ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following Management's Discussion and Analysis should be read in conjunction with MineralRite Corporation’s financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with the Company’s Board of Directors, management has identified the following accounting policies that it believes are key to an understanding of its financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.
The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.
Oil and Gas Properties
The Company uses the full-cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized until such time as the aggregate of such costs net of accumulated depletion and oil and natural gas related deferred income taxes, on a country-by-country basis, equals the sum of 1)
the discounted present value (at 10%), using prices as of the end of each reporting period on a constant basis, of the Company’s estimated future net cash flows from estimated production of proven oil and natural gas reserves as determined by independent petroleum consultants, less estimated future expenditures to be incurred in developing and producing the proven reserves but excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed unless subsequent market price changes eliminate or reduce the indicated write-down in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using the units-of-production method whereby capitalized costs, net of estimated salvage values, plus estimated future costs to develop proven reserves and satisfy asset retirement obligations, are amortized over the total estimated producing life of the well.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.
Asset Retirement Obligations
The Company use Accounting Standards Codification (“ASC”) Topic 410-20, Asset Retirement Obligations, which established accounting standards for recognition and measurement of a liability for an asset retirement obligation (“ARO”) and the associated asset retirement costs. The provisions of ASC Topic 410-20 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. ASC Topic 410-20 also requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event, if the amount can be reasonably estimated.
Fair Value Measurement
The Company adopted ACS Topic 820-10, formerly Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“Topic 820-10”), at the beginning of fiscal year 2009 to measure the fair value of certain of its financial assets and liabilities required to be measured on a recurring basis. The adoption of Topic 820-10 did not impact the Company’s consolidated financial position or results of operations. Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under Topic 820-10 are described below:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. The Company has no Level 1 assets or liabilities.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. The Company has no Level 2 assets. The Company’s Level 2 liabilities consist of related party payables, notes payable, and stockholder loans. Due to the short-term nature of related party payables and stockholders loans, the fair values of these instruments approximate their respective carrying values. The Company determines the fair value of notes payable based on the effective yields of similar obligations.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities.
Liquidity and Capital Resources.
For the Nine-Month Period Ended September 30, 2012 versus September 30, 2011
During the nine months ended September 30, 2012, net cash used in the Company’s operating activities totaled $(27,837) compared to $(99,364) during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, net cash provided by investing activities totaled $9,681 compared to $(193,897) used during the nine months ended September 30, 2011. The $9,681 consisted of $6,801 in refunds on previouslycapitalized well expenditures and $2,880 from the sale of deep bore rights. The $193,897 consisted of costs incurred in the Company’s oil and gas venturesDuring the nine months ended September 30, 2012, net cash decreased $(33,525) as compared to $(141,789) during the nine months ended September 30, 2011.
At September 30, 2012, the Company had cash of $9,365,accounts receivable of $39,792, and prepaid expenses of $1,407 that comprised the Company’s total current assets totaling $50,564. The Company’s property and equipment at September 30, 2012 had a net book value of $0, consisting of furniture and fixtures with a cost basis of $1,851 net of accumulated depreciation of $1,851. The Company also had accumulated net capitalized costs of oil & gas properties totaling $339,815 at September 30, 2012, while the Company’s total assets at September 30, 2012 were $402,589.
At September 30, 2012, the Company had total current liabilities totaling $640,836 consisting of $184,090 in accounts payable, $18,727 due certain shareholders on their interest in the Company’s oil and gas net revenue, $418,174 due to related parties, and $19,845 in shareholder loans. Additionally, the Company’s long-term debt at September 30, 2012 included $11,725 on the Company’s accrued asset recovery obligations relating to its oil and gas properties.
Therefore, at September 30, 2012, the Company had total liabilities of $652,561. The Company had no other long-term liabilities, commitments or contingencies. Other than anticipated explorations costs associated with the mineral and oil interests that the Company acquired and the anticipated increases in the legal and accounting costs associated with being a public company, Company management is not aware of any other known trends, events or uncertainties which may affect the Company’s future liquidity.
At September 30, 2012, the Company had a stockholders’ deficit totaling $249,972compared to $353,958 at the period ending December 31, 2011.
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 2012 versus September 30, 2011
The Company’s revenue for the nine months ended September 30, 2012 was $281,986 with associated production and royalty costs of $251,059 as compared to September 30, 2011 revenue totaling $398,842 and with production and royalty costs for the year of $355,583. The Company incurred administrative expenses for the nine months ended September 30, 2012 totaling $348,817 that included related party consulting fees of $135,000, related party rent of $11,909, professional fees of $186,816, and other general and administrative expenses of $15,092. Administrative expense for the nine months ended September 30, 2011 totaled $240,800 and included related party consulting fees of $135,000, related party rent of $12,041, professional fees of $70,084, and other general and administrative expenses of $23,675.
For the three Months Ended September 30, 2012 versus September 30, 2011
The Company’s revenue for the three months ended September 30, 2012 was $71,802 with associated production and royalty costs of $70,495 as compared to September 30, 2011 revenue totaling $90,556 and with production and royalty costs for the year of $86,880. The Company incurred administrative expenses for the three months ended September 30, 2012 totaling $91,285, that included related party consulting fees of $45,000, related party rent of $3,956, professional fees of $36,154, and other general and administrative expenses of $6,175. Administrative expenses for the three months ended September 30, 2011 totaled $89,013 and included related party consulting fees of $45,000, related party rent of $4,105, professional fees of $35,890, and other general and administrative expenses of $4,018.
The Company’s Plan of Operation for the Next Twelve Months.
The Company plans to shift its focus away from oil and gas, mineral and resources properties for exploration and development and toward the extraction of metals from ore extracted from mines. To that end, the Company has installed new management with expertise in that industry, and changed the name of the Company from Royal Quantum Group, Inc. to MineralRite Corporation. On August 31, 2012 the Board of Directors enacted and approved a reverse stock split on a 1:50 basis, which reverse split has had the effect of reducing the number of issued and outstanding shares of the Company’s common stock from 52,991,272 to approximately 1,059,845.
On August 17, 2012 the Board of Directors appointed Guy Peckham as President and Chief Executive Officer for the purpose of leading the Company in the commencement of new businessventures, and to raise additional capital to pursue such new opportunities. Mr. Peckham is or will be engaged in the following activities:
(a) Mr. Peckham has negotiated a modification of the Consulting Agreement between the Company and Santeo Financial Corporation (“Santeo”), which will result in a material reduction of the amount owed to Santeo;
(b) Mr. Peckham will plan and execute against a new business model for the Company, which will entail the extraction of precious metals from previously extracted ore; providing his own expertise and track record of success in that industry, and has or will recruit and hire a management team with a similar track record of successful execution against that business model.
In addition, Mr. Peckham has engaged the individuals and entities listed in Item 5.01 of the Company’s form 8-K filed with the Securities and Exchange Commission (“SEC”) on November 6, 2012 (which is incorporated herein by reference) to assist him (a) by identifying and accessing the Company’s sources of raw materials and supplies,(b) by identifying and acquiring its proposed processing facilities, (c) by providing the analytical and processing know-how needed to produce the planned products, (d) by identifying and accessing theCompany’s new markets and customers, domestic and international, (e) by providing start-up working capital and costs, (f) in the design and implementation of the Company’s recapitalization, and (g) inmanaging the Company and executing the new business plan and model.The Board of Directors has determined that the individuals and entities listed in Item 5.01 thereof have or will provide (1) consulting, scientific, engineering, production and professional servicesto the Company, via contracts to be executed, (2) planning, market research, capital formation and structuring services to the Company via contracts to be executed, as well as the funding of certainstartup costs, and (3) sales and marketing services to the Company, via contracts to be executed, both domestically and internationally.
Following the issuance of those 40,000,000 shares to Mr. Peckham and the other persons and entities, the Board of Directors is expected to approve the issuance of other shares of the Company’s common stock to certainaccredited investors in connection with a private placement offering exempt from registration with the United States Securities and Exchange Commission (“SEC”).
The Company intends to retain its oil and gas, mineral and resources properties pending the private placement of that stock and the funding of the metal extraction operations, and may decide to divest those assets in the coming months.
The Company’s forecast for the period for which the Company’s financial resources will be adequate to support operations involves risks and uncertainties and actual results could differ as a result of a number of factors. The Company will need to raise additional capital to expand operations to the point at which the Company is able to operate profitably. Other than anticipated explorations costs associated with the resources and mineral interests that the Company acquires and the anticipated increases in the legal and accounting costs associated with being a public company, and the costs associated with funding the metal extraction operations, the Company is not aware of any other known trends, events or uncertainties, which may affect the Company’s future liquidity.
In the event that the Company experiences a shortfall in capital, the Company intends to pursue opportunities to raise funds through public or private financing as well as through borrowings and via other resources, such as the Company’s officers, directors and principal shareholders. The Company cannot guaranty that additional funding will be available on favorable terms, if at all. If adequate funds are not available, then the Company’s ability to expand operations may be significantly hindered. If adequate funds are not available, the Company believes that the Company’s officers, directors and principal shareholders will contribute funds to pay for the Company’s expenses to achieve the Company’s objectives over the next twelve months. The Company’s belief that the Company’s officers, directors and principal shareholders will pay the Company’s expenses is based on the fact that the Company’s officers, directors and principal shareholders collectively own approximately 97.42% of the Company’s outstanding common stock and will likely continue to pay the Company’s expenses as long as they maintain their ownership of the Company’s common stock, so long as they do not incur financial hardship.
The Company is not currently conducting any research and development activities and management does not anticipate conducting such activities in the near future. Management does not anticipate future purchases or sales of any significant equipment. In the event that the Company’s customer base expands, then management may need to hire additional employees or independent contractors as well as purchase or lease additional equipment.
ITEM 3. QUANTITATIVE AND QUALITATATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed 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 our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act").
Based on this evaluation, our principal executive and principal financial and accounting officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of September 30, 2012.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
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 of compliance with the policies or procedures may deteriorate.
Changes In Internal Control and Financial Reporting
As previously reported in Current Report on Form 8-K as filed with the commission on August 6,2012, Ron Ruskowsky resigned from all positions with the Company, including but not limited to, that of President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director on July 31, 2012 and Roger Janssen was appointed to replace him. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
As of August 17, 2012, Guy Peckham was appointed as the Company’s President and Chief Executive Officer. Mr. Janssen remains as Chairman of the Board of Directors, Secretary and Treasurer.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
1. Quarterly Issuances:
During the quarter, we did not issue any unregistered securities other than as previously disclosed.
2. Subsequent Issuances:
Subsequent to the quarter, we issuedunregistered securities, as follows. On and after October 30, 2012, the Company has or will enter into Purchase Agreements with the followingpersons and entities, pursuant to which they are to be issued a total of 40,000,000 common shares. The consideration for the sale of these shares was services performed for the Company, or to be performed.If the purchase agreements with respect to these shares are consummated, voting control of the Company will be transferred to the above-referenced individuals and entities, who will then own sharescomprising 97.42% of the total votes of all shareholders. Before this Unregistered Sale of Equity Securities, and following the recent reverse split of the common stock, the Company had approximately1,059,845 shares issued and outstanding. The Board of Directors approved the issuance, and the Board’s resolution was approved by a majority of the then-outstanding 1,059,845 shares.
James Bame is the beneficial owner of two of the purchasers, Management Team Escrow #1-James Bame Attorney and Management Team Escrow #1-James Bame Attorney (“Purchasers”). If thepurchase agreement with respect to the Purchasers is consummated, Mr. Bame will be the beneficial owner of approximately 9,500,000 shares, or 23.14% of the issued and outstanding stock of theCompany.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION