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EX-32.1 - EXHIBIT 32.1 - U S PRECIOUS METALS INCex32x1.htm
EX-31.1 - EXHIBIT 31.1 - U S PRECIOUS METALS INCex31x1.htm
EX-32.2 - EXHIBIT 32.2 - U S PRECIOUS METALS INCex32x2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
     For the quarterly period ended:
February 29, 2012
   
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
     For the transition period:
         n/a
     
 
     Commission File Number:
000-50703

 
U.S. PRECIOUS METALS, INC.
 
 
(Exact name of registrant as specified in its charter)
 

Delaware
 
14-1839426
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
506 South Crews Avenue, Odessa, Missouri
 
64076
(Address of principal executive offices)
 
(Zip Code)
     
816-565-2499
(Registrant’s telephone number, including area code)
 
 15122 Tealrise Way, Lithia, Florida, 33547
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-K (§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).
o Yes    x No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer
o
Accelerated filer
o
 Non-accelerated filer
o
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes   x No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 100,136,850 shares of common stock issued and outstanding as of April 23, 2012.
 
 
 

 
U.S.PRECIOUS METALS, INC.
INDEX
 
 
PART 1: FINANCIAL INFORMATION     2
     
ITEM 1. FINANCIAL STATEMENTS
   2
     
CONSOLIDATED BALANCE SHEETS
February 29, 2012 (Unaudited) and May 31, 2011 (Audited)
   2
     
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and nine month periods ended February 29, 2012 and February 28, 2011 and the period from Inception (January 21, 1998) to February 29, 2012
   3
     
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine month periods ended February 29, 2012 and February 28, 2011 and the period from Inception (January 21, 1998) to February 29, 2012
   4
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   16
     
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   21
     
ITEM 4. CONTROLS AND PROCEDURES.
   21
     
PART 2: OTHER INFORMATION
   22
     
ITEM 1. LEGAL PROCEEDINGS
   22
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   22
     
ITEM 3. DEFAULT OF SENIOR SECURITIES
   22
     
ITEM 4. MINING SAFETY DISCLOSURES
   23
     
ITEM 5. OTHER INFORMATION
   23
     
ITEM 6. EXHIBITS
   24
     
SIGNATURES
   25

 1
 
 

 
PART 1: FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
U.S. PRECIOUS METALS, INC.
(An Exploration Stage Company)
CONSOLDIATED BALANCE SHEETS

   
February 29, 2012
   
May 31, 2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current Assets:
           
    Cash
  $ 49,454     $ 186,551  
    Prepaid and other current assets
    4,625       27,511  
                 
        Total current assets
    54,079       214,062  
                 
Property and equipment, net
    57,277       66,464  
                 
Other Assets
               
     Investment in mining rights and other
    160,140       160,659  
                 
                 
Total Assets
  $ 271,496     $ 441,185  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities:
               
    Accounts payable and accrued expenses
  $ 2,211,284     $ 2,196,313  
    Convertible notes payable, less discount
    667,412       2,559,504  
    Accrued interest on notes
    268,920       653,710  
                 
        Total current liabilities
    3,147,616       5,409,527  
                 
Commitments and Contingencies (Note 6.)
               
                 
Stockholders’ Deficit:
               
Preferred stock:  authorized 10,000,000 shares of $0.00001 par value; no shares issued and outstanding
    -       -  
    Common stock:  authorized 150,000,000 shares of
               
        $0.00001 par value;  99,136,850 and 78,100,646 shares, issued and outstanding respectively
    991       781  
    Additional paid in capital
    20,602,800       16,694,927  
Deficit accumulated during exploration stage
    (23,479,911 )     (21,664,050 )
                 
Total stockholders’ deficit
    (2,876,120 )     (4,968,342 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 271,496     $ 441,185  

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

2
 
 

 
U.S. PRECIOUS METALS, INC.
(An Exploration Stage Company)
CONSOLDIATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
     
January 21, 1998
(Date of Inception of Exploration Stage)
 
   
February 29,
   
February 28,
   
February 29,
   
February 28,
   
February 29,
 
   
2012
   
2011
   
2012
   
2011
   
2012
 
                               
Revenues
  $ -     $ -     $ -     $ -     $ -  
                                         
Costs and Expenses
                                       
General and administrative
    302,150       228,470       1,440,175       2,344,725       22,904,278  
Debt reduction through legal settlement
    -       -       -       -       (692,315 )
                                         
Operating Loss
    (302,150 )     (228,470 )     (1,440,175 )     (2,344,725 )     (22,211,963 )
                                         
Other Income (Expense):
                                       
Interest expense (net)
    (65,461 )     (151,805 )     (375,686 )     (477,180 )     (1,267,948 )
                                         
Total other income (expense)
    (65,461 )     (151,805 )     (375,686 )     (477,180 )     (1,267,948 )
                                         
                                         
 Loss before income taxes
    (367,611 )     (380,275 )     (1815,861 )     (2,821,905 )     (23,479,911 )
                                         
Provision for income taxes
    -       -       -       -       -  
                                         
Net loss
  $ (367,611 )   $ (380,275 )   $ (1,815,861 )   $ (2,821,905 )   $ (23,479,911 )
                                         
Net loss per share
                                       
Basic and diluted
  $ (0.00 )*   $ (0.01 )   $ (0.02 )   $ (0.05 )        
                                         
Weighted average number of  shares outstanding
                                       
Basic and diluted
    97,175,385       67,315,311       89,949,201       61,623,398          
                                         
* Less than $(0.01)
                                       
 
The accompanying notes are an integral part of these financial statements.
 
3
 
 

 
U.S. PRECIOUS METALS, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
   
January 21, 1998
(Date of Inception
Of Exploration Stage) To
 
   
February 29,
   
February 28,
   
 February 29,
 
   
2012
   
2011
   
2012
 
                   
Net loss
  $ (1,815,861 )   $ (2,821,905   $ (23,479,911 )
Adjustments required to reconcile net loss to net
                       
cash used in operating activities:
                       
Charges and credits not requiring the use of cash:
                       
    Depreciation
    9,187       9,638       77,115  
    Equity securities issued for services
    792,500       1,204,210       12,786,711  
    Accretion of debt discount
    150,408       149,521       350,812  
    Bad debt expense
    -       -       109,259  
    Debt reduction through legal settlements
    -       -       (692,315 )
Changes in operating assets and liabilities:
                       
    (Increase) decrease prepaid expenses and other current assets
    23,405       (71,141 )     (85,995 )
    Increase in Interest accrued  on convertible notes
    184,195       326,244       847,206  
    Increase (decrease) in accounts payable and
                       
        accrued expenses
    15,319       259,891       3,059,829  
Net Cash Used in Operating Activities
    (640,847 )     (943,542 )     (7,027,289 )
                         
Investing Activities:
                       
    Investment in mining rights
    -       (45,912 )     (201,588 )
    Loan to affiliated company
    -       -       (361,275 )
    Repayment of loan by the affiliated company
    -       -       253,000  
    Acquisition of equipment
    -       -       (134,392 )
Net Cash Provided By (Used in) Investing Activities
    -       (45,912 )     (444,255 )
                         
Financing Activities:
                       
    Proceeds from sales of common stock
    365,000       287,750       4,355,250  
    Proceeds from exercises of warrants
    138,750       -       406,248  
    Proceeds from convertible notes
    -       395,000       2,757,500  
    Loan from affiliated company
    -       -       70,000  
    Repayment of loan to the affiliated company
    -       -       (68,000 )
    Loans from officers
    -       -       117,700  
    Repayment of loans from officers
    -       -       (117,700 )
Net Cash Provided by Financing Activities
    503,750       682,750       7,520,998  
                         
Net increase (decrease) in cash
    (137,097 )     (306,704 )     49,454  
Cash beginning of period
    186,551       393,322       -  
Cash end of period
  $ 49,454     $ 86,618     $ 49,454  
                         

The accompanying notes are an integral part of these financial statements.
 
4
 
 

 
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2012
(unaudited)

1.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
U.S. Precious Metals, Inc. was incorporated in the state of Delaware in 1998 as a mineral exploration company. U.S. Precious Metals, Inc and its wholly owned Mexican subsidiary company, U.S. Precious Metals de Mexico, S.A. de C.V, (“U.S. Precious Metals Mexico”), (collectively “the Company”, “We” or “Us”)   are engaged in the acquisition, exploration and development of mineral properties. We focus on gold and base minerals primarily located in the State of Michoacan, Mexico where we own exploration and exploitation concessions to approximately 37,000 contiguous acres of land (the “Solidaridad Property”).

Significant Accounting Policies
Basis of Presentation:  Our accompanying unaudited financial statements have been prepared in accordance with generally  accepted  accounting  principles for interim  financial  information  and with the  instructions  to Form  10-Q and Article  10 of  Regulation  S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In our opinion the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. Operating results for the three and nine months ended February 29, 2012 are not necessarily indicative of the results that may be expected for the year ended May 31, 2012. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited financial statements for the year ended May 30, 2011 included in our Form 10-K filed with the SEC.

Exploration Stage Company: We are considered an exploration stage company under the criteria set forth by the Securities and Exchange Commission (“SEC”) since we have not yet demonstrated the existence of proven or probable reserves, as defined by the SEC, at our Solidaridad Property. As a result, and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for exploration stage companies, all expenditures for exploration and evaluation of our property are expensed as incurred and, unless mineralized material is classified as proven or probable reserves, substantially all expenditures for mine and mill construction have been and will continue to be expensed as incurred. Certain expenditures, such as for rolling stock or other general-purpose equipment, may be capitalized, subject to evaluation of the possible impairment of the asset. We will not exit the exploration stage unless and until we demonstrate the existence of proven or probable reserves that meet the SEC guidelines.

Proven and Probable Reserves: The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) 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. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven 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. In addition, reserves cannot be considered proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable at the time of the reserve determination.
 
As of February 29, 2012, none of our mineralized material met the definition of proven or probable reserves.
 
5
 
 

 
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. Estimates that are critical to the accompanying unaudited consolidated financial statements include, but are not limited to, the identification and valuation of proven and probable reserves; estimates related to asset impairments of long lived assets and investments; classification of expenditures as either an asset or an expense; stock-based compensation expenses; valuation of deferred tax assets; and the likelihood of loss contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are revised periodically and the effects of revisions are reflected in the financial statements in the period it is determined to be necessary. Actual results could differ from these estimates.

Reclassifications: Certain amounts previously presented for prior periods have been reclassified. The reclassifications had no effect on net loss, total assets, or total shareholders’ deficit.
 
Foreign Currency Translation: The operations and assets of U.S. Precious Metals Mexico are in Mexico.  U.S. Precious Metals Mexico depends on the ability of U.S. Precious Metals, Inc. to raise cash which is transferred to U.S. Precious Metals Mexico to meet its operating cash needs.  Therefore, our management has determined that the functional currency of the U.S. Precious Metals Mexico is the US dollar.  U.S. Precious Metals Mexico financial statements are denominated in Mexican Pesos. Since that is the case, we remeasure U.S. Precious Metals Mexico financial statements in US dollars.  Any gains or losses arising on the remeasurement are reflected in the Statements of Operations.
 
The accounts of U.S. Precious Metals Mexico are remeasured in US dollars as follows:

(a)  
Current assets, current liabilities, and long-term monetary assets and liabilities are translated based on the rates of exchange in effect at the balance sheet dates.

(b)  
Non-monetary assets, liabilities, and equity accounts are translated at the exchange rates prevailing at the times of acquisition of assets, assumption of liabilities or equity investments.

(c)  
Revenues and expenses are translated at the average exchange rates for each period, except for charges for amortization and depreciation of non-monetary assets which are translated at the rates associated with the assets.
 
Cash and cash equivalents -- Cash and cash equivalents consist of cash and highly liquid debt instruments with original maturities of less than three months.

Property and equipment: Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the related reasonably assured lease term.  The estimated useful lives are as follows:
 
Vehicles
      4 years
Machinery and equipment
3-10 years
 
6
 
 

 
We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Maintenance and repairs of property and equipment are charged to operations. Major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.
 
Investments in Mining Rights: Mining rights held for development are recorded at the cost of the rights, plus related acquisition costs.  These costs will be amortized when extraction begins.
 
Mine development costs: include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines. Costs incurred before mineralized material is classified as proven and probable reserves are expensed as mine development costs. At the point we reach our operating stage, such costs will be capitalized and will be written off as depletion expense as the mineralized material is mined.
 
Deferred Costs and Other: Offering costs with respect to issue of common stock, warrants or options by us were initially deferred and ultimately offset against the proceeds from these equity transactions if successful or expensed if the proposed equity transaction is unsuccessful.
 
Impairment of Long-Lived and Intangible Assets: In the event that facts and circumstances indicated that the cost of long-lived and intangible assets may be impaired, an evaluation of recoverability was performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the asset were compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value was required. No impairment was recorded during the three and nine month periods ended February 29, 2012 or February 28, 2011.
 
Financial Instruments: The estimated fair values for financial instruments were determined at discrete points in time based on relevant market information. These estimates involved uncertainties and could not be determined with precision. The carrying amounts of notes receivable, accounts receivable, accounts payable and accrued liabilities approximated fair value because of the short-term maturities of these instruments. The fair value of notes payable approximated to their carrying value as generally their interest rates reflected our effective annual borrowing rate.
 
Fair Value Measurements: ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements.  Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.  ASC 820 defines the hierarchy as follows:
 
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
 
Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date.  The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.
 
7
 
 
 

 
Level 3 – Significant inputs to pricing that are unobservable as of the reporting date.  The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
 
Our financial instruments consist of cash and cash equivalents, short-term trade prepaid expenses, payables, accruals and convertible notes payable.  The carrying values of cash and cash equivalents, short-term trade prepaid expenses, payables, accruals and convertible notes payable approximate their fair value due to their short maturities.
 
Income Taxes: We account for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
 
Revenue Recognition Policy: Revenue will be recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from a customer, the price is fixed, title to the goods has passed, and there is reasonable assurance of collection.  We have not yet entered into any contractual arrangement to deliver product or services.

Advertising costs: Advertising costs are expensed as incurred. No advertising costs were incurred during the three and nine month periods ended February 29, 2012 or February 28, 2011.
 
Comprehensive Income (Loss): Comprehensive income is defined as all changes in stockholders' equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale securities. From our Inception there have been no differences between our comprehensive loss and net loss.
 
 Our comprehensive loss was identical to our net loss for the three and nine month periods ended February 29, 2012 and February 28, 2011.
 
Net Income (Loss) Per Share: Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted income per share reflects the potential dilution that could occur if potentially dilutive securities, as determined using the treasury stock method, are converted into common stock. Potentially dilutive securities, such as stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the fair market value. During the three and nine month periods ended February 29, 2012 and February 28, 2011, there were warrants and options outstanding to purchase our common stock, and conversion privileges attached to convertible notes.  The common share equivalents of these securities have not been included in the calculations of loss per share because such inclusions would have anti-dilutive effects.

Stock-Based Compensation: We have adopted ASC Topic 718, “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield.
 
8
 
 

 
Business Segments: We believe that our activities during the three and nine month periods ended February 29, 2012 and February 28, 2011 comprised a single segment.

Recently Issued Accounting StandardsWe have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
 
2. 
GOING CONCERN AND LIQUIDITY
 
As shown in the accompanying financial statements, we have experienced continuing losses, and as at February 29, 2012,  have a working capital deficit of $3,093,537, accumulated losses of $23,479,911 since Inception (January 21, 1998), recurring negative cash flows from operations and presently do not have sufficient resources to meet our outstanding liabilities or accomplish our objectives during the next twelve months.
 
As at February 29, 2012, we were in default on repayment of convertible promissory notes with principal balances of $350,000 repayable at December 31, 2010 together with accrued interest of $172,603. In addition, convertible promissory notes with principal balances of $325,000, together with accrued interest of $96,318, is due for repayment on May 17, 2012.

Moreover, in settlement of a lawsuit with our former attorneys, we have agreed to pay on May 24, 2012 the first of four, quarterly installments of $403,554, subject to other terms of the settlement.

At the time of this report, we do not having the funding available to repay the convertible promissory notes that are currently repayable, that will become repayable in May 2012 or the installments payable in settlement of our lawsuit that commence in May 2012.
 
These conditions raise substantial doubt about our ability to continue as a going concern.
 
In our audited financial statements for the fiscal years ended May 30, 2011 and 2010, contained in our Annual Report, the Report of the Independent Registered Public Accounting Firm includes an explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.
 
Our  unaudited financial  statements for the three and nine month periods ended February 29, 2012 and February 28, 2011 have been prepared on a going  concern  basis,  which contemplates  the  realization of assets and the  settlement of liabilities  and commitments in the normal course of business. The financial statements do not include adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
 
Our present plans to overcome these difficulties, the realization of which cannot be assured, include, but are not limited to, continuing efforts to raise new funding in the public and private markets, to sell some or all of our assets and to initiate a renegotiation of the terms of scheduled repayments to our creditors.
 
9
 
 

 
3. 
SUPPLEMENTAL CASH FLOW INFORMATION
 
   
Nine Months Ended
 
   
February 29
   
February 28.
 
   
2012
   
2011
 
Income taxes paid
  $ -     $ -  
                 
Interest paid
  $ -     $ 709  
                 
Equity securities issued services
               
                 
550,000  shares of common stock issued to consultant
  $ 167,500     $ -  
200,000 shares issued to consultants
    30,000          
1,000,000 stock options issued to a consultant
    160,000          
1,750,000 shares issued to directors
    175,000          
1,500,000 options issued to directors
    260,000          
7,000,000 stock options issued to directors and officers
    -       520,000  
1,000,000  shares issued to directors
            200,000  
   Less balance classified prepaid at February 28, 2011
            (83,333 )
1,600,000 shares of common stock issued to employees and a consultant
    -       149,200  
4,737,500 shares of common stock issued to a broker in connection with the issuance of convertible notes
    -       990,125  
             Less: balance expensed in prior year
            (612,500 )
934,049 warrants to purchase shares of common stock issued to a broker in connection with the issuance of convertible notes
    -        152,250  
      Less: balance expensed in prior year
            (111,532 )
                 
Total shares and warrants issued for services
  $ 792,500     $ 1,204,210  
Liabilities settled for shares of common stock
               
                 
110,950 shares of common stock issued on conversion of
               
                       convertible notes payable
          $ 25,000  
                       accrued interest
            8,285  
13,211,204 shares of common stock issued on conversion of:
               
                       convertible notes payable
  $ 2,042,500       -  
                       accrued interest
  $ 568,985       -  
                 
Total liabilities settled for shares of common stock
  $ 2,611,485     $ 33,285  
 
 
10
 
 

 
4. 
PROPERTY AND EQUIPMENT
 
As at February 29, 2012 and May 31, 2011 property and equipment consisted of the following:

   
February 29, 2012
   
May 31, 2011
 
             
Vehicles
  $ 41,877     $ 41,877  
Machinery and equipment
    92,515       92,515  
                 
Total property and equipment
    134,392       134,392  
                 
Less accumulated depreciation
    (77,115 )     (67,928 )
                 
Total property and equipment net
  $ 57,277     $ 66,464  

Depreciation expense for the three and nine months ended February 29, 2012 was $2,671 (2011-$3,286) and $9,187 (2011- $9,638), respectively.
 
5. 
CONVERTIBLE NOTES PAYABLE
 
   
Principal Balance
   
Loan Discount
   
Total
 
May 31, 2011
  $ 2,717,500       (157,996 )   $ 2,559,504  
Issued in the period
    -       -       -  
Converted into shares of common stock
    (2,042,500 )     -       (2,042,500 )
Accretion of debt discount
    -       150,408       150,388  
February 29, 2012
  $ 675,000       (7,588 )   $ 667,412  

During the nine month period ended February 29, 2012, holders of outstanding convertible promissory notes (“Notes”) with principal balances of $2,042,500 and accrued interest of $568,985 converted such amounts due into 13,211,204 shares of our common stock under the terms of the respective notes.
 
Separately, during the nine month period ended February 28, 2011, the Company sold notes with principal balance of $395,000 to accredited investors. Of that amount, a Note Holder converted a note with a principal balance of $25,000 and accrued interest of $8,285 into 110,950 shares of our common stock.
 
11
 
 

 
The Notes outstanding at February 29, 2012 have matured, or are scheduled to mature, as follows:
 
   
# of notes
   
Principal (prior to discount)
   
Accrued Interest
   
Total
 
                         
Notes in Default
                       
Due for repayment on December, 31, 2010
  3     $ 350,000     $ 172,603     $ 522,603  
                               
Notes in Compliance
                             
Due for repayment on May 17, 2012
  6       325,000       96,317       421,317  
                               
Total Notes and Accrued Interest
  9     $ 675,000     $ 268,920     $ 943,920  
 
The Notes bear simple interest at an annual rate of 16%. The Notes may be converted into the shares of our common stock at the option of the Note Holder after a specified date depending upon when the Note was issued, or automatically, each under certain circumstances as described below:
 
Any Holder of the Notes has the option to convert the principal and outstanding interest under such Holder’s Notes into shares of our common stock, subject to certain restrictions.
 
The Notes will automatically convert into shares of our common stock at the stated conversion price if we complete any financing that results in proceeds of at least $10 million to us, or upon the occurrence of a change in control of us.

6. 
COMMITMENTS AND CONTINGENCIES
 
On May 24, 2011, we settled a lawsuit we brought against our former attorneys, alleging improper fee billing.  Under the terms of the settlement, the outstanding balance due to the attorneys was reduced by $412,949 and we agreed to pay the remaining balance of $1,614,216 in four equal installments commencing May 24, 2012, subject to other terms.
 
On April 3, 2012, our Mexican subsidiary company, US Precious Metals SA de CV, was served with a lawsuit under case number 293/2012 in Mexico City, Federal District Court by Mr. Israel Tentory Garcia (“the Plaintiff”) regarding one of our mining concessions.
 
During 2003, we acquired from eight private individuals, including the Plaintiff, an exploration concession to acquire 174.54 hectares. Pursuant to this Assignment Agreement (‘the Agreement”), we paid the former holders 1.5 million shares of our common stock. The Agreement further provided for the payment of $1 million to the former holders upon the occurrence of certain conditions. In his lawsuit, the Plaintiff alleges that the payment was due and payable on or about 2009 and ownership of the mining concession should revert back to him.
 
We have retained counsel in Mexico to represent our subsidiary in this matter. We strongly dispute the allegations raised in the lawsuit and intend to vigorously defend the lawsuit. We intend to file our answer to the complaint on or before April 25, 2012 pursuant to which we will allege numerous defects in both fact and law and will seek dismissal of the action.
 
While we remain firm in our legal position, we have nonetheless conducted preliminary discussions with the Plaintiff in an effort to settle this matter.  At the time of this filing, these discussions are ongoing. There can be no guarantee that we will be able to arrive at a settlement with the Plaintiff that is acceptable to us.
 
While we will vigorously defend the lawsuit, we cannot predict the likely outcome of this litigation in the Mexican judicial system. If we are unable to prevail in this matter and the Plaintiff is found to be entitled to the reversion of the concession, such event would have a material adverse impact on us and our plans for this concession.
 
12
 
 

 
7. 
STOCKHOLDERS’ DEFICIT
 
Preferred Stock
 
No shares of preferred stock were issued or outstanding during the three and nine month periods ended February 29, 2011 and February 28, 2010.
 
Common Stock and Warrants
 
   
Common Stock
   
Warrants
 
             
May 31, 2011
    78,100,646       5,746,549  
Issued for cash proceeds of $365,000
    3,650,000       1,825,000  
Issued to directors as compensation valued at $175,000
    1,750,000       -  
Issued on the exercise of stock options
    200,000          
Issued to consultants as compensation valued at $30,000
    200,000       -  
Issued to a consultant as compensation valued at $167,000
    550,000       -  
Issued on conversion of notes payable with principal balances of $2,042,500 and accrued interest of $568,985
    13,211,204       -  
Warrants exercised at $0.05 and $0.25
    1,475,000       (1,475,000)  
Warrants expired, unexercised
    -       (1,524,099)  
February 29, 2012
    99,136,850       4,572,450  
 

The following table summarizes information about warrants outstanding at February 29, 2012:

Exercise Price
   
Warrants Outstanding
 
Weighted Average Life of Outstanding Warrants In Months
 
    $0.16       947,450       41.5  
    $0.15       2,500,000       7.8  
    $0.25       1,125,000       3.8  
Total
      4,572,450       13.9  
 
13
 
 

 
Stock Options
 
In August 2008, our shareholders approved a Stock Option Plan (the “Plan”). Under the terms of the Plan, options to purchase up to 20,000,000 shares of Company common stock may be issued to officers, directors, key employees and consultants.
 

   
Stock Options
Outstanding and Exercisable
 
Weighted Average
Exercise Price
May 31, 2011
    10,000,000     $ 0.066  
Granted
    2,500,000       0.0186  
Exercised
    (200,000 )     (0.62 )
Cancelled or forfeited
    (1,052,000 )     (0.065 )
February 29, 2012
    11,248,000     $ 0.092  
 
All outstanding options were fully vested when issued.
 
The following table summarizes information about stock options outstanding and exercisable at February 29, 2012:

Exercise Price
   
Stock Options
Outstanding and Exercisable
 
Intrinsic Value of Stock Options Outstanding and Exercisable
 
Weighted Average Life of Stock Options Outstanding and Exercisable in Years
$0.065       7,748,000     $ 2,053,220       4.01  
$0.07       1,000,000       260,000       3.60  
$0.18       1,000,000       150,000       4.60  
$0.185       1,000,000       145,000       4.62  
$0.20       500,000       65,000       4.82  
        11,248,000     $ 2,673,220       4.12  
 
The aggregate intrinsic value represents the difference between our closing stock price of $0.33 per share as of February 29, 2012 and the exercise price multiplied by the number of options outstanding and exercisable as of that date.
 
8. 
RELATED PARTY TRANSACTIONS
 
During the nine month period ended February 29, 2012, we issued to our directors a total of 1,750,000 shares of common stock, valued at $175,000, and 1,500,000 stock options, valued at $259,999. Each director received 250,000 shares of common stock, except that the Chairman, who received 500,000 shares of common stock. In addition, 1,000,000 stock options were issued to a newly appointed director and 500,000 stock options were issued to an officer who is also a director.
 
During the nine month period ended February 28, 2011, we issued to our directors and officers 7,000,000 stock options valued at $500,000 and 1,000,000 shares valued at $200,000.
 
14
 
 

 
9. 
INCOME TAXES
 
We have had losses since our Inception, and therefore are not subject to federal or state income taxes.

10. 
SUBSEQUENT EVENTS
 
On March 9, 2012 we issued warrants with an expiry date of May 5, 2012 to purchase 500,000 shares of our common stock at $0.25 to an accredited investor. The investor exercised warrants to purchase 200,000 shares of our common stock and we received proceeds of$50,000.
 
Effective March 13, 2012, we issued 1 million shares of our common stock and stock warrants with an exercise period of six months to purchase 500,000 shares of our common stock at $0.25 to an accredited investor for cash consideration of $100,000.
 
On March 28, 2012, we filed a Form 8-K in which we disclosed that as reported in our prior filings with the Securities and Exchange Commission, we are seeking funding through debt and equity placement and/or through a joint venture participation or sale of all or part of our 37,000 acre mining concessions. To that end, our President, Dave Burney, has spent a substantial amount of time during the past two months in the Pacific Rim facilitating meetings and discussions with interested parties. Under confidentiality agreements, we have provided legal, geological, and technical information to these interested parties. Discussions to date have focused both on a joint venture arrangement to further explore and develop the property and the proposed sale of all or part of the 37,000 acre mining concessions. As of the date of this filing, discussions with such parties are ongoing, however, we have not received a definitive offer or term sheet from any third party, and there can be no assurance that any transaction will result from these ongoing discussions.
 
On April 3, 2012, our Mexican subsidiary company, US Precious Metals SA de CV, was served with a lawsuit under case number 293/2012 in Mexico City, Federal District Court by Mr. Israel Tentory Garcia (“the Plaintiff”) regarding one of our mining concessions.
 
During 2003, we acquired from eight private individuals, including the Plaintiff, an exploration concession to acquire 174.54 hectares. Pursuant to this Assignment Agreement (‘the Agreement”), we paid the former holders 1.5 million shares of our common stock. The Agreement further provided for the payment of $1 million to the former holders upon the occurrence of certain conditions. In his lawsuit, the Plaintiff alleges that the payment was due and payable on or about 2009 and ownership of the mining concession should revert back to him.
 
We have retained counsel in Mexico to represent our subsidiary in this matter. We strongly dispute the allegations raised in the lawsuit and intend to vigorously defend the lawsuit. We intend to file our answer to the complaint on or before April 25, 2012 pursuant to which we will allege numerous defects in both fact and law and will seek dismissal of the action.
 
While we remain firm in our legal position, we have nonetheless conducted preliminary discussions with the Plaintiff in an effort to settle this matter.  At the time of this filing, these discussions are ongoing. There can be no guarantee that we will be able to arrive at a settlement with the Plaintiff that is acceptable to us.
 
While we will vigorously defend the lawsuit, we cannot predict the likely outcome of this litigation in the Mexican judicial system. If we are unable to prevail in this matter and the Plaintiff is found to be entitled to the reversion of the concession, such event would have a material adverse impact on us and our plans for this concession.
 
On April 13, 2012,  Mr. Cutler, our Chief Financial Officer, was granted stock options to acquire 500,000 shares of our common stock at an exercise price of $0.17, all of which have been vested. The options expire five years from the date of grant unless sooner terminated by resignation or removal
 
We have evaluated subsequent events through April 23, 2012.  Other than those set out above, there have been no subsequent events after February 29, 2011 for which disclosure is required.
 
15
 
 

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This quarterly report on Form 10-Q (this “Quarterly Report”) contains certain forward-looking statements that are subject to risks and uncertainties. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Quarterly Report, the words “anticipate,” “believe,” “plan,” “target,” “estimate,” “intend,” “expect” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our strategy, future plans for exploration and production, future expenses and costs, future liquidity and capital resources, and estimates of mineralized material. All forward-looking statements in this Quarterly Report are based upon information available to our management on the date of this Quarterly Report.
 
Forward-looking statements are subject to a number of risks and uncertainties and there can be no assurance that such statements will be accurate. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially and adversely from those described herein as anticipated, believed, planned, targeted, estimated, intended or expected. Although we believe the assumptions underlying and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Actual results could differ materially and adversely from those discussed in this Quarterly Report.
 
Substantial risks exist with respect to an investment in us. These risks include but are not limited to, those factors discussed in our Annual Report on Form 10-K/A for the fiscal year ended May 31, 2011, filed with the Securities and Exchange Commission (“ SEC ”) on September 20, 2011 (the “ Annual Report ”) including the section entitled “ Item 1A. Risk Factors.” More broadly, these factors include, but are not limited to:
 
Our current financial condition and immediate need for capital;
Potential dilution resulting from the issuance of new securities for any funding;
Unexpected changes in business and economic conditions;
Change in interest rates and currency exchange rates;
Timing and amount of production, if any;
Technological changes in the mining industry;
Changes in exploration and overhead costs;
Access to and availability of materials, equipment, supplies, labor and supervision, power and water;
Results of future feasibility studies, if any;
The level of demand for our products;
Changes in our business strategy;
Interpretation of drill hole results and the geology, grade and continuity of mineralization;
The uncertainty of mineralized material estimates and timing of development expenditures;
Commodity price fluctuations; and
Changes in exploration results.
 
We qualify all of our forward-looking statements by the cautionary statements listed above, as well as those factors described in our Annual Report including the referenced “Item 1A. Risk Factors.” The list above, together with the factors described in our Annual Report under “Item 1A. Risk Factors,” is not exhaustive of the factors that may affect the accuracy of our forward-looking statements. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially and adversely different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only as of the date of this Quarterly Report. Except as required by applicable law, including the securities laws of the United States, we assume no obligation to update any such forward-looking statements.
 
16
 
 

 
 
Overview
We were formed as a mineral exploration company on January 21, 1998. We are engaged in the acquisition, exploration and development of mineral properties. We focus on gold and base minerals primarily located in the State of Michoacan, Mexico where we own exploration and exploitation concessions to approximately 37,000 contiguous acres of land (the “Solidaridad Property”). Mineral exploration requires significant capital and our assets and resources are limited. We have never earned revenue from our operations and have relied on equity and debt financing to fund our operations to date.
 
We are considered an exploration stage company for accounting purposes because we have not demonstrated the existence of proven or probable reserves. In accordance with accounting principles generally accepted in the United States of America, all expenditures for exploration and evaluation of our properties have been expensed as incurred. Furthermore, unless our mineralized material is classified as proven or probable reserves, substantially all expenditures have been or will be expensed as incurred. Since substantially all of our expenditures to date have been expensed and we expect to expense significant expenditures during the fiscal year 2012, most of our investment in mining properties do not appear as an asset on our balance sheet.
 
During the nine months ended February 29, 2012, we reduced our outstanding liabilities as a result of the conversion of a substantial value of our promissory notes into shares of our common stock. We also made a number of appointments to strengthen our management team and undertook certain initiatives to progress our business plan as set out below:
 
During the nine month period ended February 29, 2012, Note Holders converted convertible notes payable with principal balances of $2,042,500 and accrued interest of $568,985 into 13,211,204 shares of our common stock. This reduced our outstanding liabilities by $2,611,485.
 
In June 2011, we had completed a Technical Report on our mining property located in Michaocan, Mexico. The Technical Report is entitled PRECIOUS AND BASE METALS DEPOSIT AT LA SABILA RANCH IN SOUTHERN MICHOACAN, MEXICO and was authored jointly as Qualified Persons by Michael Floersch of Applied Minerals, Inc., Thompson Falls, Montana and Betty Gibbs of Gibbs Associates, Boulder, Colorado.
 
We believe that the report is compliant with National Instrument 43-101 – Standards of Disclosure for Mineral Projects implemented by the Canadian Securities Administrators; however, we have not filed this report with any Canadian authority to determine compliance. Moreover, the report has not been reviewed and/or accepted by any Canadian or US regulatory authority.
 
On June 28, 2011, Mr. Peter Christos resigned in his capacity as one of our directors. Mr. Christos did not resign over any disagreement with us on any matter relating to our operations, policies or practices.
 
On October 3, 2011, our Board of Directors appointed Mr. Gennaro (Jerry) Pane as our interim Chief Executive Officer.  Mr. Pane also remains a member of our Board of Directors. As consideration for his services in such capacity, the Board of Directors granted Mr. Pane five year stock options to purchase 500,000 shares of our common stock at $0.20 per share.
 
17
 
 

 
On September 20, 2011, our Board of Directors appointed Mr. Daniel H. Luciano as our Chief Operating Officer, replacing Mr. Sheldon Baer.
 
On November 29, 2011, Mr. Jack Wagenti resigned as our Chief Financial Officer, and the Board of Directors appointed Mr. David Cutler as our new Chief Financial Officer.
 
On November 30, 2011, Mr. Jack Wagenti resigned from all other capacities in which he had served us, as Chairman, Secretary, Treasurer and director, and Mr. Daniel H. Luciano resigned as our Chief Operating Officer. The resignation of Mr. Wagenti (age 74) as a director is not as a result of any disagreement with us on matters relating to our policies, practices or procedures. Mr. Luciano remains as one of our directors.
 
Immediately following the resignations of Messrs. Wagenti and Luciano in their respective officer capacities, our Board of Directors appointed Mr. John Gildea, a director of the Company, as Chairman and Chief Operating Officer of the Company and Mr. Luciano as Secretary.
 
On November 29, 2011, we entered into a Definitive Agreement with a major institutional investment bank. Under the agreement, the firm will provide initial advisory services to us and any other investment banking services as they are required. The term of the agreement is for a period of six months, and may be extended by mutual consent. The investment banking firm is a FINRA/SEC registered broker/dealer based in the continental United States.
 
On December 29, 2011, we appointed Mr. Daniel Joonsikk Moon to our Board of Directors.  
 
Mr. Moon was granted stock options to acquire 1 million shares of our common stock at an exercise price of $0.18, all of which have been vested. The options expire five years from the date of grant unless sooner terminated by resignation or removal.
 
As reported in our prior filings with the Securities and Exchange Commission, we are seeking funding through debt and equity placement and/or through a joint venture participation or sale of all or part of our 37,000 acre mining concessions. To that end, our President, Dave Burney, has spent a substantial amount of time during January and February 2012 in the Pacific Rim facilitating meetings and discussions with interested parties. Under confidentiality agreements, we have provided legal, geological, and technical information to these interested parties. Discussions to date have focused both on a joint venture arrangement to further explore and develop the property and the proposed sale of all or part of the 37,000 acre mining concessions. As of the date of this filing, discussions with such parties are ongoing, however, we have not received a definitive offer or term sheet from any third party, and there can be no assurance that any transaction will result from these ongoing discussions
 
Liquidity and Capital Resources
There is no assurance that commercially viable mineral deposits exist in sufficient amounts in our areas of exploration to justify exploitation. Further exploration will be required before a final evaluation as to the economic and legal feasibility of the mining rights we own can occur. Because we are still in our exploration stage, we have no revenues and have had only losses since our inception.
 
Our plan of operations for the next 12 months is to continue the drilling program and begin a small exploitation program, provided that we receive sufficient funding to do so. However, we have made no commitments for capital expenditures over the next 12 months.
 
18
 
 

 
As of February 29, 2019, our management estimates that approximately $600,000 will be required over the next 12 months to maintain our current status. This amount does not include any exploitation or any additional exploration (the amount for such expenditures will vary depending on the nature and extent of such activities) and also excludes our current liabilities described below. Of this total amount, we estimate these expenses to include approximately $250,000 for salaries, outsourced labor and consulting services, $80,000 for professional services, including work undertaken by the independent accountant and legal fees, $100,000 for rent, maintenance, office expenses and utilities, $100,000 for permits and expenses required to maintain our mining rights, $50,000 for taxes and insurance, and $20,000 for other miscellaneous expenses, including travel expenses. We do not intend to hire any additional employees at this time. Our current employees and independent contractors will conduct all of the work related to our business. To the extent we receive funding, this is likely to change.
 
In addition to the above projected expenditures, as of February 29, 2012, we have current liabilities, including those described below, totaling $3,174,616.
 
Of the current liabilities, we had convertible notes outstanding of $675,000 with related unpaid interest of $268,921. Of the total amount, $350,000 in principal was due December 31, 2010 and is now in default.  Interest accrued on the principal through February 29, 2012 is $172,603 and is now also due. The balance of the loan notes, $325,000, together with accrued interest at February 29, 2012 of $96,318, are repayable in full on May 17, 2012.
 
In addition, under a settlement agreement, we are obligated to pay Duane Morris LLP, our former attorneys, the sum of $1,614,216 in four equal payments, at 90 day intervals, beginning in May 2012. Certain other conditions may apply which would result in an acceleration of such payments (Please refer to our Form 8-K filed with the Securities and Exchange Commission on May 27, 2011). On January 7, 2010, our Mexican subsidiary granted and pledged to Duane Morris, as security for the payment of outstanding legal bills, a security interest in and a lien on all of its rights to our mining concessions in Mexico.  A Payment Agreement and General Release also were signed by the Mexican subsidiary which imposes restrictions on our ability to conduct our business without the prior written consent of Duane Morris.  Under the settlement agreement, we also released Duane Morris and, inter alia, its partners, from any and all liabilities or claims the Company may have had in connection with the provision of legal services rendered by Duane Morris.
 
As of the date of this report, we have not paid the holders of certain of the notes described above as required under their terms. In addition, we have amounts due under the settlement agreement with our former attorney’s discussed above.   If we are unable to pay these notes or our other outstanding payables in the immediate future or otherwise re-negotiate their terms, we may be required to seek protection under the US bankruptcy laws or otherwise be forced into bankruptcy.
 
Since we do not anticipate generating any revenue for the foreseeable future, we will have to continue to seek additional funding from outside sources. However, we are facing volatile financial markets that may make it difficult to satisfy our need for additional capital to finance our plan of operations for fiscal 2012 through either debt or equity. As a result, we continue to seek appropriate opportunities that are likely to provide us with adequate fiscal resources to execute our plan of operations in the current fiscal year and beyond.
 
Depending on market conditions and the options available to us, we may attempt to enter into a joint venture with an operating company or permit an operating company or third party to undertake exploration work on the Solidaridad Property, we may attempt to sell all or part of our Solidaridad Property, or we may seek equity or debt financing (including borrowing from commercial lenders) or we may consider a sale of ourselves or our assets.
 
To date, we have raised capital through the sale of shares of our common stock and sales of convertible promissory notes. During the nine months ended February 29, 2012, we issued 3,650,000 stock units for cash proceeds of $365,000. A unit is comprised of one share of stock and one-half warrant. A full warrant is required to purchase one additional share of stock. The warrants issued in the current year are exercisable for a period of six months from the issue date, and are exercisable at $0.25 per share
 
19
 
 

 
As mentioned above, we must obtain additional funding to continue our operations. There can be no guarantee that we will be able to obtain additional funding on terms that are favorable to us or at all. As an exploration stage company, we have no current ability to generate revenue and no plans to do so in the foreseeable future. Our assets consist of cash, prepaid expenses, nominal equipment and certain mineral property interests. There can be no assurance that we will obtain sufficient funding to continue operations, or if, we do receive funding, to generate revenues in the future or to operate profitably in the future. We have incurred net losses in each fiscal year since Inception of our operations. These conditions raise substantial doubt about our ability to continue as a going concern.
 
Because of the exploratory nature of our current business plan, we anticipate incurring operating losses for the foreseeable future. Our future financial results also are uncertain due to a number of factors, some of which are outside our control. These factors include, but are not limited to:

i.
Our ability to raise sufficient additional funding;
   
ii.
The results of our proposed exploration programs on the Solidaridad Property; and
   
iii.
Assuming significant mineral deposits, our ability to be successful in commercially producing mineral deposits, find joint venture partners for the development of our property interests or find a purchaser for the property interests.
 
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 2012 COMPARED TO THE THREE MONTHS ENDED FEBRUARY 28, 2011
 
Revenue
We earned no revenue in either the three months ended February 29, 2012 or the three months ended February 28, 2011 and as an exploration stage company we do not anticipate earning revenue in the foreseeable future.
 
General and administrative expenses
During the three months ended February 29, 2012, we incurred general and administrative expenses of $302,150 compared to $228,470 in the three months ended February 28, 2011, an increase of $73,680, or 32%.
 
The increase was principally due to the issue of stock options to a newly appointed director in the three months ended February 29, 2012 as compared to the three months ended February 28, 2011, partially offset by a general reduction in corporate overhead expenses the same period.
 
Interest expense (net)
During the three months ended February 29, 2012, we incurred interest expense (net) of $65,461 compared to $151,805 during the three months ended February 28, 2011, a decrease of $86,344, or 57%.
 
The decrease is due to the reduced level of debt outstanding in the three months ended February 29, 2012 as compared to the same period to February 28, 2011 which reflects the conversion of $2,067,500 convertible notes payable into equity since February 28, 2011.
 
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Net loss
The net loss for the three months ended February 29, 2012 was 367,611 compared to $380,375 during the three months ended February 28, 2011, a decrease of $12,764, or 3%, due to the factors discussed above.
 
NINE MONTHS ENDED FEBRUARY 29, 2012 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 2011
 
Revenue
We earned no revenue either in the nine months ended February 29, 2012 or the nine months ended February 28, 2011 and as an exploration stage company we do not anticipate earning revenue in the foreseeable future.
 
General and administrative expenses
During the nine months ended February 29, 2012, we incurred general and administrative expenses of $1,440,175 compared to $2,344,725 in the nine months ended February 28, 2011, a decrease of $904,550, or 39%.
 
The decrease in the level of general and administrative costs between the two periods reflected widespread cost reductions implemented by management including a substantial decrease in directors’ fees, professional fees, drilling and excavation costs, salaries, and other corporate overhead.
 
Interest expense (net)
During the nine months ended February 29, 2012, we incurred interest expense (net) of $375,686 compared to $477,180 during the nine months ended February 28, 2011, a decrease of $101,494, or 21%.
 
The decrease is due to the reduced level of debt outstanding in the nine months ended February 29, 2012 as compared to the nine months ending February 28, 2011 following the conversion of $2,067,500 convertible notes payable into equity during since February 28, 2011.
 
Net loss
The net loss for the nine months ended February 29, 2012 was $1,815,861 compared to $2,821,905 for the nine months ended February 28, 2011, a decrease of $1,006,044, or 36%, due to the factors discussed above.
 
CASH FLOW INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 29, 2012 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 2011

Net cash flow used in operations in the nine months ended February 29, 2012 was $640,847 compared to $943,542 for the nine months ended February 28, 2011, a decrease of $302,695, or 32%.
 
In the nine months ended February 29, 2012, our net loss was $1,815,861 which was offset by $952,095 in non cash items and a positive movement in operating assets and liabilities of $222,919 to arrive at net cash used in operations of $640,847. By comparison, in the nine months ended February 28, 2011, our net loss was $2,821,905 which was offset by $1,363,369 in noncash items and a positive movement in operating assets and liabilities of $514,894 to arrive at net cash used in operations of $943,542.
 
Net cash flow used in investing activities in the nine months ended February 29, 2012 was $0 compared to $45,912 for the nine months ended February 28, 2011. We incurred certain expenditures on mining rights during the nine months ended February 28, 2011 which we did not incur during the nine months ended February 29, 2012.
 
Net cash flow generated from financing activities was $503,750 in the nine months ended February 29, 2012 compared to $682,750 for the nine months ended February 28, 2011, a decrease of $179,000, or 26%.
 
In the nine months ended February 29, 2012 we generated net cash of $365,000 from the sale of shares of our common stock, and $138,750 through the exercise of our warrants. By comparison, in the nine months ended February 28, 2011 we generated $287,750 from the sale of shares of our common stock and $395,000 through the issuance of convertible notes.
 
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures.
Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), as of the last day of the fiscal period covered by this report, February 29, 2012.The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of February 29, 2012.
 
Changes in Internal Control over Financial Reporting.
During the fiscal quarter ended February 29, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART 2: OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
We were not subject to any legal proceedings during the three and nine month periods ended February 29, 2012.
 
On April 3, 2012, our Mexican subsidiary company, US Precious Metals SA de CV, was served with a lawsuit under case number 293/2012 in Mexico City, Federal District Court by Mr. Israel Tentory Garcia (“the Plaintiff”) regarding one of our mining concessions.
 
During 2003, we acquired from eight private individuals, including the Plaintiff, an exploration concession to acquire 174.54 hectares. Pursuant to this Assignment Agreement (‘the Agreement”), we paid the former holders 1.5 million shares of our common stock. The Agreement further provided for the payment of $1 million to the former holders upon the occurrence of certain conditions. In his lawsuit, the Plaintiff alleges that the payment was due and payable on or about 2009 and ownership of the mining concession should revert back to him.
 
We have retained counsel in Mexico to represent our subsidiary in this matter. We strongly dispute the allegations raised in the lawsuit and intend to vigorously defend the lawsuit. We intend to file our answer to the complaint on or before April 25, 2012 pursuant to which we will allege numerous defects in both fact and law and will seek dismissal of the action.
 
While we remain firm in our legal position, we have nonetheless conducted preliminary discussions with the Plaintiff in an effort to settle this matter.  At the time of this filing, these discussions are ongoing. There can be no guarantee that we will be able to arrive at a settlement with the Plaintiff that is acceptable to us.
 
While we will vigorously defend the lawsuit, we cannot predict the likely outcome of this litigation in the Mexican judicial system. If we are unable to prevail in this matter and the Plaintiff is found to be entitled to the reversion of the concession, such event would have a material adverse impact on us and our plans for this concession.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
During the three months ended August 31, 2011, we received $100,000 from the sale of 1,000,000 units. Each unit consists of one share of our common stock, and one half of a warrant. The conversion price of the warrant is $0.25 during an exercise period of six months. The transaction was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that the investor was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend.
 

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During the three months ended November 30, 2011, we received $165,000 from the sale of 1,650,000 units. Each unit consists of one share of our common stock, and one half of a warrant. The conversion price of the warrant is $0.25 during an exercise period of six months. The transaction was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that the investor was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend. 
 
During the three months ended February 29, 2012, we received $200,000 from the sale of 2,000,000 units. Each unit consists of one share of our common stock, and one half of a warrant. The conversion price of the warrant is $0.25 during an exercise period of six months. The transaction was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that the investor was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend.
 
ITEM 3. DEFAULT OF SENIOR SECURITIES.
 
As at February 29, 2012 we are in default on repayment of convertible promissory notes with principal balances of $350,000 repayable December 31, 2010 and accrued interest of $172,603.
 
As of the date of this report, we have not paid the holders of these notes as required under their terms.
 
ITEM 4. MINING SAFETY DISCLOSURES
 
Mining operations and properties in the United States are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), issuers are required to disclose specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities.
 
During the three and nine month periods ending February 29, 2012 and February 28, 2011, we did not conduct mining operations nor maintain any mining properties in the US. Consequently we were not subject to any health or safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities during the three and nine months periods ending February 29, 2012 and February 28, 2011.
 
ITEM 5. OTHER INFORMATION.
 
None.

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ITEM 6. EXHIBITS.
 
   
Incorporation by Reference
 
Exhibit Number
Exhibit Description
 
Form
 
File
Number
 
Exhibit
 
File
Date
Filed herewith
31.1
Certification of Principal Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
               
X
31.2
Certification of Principal Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
               
X
32.1
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
               
X
32.2
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
               
X
101.INS
XBRL Instance Document (1)
               
X
101.SCH
XBRL Taxonomy Extension Schema Document (1)
               
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
               
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
               
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
               
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
               
X

(1)
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
 
 
 
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SIGNATURES
 
Pursuant to the requirements of Section 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.

     
 
U.S. Precious Metals, Inc.
     
 
By:
/s/ Gennaro Pane
   
Name:  Gennaro Pane
   
Title:  Chief Executive Officer
   
Date:  April 23, 2012
 

     
 
U.S. Precious Metals, Inc.
     
 
By:
/s/ David J. Cutler
   
Name:  David J. Cutler
   
Title:  Chief Financial Officer
   
Date:  April 23, 2012
 


 
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