining Rights     (80,676 )
Impairment of Mining Rights     (135,450 )
Balance, December 31, 2015   $ -  
Accretion of Mining Rights     -  
Balance, December 31, 2016   $ -  

 

7. Mine Reclamation Liability

 

The Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of our site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies.

 

The fair value of the long-term liability of $256.070 and $77,716 as of December 31, 2016 and 2015, respectively, for our obligation to reclaim our mine facility is based on our most recent reclamation plan, as revised, submitted and approved by the Honduran Institute of Geology and Mines (INHGEOMIN) and Ministry of Natural Resources and Environment (SERNA). Such costs are based on management’s current estimate of then expected amounts for the remediation work, assuming the work is performed in accordance with current laws and regulations and using a credit adjusted risk free rate of 18.00% and an inflation rate of 5.3%. It is reasonably possible that, due to uncertainties associated with the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate cost of reclamation and remediation could change in the future. We periodically review the accrued reclamation liability for information indicating that our assumptions should change.

 

The increases in the reclamation liability in 2016 and 2015 were related to the expansion of the heap leach facility and related infrastructure.

 

Changes to the asset retirement obligation were as follows:

 

    December 31, 2016     December 31, 2015  
Balance, Beginning of Year   $ 77,716     $ 29,637  
Accretion of reclamation obligation     178,354       48,079  
Disposal     -       -  
Balance, End of Year   $ 256,070     $ 77,716  

 

  F- 12  

 

 

8. Accounts Payable and Accrued Liabilities

 

Accounts Payable and accrued liabilities at December 31, 2016 and 2015 consisted of the following:

 

    2016     2015  
Accounts Payable   $ 428,751     $ 309,085  
Accrued Liabilities     296,069       725,899  
Accrued Salaries and Benefits     175,811       144,651  
Advances Payable     175,864       258,041  
Smelter Royalties Payable     1,220       13,154  
Total Accrued Liabilities   $ 1,077,715     $ 1,450,830  

 

9. Secured Borrowings

 

During the year ended December 31, 2016, the Company entered into five financing arrangements with third parties for a combined principal amount of $251,980.  The terms of the arrangements require the Company to pay the combined principal balance plus a guaranteed return of no less than 10 percent, or $25,198, for a total expected remittance of $277,178. The maturity dates of the notes range between June 22, 2017 and June 23, 2017. The terms of repayment allow the Company to remit to the lender a certain quantity of gold to satisfy the liability though the Company expects to liquidate gold held and satisfy the liability in cash. As of December 31, 2016, the Company held 101 ounces of gold, valued at cost of $116,241, to satisfy the liabilities upon maturity leaving a net obligation of $135,739, which is recorded on the Company’s balance sheet as secured borrowings.

 

10. Notes Payable

 

Notes payable were comprised of the following as of December 31, 2016 and December 31, 2015:

 

Notes Payable   12/31/2016     12/31/2015  
3-2-1 Partners, Inc.   $ 100,000     $ -  
Diamond 80, LLC     -       -  
Jonathan Shane     -       -  
LVD Investments     75,000       -  
Phil Zobrist     60,000       -  
Pine Valley Investments     -       70,000  
Total Notes Payable   $ 235,000     $ 70,000  

 

3-2-1 Partners, LLC – On December 30, 2016, the Company issued an unsecured Short-Term Promissory Note to 3-2-1 Partners, LLC in the principal amount of $100,000 (the “Note”) due on January 20, 2017 and bears a 5% interest rate. As of December 31, 2016, the outstanding balance of the Note was $100,000 and accrued interest was $5,000.

 

Diamond 80, LLC – On December 22, 2016, the Company issued an unsecured Short-Term Promissory Note to Diamond 80, LLC in the principal amount of $50,000 (the “Note”) due on January 1, 2017 and bears a 7.5% interest rate. The Company made a payment of $53,750 towards the principal balance and accrued interest of $3,750 on December 30, 2016. As of December 31, 2016, the outstanding balance of the Note was $0.

 

Jonathan Shane – On July 15, 2016, the Company negotiated a settlement for these convertible notes with the note holder. The balance of the notes of $55,000 is to be paid via a payment each month with the last payment due on November 15, 2016. The Company negotiated a settlement on this note and issued 9,090 shares of common stock valued at $7,272 and 180,000 warrants for shares of common stock. The warrants have a three year life with 30,000 warrants are exercisable at $0.50 per share, 30,000 warrants are exercisable at $1.00 per share, 30,000 warrants are exercisable at $1.50 per share and 90,000 warrants are exercisable at $2.00 per share. The accrued interest of $5,867 was forgiven. The note was changed to a short term note payable instead of a convertible note payable. As of December 31, 2016, the outstanding balance of the Note was $0.

 

LVD Investments – On November 29, 2016, the Company issued an unsecured Short-Term Promissory Note to LVD Investments in the principal amount of $75,000 (the “Note”) due on January 13, 2017 and bears a 7.5% interest rate. As of December 31, 2016, the outstanding balance of the Note was $75,000 and accrued interest was $5,625.

 

Phil Zobrist – On January 11, 2013, the Company issued an unsecured Promissory Note to Phil Zobrist in the principal amount of $60,000 (the “Note”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $60,000. On October 2, 2015, the Company entered into a new convertible note with Phil Zobrist that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $29,412 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $121,337 for the remaining derivative liability and of $11,842 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $36,316 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $60,000 and accrued interest was $42,904.

 

  F- 13  

 

 

11. Notes Payable – Related Parties

 

Notes payable – related parties were comprised of the following as of December 31, 2016 and December 31, 2015:

 

Notes Payable - Related Parties   12/31/2016     12/31/2015  
Claymore Management   $ 185,000     $ -  
GAIA Ltd     1,150,000       -  
Legends Capital     765,000       -  
LWB Irrev Trust     1,101,000       -  
MDL Ventures     1,049,888       -  
Silverbrook Corporation     2,227,980       -  
WOC Energy LLC     50,000       -  
Total Notes Payable - Related Parties   $ 6,528,868     $ -  

 

Claymore Management – On March 18, 2011, the Company issued an unsecured Promissory Note to Claymore Management in the principal amount of $185,000 (the “Note”) due on demand and bears 0% per annum interest. The total net proceeds the Company received was $185,000. On October 2, 2015, the Company entered into a new convertible note with Claymore Management that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from March 18, 2011 in the amount of $151,355 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $448,369 for the remaining derivative liability and of $36,513 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $111,974 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $185,000 and accrued interest was $192,958.

 

GAIA Ltd. – Between December 2011 and October 2012, the Company issued seven unsecured Promissory Notes to GAIA Ltd. for a total principal amount of $1,150,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $1,150,000. On October 2, 2015, the Company entered into a new convertible note with GAIA Ltd. that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $724,463 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $2,524,747 for the remaining derivative liability and of $226,974 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $696,053 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $1,150,000 and accrued interest was $983,071.

 

Legends Capital Group – Between October 2011 and September 2012, the Company issued eleven unsecured Promissory Notes to Legends Capital Group for a total principal amount of $765,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $765,000. On October 2, 2015, the Company entered into a new convertible note with Legends Capital Group that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $504,806 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $2,564,130 for the remaining derivative liability and of $150,987 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $463,026 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $765,000 and accrued interest was $676,837.

 

LW Briggs Irrevocable Trust – Between December 2010 and January 2013, the Company issued eight unsecured Promissory Notes to LW Briggs Irrevocable Trust for a total principal amount of $1,101,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $1,101,000. On October 2, 2015, the Company entered into a new convertible note with LW Briggs Irrevocable Trust that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $814,784 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $2,564,130 for the remaining derivative liability and of $217,303 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $666,395 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $1,101,000 and accrued interest was $1,062,373.

 

MDL Ventures – The Company entered into an unsecured convertible note payable agreement with MDL Ventures, LLC, which is 100% owned by a Company officer, effective October 1, 2014, due on December 31, 2016 and bears 18% per annum interest, due at maturity. Principal on the convertible note is convertible into common stock at the holder’s option at a price of the lower of $0.99 (0.18 pre-split) or 50% of the lowest three daily volume weighted average prices of the Company’s common stock during the 20 consecutive days prior to the date of conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $1,487,158 for the remaining derivative liability. As of December 31, 2016 the gross balance of the note was $1,049,888 and accrued interest was $0.

 

  F- 14  

 

 

Silverbrook Corporation – Between March 2011 and February 2015, the Company issued 23 unsecured Promissory Notes to Silverbrook Corporation for a total principal amount of $2,227,980 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $2,227,980. On October 2, 2015, the Company entered into a new convertible note with Silverbrook Corporation that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $1,209,606 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. On October 2, 2016, the Company renegotiated the note payable. The convertible feature was removed and the note was extended until December 31, 2017. The Company recognized a gain on the extinguishment of debt of $4,656,189 for the remaining derivative liability and of $439,733 for the remaining debt discount. For the year ended December 31, 2016, the Company amortized $1,348,514 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $2,227,980 and accrued interest was $1,710,627.

 

WOC Energy, LLC – On September 29, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $75,000 (the “Note”) due on October 20, 2016 and bears a 3.5% interest rate. The Company made a payment of $77,625 towards the principal balance and accrued interest of $2,625 on October 18, 2016. As of December 31, 2016, the outstanding balance of the Note was $0.

 

WOC Energy, LLC – On November 2, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $75,000 (the “Note”) due on December 17, 2016 and bears a 5.0% interest rate. The Company made a payment of $78,750 towards the principal balance and accrued interest of $3,750 on December 16, 2016. As of December 31, 2016, the outstanding balance of the Note was $0.

 

WOC Energy, LLC – On December 20, 2016, the Company issued an unsecured Short-Term Promissory Note to WOC Energy, LLC in the principal amount of $50,000 (the “Note”) due on January 12, 2017 and bears a 5.0% interest rate. As of December 31, 2016, the outstanding balance of the Note was $50,000 and accrued interest was $2,500.

 

12. Convertible Notes Payable

 

Convertible notes payable were comprised of the following as of December 31, 2016 and December 31, 2015:

 

Convertible Notes Payable   12/31/2016     12/31/2015  
Brunson, Chandler & Jones   $ -     $ -  
Dave Wavrek     -       4,500  
Iconic Holdings     -       55,000  
JMJ Financial     -       55,000  
Jonathan Shane     -       55,000  
Phil Zobrist     -       60,000  
Typenex     -       58,000  
UP and Burlington     10,000       10,000  
Total Convertible Notes Payable     10,000       297,500  
Less Unamortized Discount     -       (178,610 )
Total Convertible Notes Payable, Net of Unamortized Debt Discount     10,000       118,890  
Less: Current Portion     -       (117,235 )
Total Convertible Notes Payable, Net of Unamortized Debt Discount   $ 10,000     $ 1,655  

 

Brunson, Chandler & Jones, PLLC – On January 13, 2016, the Company issued an unsecured Convertible Promissory Note to Brunson, Chandler & Jones, PLLC (“BCJ”), in the principal amount of $27,578 (the “Note”) due on July 13, 2016 and bears 10% per annum interest, due at maturity as settlement of services rendered for the same amount. The Note is convertible into common stock, at holder’s option, at 10% discount of the lowest VWAP of the common stock during the 3 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Note. The embedded derivatives relate to conversion features.

 

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Note and to fair value as of each subsequent reporting date, which at March 31, 2016 was $3,627. At the inception of the Note, the Company determined the aggregate fair value of $25,104 of the embedded derivatives. The fair value of the embedded derivatives were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 288.75%, (3) weighted average risk-free interest rate of 0.46%, (4) expected life of 0.50 year, and (5) estimated fair value of the Company’s common stock from $0.74 (0.14 pre-split) per share based upon quoted market price. The initial fair value of the embedded debt derivatives of $25,104 were allocated as a debt discount. For the nine months ended September 30, 2016, the Company amortized $25,104 of debt discount to current period operations as interest expense. On July 13, 2016, the Note was settled with a payment of $22,000 in cash paid by an officer on behalf of the Company. The remaining balance of $5,758 and accrued interest of $2,758 were forgiven and have been recorded as a gain on extinguishment of debt during the nine months ended December 31, 2016. As of December 31, 2016, the gross balance of the Note was $0 and accrued interest was $0.

 

  F- 15  

 

 

Dave Wavrek – On June 7, 2014, the Company entered into an unsecured Note Purchase Agreement for the sale of a 20% convertible promissory note in which the Company will receive the principal amount of $100,000. The note bears interest at the rate of 20% per annum and all interest and principal must be repaid on December 31, 2015. The note is convertible, at the holder’s option into shares of the Company’s common stock at $2.48 (0.45 Pre-split) per share. A beneficial conversion feature on the new note was recorded for $100,000. For the year ended December 31, 2016, the Company amortized $0 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

Iconic Holdings – On November 17, 2015, the Company entered into an unsecured Note Purchase Agreement in which the Company will receive the principal amount of $55,000 with an original issue discount of 10% of loaned funds. The Company has received funds totaling $50,000 and recorded additional principal due to the original issue discount totaling $5,000. The note bears interest at the rate of 10% per annum and all interest and principal must be repaid on June 1, 2016. The note is convertible into common stock, at the holder’s option, at the lower of $0.83 (0.15 pre-split) or 60% of the lowest three trading prices of the Company’s common stock during the 20 consecutive trading days prior to the date of conversion. On February 9, 2016, the Company made a payment of $6,000 against the principal balance. In May 2016, the Company made payments of $71,000 to pay the note and accrued interest in full. For the year ended December 31, 2016, the Company amortized $42,716 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

JMJ Financial Services – On December 9, 2015, the Company issued an unsecured Convertible Promissory Note to JMJ Financial Services (“JMJ”), in the principal amount of $55,000 (the “Note”) due on December 9, 2017 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at the lesser of $1.34 (0.25 pre-split) or a 40% discount of the lowest trading price of the common stock during the 25 trading day period prior to conversion. On May 25, 2016, the Company made a payment of $84,000 against the balance of the note and accrued interest. For the year ended December 31, 2016, the Company amortized $53,345 of debt discount to current period operations as interest expense. As of December 31, 2016, the gross balance of the note was $0 and accrued interest was $0.

 

Jonathan Shane – On June 15, 2015, the Company issued an unsecured Convertible Promissory Note to Jonathan Shane in the principal amount of $25,000 (the “Note”) due on June 14, 2016 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $25,000. The Note is convertible into common stock, at holder’s option, at a price of $3.25 (0.59 pre-split) or a 40% discount to the average of the three lowest trading prices of the common stock during the 25 trading day period prior to conversion. On July 15, 2016, a settlement for this note was reached. See settlement below. As of December 31, 2016, the gross balance of the note was $0 and accrued interest was $0.

 

On July 7, 2015, the Company issued an unsecured Convertible Promissory Note to Jonathan Shane in the principal amount of $30,000 (the “Note”) due on July 6, 2016 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $30,000. The Note is convertible into common stock, at holder’s option, at a price of $3.25 (0.59 pre-split) or a 40% discount to the average of the three lowest trading prices of the common stock during the 25 trading day period prior to conversion. On July 15, 2016, a settlement for this note was reached. See settlement below. As of December 31, 2016, the gross balance of the note was $0 and accrued interest was $0.

 

On July 15, 2016, the Company negotiated a settlement for these notes with the note holder. The balance of the notes of $55,000 is to be paid via a payment each month with the last payment due on November 15, 2016. As of September 30, 2016, the Company had made payments of $35,000 towards the outstanding balance. In addition to the principle payments, the Company issued 9,090 shares of common stock valued at $7,272. The accrued interest of $5,867 was forgiven. The note was changed to a short term note payable instead of a convertible note payable. The Company also issued 180,000 warrants to the note holder. These warrants have a life of three years and are exercisable accordingly: 30,000 warrants at $0.50 per share, 30,000 warrants at $1.00 per share, 30,000 warrants at $1.50 per share and 90,000 warrants at $2.00 per share. These warrants were valued using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 214.85%, (3) weighted average risk-free interest rate of 0.87% (4) expected life of 3.00 years, and (5) the quoted market price of $0.80. These warrants were valued at $131,183. The Company recorded a loss on extinguishment of debt for these notes and warrants of $101,445 during the year ended December 31, 2016.

 

For the year ended December 31, 2016, the Company amortized $26,822 of debt discount to current period operations as interest expense. As of December 31, 2016, the gross balance of the note was $0 and accrued interest was $0.

 

Typenex – On July 7, 2015, the Company issued an unsecured Convertible Promissory Note to Typenex Co-Investment LLC (“Typenex”), in the principal amount of $58,000 (the “Note”) due on February 7, 2016 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $5,000 and legal fees reimbursement of $3,000). The Note is convertible into common stock, at holder’s option, at a 40% discount to the average of the three lowest bid prices of the common stock during the 20 trading day period prior to conversion. However, should the average of the three lowest bid prices as described above fall below $3.30 (0.60 pre-split), then the applicable discount increases to 45%. In addition, the conversion price is to subject to be reduced should the Company issue or grant common stock or equivalents (as defined) at a lower issuance price (dilutive issuance). On January 7, 2016, the Company made a payment of $20,437 for principal of $12,625, accrued interest of $3,372, an extension fee of $2,500 and premium fee of $1,940. On February 3, 2016, the Company made a payment of $17,457 for principal of $15,125, accrued interest of $392 and premium fee of $1,940. On March 4, 2016, the Company made a payment of $17,291 for principal of $15,125, accrued interest of $226 and premium fee of $1,940. On April 8, 2016, the Company made a payment of $17,163 for principal of $15,125, accrued interest of $98 and premium fee of $1,940. For the year ended December 31, 2016, the Company amortized $10,251 of debt discount to current period operations as interest expense. As of December 31, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

  F- 16  

 

 

UP and Burlington Development – On February 25, 2013, the Company, its majority shareholder, and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement with Inception Resources, LLC, a Utah corporation, pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock valued at $160 (valued at par value of $0.00001 because of the entities being under common control), the assumption of promissory notes in the amount of $800,000 and $150,000 and the assignment of a 3% net royalty. The Asset Purchase Agreement closed on February 25, 2013. On November 1, 2013, one of the notes was renegotiated with the note holder. The original note was restructured and treated as an extinguishment and as such is now convertible into shares of the Company’s common stock at $2.48 (0.45 pre-split) per share. All the other points of the note remained the same. A beneficial conversion feature on the new note was recorded for $630,000. On February 11, 2014, the Company converted $130,000 of principal into 288,889 shares of common stock. On December 10, 2014, the note holder elected to convert $41,250 of the principle balance of the note into 91,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to convert $300,000 of the principle balance of the note into 666,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to forgive $148,750 of the principle balance of the note. As of December 31, 2016, the outstanding balance on this note was $10,000.

 

13. Convertible Notes Payable – Related Parties

 

Convertible notes payable – related parties were comprised of the following as of December 31, 2016 and December 31, 2015:

 

Convertible Notes Payable - Related Parties   12/31/2016     12/31/2015  
Claymore Management   $ -     $ 185,000  
GAIA Ltd     -       1,150,000  
Legends Capital     -       765,000  
LWB Irrev Trust     -       1,101,000  
MDL Ventures     -       774,635  
Silverbrook Corporation     -       2,227,980  
Total Convertible Notes Payable - Related Parties     -       6,203,615  
Less Unamortized Discount     -       (4,357,470 )
Total Convertible Notes Payable - Related Parties, Net of Unamortized Debt Discount   $ -     $ 1,846,145  

 

Refer to the Note 11 - Notes Payable – Related Parties for the descriptions on the convertible notes payable – related parties.

 

14. Stockholders’ Deficit

 

Preferred Stock – Series A

 

On August 30, 2016, the board of directors designated 51 shares of preferred stock as Series A. The shares have voting rights shall equal to: (x) 0.019607 multiplied by the total issued and outstanding shares of common stock eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. These shares have preferential voting rights, no conversion rights and no liquidation preferences.

 

On December 30, 2016, the Company issued 51 shares of preferred Series A stock to the chief executive officer for services rendered. The Company recognized $2,778,053 in consulting expense related to this issuance.

 

Common Stock

 

On January 19, 2015, the Company issued 16,634 shares of common stock upon the conversion of $10,000 of note payable principle.

 

In January 2015, the Company issued 32,955 shares for services valued at $46,221. The value for shares issued was based on quoted market prices. The services are being provided over a twelve month period.

 

On February 9, 2015, the Company issued 18,368 shares of common stock upon the conversion of $15,000 of note payable principle.

 

On February 18, 2015, 107,636 shares originally issued for an asset purchase were cancelled upon negotiations by the Company for these shares to be returned for no value.

 

  F- 17  

 

 

In February 2015, the Company issued 32,955 shares for services valued at $42,033. The value for shares issued was based on quoted market prices. The services are being provided over a twelve month period.

 

On March 10, 2015, the Company issued 16,096 shares of common stock upon the conversion of $7,500 of note payable principle.

 

On March 16, 2015, the Company issued 22,539 shares of common stock upon the conversion of $7,500 of note payable principle.

 

In March 2015, the Company issued 69,318 shares for services valued at $49,924. The value for shares issued was based on quoted market prices. The services are being provided over a twelve month period.

 

On April 2, 2015, the Company issued 23,097 shares of common stock upon the conversion of $7,500 of note payable principle.

 

In April 2015, the Company issued 32,955 shares for services valued at $20,928. The value for shares issued was based on quoted market prices. The services are being provided over a twelve month period.

 

In May 2015, the Company issued 32,955 shares for services valued at $18,787. The value for shares issued was based on quoted market prices. The services are being provided over certain periods based on agreements entered into.

 

On June 25, 2015, the Company issued 52,289 shares of common stock upon the conversion of $14,375 of note payable principle and accrued interest.

 

In June 2015, the Company issued 32,955 shares for services valued at $28,596. The value for shares issued was based on quoted market prices. The services are being provided over certain periods based on agreements entered into.

 

In July 2015, the Company issued 51,137 shares for services valued at $50,844. The value for shares issued was based on quoted market prices. The services are being provided over certain periods based on agreements entered into.

 

On August 6, 2015, the Company issued 37,106 shares of common stock upon the conversion of $15,000 of note payable principle.

 

On September 9, 2015, the Company issued 46,561 shares of common stock upon the conversion of $5,000 of note payable principle and $8,250 of accrued interest.

 

On September 22, 2015, the Company issued 27,273 shares of common stock for the extension of convertible note payable. These shares were valued at $17,145.

 

On September 25, 2015, 1,081,818 shares originally issued for consulting services were cancelled, which the Company re-purchased for no value.

 

On September 30, 2015, 19,727 shares originally issued for consulting services were cancelled, which the Company re-purchased for no value.

 

On October 2, 2015, the Company issued 2,683,215 shares of common stock in exchange for the issued and outstanding shares of Clavo Rico, Ltd. Clavo Rico, Ltd. Became a wholly owned subsidiary of the Company. Under this merger agreement, there was a change in control and it has been treated for accounting purposes as a reverse recapitalization with Clavo Rico, Ltd. being the surviving entity.

 

On October 20, 2015, the Company issued 18,182 shares of common stock for negotiation of a note extension. The Company recorded $30,000 as a loss on extinguishment of debt.

 

On October 20, 2015, a shareholder returned 27,273 shares of common stock to the Company for cancellation. There was no cost to the Company for these shares.

 

On December 15, 2015, a shareholder returned 15,151 shares of common stock to the Company for cancellation. There was no cost to the Company for these shares.

 

On December 17, 2015, the Company issued 90,909 shares of common stock for cash at $0.54 per share. The Company received cash proceeds of $49,000.

 

On January 1, 2016, 18,182 shares of common stock were issued to Whit Cluff as payment for consulting services performed for the Company. These shares were valued at $0.20 per share for a value of $20,000.

 

On January 5, 2016, 18,182 shares of common stock were issued to Brunson Chandler & Jones PLLC as payment for legal services performed for the Company. These shares were valued at $0.20 per share for a value of $20,000.

 

On January 11, 2016, the Company issued 944,461 shares of common stock to The Panamera Trust pursuant to the exercise of a cashless warrant.

 

  F- 18  

 

 

On January 11, 2016, the Company issued 1,077,308 shares of common stock to Cornerstone Holdings LTD pursuant to the exercise of a cashless warrant.

 

On January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock. The reverse split was approved and announced by FINRA with an effective date of May 26, 2016. There were 266,669,950 shares of common stock issued and outstanding prior to the split which resulted in 48,485,451 post-split shares of common stock outstanding.

 

On December 15, 2015, the Company entered into a Settlement Agreement with Brian Brewer through which he agreed to return up to 90,912 shares of common stock in the Company. Pursuant to the terms of that Settlement Agreement on January 15, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on February 17, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on March 15, 2016, 15,152 shares of the Company were returned to the Company for cancellation, on April 26, 2016, 15,152 shares of the Company were returned to the Company for cancellation, and on May 18, 2016, the remaining 15,152 shares of the Company were returned to the Company for cancellation.

 

On May 19, 2016, 18,182 shares of common stock were issued to Rodney Sperry as payment for consulting services performed for the Company. These shares were valued at $0.99 per share for a value of $18,000.

 

On June 3, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at the amount of the debt converted of $725,853.

 

On June 30, 2016, 20,100 shares of common stock were issued to Bodell Construction as payment for equipment acquired by the Company. These shares were valued at $0.50 per share for a value of $10,050.

 

On July 15, 2016, the Company issued 9,090 shares of common stock per a negotiated debt settlement agreement. These shares were valued at $7,272.

 

On July 29, 2016, 881,057 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at the amount of the debt converted of $200,000.

 

On August 8, 2016, the Company entered into a 90 day consulting agreement with Red Rock Marketing Media, Inc. Per the agreement, the Company is required to make three $40,000 payments and three issuances of 150,000 shares of common stock each month starting in August 2016. On August 8, 2016, the Company made the required payment of $40,000 and issued 150,000 shares of common stock. The shares issued were valued at $0.80 per share for a value of $120,000.

 

On September 6, 2016, the Company issued 150,000 shares of common stock per the consulting agreement with Red Rock Marketing Media, Inc. These shares were valued at $0.57 per share for a value of $85,500.

 

On September 13, 2016, the Company entered into a Settlement Agreement with a consultant through which the consultant agreed to return 177,540 shares of common stock to the Company. The 177,540 shares were returned to the Company and were immediately cancelled.

 

On October 3, 2016, the Company issued 150,000 shares of common stock per the consulting agreement with Red Rock Marketing Media, Inc. These shares were valued at $0.55 per share for a value of $82,500.

 

On December 30, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at $0.63 per share for a total of $315,000. The amount of the debt converted was $100,000 and the Company recognized a loss on the extinguishment of debt of $215,000.

 

On December 30, 2016, 615,000 shares of common stock were issued to officers, former officers and members of the board of directors of the Company as payment for consulting services performed. These shares were valued at $0.4353 per share for a value of $267,705.

 

Warrants

 

On July 15, 2016, the Company issued 180,000 warrants associated with the extinguishment of a convertible note payable. The warrants have a three year life, 30,000 warrants are exercisable at $0.50 per share, 30, 000 warrants are exercisable at $1.00 per share, 30, 000 warrants are exercisable at $1.50 per share and 90, 000 warrants are exercisable at $2.00 per share.

 

On August 5, 2016, 20,411 three year warrants expired without being exercised. These warrants had an exercise price of $4.95.

 

The following tables summarize the warrant activity during the years ended December 31, 2016 and 2015:

 

Stock Warrants   Number of Warrants     Weighted Average Exercise Price  
Balance at December 31, 2014     54,459     $ 4.95  
Granted     63,637       5.23  
Exercised     -       -  
Forfeited     -       -  
Balance at December 31, 2015     118,096       1.04  
Granted     180,000       1.50  
Exercised     -       -  
Forfeited     (20,411 )     (4.95 )
Balance at December 31, 2016     277,685     $ 3.08  

 

  F- 19  

 

 

2016 Outstanding Warrants     Warrants Exercisable  
Range of
Exercise Price
    Number Outstanding at
September 30, 2016
    Weighted Average Remaining Contractual Life   Weighted Average Exercise Price     Number Exercisable at
September 30, 2016
    Weighted Average
Exercise Price
 
$ 0.50 - 6.88       277,685     2.42 years   $ 3.08       277,685     $ 3.08  

 

15. Net Income Per Common Share

 

Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if stock options, warrants, and convertible securities to issue common stock were exercised or converted into common stock, if not anti-dilutive. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net income per share:

 

    Year Ended December 31,  
    2016     2015  
Numerator:                
Net Income (Loss)   $ 17,434,795     $ (27,165,344 )
Non-Controlling Interest     (638 )     3,294  
Income (Loss) available to Controlling Shareholders   $ 17,434,157     $ (27,162,050 )
                 
Denominator:                
Basic Weighted Average Shares Outstanding     49,103,382       44,353,593  
Effect of Dilutive Securities     -       -  
Diluted Weighted Average Shares Outstanding     49,103,382       44,353,593  
                 
Net Income (Loss) per Common Share:                
Basic   $ 0.36     $ (0.61 )
Diluted   $ 0.36     $ (0.61 )

 

16. Income Taxes

 

The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The provision for income tax expense (recovery) is comprised the following amounts:

 

    2015     2015  
Expected income tax (recovery) expense at the statutory rate of 34%   $ 5,900,630     $ (9,236,217 )
Tax effect of expenses that are not deductible for tax purposes (net of other amounts deductible for tax purposes)     3,984       186  
Change in valuation allowance     (5,904,6140       9,236,031  
Provision for income taxes   $ -     $ -  

 

  F- 20  

 

 

The components of deferred income tax in the accompanying balance sheets are as follows:

 

Deferred income tax asset:   2016     2015  
Net operating loss carry-forwards   $ 8,660,075     $ 1,269,221  
Section 195 Startup Costs     1,393,346       1,393,346  
Other     -       -  
Debt Discount     (1,183,375 )     (1,543,179 )
Derivative Liability     (4,451,538 )     9,157,681  
Mineral Property     -       46,053  
Valuation allowance     (4,418,508 )     (10,323,122 )
Deferred income taxes   $ -     $ -  

 

As of December 31, 2016 and December 31, 2015, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $9,236,000 and $3,197,000 million, respectively. A portion of the federal amount, $1,710,000, is subject to an annual limitation of approximately $17,000 as a result of a change in the Company’s ownership through February 2013, as defined by Federal Internal Revenue Code Section 382 and the related income tax regulations. As a result of the 20-year federal carryforward period and the limitation, approximately, $1,400,000 of the net operating loss will expire unutilized. These net operating loss carry-forwards will expire through the year ending 2036.

 

The valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized. This is necessary due to the Company’s continued operating losses and the uncertainty of the Company’s ability to utilize all of the net operating loss carry-forwards before they will expire through the year 2035.

 

The net change in the valuation allowance for the year ended December 31, 2015 was an approximate increase of $9,236,031.

 

The Company is subject to income tax in the U.S. federal jurisdiction. The Company has not been audited by the U.S. Internal Revenue Service in connection with income taxes. The Company’s tax years beginning with the year ended June 30, 2010 through December 31, 2015 generally remain open to examination by the Internal Revenue Service until its net operating loss carryforwards are utilized and the applicable statutes of limitation have expired.

 

17. Related Party Transactions

 

Consulting Agreement – In February 2014, the Company entered into a consulting agreement with a stockholder/director. The Company agreed to pay $18,000 per month for twelve months. As of December 31, 2016, the Company owed $648,000 to the stockholder/director in accrued consulting fees.

 

Lease – The Company leases office space from a related affiliate, MDL Ventures, LLC, which includes month to month terms. Rent expense for the year ended December 31, 2016 amounted to $10,821.

 

Employment Agreements – On February 25, 2013, the Company entered into an employment agreement with Michael Ahlin pursuant to which he was appointed as the Chief Executive Officer, President, Treasurer, Secretary and Director of the Company. Under the terms of his employment agreement, Mr. Ahlin will become eligible to receive an annual salary, bonus and stock option upon the Company achieving positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in two consecutive quarters as reflected in its filings with the Securities and Exchange Commission (“SEC”). On August 1, 2015, the Company amended the previously entered into employment agreement with Michael Ahlin pursuant to which the eligibility requirements of the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC were removed. On December 14, 2016, Michael Ahlin resigned as the Chief Executive Officer of the Company. Effective as of January 1, 2107, Mr. Ahlin entered into a Consulting Agreement with the Company that memorialized his amended role with the Company.

 

  F- 21  

 

 

On February 25, 2013, the Company entered into an employment agreement with Whit Cluff pursuant to which he was appointed as the Chief Financial Officer and Director of the Company. Under the terms of his employment agreement, Mr. Cluff will become eligible to receive an annual salary, bonus and stock option upon the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC. Mr. Cluff resigned as the Chief Financial Officer of the Company on November 3, 2015. Mr. Cluff currently serves as a director of the Company and has a separate agreement as a consultant of the Company effective as of October 2, 2015.

 

18. Commitments and Contingencies

 

Litigation

 

The Company at times is subject to other legal proceedings that arise in the ordinary course of business.

 

On January 26, 2017, the Company, was served a copy of a complaint filed by Danzig Ltd. (“Danzig”) and Brett Bertolami (“Bertolami”) in the Western District of North Carolina, Statesville Division District Court. The complaint alleges fraud, breach of contract, state securities fraud, federal securities fraud, breach of fiduciary duty, unjust enrichment, and negligent misrepresentation against the Company and two of its officers and directors (Trent D’Ambrosio and Michael Ahlin). The allegations arise from the change of control transaction in February 2013 and other documents related to that transaction. The Company has retained counsel to vigorously defend the allegations. The Company has filed a request for jurisdictional ruling in the lawsuit.

 

One of the Company’s subsidiaries, Compañía Minera Clavo Rico, S.A. de C.V., has been served with notice of a labor dispute brought in Honduras by one of the Company’s former employees. The complaint alleges that the former employee was terminated from his position with the Company’s subsidiary and is entitled to certain statutory compensation. The Company has responded with its assertion that the employee voluntarily resigned and was not involuntarily terminated. The case will be heard in a labor court in Honduras and a labor judge will make the final decision regarding the case. The next hearing in this case is scheduled for April 18, 2017.

 

In the opinion of management, as of December 31, 2016, the amount of ultimate liability with respect to such matters, if any, is not likely to have a material impact on the Company’s business, financial position, results of operations or liquidity. However, as the outcome of litigation and other claims is difficult to predict significant changes in the estimated exposures could exist.

 

19. Concentrations

 

We generally sell a significant portion of our mineral production to a relatively small number of customers. For the year ended December 31, 2016, 100 percent of our consolidated product revenues were attributable to A-Mark Precious Metals and to Asahi Refining, Inc., our current and only two customers as of December 31, 2016. We are not dependent upon any one purchaser and have alternative purchasers readily available at competitive market prices if there is a disruption in services or other events that cause us to search for other ways to sell our production.

 

The Company currently is producing all of its precious metals from one mine located in Honduras. This location has most of the Company’s fixed assets and inventories. It would cause considerable disruption to the Company’s operations and revenue if this mine was disrupted or closed.

 

20. Subsequent Events

 

Typenex Co-Investment, LLC Transaction

 

On February 27, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Typenex Co-Investment, LLC (the “Purchaser”), pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the “Note”) in the aggregate amount of $130,000. The Note has a maturity date of September 1, 2017. The Note accrues no interest, but does include an original issue discount of $25,000 and transaction expenses of $5,000. The Company has the right to prepay the Note prior to the Maturity Date without penalty.

 

The outstanding principal amount of the Note (if any) is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock, par value $0.0001 per share (the