UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2012

 

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from _________ to ___________

 

LONE STAR GOLD, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada	333-159561	45-2578051
(State of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

 

6565 Americas Parkway NE
Suite 200
Albuquerque, New Mexico 87110
(Address of principal executive offices) (Zip code)

 

Issuer's telephone number: (505) 563-5828

 

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 x     No ¨

 

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

 

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

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

(Do not check if smaller reporting company)

 

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

 

The number of shares of the registrant's Common Stock, $0.001 par value per share, outstanding as of August 14, 2012 was 89,341,068.

 

 

EXPLANATORY NOTE

 

Lone Star Gold, Inc., a Nevada corporation (the “Company”), is filing this Amendment No. 1 (this “Amendment”) to its Quarterly Report on Form 10-Q for the period ended June 30, 2012, as filed with the Securities and Exchange Commission (the “Commission”) on August 20, 2012 (the “Original Filing”).

 

The Company is filing this Amendment in response to a comment letter from the Commission staff dated September 17, 2012. The Amendment is filed for the following purposes:

 

1.

Amending and restating Footnotes 1 and 6 to the Company’s Consolidated Financial Statements dated June 30, 2012 to clarify the Company’s interest in the Tailings project and the accounting treatment for the Company’s interest; and

 

2.

Amending and restating the remainder of the Original Filing to remove the defined term “Joint Venture”.

 

No changes have been made to the Original Filing other than to add the information as described above.  This Amendment should be read in conjunction with the Original Filing. This Amendment speaks as of the date of the Original Filing, does not reflect events that may have occurred after the date of the Original Filing and does not modify or update in any way the disclosures made in the Original Filing, except as required to reflect the revisions discussed above.

 

 

Table of Contents

 

			Page
Part I -	Financial Information
	Item 1. Consolidated Financial Statements
	Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011		1
	Consolidated Statements of Operations for the three and six month periods ended June 30, 2012 and 2011 and from November 26, 2007 (Date of Inception) to June 30, 2012 (Unaudited)		2
	Consolidated Statements of Cash Flows for the six month periods ended June 30, 2012 and 2011 and from November 26, 2007 (Date of Inception) to June 30, 2012 (Unaudited)		3
	Consolidated Statements of Stockholders’ Equity (Deficit) for the period from November 26,  2007 (Date of Inception) to June 30, 2012 (Unaudited)		4
	Notes to the Consolidated Financial Statements (unaudited)		5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		16
	Item 4. Controls and Procedures		16
Part II -	Other Information
	Item 1. Legal Proceedings		17
	Item 1A. Risk Factors		17
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		17
	Item 3. Defaults upon Senior Securities		18
	Item 4. Mine Safety Disclosures		18
	Item 5. Other Information		18
	Item 6. Exhibits		18
Signatures			19
Exhibit Index
Rule 13a-14(a) Certification
Section 1350 Certification

 

  

Lone Star Gold, Inc.

(An Exploration Stage Company)

Consolidated Balance Sheets

 

		June 30,				December 31,
		2012				2011
		(unaudited)
ASSETS
Current Assets
Cash		$	9,433			$	215,737
Prepaid expenses			151				2,238
Total current assets			9,584				217,975
Property and equipment, net			41,645				46,325
Mining assets			179,300				25,000
Total Assets		$	230,529			$	289,300
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	32,208			$	21,767
Accrued liabilities			6,322				13,698
Note payable			50,000				-
Due to related party			38,910				38,910
Total current liabilities			127,440				74,375
Total Liabilities			127,440				74,375
Commitments
Stockholders' Equity
Common stock, 150,000,000 shares authorized, $0.001 par value; 88,341,068 and 116,791,068 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively			88,341				116,791
Additional paid-in capital			2,970,278				1,812,532
Deficit accumulated during the exploration stage			(2,937,508	)			(1,697,717	)
Total Lone Star Gold, Inc. Stockholders' Equity			121,111				231,606
Noncontrolling interest in subsidiary			(18,022	)			(16,681	)
Total Stockholders' Equity			103,089				214,925
Total Liabilities and Stockholders' Equity		$	230,529			$	289,300

 

(The Accompanying Notes are an Integral Part of These Financial Statements)

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Consolidated Statements of Operations

(unaudited)

 

																		Accumulated
																		from
																		November 26,
																		2007
																		(Date of
																		Inception)
		For the three months ended								For the six months ended								through
		June 30,								June 30,								June 30,
		2012				2011				2012				2011				2012
Revenue		$	-			$	-			$	-			$	-			$	-
Operating Expenses
General and administrative			63,852				106,683				215,916				125,100				837,162
Exploration costs			108,500				-				465,196				-				1,018,394
Management fees			279,999				-				559,998				-				1,116,452
Total Operating Expenses			(452,351	)			(106,683	)			(1,241,110	)			(125,100	)			(2,972,008	)
Other income / (expense)
Interest income			-				1,250				-				8,647				9,839
Gain on settlement of note receivable			-				5,161				-				5,161				5,161
Interest expense			(22	)			-				(22	)			-				(22	)
Total other income			(22	)			6,411				(22	)			13,808				14,978
Loss before income taxes			(452,373	)			(100,272	)			(1,241,132	)			(111,292	)			(2,957,030	)
Provision for Income Tax			-				-				-				-				-
Net Loss for the Period			(452,373	)			(100,272	)			(1,241,132	)			(111,292	)			(2,957,030	)
Net loss attributable to noncontrolling interest			416				6,000				1,341				6,000				19,522
Net loss attributable to Lone Star Gold, Inc.		$	(451,957	)		$	(94,272	)		$	(1,239,791	)		$	(105,292	)		$	(2,937,508	)
Net Loss Per Share - Basic and Diluted		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
Weighted Average Common Shares Outstanding - Basic and Diluted			88,143,266				115,399,368				89,935,436				117,014,206

  

(The Accompanying Notes are an Integral Part of These Financial Statements)

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

 

										Accumulated from
										November 26,
		For the				For the				2007
		Six Months				Six Months				(Inception)
		Ended				Ended				through
		June 30,				June 30,				June 30,
		2012				2011				2012
Operating Activities
Net loss		$	(1,241,132	)		$	(111,292	)		$	(2,957,030	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense			4,680				-				7,532
Stock based compensation expense			499,998				-				1,099,972
Shares issued for exploration expenses			-				-				429,250
Gain on redemption of common stock			-				(5,161	)			(5,161	)
Changes in operating assets and liabilities:
Prepaid expenses			2,087				-				(151	)
Interest receivable			-				(8,647	)			(9,839	)
Accounts payable and accrued liabilities			3,065				22,214				38,530
Net Cash Used In Operating Activities			(731,302	)			(102,886	)			(1,396,897	)
Investing Activities
Purchase of property and equipment and mining assets			(75,000	)			-				(149,177	)
Note receivable extended to Related Party			-				(295,000	)			(585,000	)
Net Cash Used in Investing Activities			(75,000	)			(295,000	)			(734,177	)
Financing Activities
Redemption of shares			(2	)			-				(2	)
Proceeds from advances related party			-				-				56,484
Proceeds from sale of common stock			550,000				400,000				2,034,025
Proceeds from issuance of note payable			50,000				-				50,000
Net Cash Provided By Financing Activities			599,998				400,000				2,140,507
Net change in Cash			(206,304	)			2,114				9,433
Cash - Beginning of Period			215,737				9,977				-
Cash - End of Period		$	9,433			$	12,091			$	9,433
Supplemental Disclosures
Interest paid		$	-			$	-			$	-
Income taxes paid		$	-			$	-			$	-
Non Cash Transactions:
Redemption of common stock		$	-			$	600,000			$	600,000
Forgiveness of advances related party		$	-			$	-			$	17,574
Shares issued for mining assets		$	79,300			$	-			$	79,300

 

(The Accompanying Notes are an Integral Part of These Financial Statements)

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficit)

For the Period from November 26, 2007 (Inception) to June 30, 2012

 

														Deficit
														Accumulated
										Additional				During the				Non-
		Common Stock								Paid-in				Exploration				controlling
		Shares				Par Value				Capital				Stage				Interests				Total
Balance November 26, 2007 (Date of Inception)			-			$	-			$	-			$	-			$	-			$	-
Net loss for the period			-				-				-				-				-				-
Balance December 31, 2007			-				-				-				-				-				-
Common shares issued for cash in private placement:
at $0.001 per share on January 19, 2008			60,000,000				60,000				(57,000	)			-				-				3,000
at $0.015 per share on April 28, 2008			32,699,920				32,700				(8,175	)			-				-				24,525
at $0.05 per share on December 24, 2008			22,600,000				22,600				33,900				-				-				56,500
Net loss for the year (Restated)			-				-				-				(13,983	)			-				(13,983	)
Balance December 31, 2008 (Restated)			115,299,920				115,300				(31,275	)			(13,983	)			-				70,042
Net loss for the year			-				-				-				(93,034	)			-				(93,034	)
Balance December 31, 2009			115,299,920				115,300				(31,275	)			(107,017	)			-				(22,992	)
Sale of common stock for cash and warrants			6,000,000				6,000				294,000				-				-				300,000
Forgiveness of advances related party			-				-				17,574				-				-				17,574
Net loss for the year			-				-				-				(61,049	)			-				(61,049	)
Balance December 31, 2010			121,299,920				121,300				280,299				(168,066	)			-				233,533
Sale of common stock for cash and warrants			6,916,148				6,916				1,093,084				-				-				1,100,000
Redemption of shares			(12,000,000	)			(12,000	)			(588,000	)			-				-				(600,000	)
Formation of subsidiary			-				-				-				-				1,500				1,500
Stock based compensation			150,000				150				598,324				-				-				598,474
Shares issued for exploration costs			425,000				425				428,825				-				-				429,250
Net loss for the year			-				-				-				(1,529,651	)			(18,181	)			(1,547,832	)
Balance December 31, 2011			116,791,068				116,791				1,812,532				(1,697,717	)			(16,681	)			214,925
Sale of common stock for cash			1,250,000				1,250				548,750				-				-				550,000
Stock based compensation			-				-				499,998				-				-				499,998
Shares issued for mining assets			300,000				300				79,000				-				-				79,300
Cancellation of shares			(30,000,000	)			(30,000	)			29,998				-				-				(2	)
Net loss for the period			-				-				-				(1,239,791	)			(1,341	)			(1,241,132	)
Balance June 30, 2012 (unaudited)			88,341,068			$	88,341			$	2,970,278			$	(2,937,508	)		$	(18,022	)		$	103,089

 

(The Accompanying Notes are an Integral Part of These Financial Statements)

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited)

 

1.	Nature of Operations and Continuance of Business

 

Lone Star Gold, Inc. (the “Company” or “Lone Star”), formerly known as Keyser Resources, Inc. (“Keyser”), was incorporated in the State of Nevada on November 26, 2007. The Company is an Exploration Stage Company as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, Development Stage Entities.

 

On January 26, 2012, the Company, acting through a newly-formed subsidiary, Amiko Kay, S. de R.L. de C.V., a company organized under the laws of Mexico (“Amiko Kay”), entered into a Joint Venture Agreement (the “JV Agreement”) with Miguel Angel Jaramillo Tapia (“Jaramillo”), a resident of Mexico. Under the JV Agreement, Amiko Kay and Jaramillo agreed to process mine tailings located in the city of Hidalgo Del Parral in the state of Chihuahua, Mexico (the “Tailings”), and, after processing, to use, market and sell any minerals extracted from the Tailings. The Company owns 99% of the issued and outstanding membership interests of Amiko Kay. The JV Agreement provides Amiko Kay the right to receive 65% of the net revenues from the sale of any materials extracted from the Tailings. The Company is accounting for the activities under the JV Agreement as a collaborative arrangement as defined by ASC 808. As a result, acquisition costs related to the JV Agreement have been capitalized and all other expenditures by the Company related to the JV Agreement have been expensed as incurred as exploration costs. This is in accordance with the Company’s Mineral Property Cost Accounting Policy. For the three and six months ended June 30, 2012, the Company has recognized costs associated with the collaborative arrangement of $90,000 and $250,000, respectively, which are included in Exploration Costs.

  

These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated any revenue since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders and other investors, the ability of the Company to obtain any necessary financing to continue operations, and the attainment of profitable operations. As at June 30, 2012, the Company has accumulated losses of $2,937,508 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The unaudited financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011, and for the period November 26, 2007 (inception) to June 30, 2012 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2012 and the results of operations and cash flows for the periods ended June 30, 2012 and 2011, and for the period November 26, 2007 (inception) to June 30, 2012. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the six month period ended June 30, 2012 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2012.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2011 as included in our Form 10-K filed with the Securities and Exchange Commission.

 

Principles of consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited)

 

2.	Related Party Transactions

 

All related party transactions are recorded at the exchange amount which is the value established and agreed to by the related party.

 

An advance from Maurice Bideaux, former chief executive officer and director, in the amount of $38,910, remains unpaid.

 

On January 13, 2012, the Company agreed to redeem certain shares of the common stock, 0.001 par value, of the Company (the Common Stock”) held by two of its principal shareholders. The Company redeemed 7,500,000 shares of Common Stock owned by Dan Ferris, for total consideration of $1.00. Mr. Ferris is the sole officer and director of the Company. In addition, the Company redeemed 22,500,000 shares of Common Stock held by John G. Rhoden, for total consideration of $1.00.

 

After redemption, Mr. Ferris owns 7,500,000 shares of Common Stock, and Mr. Rhoden owns 22,500,000 shares of Common Stock, representing 8.49% and 25.47%, respectively, of the issued and outstanding shares of Common Stock. The redeemed shares of Common Stock were retired and restored to the status of authorized and unissued shares, and not held in treasury. The Company, Mr. Ferris and Mr. Rhoden agreed to effect the redemption in order to reduce the number of issued and outstanding shares of Common Stock.

 

The redemption of the stock formerly owned by Mr. Ferris has been reflected on the books and records of the Company’s stock transfer agent. The stock transfer agent has not yet recorded the redemption of the stock formerly owned by Mr. Rhoden due to a delay caused by his inability to locate and deliver one of his stock certificates. However, the number of issued and outstanding shares reported by the Company in this Quarterly Report gives effect to this redemption.

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited)

 

3.	Equity Lines of Credit

 

On August 29, 2011, the Company and North American Gold Corp., a company organized under the laws of the Marshall Islands (“North American”), executed an Investment Agreement (the “Investment Agreement”). Under the Investment Agreement, North American agreed to invest up to $15,000,000 to purchase shares of  the Company’s $0.001 par value common stock (the “Common Stock”), in increments of $100,000 or an integral multiple thereof, at the Company’s option at any time through August 31, 2013 (the “Open Period”). During the Open Period, the Company has the option to deliver a put notice (a “Put Notice”) to North American that states the number of shares of Common Stock the Company proposes to sell to North American (the “Put Shares”), and the price per share for those Put Shares (the “Share Price”). The Share Price is equal to 90% of the volume weighted average closing price of the Common Stock for the 20 Trading Days immediately preceding the date on which the Company sends the Put Notice. The closing for the sale of the Put Shares pursuant to a Put Notice shall take place no later than 10 Trading Days after the date on which the Company sends such Put Notice. A “Trading Day” is defined as a day in which the NASDAQ stock market or OTC Bulletin Board is open for business.  North American has the right to refuse to close any requested sale of Put Shares because of negative market conditions affecting the Common Stock.

 

The original Investment Agreement required the Company to use the net proceeds from the sale of the Put Shares to fund the exploration and development of gold and silver mining concessions in the La Candelaria project in Chihuahua, Mexico. On November 9, 2011, the Company and North American executed a First Amendment to Investment Agreement, which states that the Company shall use the net proceeds from the sale of Put Shares to fund operating expenses, working capital and general corporate activities related to the exploration and development of gold and silver mining concessions held by the Company and/or a subsidiary in relation to the La Candelaria property, the Ocampo property, or any other properties agreed upon in advance by the Company and North American. The Company and North American have further agreed that the Company may use the proceeds of the Put Shares to fund operations related to the Mine Tailings project.

 

The sales of Put Shares will not be registered under the Securities Act of 1933, but will be issued under an exemption from the registration requirements of the Securities Act of 1933. Any Put Shares issued and sold to North American will be “restricted securities” and will be subject to applicable restrictions on resale.

 

On April 30, 2012, the Company entered into an Investment Agreement (as amended, the “Fairhills Investment Agreement”) with Fairhills Capital Offshore Ltd., a Cayman Islands exempted company (“Fairhills”), as amended by Amendment No. 1 to Investment Agreement dated June 25, 2012, pursuant to which Fairhills has agreed to purchase shares of Common Stock for an aggregate purchase price of up to $15,000,000.

 

The Fairhills Investment Agreement provides that the Company may, from time to time during the Open Period (defined below), in its sole discretion, deliver a put notice to Fairhills which states the dollar amount that the Company intends to sell to Fairhills on a date specified in the put notice. The maximum investment amount per notice shall be no more than two hundred percent (200%) of the average daily volume of the Common Stock for the ten consecutive trading days immediately prior to date of the applicable put notice. The purchase price per share to be paid by Fairhills will be calculated at a twenty-four and a half percent (24.5%) discount to the lowest trading price of the Common Stock reported by Bloomberg, L.P. during the ten (10) consecutive trading days immediately prior to Fairhills receipt of the put notice. The Open Period begins on the trading day after a registration statement is declared effective as to the Common Stock to be subject to the put, and ends thirty-six (36) months after such date, unless earlier terminated in accordance with the Fairhills Investment Agreement. The Company has reserved 30,000,000 shares of its Common Stock for issuance to Fairhills under the Investment Agreement.

 

The Company will use the proceeds from the sale of the Common Stock under the Fairhills Investment Agreement for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that the Board of Directors, in its good faith, deem to be in the best interest of the Company.

 

The Company filed a Registration Statement on Form S-1 covering the resale of 30,000,000 shares of Common Stock subject to the Investment Agreement on July 13, 2012.

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited)

 

4.

Debt

 

In June 2012 the Company entered into a secured note agreement with Fairhills Capital Offshore Ltd., a Cayman Islands exempted company, in the principal amount of $50,000 at an annual interest rate of 2%. Principal and accrued and unpaid interest is due on December 24, 2012.  The Note is secured by 3,750,000 shares of common stock of the Company owned by Dan Ferris, our President and sole director. 

 

5.

Equity

 

On January 13, 2012, the Company agreed to redeem certain shares of Common Stock held by two of its principal shareholders. The Company agreed to redeem 7,500,000 shares of Common Stock owned by Dan Ferris, for total consideration of $1.00. In addition, the Company agreed to redeem 22,500,000 shares of Common Stock held by John G. Rhoden, for total consideration of $1.00. The redeemed shares of Common Stock are to be retired and restored to the status of authorized and unissued shares, and not held in treasury. (See Note 2)

 

On January 30, 2012, the Company issued 100,000 shares of its $0.001 par value Common Stock to Miguel Angel Jaramillo Tapia in accordance with the JV Agreement (See Note 6). The fair market value of the shares on the date of issuance was $46,000.

 

On February 13, 2012, the Company sold 625,000 shares of its $0.001 par value Common Stock to North American for gross proceeds of $300,000 pursuant to a Put Notice delivered under the Investment Agreement.  

 

On March 21, 2012, the Company sold 625,000 shares of its $0.001 par value Common Stock to North American for gross proceeds of $250,000 pursuant to a Put Notice delivered under the Investment Agreement.

 

On June 29, 2012, the Company issued 200,000 shares of its $0.001 par value common stock to Miguel Angel Jaramillo Tapia in accordance with the JV Agreement (See Note 6). The fair market value of the shares on the date of issuance was $33,300.

 

A summary of warrant activity for the six months ended June 30, 2012 is presented below:

 

										Weighted
						Weighted				average
						average				remaining				Aggregate
						exercise				contractual				Intrinsic
		Warrants				price				life (years)				Value
Outstanding December 31, 2011			200,000			$	1.20
Granted			-				-
Exercised			-				-
Forfeited or cancelled			-				-
Expired			-				-
Outstanding June 30, 2012			200,000			$	1.20				2.08			$	59,467

 

 

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited) 

 

6.	Commitments

 

On October 31, 2011, the Company entered into an agreement with a consultant to perform consulting services as requested by the Company. The contract calls for the consultant to receive $15,000 upon execution of the agreement, $5,000 per month through the term of the agreement, and a one-time grant of 150,000 restricted shares of the Company's $0.001 par value common stock. The fair market value of the common stock on the date of grant was $124,500. The term of the agreement is one year and it will automatically renew if not cancelled in writing 30 days prior to the end of the annual period.

 

La Candelaria Property

 

On May 31, 2011, Metales was formed, with the Company owning 70% of the issued and outstanding shares of capital stock.  The remaining 30% of the issued and outstanding capital stock of Metales was issued to Gonzalez.  On June 10, 2011, Gonzalez assigned the Concessions to Metales.  The Concessions cover 800 hectares, or approximately 1,976 acres.

 

Gonzalez transferred the Concessions to Metales pursuant to an agreement with American Gold.    On August 17, 2011, in connection with its investment in Metales and the exploration and development of the Concessions, the Company, American Gold, and Gonzalez executed an Assignment Agreement (the “Assignment Agreement”) pursuant to which (a) American Gold assigned all of its right and interest in and to a Letter of Intent between American Gold and Gonzalez, and an Option to Purchase Agreement between American Gold and Gonzalez dated January 11, 2011 (the “Option Agreement”), (b) the Company accepted the assignment of all of the rights and interest of American Gold in and to the Letter of Intent and the Option Agreement, and (c) the Company assumed all of the duties and obligations of American Gold under the Letter of Intent and the Option Agreement with Gonzalez. Pursuant to the Assignment Agreement (which has an effective date of June 10, 2011), the Company has taken or will take the following actions in connection with transfer of the Concessions from Gonzalez to Metales:

 

1.

The Company issued 125,000 shares of its $0.001 par value common stock to North American as repayment of the $125,000 that American Gold paid Gonzalez in connection with Option Agreement (the “American Gold Shares”) on August 17, 2011.

 

2.

The Company issued 300,000 shares of its $0.001 par value common stock, with a fair value of $303,000, to Gonzalez on September 16, 2011.

 

3.

The Company, either alone or through Metales, is obligated to fund $150,000 per year of development costs for three years, for a total of $450,000 (the “Work Plan”).  During the Work Plan year ended January 11, 2012, the Company funded $163,557 towards the Work Plan.

 

4.

For the six months ended June 30, 2012, the Company has paid Gonzalez an additional $125,000.

 

The American Gold Shares were issued in the name of North American, with the agreement of American Gold.

 

Gonzalez retains a 2% Net Smelter Returns Royalty on the Property.  Metales is obligated to undertake work necessary to bring the existing geological survey on the Property up to NJ 43-101 standards. Under the second year of the Work Plan, the Company has advanced $56,695 and $3,500 during the quarters ended March 31, 2012 and June 30, 2012, respectively, for a total of $60,195. 

 

The Company has granted anti-dilution rights to Gonzalez, such that the Company must allow Gonzalez the opportunity to maintain his percentage stock ownership in the Company until the date on which the Company has complied fully with its obligations under the Option Agreement or January 11, 2014, whichever comes first.  Gonzalez has waived the exercise of his anti-dilution rights with respect to issuances of common stock to North American under the Investment Agreement.  In addition, the Company is obligated to issue 1,000,000 shares of its $0.001 par value common stock to Gonzalez upon the discovery of a 1 million-ounce equivalent gold deposit, as defined by industry standards as set forth by a recognized exchange in North America.  Finally, if the Company fails to comply with all its obligations under the Option Agreement before January 11, 2014, the Option Agreement will terminate and the Company will be obligated to return the Concessions to Gonzalez.

 

  

Lone Star Gold, Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

June 30, 2012

(unaudited)

 

6.	Commitments (cont’d)

 

Employment Agreement

 

On July 12, 2011, the Company entered into an Employment Agreement with Dan Ferris regarding his position as President of the Company.  The Employment Agreement has an initial term of three years, and after the initial term will automatically renew for successive one-year periods until terminated in accordance with the Agreement (the “Term”).  Mr. Ferris will be paid a base salary of $120,000 per year during the Term.  Mr. Ferris will also be entitled to receive 3,000,000 shares of the Company’s Common Stock, which will be issued in three equal increments of 1,000,000 shares over the first 3 years of the Term.  The shares of Common Stock will not be registered under the Securities Act, and will be subject to restrictions on transfer.  Therefore, Mr. Ferris will receive 1,000,000 shares of Common Stock on July 12 of each of the years 2012, 2013, and 2014.  The Employment Agreement may be terminated voluntarily by either party upon 30 days written notice, upon Mr. Ferris’ death or disability, by mutual agreement at the end of the Term, or at any time for “cause” by the Company.  If Mr. Ferris’ employment is terminated for “cause”, or if he voluntarily resigns, then he would not be entitled to receive any shares of Common Stock that have not been issued as of the date of resignation or termination.  If Mr. Ferris’ employment is terminated for any other reason, he would receive the full 3,000,000 shares of Common Stock.  The Employment Agreement defines “cause” as the willful and continued failure by Ferris to perform his duties under the Employment Agreement, conviction of a felony, or engaging in conduct that is contrary to the best interests of the Company or adversely affects the Company’s reputation.  The fair market value of the stock grant on the date of the Employment Agreement was $3,000,000.  The Company recognized $499,998 in expense related to the stock grant during the six months ended June 30, 2012.

  

Tailings Project

 

On January 26, 2012, the Company, acting through a newly-formed subsidiary, Amiko Kay, S. de R.L. de C.V., a company organized under the laws of Mexico (“Amiko Kay”), entered into a Joint Venture Agreement (the “JV Agreement”) with Miguel Angel Jaramillo Tapia (“Jaramillo”), a resident of Mexico. The JV Agreement sets forth the terms on which Amiko Kay and Jaramillo will work together to process mine tailings located in the city of Hidalgo Del Parral in the state of Chihuahua, Mexico (the “Tailings”), and, after processing, use, market and sell any minerals extracted from the Tailings. The Company owns 99% of the issued and outstanding membership interests of Amiko Kay.

 

The Tailings consist of approximately 1.2 million tons of mine tailings from previous mining activity in the Chihuahua area over the last 100 years or more. Mine tailings represent the refuse remaining after ore has been processed. Amiko Kay and Jaramillo entered into the JV Agreement so they could re-process the mine tailings heap to extract minerals that were not extracted during the initial processing, and to market and sell any minerals extracted from the Tailings.

 

As consideration for Jaramillo’s agreement to process the Tailings pursuant to the JV Agreement, the Company paid Jaramillo $25,000 when it signed a letter of intent for a proposed acquisition of an interest in the Tailings on December 5, 2011, and another $75,000 when it signed the JV Agreement in the quarter ending March 31, 2012. The Company also agreed to pay Jaramillo an additional $200,000 no later than January 26, 2013.

  

In addition, the Amiko Kay agreed to fund an amount up to $1,000,000 (the “Work Commitment”) for the benefit of the processing operation over its first two years, as follows:

 

(a)    $250,000 within the first year of the JV Agreement for the purchase of used heavy equipment, miscellaneous equipment and materials for processing the Tailings, and taxes, permits, and general operating expenses.

 

(b)    $750,000 within the second year of the JV Agreement for the construction of a heap leach system and floatation plant on the Property.

 

Amiko Kay may make an additional $250,000 available, if additional processing equipment is justified and required to maximize the liberation of precious metals in the Tailings material.

 

 

As further consideration for the JV Agreement, the Company is obligated to issue 600,000 shares of the common stock, $0.001 par value, of the Company (“Common Stock”), to Jaramillo as follows:

 

(a)    300,000 shares of Common Stock, which have been issued to Jaramillo; and

 

(b)    300,000 shares of Common Stock within 12 months of signing the JV Agreement.

 

The shares of Common Stock will be restricted shares and carry current and appropriate legends to that effect. Jaramillo executed a Share Issuance Agreement concurrently with the execution of the JV Agreement, with respect to the shares of Common Stock to be issued under the JV Agreement.

 

Jaramillo will manage the day-to-day affairs associated with processing the Tailings, selling the minerals extracted from the Tailings (“Extracted Minerals”) and performing other related activities. Jaramillo will pay all expenses associated with the processing of the Tailings, the sale of any Extracted Minerals from the Tailings, and other obligations of the project, initially from the funds received under the Work Commitment and, eventually, from revenues from operations. All net revenues from the sale of any Extracted Minerals or other sources, after deducting expenses, will be distributed and paid monthly, with 65% of the net revenues paid to Amiko Kay and 35% of the net revenues paid to Jaramillo. It is anticipated that the portion to be paid to Amiko Kay will be paid directly to the Company. Jaramillo will provide a monthly accounting of all revenues and expenses associated with the processing operations. For the six months ended June 30, 2012, the Company paid $250,000 toward the Work Commitment, of which $160,000 was paid during the three months ended March 31, 2012 and $90,000 was paid during the three months ended June 30, 2012.

 

Title to the Property and the Tailings will remain in Jaramillo’s name. Jaramillo will be responsible for obtaining all permits, approvals and authorizations associated with the processing of the Tailings. He is also responsible for processing the Tailings in compliance with all applicable laws, rules and regulations and to maintain insurance on the Property. Amiko Kay will have access to the Property and the Tailings at all times during the term of the JV Agreement.

 

Amiko Kay and Jaramillo will mutually develop plans and programs to process the Tailings. Jaramillo will prepare a detailed budget setting forth the expenses to be paid under the Work Commitment, which will be approved by Amiko Kay. Finally, Jaramillo will provide quarterly financial reports to Amiko Kay. The Company and Amiko Kay intend to oversee the activities of Jaramillo and to confirm compliance of the operation with the budgets and plans agreed upon by the parties on an ongoing basis.

 

If either party defaults under the JV Agreement, the defaulting party’s rights to participate in the Tailings operation will be immediately suspended, and the defaulting party will have no right to share in the revenues subject to the JV Agreement, until the breach is cured. If the defaulting party is Jaramillo, then Amiko Kay may perform the duties of Jaramillo under the Agreement. The non-defaulting party may also sue for damages incurred as a result of the event of default.

 

Despite the Company’s role in jointly developing policies and programs of the project, including its ability to monitor Jaramillo’s actions, and its control over the funds provided under the Work Commitment, the Company has limited control over the processing operations contemplated by the JV Agreement. Jaramillo makes all day to day decisions regarding the processing of the Tailings, the construction of the wash plant on the property, and the plans to construct a heap leach system and flotation plant. As noted above, he is also responsible for obtaining all permits, selling any extracted minerals and paying all expenses. The Company, through Amiko Kay and its on-site consultant, regularly advises Jaramillo as to these matters, makes on-site inspections of the operation and receives progress reports from Jaramillo, but the Company is ultimately dependent on Jaramillo to make all operational decisions and execute all plans with respect to the project. The Company does control initial funding of the project and receives reports of the specific costs and expenses of the enterprise, which it intends to compare against the agreed budget before making further advances. Otherwise, except as outlined above, the Company has no direct control over the operations.

 

If the Company determines that Jaramillo is breaching his responsibilities under the Agreement, the Company’s could either terminate the Agreement, or allow the suspension of Jaramillo’s right to participate in the Tailings, as provided in the JV Agreement. If Jaramillo is in default, then the Company has the contractual right (but not the obligation) to perform the duties of Jaramillo under the JV Agreement; however, it is unlikely that the Company would do so, given Jaramillo’s ownership of the surrounding properties and the Company’s lack of physical processing resources in Mexico. Alternatively, the Company could withhold payments under the Work Commitment until the default is cured, in order to minimize any further financial exposure to the Company and to encourage Jaramillo to resolve the default. The significant costs and resources required for litigation, together with the Company's limited financial resources at this time, make the pursuit of litigation unlikely at this time.

 

The JV Agreement will terminate upon completion of processing the Tailings, as determined by Amiko Kay in its sole discretion. If Jaramillo materially breaches the JV Agreement, the Amiko Kay may terminate the JV Agreement upon 30 days’ notice to Jaramillo. Jaramillo has no right to terminate the JV Agreement before the processing of the Tailings is complete.

 

Jaramillo provides independent consulting services to the Company on the La Candelaria project. He acts as Vice President of Exploration on the La Candelaria project (although he is not an executive officer, or an employee, of the Company, Metales or Amiko Kay).

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Special Note on Forward-Looking Statements

 

This Form 10-Q contains "forward-looking" statements including statements regarding our expectations of our future operations. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited to, economic conditions generally and in the industries in which we may participate, competition within our chosen industry, including competition from much larger competitors, technological advances, and the failure by us to successfully develop business relationships.

 

General Overview

 

We are a start-up exploration stage company in the business of gold and mineral exploration, acquisition and development. Our principal office is located at 6565 Americas Parkway NE, Suite 200, Albuquerque, New Mexico 87110. Our telephone number is (505) 563-5828.

 

Agreements

 

La Candelaria Project

 

In May 2011, Metales HBG, S.A. de C.V., a company organized under the laws of Mexico (“Metales”) was formed, with the Company owning 70% of the issued and outstanding shares of capital stock. Metales owns certain gold and silver mining Concessions covering 800 hectares, or 1,976 acres, near Guachochi, Chihuahua, Mexico. The Concessions are sometimes referred to as the “La Candelaria Project”. See Note 6 to the Financial Statements.

 

In order to fulfill its obligations under the Option Agreement executed in connection with the transfer of the Concessions to Metales, the Company paid Homero Bustillos Gonzalez (“Gonzalez”) the amount of $125,000 in January 2012. The Company, either alone or through Metales, is obligated to fund $150,000 of development costs per year for three years beginning in January 2011, under a Work Plan established for the Concessions (the “Work Plan”). For the six months ending June 30, 2012, the Company made payments totaling $185,195 pursuant to the Work Plan. See “Results of Operations” below.

 

The Company has granted anti-dilution rights to Gonzalez, such that the Company must allow Gonzalez the opportunity to maintain his percentage stock ownership in the Company until the date on which the Company has complied fully with its obligations under the Option Agreement or January 11, 2014, whichever comes first. Gonzalez has waived the exercise of his anti-dilution rights with respect to issuances of Common Stock to North American under the Investment Agreement.

 

If the Company fails to comply with all its obligations under the Option Agreement before January 11, 2014, the Option Agreement will terminate and the Company will be obligated to return the Concessions to Gonzalez.

 

In November 2011, a team of geologists drilled ten drill holes to a depth of approximately 200 meters (650 feet).  The inital results received from ALS CHEMEX showed only trace amounts of gold and silver. The Company is currently remapping the area in order to determine whether additional drilling targets are warranted.

 

The Concessions are without known proven (measured) or probable (indicated) reserves, as defined under SEC Industry Guide 7, and the exploration program described in this Quarterly Report is exploratory in nature. See “No Proven or Probable Reserves” below.

 

Tailings Project

 

On January 26, 2012, the Company, acting through a newly-formed subsidiary, Amiko Kay entered into the Joint Venture Agreement with Jaramillo to process mine tailings located in the city of Hidalgo Del Parral in the state of Chihuahua, Mexico, and, after processing, to use, market and sell any minerals extracted from the Tailings. See Note 6 to the Financial Statements for a description of the JV Agreement.

 

 

The Company is obligated to fund $250,000 for the benefit of the processing operation before January 26, 2013, under the work commitment established for the Tailings Project. For the six months ending June 30, 2012, the Company made payments totaling $250,000 pursuant to the Work Commitment. See “Results of Operations” below.

 

On the Tailings property, two out of three on-site washing jigs are now complete and operational. The jigs separate the heavy mineral-rich material from the lighter worthless material in the Tailings. The Company has been pre-washing material for two months to maximize the silver and gold content per ton of material to be shipped to nearby floatation and leaching plants in Parral, Mexico. The cost of the wash plant and jig circuit was $60,000 to date.

 

Approximately 6,000 tons of the Tailings material has been sent to the processing plant in Parral, Mexico. As of the date of this Quarterly Report, this shipment has not been fully processed. The first processing plant selected in Parral, Mexico closed unexpectedly for the last few months and recently re-opened. The plant is expected to resume processing in the near future. The plant’s management has agreed to receive and process 200 tons per day (tpd) of the Company’s Tailings material. In addition, the Company is negotiating an agreement with a second nearby processing plant. The second plant continues to receive small amounts of the Company’s washed concentrate and is currently fine-tuning and determining the optimal processing route for the material. The Company has no revenues from the Tailings as of the date of filing.

 

The Company has completed its preliminary study regarding the construction of a benign nitrogen leaching pile process to be built on the property, which is expected to be capable of processing 1,000 tons of Tailings per day. This relatively new leaching process represents the benefits of not using cyanide and of having minimal environmental impact. In turn, the complexity of the permitting process for the plant's construction will be greatly reduced. The Company’s consultants in Mexico are in the process of obtaining permits for the new plant.

 

No Proven or Probable Reserves

 

We are a start-up, exploration-stage company engaged in the search for gold and related minerals. No proven (measured) or probable (indicated) reserves have been established with respect to the La Candelaria project or the Tailings project, and the proposed program of exploration and development for the La Candelaria project and the Tailings project is exploratory in nature. There is no assurance that a commercially viable mineral deposit, or reserve, exists on the property covered by the Concessions or the Tailings project or can be shown to exist until sufficient and appropriate exploration is done, and a comprehensive evaluation of such work concludes that the extraction of such a mineral deposit, if found, can be economically and legally feasible.

 

Fairhills Investment Agreement

 

On April 30, 2012, the Company entered into an Investment Agreement (as amended, the “Fairhills Investment Agreement”) with Fairhills Capital Offshore Ltd., a Cayman Islands exempted company Fairhills, as amended by Amendment No. 1 to Investment Agreement dated June 25, 2012. Under the Fairhills Investment Agreement, Fairhills agreed to purchase shares of Common Stock for an aggregate purchase price of up to $15,000,000. The Fairhills Investment Agreement was filed as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q filed on May 14, 2012 and Amendment No. 1 was filed as Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the Commission on July 13, 2012.

 

The Fairhills Investment Agreement provides that the Company may, from time to time during the Open Period (defined below), in its sole discretion, deliver a put notice to Fairhills which states the dollar amount that the Company intends to sell to Fairhills on a date specified in the put notice. The maximum investment amount per notice shall be no more than two hundred percent (200%) of the average daily volume of the Common Stock for the ten consecutive trading days immediately prior to date of the applicable put notice. The purchase price per share to be paid by Fairhills will be calculated at a twenty-four and a half percent (24.5%) discount to the lowest trading price of the Common Stock reported by Bloomberg, L.P. during the ten (10) consecutive trading days immediately prior to Fairhills receipt of the put notice. The Open Period begins on the trading day after a registration statement is declared effective as to the Common Stock to be subject to the put, and ends thirty-six (36) months after such date, unless earlier terminated in accordance with the Fairhills Investment Agreement. The Company has reserved 30,000,000 shares of its Common Stock for issuance to Fairhills under the Investment Agreement.

 

The Company will use the proceeds from the sale of the Common Stock under the Fairhills Investment Agreement for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that the Board of Directors, in its good faith, deems to be in the best interest of the Company.

 

The Company filed a Registration Statement on Form S-1 covering the resale of 30,000,000 shares of Common Stock subject to the Investment Agreement on July 13, 2012. The Company may not sell common stock to Fairhills until the Registration Statement is declared effective by the Commission.

 

 

Results of Operations

 

We have not generated any revenue since our inception.  We do not anticipate earning revenues until we have begun to commercially produce minerals from the Concessions, the Tailings, or other mineral properties that we may own in the future.

 

Three months ended June 30, 2012 and 2011, respectively

 

For the periods below, we had the following expenses:

 

		For the  Three Months   Ended   June 30,   2012				For the   Three Months   Ended   June 30,   2011
General and administrative		$	63,852			$	106,683
Exploration			108,500				-
Management fees			279,999				-
Total operating expenses		$	452,351			$	106,683

 

Included in exploration expenses of $108,500 for the three months ended June 30, 2012 are costs of $3,500 related to the La Candelaria Project and costs of $90,000 related to the Tailings project. With respect to the La Candelaria project, we paid a total of $3,500 under the Work Plan for La Candelaria. The Company made payments of $90,000 under the Work Commitment for the Tailings project, which includes approximately $40,000 for construction of the wash plant, $40,000 for equipment and trucks, and $10,000 for repairs, fuel, taxes, insurance, office and management costs. The Company incurred no exploration costs for the three months ended June 30, 2011.

 

For the three months ended June 30, 2012, we incurred general and administrative expenses totaling $63,852.  This decrease of $42,831 was due to increases (decreases) as compared to the three months ended June 30, 2011 as follows:  accounting and auditing fees of ($15,036), legal and professional fees of ($58,656), travel of ($5,786), telephone expense of $2,340, rent expense of ($828), office expenses of $32,669, and general expenses of $2,466.

 

During the three months ended June 30, 2012, the Company paid management fees totaling $30,000 to our sole officer and director and recognized $249,999 in expenses related to the stock grant under Mr. Ferris’ Employment Agreement., The Company paid no management fees in the first three months of 2011.

 

Six months ended June 30, 2012 and 2011, respectively

 

For the periods below, we had the following expenses:

 

		For the  Six Months   Ended   June 30,   2012				For the   Six Months   Ended   June 30,   2011				Accumulated   Deficit from   November 26,   2007   to   June 30,   2012
General and administrative		$	215,916			$	125,100			$	837,162
Exploration			465,196				-				1,018,394
Management fees			559,998				-				1,116,452
Total operating expenses		$	1,241,110			$	125,100			$	2,972,008

 

 

Included in Exploration expenses of $465,196 for the six months ended June 30, 2012 are costs of $185,195 related to the La Candelaria Project and costs of $250,000 related to the Tailings Project. With respect to the La Candelaria Project, we paid a total of $60,195 under the Work Plan for La Candelaria, and made $125,000 in payments to Homero Gonzalez under the Option Agreement. With respect to the Tailings Project, the Company made payments of $250,000 under the Work Commitment, which includes approximately $60,000 for construction of the wash plant, $122,500 for equipment and trucks, and $67,500 for repairs, fuel, taxes, insurance, office and management costs. The Company incurred no exploration costs in the first six months of 2011.

 

For the six months ended June 30, 2012, we incurred general and administrative expenses totaling $215,916.  This increase of $90,816 was due to increases (decreases) as compared to the first six months of 2011 as follows:  accounting and auditing fees of $15,128, legal and professional fees of $63,219, travel of ($4,882), depreciation expense of $4,680, telephone expense of $6,597, rent expense of $2,062, and general expenses of $4,012.

 

During the six months ended June 30, 2012, the Company paid management fees totaling $60,000 to our sole officer and director and recognized $499,998 in expenses related to the stock grant under Mr. Ferris’ Employment Agreement. The Company paid no management fees in the first six months of 2011.

 

Liquidity and Capital Resources

 

The following is a summary of our balance sheets as of June 30, 2012 and December 31, 2011:

 

		June 30, 2012 ($)				December 31, 2011 ($)
Cash			9,433				215,737
Current Liabilities			127,440				74,375
Working Capital (deficit)			(117,856	)			143,600
Stockholders’ Equity			103,089				214,925

 

We had cash of $9,433 as of June 30, 2012.  We have committed to fund $450,000 over three years under the La Candelaria Work Plan, and $1,000,000 over two years under the work commitment for the Tailings Project.  Because the Company has no revenues from operations, we are dependent upon obtaining additional financing in order to fund our obligations under the Work Plan, and also to fund our obligations under the Tailings Project.  The Company has funded its exploratory program to date through the Investment Agreement with North American and other sources of equity financing. The Company recently signed the Fairhills Investment Agreement, the proceeds of which may be used for general corporate and working capital purposes, acquisitions, and other purposes as determined in good faith by the Board of Directors. However, the Company may not sell common stock to Fairhills until the Registration Statement is declared effective by the Commission. There is no assurance that adequate financing on acceptable terms will continue to be available to us.  

 

  

During the six months ended June 30, 2012, our sole source of financing was the proceeds of a Secured Note (the “Note”) in the principal amount of $50,000 executed by the Company in favor of Fairhills. The Note contains the following payment terms: (a) the unpaid principal amount accrues interest at the rate of two percent (2%) per annum, (b) the unpaid principal and all accrued but unpaid interest thereon will be due and payable on December 24, 2012, and (c) any portion of the unpaid principal and accrued but unpaid interest may be prepaid by the Company, without penalty. Payment of the Note is secured by 3,750,000 shares of Common Stock of the Company owned by Dan M. Ferris. Mr. Ferris is the sole director and officer of the Company.

 

The proceeds of the Note were used to make certain payments relating to the Company’s Tailings project, and for general operating expenses.

 

Going Concern

 

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive exploration activities. For these reasons our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern.

 

Accounting Plan

 

We intend to continue to have our outside accountants assist us in the preparation of our quarterly and annual financial statements and have these financial statements reviewed or audited by our independent auditor. Our outside accountant is expected to charge us approximately $3,000 to prepare our quarterly financial statements and approximately $10,000 to prepare our annual financial statements.

 

Off-balance sheet arrangements

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

N/A

 

Item 4. Controls and Procedures.

 

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to a lack of segregation of duties and an absence of written policies and procedures for accounting and financial reporting, which are identified in our Annual Report on Form 10-K for the year ended December 31, 2011 as a material weakness in our internal controls over financial reporting.

 

 

(b) Changes In Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during this fiscal quarter that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.

 

PART II

OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not aware of any pending or threatened legal proceedings which involve the Company.

 

Item 1A.  Risk Factors.

 

There are no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K filed with the Commission on March 27, 2012.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On June 29, 2012, the Company issued 200,000 shares of Common Stock to Miguel Angel Jaramillo Tapia (“Jaramillo”), an individual who is a resident of Mexico. The shares were issued to Jamarillo as partial consideration under the Tailings JV Agreement.

 

On July 11, 2012, the Company issued 1,000,000 shares of its Common Stock to Daniel M. Ferris, the sole executive officer of the Company. The shares of Common Stock are part of Mr. Ferris’ compensation for serving as President of the Company, as set forth in Mr. Ferris’ Employment Agreement dated July 12, 2011.

 

 Neither the Common Stock issued to Mr. Ferris, nor the Common Stock issued to Jaramillo, were registered under the Securities Act.  The issuances of stock were completed in reliance upon an exemption pursuant to Regulation S.  Both Jaramillo and Mr. Ferris have represented to the Company that he is not a US person as defined in Regulation S, and that he is acquiring the Common Stock for investment purposes only and not with a view towards distribution.

 

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures

 

Our mining activities are located and operated outside of the United States of America. Therefore, the Company is not required to provide information under this Item.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits.

 

31.1	Certification of Periodic Financial Reports by Daniel M. Ferris in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Periodic Financial Reports by Daniel M. Ferris in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

 

 

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.

 

LONE STAR GOLD, INC.
By:	/s/ Dan Ferris
Name:	Dan Ferris
Title:	President, Secretary and Treasurer
Date:	October 11, 2012