Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2014
¨		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

 

Commission file number:  333-56262

 

 

(Exact name of registrant as specified in its charter)

 

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

 

8390 Via de Ventura, Suite F-110, #215 Scottsdale, AZ		85258
(Address of principal executive offices)		(Zip Code)

 

(928) 515-1942

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 275,769,643 shares of common stock, par value $0.001, of the issuer were issued and outstanding as of May 14, 2014. 

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

Table of Contents

 

			Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets – March 31, 2014 and September 30, 2013 (Unaudited)		3
	Consolidated Statements of Expenses – Three and six months ended March 31, 2014 and 2013 and for the period from July 26, 2002 (inception) through March 31, 2014 (Unaudited)		4
	Consolidated Statement of Stockholders’ Equity – September 30, 2012 through March 31, 2014 (Unaudited)		5
	Consolidated Statements of Cash Flows – Six months ended March 31, 2014 and 2013 and for the period from July 26, 2002 (inception) through March 31, 2014 (Unaudited)		6
	Notes to the Consolidated Financial Statements (Unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Mine Safety Disclosures		22
Item 5.	Other Information		22
Item 6.	Exhibits		22
SIGNATURES			24

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

 

 EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

		March 31,				September 30,
		2014				2013
ASSETS
CURRENT ASSETS:
Cash		$	51,906			$	373,692
Prepaid expenses and other current assets			90,436				78,526
Deferred costs			—				120,476
Total Current Assets			142,342				572,694
Furniture and equipment net of accumulated depreciation of $33,412 and $33,102, respectively			620				930
Mineral property			1,879,608				1,879,608
Deposits			1,022,440				22,440
Total Assets		$	3,045,010			$	2,475,672
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	136,424			$	114,877
Accrued liabilities			60,450				40,400
Short term note payable			3,488				—
Total Current Liabilities			200,362				155,277
Equipment note payable			400,000				—
Total Liabilities			600,362				155,277
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $0.001 par value; 300,000,000 shares authorized; 273,230,781 and 262,604,345 issued and outstanding, respectively			273,231				262,604
Additional paid-in capital			205,989,832				203,879,146
Deficit accumulated during the exploration stage			(203,818,415	)			(201,821,355	)
Total Stockholders’ Equity			2,444,648				2,320,395
Total Liabilities and Stockholders’ Equity		$	3,045,010			$	2,475,672

 

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

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF EXPENSES

(Unaudited)

 

		Three Months Ended March 31,								Six Months Ended March 31,								July 26, 2002 (Inception) Through March 31,
		2014				2013				2014				2013				2014
OPERATING EXPENSES:
Professional fees		$	83,869			$	49,849			$	230,013			$	110,997			$	4,301,069
Officer compensation expense			—				—				—				—				2,863,833
Administrative consulting fees			65,000				55,000				130,000				105,000				2,770,766
Management fees, related party			—				—				—				—				320,500
Legal and accounting fees			62,347				26,850				85,494				86,507				2,112,913
Exploration expenses			869,041				237,960				1,053,593				341,058				5,271,295
Other general and administrative			271,592				337,075				496,182				476,619				8,087,409
Write-off of accounts payable and accrued interest			—				—				—				—				(63,364	)
Loss on impairment of mineral property			—				—				—				—				176,567,424
Loss on asset dispositions			—				—				—				—				33,170
Total Operating Expenses			1,351,849				706,734				1,995,282				1,120,181				202,265,015
LOSS FROM OPERATIONS			(1,351,849	)			(706,734	)			(1,995,282	)			(1,120,181	)			(202.265,015	)
OTHER INCOME (EXPENSE):
Interest income			14				70				73				145				39,784
Other income			—				—				—				—				18,632
Forgiveness of debt			—				—				—				—				115,214
Interest expense:
Related parties			—				—				—				—				(68,806	)
Other			(1,764	)			—				(1,851	)			—				(310,591	)
Loss on extinguishment of liabilities			—				—				—				—				(222,748	)
Gain on derivative instrument liability			—				—				—				—				7,203
Accretion of notes payable discounts			—				—				—				—				(1,132,088	)
Total Other Income (Expense)			(1,750	)			70				(1,778	)			145				(1,553,400	)
NET LOSS		$	(1,353,599	)		$	(706,664	)		$	(1,997,060	)		$	(1,120,036	)		$	(203,818,415	)
Net loss per common share, basic and diluted		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
Weighted average number of common shares outstanding, basic and diluted			268,880,930				254,261,386				267,022,484				253,296,111

 

 

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

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

September 30, 2012 through March 31, 2014

(Unaudited)

 

 

		Common Stock Shares				Common Stock Amount				Additional Paid-in Capital				Deficit Accumulated During the Exploration Stage				Total
Balances at September 30, 2012			251,327,040			$	251,328			$	201,903,913			$	(200,078,743	)		$	2,076,498
Common stock granted for deferred costs			—				—				20,476				—				20,476
Common stock issued for services			60,000				60				15,690				—				15,750
Costs associated with options			—				—				400,283				—				400,283
Sales of common stock			11,217,305				11,216				1,538,784				—				1,550,000
Net loss			—				—				—				(1,742,612	)			(1,742,612	)
Balances at September 30, 2013			262,604,345				262,604				203,879,146				(201,821,355	)			2,320,395
Common stock issued for services			4,350,000				4,350				845,275				—				849,625
Common stock issued for equipment deposit			2,500,000				2,500				497,500				—				500,000
Costs associated with options			—				—				470,664				—				470,664
Options exercised			100,000				100				21,400				—				21,500
Reversal of deferred costs			—				—				(20,476)				—				(20,476	)
Sales of common stock			3,676,436				3,677				296,323				—				300,000
Net loss			—				—				—				(1,997,060	)			(1,997,060	)
Balances at March 31, 2014			273,230,781			$	273,231			$	205,989,832			$	(203,818,415	)		$	2,444,648

 

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

 

 EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended March 31,								July 26, 2002  (Inception) Through March 31,
		2014				2013				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,997,060	)		$	(1,120,036	)		$	(203,818,415	)
Adjustments to reconcile net loss to net cash used in operating activities:
Warrant and option associated costs			470,664				377,564				6,022,504
Beneficial conversion feature of notes payable			—				—				225,207
Non-cash expense with affiliate			—				—				7,801
Stock-based compensation			849,625				15,750				7,589,908
Non-cash merger related costs			—				—				1
Accretion of discounts on notes payable			—				—				1,132,088
Loss on sale of fixed assets			—				—				33,170
Gain on derivative instruments liability			—				—				(7,203	)
Loss on impairment of mineral property			—				—				176,567,424
Write-off accounts payable and accrued interest			—				—				(63,364	)
Forgiveness of debt			—				—				(115,214	)
Gain on conversion of debt			—				—				(2,459	)
Provision for uncollectible note receivable			—				—				62,500
Non-cash litigation settlement			—				—				214,642
Depreciation			310				1,113				84,543
Changes in operating assets and liabilities:
Miscellaneous receivable			—				—				4,863
Interest receivable			—				—				(13,611	)
Prepaid expenses and other current assets			(11,910	)			17,998				(87,146	)
Advances on behalf of affiliated company			—				—				(562,990	)
Deferred costs			100,000				—				–
Accounts payable			21,547				2,899				145,844
Accounts payable - related party			—				—				364
Accrued liabilities			20,050				(12,900	)			280,756
Interest payable, other			—				—				49,750
Net Cash Used in Operating Activities			(546,774	)			(717,612	)			(12,249,037	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property interest			—				—				(100,000	)
Purchase of furniture and equipment			—				—				(150,600	)
Proceeds from sale of fixed assets			—				—				32,001
Cash paid for equipment deposit			(100,000	)			—				(122,440	)
Issuance of notes receivable			—				—				(249,430	)
Payments received on notes receivable			—				—				129,450

(Continued)

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

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited) 

 

		Six Months Ended March 31,								July 26, 2002  (Inception) Through March 31,
		2014				2013				2014
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Cash received in acquisition of Gold and Minerals Company, Inc.			—				—				89,902
Costs associated with acquisition share issuance			—				—				(32,324	)
Cash paid in connection with acquisition of DML Services, Inc.			—				—				(50,000	)
Net Cash Used in Investing Activities			(100,000	)			—				(453,441	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock and subscriptions			300,000				750,000				8,761,591
Costs associated with the sale of stock			—				—				(19,363	)
Proceeds from notes payable, related parties			—				—				219,900
Proceeds from warrant exercise			21,500				—				1,572,242
Proceeds from notes payable, other			—				—				2,322,300
Increase in finance contracts			17,439				—				134,918
Repayment of notes payable, related parties			—				—				(61,900	)
Payments on finance contracts			(13,951	)			—				(131,430	)
Repayment of notes payable, other			—				—				(43,874	)
Net Cash Provided by Financing Activities			324,988				750,000				12,754,384
NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS			(321,786	)			32,388				51,906
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			373,692				238,085				—
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	51,906			$	270,473			$	51,906
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	—			$	—			$	172,917
Cash paid for income taxes			—				—				—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fixed assets disposed for accrued liabilities		$	—			$	—			$	1,991
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of interest in El Capitan, Ltd.			—				—				28
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of the COD property			—				—				3,600
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of the Weaver property			—				—				3,000

(Continued)

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

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited) 

 

		Six Months Ended March 31,								July 26, 2002 (Inception) Through March 31,
		2014				2013				2014
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (Continued):
Net non-cash advances from affiliated company			—				—				562,990
Notes payable and accrued interest converted to equity			—				—				2,495,544
Accounts payable and accrued liabilities converted to equity			—				—				31,176
Issuance of common stock to former Company officers			—				—				329,015
Issuance of common stock to Gold and Minerals Company, Inc. stockholders in connection with the merger of Gold and Minerals Company, Inc.			—				—				177,752,452
Common stock granted for deferred costs			—				—				20,476
Reversal of common stock granted for deferred costs			20,476				—				20,476
Common stock issued equipment deposit			500,000				—				500,000
Debt issued equipment deposit			400,000				—				400,000

 

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

 

 

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company) 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited interim financial statements of El Capitan Precious Metals, Inc. (“El Capitan” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, the financial statements do not include all information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed interim financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending September 30, 2014, or for any subsequent period. These interim financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2013, included in the Company’s Annual Report on Form 10-K, filed with the SEC on December 27, 2013. The consolidated balance sheet at September 30, 2013, has been derived from the audited financial statements included in the 2013 Annual Report.

 

Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2013 as reported in the Form 10-K have been omitted. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Principles of Consolidation

 

With the acquisition of Gold and Minerals Company, Inc. (“G&M”), the Company also became the 100% owner of EL Capitan, Ltd. (“ECL”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries El Capitan Precious Metals, Inc., a Delaware corporation; G&M, a Nevada corporation; and ECL, an Arizona corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

New Accounting Pronouncements

 

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

 

Management Estimates and Assumptions

 

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

 

NOTE 2 – MINERAL PROPERTY COSTS

 

Mineral property exploration costs are expensed as incurred until such time as economic reserves are quantified. To date El Capitan has not established any proven or probable reserves on its mineral properties. The Company has capitalized $1,879,608 of mineral property acquisition costs reflecting its investment in the El Capitan site.

 

 

NOTE 3 – short term note payable

 

On November 21, 2013, the Company entered into an agreement to finance a portion of its insurance premiums in the amount of $17,440 at an interest rate of 10.0% with equal payments of $3,575.58 including interest, due monthly beginning December 21, 2013 and continuing through April 21, 2014. As of March 31, 2014, the outstanding balance under this note payable was $3,488.

 

NOTE 4 – long term note payable

 

On February 28, 2014, the Company agreed to deliver a $400,000 promissory note for a deposit on the purchase of heavy mining equipment. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of the Company’s proceeds from sale of iron ore from its mining operations.  See “Note 5 - Commitments, Additional Financing Agreement,” below.

 

NOTE 5– COMMITMENTS

 

In June 2013, the Company signed a contract to have chain of custody head ore located in Denver, Colorado processed by an independent party. The head ore has been shipped to the processing site. The contract called for a $100,000 retainer that was paid in June 2013. Upon completion of the project, if it generated a profit, the Company was to receive the profit from the sale of the recovered precious metals above and beyond the retainer amount paid. Also, the Company was to issue 500,000 shares of the Company’s common stock pursuant to our 2005 Stock Incentive Plan to the processing company. The fair value of the common shares was determined to be $35,000 as of September 30, 2013 and it was being recognized over the service period through the expected completion date of the project in November 2013. The $100,000 retainer and $20,476 of the fair value of the shares were classified as current deferred costs on the balance sheet as of September 30, 2013. In November 2013, the project was completed and a profit was not generated. Accordingly, the $100,000 retainer was expensed and the deferred costs associated with the common shares of $20,476 were reversed during the six months ended March 31, 2014.

 

Related Party

 

In January 2012, the Company retained Management Resource Initiatives, Inc. (“MRI”) for managing and overseeing the process of marketing and selling the El Capitan property and performing other services aimed at furthering the Company's strategic goals pursuant to an unwritten consulting arrangement. Under this arrangement, the Company pays MRI a monthly consulting fee of $10,000 which was increased to $15,000 effective August 1, 2013. The Company made aggregate payments of $90,000 to MRI during the six months ended March 31, 2014. MRI is a related party because it is a corporation that is wholly-owned by John F. Stapleton who is Chief Financial Officer and Director of El Capitan.

 

Purchase Contract with Glencore AG

 

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

 

Agreements with Logistica U.S. Terminals, LLC

 

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

 

 

Master Agreement with Logistica

 

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

 

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

 

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

 

Processing Agreement with Logistica

 

Under the Processing Agreement, Logistica has agreed to deliver iron ore processing equipment to the El Capitan property and to use it best efforts to process to contract specification, stock pile and load for delivery iron ore that the Company has contracted to sell to Glencore under the Glencore Purchase Contract. In order to do so, Logistica will act as the Company’s turn-key contractor for all of the Company’s iron ore processing and delivery operations at the El Capitan property. In consideration for such services, the Company will pay Logistica a set price per metric ton of iron ore that is processed in accordance with the Glencore Purchase Contract specifications and purchased by Glencore. As additional compensation for entering into the Processing Agreement, the Company issued 4,000,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock Incentive Plan valued at $800,000. The shares vested immediately upon grant and the $800,000 was expensed in full during the six months ended March 31, 2014.

 

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

 

Additional Financing Agreement

 

Under a separate agreement with Logistica, also dated February 28, 2014, Logistica agreed to remit a $900,000 payment on the Company’s behalf that represented the remaining balance of the Company’s purchase price for a heavy ore trailing separation line to be used for ore processing at the El Capitan mine site. The Company previously remitted $100,000 toward the purchase of such equipment. In consideration for Logistica remitting such payment, the Company agreed to deliver a $400,000 promissory note to Logistica and issued 2,500,000 shares of common stock to a designee of Logistica under the Company’s 2005 Stock Incentive Plan. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of the Company’s proceeds from sale of iron ore from its mining operations. The fair value of the common stock was determined to be $500,000.

 

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Equity Purchase Agreement

 

On July 11, 2011, the Company entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with Southridge Partners II, LP (“Southridge”), pursuant to which the Company may from time to time, in its discretion, sell newly-issued shares of its common stock to Southridge for aggregate gross proceeds of up to $5,000,000. On April 3, 2013, the Company entered into an amendment (the “Amendment”) to the Equity Purchase Agreement. Southridge’s purchase commitment under the Equity Purchase Agreement was scheduled to expire on the earlier of July 11, 2013, or the date on which aggregate purchases by Southridge under the Agreement total $5,000,000. Pursuant to the Amendment, the parties agreed to extend Southridge’s purchase commitment under the Equity Purchase Agreement for an additional year, expiring July 11, 2014. The maximum amount of Southridge’s aggregate purchase commitment under the Equity Purchase Agreement remains unchanged at $5,000,000.

 

El Capitan has no obligation to sell any shares under the Equity Purchase Agreement. The Equity Purchase Agreement may be terminated by the Company at any time. Southridge will have no obligation to purchase shares under the Equity Purchase Agreement to the extent that such purchase would cause Southridge to own more than 9.99% of El Capitan’s common stock.

 

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

 

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

 

As of March 31, 2014, the Company had received aggregate proceeds of $3,800,000 under the Equity Purchase Agreement and had available gross proceeds of $1,200,000 under the Equity Purchase Agreement to sell newly-issued shares of El Capitan common stock. Subsequent to March 31, 2014 and prior to the filing of this report, the Company received additional aggregate proceeds of $100,000 leaving gross proceeds of $1,100,000 available under the Equity Purchase Agreement.

 

Issuances of Common Stock, Warrants and Options

 

Common Stock

 

During the six months ended March 31, 2014, the Company:

 

(i)

issued 3,676,436 shares of common stock under the Equity Purchase Agreement and received cash proceeds of $300,000;

(ii)

issued 4,350,000 shares of common stock for non-employee consulting services valued at $849,625;

(iii)

issued 100,000 shares of common stock upon the exercise of non-statutory stock options and the Company received cash proceeds of $21,500; and

(iv)

issued 2,500,000 shares of common stock for a deposit on heavy mining equipment valued at $500,000.

 

 

Warrants

 

During the six months ended March 31, 2014, the Company did not issue any warrants.  There were no warrants outstanding as of September 30, 2013 or March 31, 2014.

 

Options

 

Aggregate options expense recognized was $470,664 and $377,564 for the six months ended March 31, 2014 and 2013, respectively, related to the option grants and modifications described below. As of March 31, 2014 and 2013, there was $233,638 and $22,719, respectively of unamortized option expense.

 

During the six months ended March 31, 2014, the Company:

 

(i)

Granted, pursuant to the 2005 Stock Incentive Plan, to each of two new directors of the Company five-year options to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.3452 per share which will vest in equal monthly installments over two years, commencing on April 17, 2014. The fair value of the options was determined to be $233,638 using the Black-Scholes option pricing model and will be expensed as stock-based compensation over the vesting period. None was expensed as stock-based compensation during the six months ended March 31, 2014.

 

(ii)

Granted, pursuant to the 2005 Stock Incentive Plan, to each of two existing directors of the Company a five-year stock option to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.31 per share, all of which vested immediately. The fair value of the options was determined to be $209,896 using the Black-Scholes option pricing model and was expensed as stock-based compensation during the six months ended March 31, 2014.

 

(iii)

Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.31 per share with the options vesting on the date of grant. The fair value of the options was determined to be $26,505 using the Black-Scholes option pricing model and was expensed as stock-based compensation during six months ended March 31, 2014.

 

(iv)

Amended the expiration date of an aggregate of 500,000 outstanding common stock options. The options were originally scheduled to expire on January 31, 2014. The expiration date of the 500,000 options was extended to January 31, 2019. The incremental increase in the fair value of the options was determined to be $27,718 using the Black-Scholes option pricing model and was expensed as stock-based compensation during six months ended March 31, 2014.

 

(v)

Granted, pursuant to the 2005 Stock Incentive Plan, to each of three directors of the Company a five-year stock option to purchase 500,000 of the Company’s common stock at an exercise price of $0.16 per share, all of which vested immediately. The fair value of the options was determined to be $159,456 using the Black-Scholes option pricing model and was expensed as stock-based compensation during the during six months ended March 31, 2014.

 

(vi)

Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.14 per share with the options vesting on the date of grant. The fair value of the options was determined to be $12,423 using the Black-Scholes option pricing model and was expensed as stock-based compensation during six months ended March 31, 2014.

 

(vii)

Granted, pursuant to the 2005 Stock Incentive Plan, to a consultant five-year stock options to purchase an aggregate of 300,000 shares of the Company’s common stock at an exercise price of $0.13 per share with the options vesting on the date of grant. The fair value of the options was determined to be $34,665 using the Black-Scholes option pricing model and was expensed as stock-based compensation during six months ended March 31, 2014.

 

 

The Company utilizes the Black-Scholes option pricing model to estimate the fair value of its option awards. The following table summarizes the significant assumptions used in the model during the six months ended March 31, 2014.

 

Six Months Ended March 31, 2014:
Exercise prices			$0.13 - $0.38
Expected volatilities			128.52% - 140.83%
Risk free interest rates			0.51% - 1.55%
Expected terms			2.5 - 5.0 years
Expected dividends			—

 

The following table summarizes the option activity for the six months ended March 31, 2014:

 

			Options Outstanding
							Weighted
							Average
			Number of				Exercise
			Shares				Price
Balance, September 30, 2013			6,100,000			$	0.42
Granted			4,000,000				0.243
Expired/Cancelled			(100,000	)			0.42
Exercised			(100,000	)			0.215
Balance March 31, 2014			9,900,000			$	0.35
Exercisable at September 30, 2013			6,100,000			$	0.42
Exercisable at March 31, 2014			8,900,000			$	0.35

 

The range of exercise prices and the weighted average exercise price and remaining weighted average life of the options outstanding at March 31, 2014 were $0.13 to $1.02 and 4.73 years, respectively. The range of exercise prices and the weighted average exercise price and remaining weighted average life of the vested and exercisable options outstanding at March 31, 2014 were $0.13 to $1.02 and 4.72 years, respectively. The aggregate intrinsic value of the outstanding options and vested options outstanding at March 31, 2014 was $211,250.

 

The Company adopted its 2005 Stock Incentive Plan (the “2005 Plan”) pursuant to which the Company reserved and registered 30,000,000 shares stock and option grants. As of March 31, 2014, there were 1,485,913 shares available for grant under the 2005 Plan, excluding the 9,900,000 options outstanding.

 

 

NOTE 7 – SUBSEQUENT EVENTS

 

Subsequent to March 31, 2014 and prior to the filing of this report, El Capitan sold an aggregate of 584,317 shares to Southridge Partners under the Equity Purchase Agreement for aggregate cash proceeds of $100,000.

 

Subsequent to March 31, 2014 and prior to the filing of this report, El Capitan sold an aggregate of 1,954,545 shares of restricted common stock to four qualified investors for aggregate cash proceeds of $215,000.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with our audited financial statements and the “Risk Factors” section included in our Form 10-K for the year ended September 30, 2013, filed with the U.S. Securities and Exchange Commission (“SEC”) on December 27, 2013.

 

Cautionary Statement on Forward-Looking Statements

 

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

 

Company Overview

 

We are an exploration stage company that has owned interests in several properties located in the southwestern United States in the past. We are principally engaged in the exploration of precious metals and other minerals. At this time, we are not engaged in any revenue-producing operations. We are considered an exploration stage company under the SEC criteria since we have not yet demonstrated the existence of proven or probable reserves at our El Capitan property.  As a result, and in accordance with accounting principles generally accepted in the United States for exploration stage companies, all expenditures for exploration and evaluation of our properties are expensed as incurred. 

 

We have completed testing and enhancement of our recovery process and have determined the existence and concentration of commercially extractable precious metals or other minerals at this property site. Based upon the results to date, we engaged an investment banker on January 31, 2012, to formalize plans for the marketing of the El Capitan property for sale to a major mining company.

 

In late September 2013, with the support of a different technology, we began a project of production processing of El Capitan head ore collected and managed under chain-of-custody guidelines. This is the first production-scale process ever to have been conducted by us. We anticipate the expected results will describe both the effectiveness of the process being used and the precious metals values recoverable, without the use of chemicals. This process involves the fine grinding of head ore and separation of iron ore from the precious metals without the use of cyanide.

 

In conjunction with this fine grind/separation recovery method, we processed 30 tons of our stored concentrates produced approximately 8 years ago that have been stored at the mine site. This initiative is important for two reasons: first, because it will provide materials process-handling information, and, second, because of the potential cash flow from the spot-market sale of any resulting dore’ bars. If we are able to generate such cash flow, we do not expect the amount to be significant. It is important to note, no direct information related to head ore value is to be gained from these concentrates since they do not have a documented history. The thirty tons of these concentrates was processed to determine the viability of the recovery of precious metals under this technology from these stored concentrates. Although these concentrates lack the pedigree of freshly mined and concentrated ore, testing has revealed that they may yield precious metals that can be sold in the spot market.

 

 

On November 7, 2013, we announced that we have recovered 1.04 ounces per ton of gold equivalent from our El Capitan property. These results were produced from head ore that has been sold in an arm’s-length transaction to an independent refinery. The chain-of-custody ore was finely milled and magnetically separated using specific gravity concentrating methodology without the use of cyanide. This initial production testing represents the complete methodology - from head ore to final sale.

 

On November 20, 2013, we announced the fine grind/separation recovery method was also used on another 30 tons of stored concentrates that had been produced approximately eight years ago. After storage and possible contamination, these concentrates proved to be incompatible with this recovery process. We decided to discontinue processing of the stored concentrates and focus on processing the head ore and the recovery of precious metals.

 

Based upon results from the fine grind/separation method, we decided to utilize our 5-Acre Small Mining Permit to initiate limited-scale production, which we believe is a major step toward presenting the property for sale to potential industry purchasers. We hope to accomplish this step by demonstrating regular, certified production and sales of precious metals to independent refineries. It is incumbent upon us to demonstrate that the results we have obtained are repeatable. The 5-Acre Small Mining Permit can be moved as the mining plan dictates. We have contracted an independent contract miner to perform the physical mining and crushing, and to stockpile the ore on our owned land. We also retained a professional and experienced mining-management talent to run operations after the iron has been removed from the ore. The personnel will be on site and oversee the fine grinding and separation operations, which will be located on our owned land. The final processed concentrates will be sent off-site for smelting into dore’ bars for sale.

 

On January 6, 2014, we announced that we are working to commence on-site mining operations that will separate precious metals from the iron ore using the fine/grind separation recovery method referred to above and sell the iron ore.

 

During quarter ended March 31, 2014, we made major strides towards putting the El Capitan property into limited production.  On March 10, 2014, we entered into a life-of-mine offtake agreement with Glencore AG (“Glencore”) for the sale of iron ore from the El Capitan property (such agreement is referred to herein as the “Glencore Purchase Contract”). Under the terms of the Glencore Purchase Contract, we agreed to sell to Glencore, and Glencore agreed to purchase from us, iron ore meeting the applicable specifications from the El Capitan mine. Payment for the iron ore is to be made pursuant an irrevocable letter of credit in our favor. The purchase price is based on an index price less an applicable discount.

 

In anticipation of, and in conjunction with, the Glencore Purchase Contract, we entered into a Master Services Agreement (the “Master Agreement”) and corresponding Iron Ore Processing Agreement (the “Processing Agreement”) with Logistica U.S. Terminals, LLC (“Logistica”), each effective as of February 28, 2014. Pursuant to these agreements, Logistica agreed to, among other things, provide the logistics required for us to fulfill its obligations under the Glencore Purchase Contract, to assist the Company in financing the costs of processing and delivering the iron ore under the Glencore Purchase Contract, and to provide and/or manage the processing of iron ore to be delivered under the Glencore Purchase Contract. In consideration for such services, the Company will pay Logistica a percentage of the Company’s profits from the sale of iron ore under the Glencore Purchase Contract (or make up the shortfall of any loss out of profits from its precious metals processing and refining business, to the extent of available profits therefrom, or otherwise) and pay a set price per metric ton of iron ore that is processed in accordance with the Glencore Purchase Contract specifications and purchased by Glencore. In addition, the Company issued 4,000,000 shares of common stock to a designee of Logistica.

 

Under a separate agreement with Logistica, also dated February 28, 2014, Logistica agreed to remit a $900,000 payment on our behalf that represented the remaining balance of our purchase price for a heavy ore trailing separation line to be used for ore processing at the El Capitan mine site. We previously remitted $100,000 toward the purchase of such equipment. In consideration for Logistica remitting such payment, we agreed to deliver a $400,000 promissory note to Logistica and we issued 2,500,000 shares of common stock to a designee of Logistica. The promissory note accrues interest at 4.5%, with principal and accrued interest payments to be made out of our proceeds from sale of iron ore from its mining operations.

 

For additional information regarding the Glencore Purchase Contract and our agreements with Logistica, see “Note 5 of the Notes to Consolidated Financial Statements – “Commitments.”

 

We expect that the planned mining operation will require approximately $2.5 million in an overall budget. We anticipate it will take approximately two to three months to bring the mining operation on-line after financing and permitting is in place. We expect that the proceeds from our sale of the iron will ultimately offset the expense of the mining operations and generate cash flow for the Company while we continue to pursue our ultimate strategic goal of selling the El Capital property. 

 

 

Financial Condition, Liquidity, and Plan of Operation

 

Historically we have relied on equity and debt financings to finance our ongoing operations.  Our only current committed source of financing is the arrangement under our Equity Purchase Agreement (the “Equity Purchase Agreement”) with Southridge Partners II, L.P. (“Southridge”) that we entered into in July 2011 and subsequently amended on April 3, 2013. The Equity Purchase Agreement, as amended, is described below. Although we are assessing our financing alternatives at this time, we currently expect to continue utilizing the Equity Purchase Agreement to implement our business plan on the El Capitan mining project and continue our near-term business strategies, drawing down on the facility as operating costs require until the Equity Purchase Agreement expires. As amended, the term of the Equity Purchase Agreement will expire on July 11, 2014, and can be terminated by the Company at any time. 

 

Southridge’s purchase commitment under the Equity Purchase Agreement terminates upon expiration or termination of the Equity Purchase Agreement or, if earlier, on the date that aggregate purchases by Southridge under the Equity Purchase Agreement total $5,000,000.  The Equity Purchase Agreement permits the Company to sell newly-issued shares of our common stock to Southridge for aggregate proceeds of up to $5,000,000.  We have no obligation to sell any shares under the Equity Purchase Agreement. The shares to be sold under the Equity Purchase Agreement will be made pursuant to our effective registration statement on Form S-3 filed with the SEC.  Subsequent to March 31, 2014 and prior to the filing of this report, we have sold Southridge shares of common stock for aggregate proceeds of $100,000 and have the right, subject to certain conditions, to sell to Southridge $1,100,000 of newly-issued shares of El Capitan common stock pursuant to the Equity Purchase Agreement.

 

A further description of the Equity Purchase Agreement is set forth in Note 6 of the Notes to Consolidated Financial Statements – “Equity Purchase Agreement.”

 

We expect that the Equity Purchase Agreement will initially provide us with adequate funding to sustain our planned operations and provide a source of funds for our near-term business plan strategy. At this time, the Company plans to utilize such funds to complete any additional permitting requirements that may be required on the El Capitan property (no further exploration plans exist at this time) and pay for necessary corporate personnel and general and administrative operating costs and expenses to be incurred in putting the El Capitan property into limited production, and to support continued marketing of the El Capitan property for sale. To implement the business strategy for our mining plan, however, and to continue to provide funds to support the final phase of our business strategy – name to continue marketing the El Capitan property for sale - we will need to secure additional adequate financing. We may seek to obtain such financing pursuant to the sale of our equity or debt securities if sources of such financing become available on terms that we believe are acceptable. There is no guaranty that such financing will be available on acceptable terms or at all.

 

To provide us with continued flexibility to seek funds in the equity capital markets, on January 6, 2014 we filed a shelf registration statement on Form S-3 registering the offer and sale of securities in offerings from time to time, up to a maximum aggregate offering amount of $2,000,000. This registration statement was declared effective on January 26, 2014. We expect to use the proceeds from any sales of securities under the registration statement as necessary for deploying the El Capitan property into limited production, corporate operating costs and the continued marketing of the El Capitan property for sale. There is no guaranty that any such sales will occur.

 

As of March 31, 2014, we had cash on hand of $51,906 and an accumulated deficit of $203,818,415. Based upon our budgeted burn rate, we had operating capital for approximately 6 months as of such date, excluding any cash that would be received by the Company upon the sale of its shares of common stock under the terms of the Agreement.

 

 

RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

Revenues

 

We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until deployment of our planned mining operation on the El Capitan property. We anticipate generating revenues late in our third or early in the fourth operating quarter for our fiscal year ending September 30, 2014. There is no guarantee that we will achieve proven commercially viable recovery of precious and other metals at the El Capitan property.

 

Expenses and Net Loss

 

Our operating expenses increased $645,115 from $706,734 for the three months ended March 31, 2013, to $1,351,849 for the three months ended March 31, 2014. The increase is mainly attributable to increases in professional fees aggregating $34,020; legal and accounting of 35,497; and exploration expenses of $631,081. These increases were offset by a decrease in other general and administrative of $65,483.

 

The increases in professional fees is mainly attributable to costs incurred relating to investor relation activities and consisted of non-cash stock compensation of $23,505 and non-cash stock compensation of $9,625 for miscellaneous legal services.

 

The increase in legal and accounting fees is attributable to increases audit and accounting fees of $8,491 and an increase in legal fees of $27,006 which were mainly incurred in conjunction with the agreements entered into by us in the current period of measurement.

 

The increase in mine related costs is attributable to non-cash stock compensation of $800,000 for services rendered related to deploying our mining operation at the El Capitan property and was offset by decreases in assay costs of $46,188, other mine consulting of $49,062 and mineral extraction costs of $81,207.

 

The decrease in other general and administrative is mainly attributable non-cash costs of $79,673 associated with options that were issued to the directors. This decrease was offset mainly by increases in shareholder meeting costs of $11,543 and press related costs of $3,150.

 

Our net loss for the three months ended March 31, 2014 increased to $1,353,599 from a net loss of $706,664 incurred for the comparable three month period ended March 31, 2013. The increase in net loss of $646,935 for the current period is attributable to the aforementioned net increase in operating expenses.

 

Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013

 

Revenues

 

We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until deployment of our planned mining operation on the El Capitan property. We anticipate generating revenues late in our third or early in the fourth operating quarter for our fiscal year ending September 30, 2014. There is no guarantee that we will achieve proven commercially viable recovery of precious and other metals at the El Capitan property.

 

Expenses and Net Loss

 

Our operating expenses increased $875,101 from $1,120,181 for the six months ended March 31, 2013 to $1,995,282 for the six months ended March 31, 2014. The increase is mainly attributable to increases in professional fees aggregating $119,016 and exploration expenses of $712,535.

 

 

The increases in professional fees is mainly attributable to costs incurred relating to investor relation activities and consisted of non-cash stock compensation of $97,844; non-cash stock compensation of $9,625 for miscellaneous legal services and an increase in consulting fees of $27,000. These increases were offset by a decrease in financial consulting fees of $11,509.

 

The increase in mine related costs is attributable to non-cash stock compensation of $800,000 for services rendered related to deploying our mining operation at the El Capitan property and was offset by decreases in assay costs of $28,478, other mine consulting of $49,299 and mineral extraction costs of $86,089. These decreases were offset by an increase in mine legal fees of $19,862 which were incurred in connection of deploying our mining plan at the El Capitan property.

 

Our net loss for the six months ended March 31, 2014 increased to $1,997,060 from a net loss of $1,120,036 incurred for the comparable six month period ended March 31, 2013. The increase in net loss of $877,024 for the current period is attributable to the aforementioned net increase in operating expenses.

 

Factors Affecting Future Operating Results

 

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

 

The price of gold and silver has experienced an increase in value over the past five years.  A historical chart of their respective prices is contained in Item 1, the “Business” portion of the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, filed with the SEC on December 27, 2013.  Beginning in April 2013, the price of gold and silver has experienced a downward swing. A significant permanent drop in the price of gold, silver or other precious metals may have a materially adverse effect on the future results of potential operations and the opportunity to market the sale of the El Capitan property. The costs associated with the recovering of precious metals may also cause a material adverse effect on the financial success of the Company and our ability to market the sale of the El Capitan property.

 

Our Equity Purchase Agreement with Southridge will expire in July 2014. At such time, we will have no committed source of capital. Although we believe we will be able to obtain financing through private placements of our securities or in registered offerings under our registration statement on Form S-3, we cannot guaranty that we will be able to do so on terms acceptable to use or at all.

 

Under the Logistica Master Agreement, Logistica is required to use its best efforts to establish an operating credit line capable of funding all processing and delivery costs and, upon opening and funding such a credit line, will disburse as needed all operating costs contemplated under the Glencore Purchase Contract. We are required to reimburse Logistica for all such amounts, without interest, out of payments received from Glencore in respect of the purchase of the iron ore. If this credit line is not attained or is not in an adequate amount to fund our projected operations, our operations and liquidity may be adversely impacted.

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2014, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K. 

 

Contractual Obligations

 

As of March 31, 2014, we had no contractual obligations (including long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations and other long-term liabilities) reflected on our balance sheet under GAAP that are expected to have an adverse effect on our liquidity and cash flows in future periods.

 

 

Critical Accounting Policies

 

Our unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Note 1, “Business, Basis of Presentation and Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 30, 2013 , filed with the SEC on December 27, 2013, describes our significant accounting policies which are reviewed by management on a regular basis.

 

New Accounting Pronouncements

 

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Our exposure to market risks is limited to changes in interest rates. We do not use derivative financial instruments as part of an overall strategy to manage market risk.

 

We have long-term debt outstanding with a fixed rate of interest and have no investment in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.

 

Item 4.

Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, during the quarter ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

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

 

Item 1A.

Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the U.S. Securities and Exchange Commission on December 27, 2013, in addition to the other information included in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time prior to investing in our common stock.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

(a)

Exhibits

 

Exhibit Number		Description
2.1		Agreement and Plan of Merger between the Company, Gold and Minerals Company, Inc. and MergerCo, dated June 28, 2010 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 7, 2010).
3.1		Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010).
3.2		Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010).
10.1		Agreement dated March 10, 2014 between the Company and Glencore AG. *+
10.2		Master Services Agreement dated February 28, 2014 by and between the Company and Logistica, U.S. Terminals, LLC, including the Iron Ore Processing Agreement attached as Appendix A thereto. *+

(Continued)

 

 

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document**
101.SCH*		XBRL Extension Schema Document**
101.CAL*		XBRL Extension Calculation Linkbase Document**
101.DEF*		XBRL Extension Definition Linkbase Document**
101.LAB*		XBRL Extension Labels Linkbase Document**
101.PRE*		XBRL Extension Presentation Linkbase Document**

__________________

*

Filed herewith.

**

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

+

Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 

 

SIGNATURES

 

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

 

	EL CAPITAN PRECIOUS METALS, INC.
Dated:   May 14, 2014	By:	/s/  Charles C. Mottley
		Charles C. Mottley Chief Executive Officer, President and Director (Principal Executive Officer)

 

Dated:   May 14, 2014	By:	/s/  John F. Stapleton
		John F. Stapleton Chief Financial Officer and Director (Principal Financial Officer)