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 June 30, 2013
¨		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: 259,058,143 shares of common stock, par value $0.001, of the issuer were issued and outstanding as of August 12, 2013. 

 

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 – June 30, 2013 and September 30, 2012 (Unaudited)		3
	Consolidated Statements of Expenses – Three and nine months ended June 30, 2013 and 2012 and for the period from July 26, 2002 (inception) through June 30, 2013 (Unaudited)		4
	Consolidated Statement of Stockholders’ Equity (Deficit) – September 30, 2011 through June 30, 2013 (Unaudited)		5
	Consolidated Statements of Cash Flows – Nine months ended June 30, 2013 and 2012 and for the period from July 26, 2002 (inception) through June 30, 2013 (Unaudited)		6
	Notes to the Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15
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		17
Item 4.	Mine Safety Disclosures		17
Item 5.	Other Information		17
Item 6.	Exhibits		17
SIGNATURES			19

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

 

 EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

		June 30,				September 30,
		2013				2012
ASSETS
CURRENT ASSETS:
Cash		$	245,390			$	238,085
Prepaid expenses			130,691				62,433
Total Current Assets			376,081				300,518
Furniture and equipment net of accumulated depreciation of $38,182 and $37,069, respectively			982				2,095
Mineral property			1,879,608				1,879,608
Deposits			22,440				22,440
Total Assets		$	2,279,111			$	2,204,661
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	119,594			$	83,163
Accrued liabilities			42,350				45,000
Total Current Liabilities			161,944				128,163
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; 257,555,336 and 251,327,040 issued and outstanding, respectively			257,555				251,328
Additional paid-in capital			203,413,719				201,903,913
Deficit accumulated during the exploration stage			(201,554,107	)			(200,078,743	)
Total Stockholders’ Equity			2,117,167				2,076,498
Total Liabilities and Stockholders’ Equity		$	2,279,111			$	2,204,661

 

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 June 30,								Nine Months Ended June 30,								Period From July 26, 2002 (Inception) Through June 30,
		2013				2012				2013				2012				2013
OPERATING EXPENSES:
Professional fees		$	37,798			$	137,982			$	148,795			$	317,133			$	4,022,639
Officer compensation expense			—				—				—				—				2,863,833
Administrative consulting fees			50,000				65,000				155,000				205,000				2,580,766
Management fees, related party			—				—				—				—				320,500
Legal and accounting fees			32,870				35,305				119,377				151,942				1,999,633
Exploration expenses			169,947				148,275				511,005				501,717				4,121,577
Other general and administrative			64,774				53,406				541,393				242,653				7,554,698
Write-off of accounts payable and accrued interest			—				—				—				—				(63,364	)
Loss on impairment of mineral property			—				—				—				—				176,567,424
Loss on asset dispositions			—				—				—				—				34,733
Total Operating Expenses			355,389				439,968				1,475,570				1,418,445				200,002,439
LOSS FROM OPERATIONS			(355,389	)			(439,968	)			(1,475,570	)			(1,418,445	)			(200,002,439	)
OTHER INCOME (EXPENSE):
Interest income			61				53				206				169				39,665
Other income			—				—				—				—				18,632
Forgiveness of debt			—				—				—				—				115,214
Interest expense:
Related parties			—				—				—				—				(68,806	)
Other			—				—				—				—				(308,740	)
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)			61				53				206				169				(1,551,668	)
NET LOSS		$	(355,328	)		$	(439,915	)		$	(1,475,364	)		$	(1,418,276	)		$	(201,554,107	)
Net loss per common share, basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted average number of common shares outstanding, basic and diluted			256,376,177				249,121,239				254,322,800				247,444,091

 

 

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, 2011 through June 30, 2013

(Unaudited)

 

		Common Stock Shares				Common Stock Amount				Additional Paid-in Capital				Deficit Accumulated During the Exploration Stage				Total
Balances at September 30, 2011			245,582,461			$	245,582			$	200,010,493			$	(198,160,539	)		$	2,095,536
Common stock issued for services			435,000				435				118,965				—				119,400
Common stock sold in private placement			5,289,384				5,291				1,444,709				—				1,450,000
Costs associated with options			—				—				329,766				—				329,766
Gold and Minerals Company, Inc. merger rounding shares			20,195				20				(20	)			—				—
Net loss			—				—				—				(1,918,204	)			(1,918,204	)
Balances at September 30, 2012			251,327,040				251,328				201,903,913				(200,078,743	)			2,076,498
Common stock issued for services			60,000				60				15,690				—				15,750
Common stock sold in private placement			6,168,296				6,167				1,093,833				—				1,100,000
Costs associated with options			—				—				400,283				—				400,283
Net loss			—				—				—				(1,475,364	)			(1,475,364	)
Balances at June 30, 2013			257,555,336			$	257,555			$	203,413,719			$	(201,554,107	)		$	2,117,167

 

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)

 

		Nine Months Ended June 30,								July 26, 2002  (Inception) Through June 30,
		2013				2012				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,475,364	)		$	(1,418,276	)		$	(201,554,107	)
Adjustments to reconcile net loss to net cash used in operating activities:
Warrant and option associated costs			400,283				105,003				5,551,840
Beneficial conversion feature of notes payable			—				—				225,207
Non-cash expense with affiliate			—				—				7,801
Stock-based compensation			15,750				112,800				6,740,283
Non-cash merger related costs			—				—				1
Accretion of discounts on notes payable			—				—				1,132,088
Loss on sale of fixed assets			—				—				34,733
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			1,113				3,028				84,181
Changes in operating assets and liabilities:
Miscellaneous receivable			—				—				4,863
Interest receivable			—				—				(13,611	)
Prepaid expenses and other current assets			(68,258	)			(904	)			(128,694	)
Advances on behalf of affiliated company			—				—				(562,990	)
Accounts payable			36,431				21,459				129,014
Accounts payable - related party			—				—				364
Accrued liabilities			(2,650	)			(8,441	)			262,656
Interest payable, other			—				—				49,750
Net Cash Used in Operating Activities			(1,092,695	)			(1,185,331	)			(11,380,565	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property interest			—				—				(100,000	)
Purchase of furniture and equipment			—				(1,860	)			(150,600	)
Proceeds from sale of fixed assets			—				—				32,001
Deposits			—				—				(22,440	)
Issuance of notes receivable			—				—				(249,430	)
Payments received on notes receivable			—				—				129,450
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			—				(1,860	)			(353,441	)

(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) 

 

		Nine Months Ended June 30,								July 26, 2002 (Inception) Through June 30,
		2013				2012				2013
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock and subscriptions			1,100,000				1,050,000				8,011,591
Costs associated with the sale of stock			—				—				(19,363	)
Proceeds from notes payable, related parties			—				—				219,900
Proceeds from warrant exercise			—				—				1,550,742
Proceeds from notes payable, other			—				—				2,322,300
Increase in finance contracts			—				—				117,479
Repayment of notes payable, related parties			—				—				(61,900	)
Payments on finance contracts			—				—				(117,479	)
Repayment of notes payable, other			—				—				(43,874	)
Net Cash Provided by Financing Activities			1,100,000				1,050,000				11,979,396
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			7,305				(137,191	)			245,390
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			238,085				319,939				—
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	245,390			$	182,748			$	245,390
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
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

 

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, 2013, 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, 2012, included in the Company’s Annual Report on Form 10-K, filed with the SEC on December 14, 2012. The consolidated balance sheet at September 30, 2012, has been derived from the audited financial statements included in the 2012 Annual Report.

 

Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2012 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

 

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.

 

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 – COMMITMENTS

 

On January 31, 2012, the Company engaged Houlihan Lokey Capital, Inc. as its exclusive financial advisor to assist the Company in evaluating potential strategic alternatives related to the approximately 3,740 acre property located near Capitan, New Mexico, including the potential sale of the property. As part of the contract the Company paid a retainer of $100,000 and is committed to a monthly payment of approximately $2,000 for fees and cost incurred.

 

In January 2012, the Company retained Management Resource Initiatives, Inc. for managing and overseeing the process of marketing and selling the Company and performing other services aimed at furthering the Company's strategic goals pursuant to an unwritten consulting arrangement. Under this arrangement, the Company pays Management Resource Initiatives a monthly consulting fee of $10,000. The Company made aggregate payments of $90,000 to Management Resource Initiatives during the nine months ended June 30, 2013. Management Resource Initiatives is a related party because it is a corporation that is wholly-owned by John F. Stapleton who is a Director of El Capitan and Chief Financial Officer of the Company.

 

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 process will be observed by one of our outside “Qualified Person” (QP) consultants.

 

The contract calls for a $100,000 retainer that was paid as of June 30, 2013. Upon completion of the project, if the Company receives a profit from the sale of the recovered precious metals above and beyond the retainer amount paid, the Company will issue 500,000 shares of the Company’s S-8 common stock pursuant to our 2005 Stock Incentive Plan to the processing company. The fair value of the common shares was determined to be $63,750 as of June 30, 2013 and it will be recognized over the service period through the expected completion date of the project in September 2013.

 

NOTE 4 – STOCKHOLDERS’ EQUITY

 

Equity Purchase Agreement

 

On July 11, 2011, the Company entered into an Equity Purchase Agreement (the “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 Agreement with Southridge. Southridge’s purchase commitment under the 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 Agreement for an additional year, expiring July 11, 2014. The maximum amount of Southridge’s aggregate purchase commitment under the Agreement remains unchanged at $5,000,000.

 

El Capitan has no obligation to sell any shares under the Agreement. The Agreement may be terminated by the Company at any time. Southridge will have no obligation to purchase shares under the 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 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.

 

As of June 30, 2013, the Company has received aggregate proceeds of $3,050,000 under the Agreement and $150,000 subsequent to June 30, 2013 and through August 12, 2013. As of June 30, 2013, the Company had available gross proceeds of $1,950,000 under the Agreement to sell newly-issued shares of El Capitan common stock.

 

 

Issuances of Common Stock, Warrants and Options

 

Common Stock

 

During the nine months ended June 30, 2013, El Capitan issued 6,168,296 shares of common stock at an average price of $0.1783 per share under the terms of the Equity Purchase Agreement and received cash proceeds of $1,100,000.

 

During the nine months ended June 30, 2013, El Capitan issued 60,000 shares of S-8 common stock pursuant to our 2005 Stock Incentive Plan for outside consulting services valued at $15,750, the value of the closing price of the stock on the date of issuance.

 

Warrants

 

During the nine months ended June 30, 2013, the Company did not issue any warrants.  There were no warrants outstanding as of September 30, 2012 or June 30, 2013.

 

Options

 

On June 22, 2013, 500,000 options at an exercise price of $1.02 expired.

 

On January 15, 2013, pursuant to the 2005 Stock Incentive Plan, the Company granted two consultants five-year stock options to purchase an aggregate 350,000 shares of the Company’s common stock at an exercise price of $0.215 per share. 250,000 options vested immediately. 100,000 options were scheduled to vest in 20% annual increments beginning on January 15, 2014. The fair value of the option was determined to be $65,866 using the Black-Scholes option pricing model, and was expensed as stock-based compensation during the nine months ended June 30, 2013. The significant assumptions used in the valuation were: the exercise price of $0.215, the market value of the Company’s common stock on the date of grant, expected volatility of 136.43%, risk free interest rate of 0.751%, expected term of 5.0 years and expected dividend yield of zero.

 

On March 12, 2013, the Company modified existing option awards by amending the vesting terms of the 100,000 options granted on January 15, 2013 which were scheduled to vest in 20% annual increments. The options were modified to vest immediately. There was no incremental increase in the fair value of the option, which was determined using the Black-Scholes option pricing model. The significant assumptions used in the valuation were: the exercise price of $0.215, the market value of the Company’s common stock on the date of amendment, expected volatility of 136.68%, risk free interest rate of 0.88%, expected term of 4.85 years and expected dividend yield of zero.

  

On January 15, 2013, pursuant to the 2005 Stock Incentive Plan, the Company granted to each of three directors of the Company five-year stock options to purchase 500,000 of the Company common stock, and to the controller a five-year stock option to purchase 100,000 shares of the Company’s common stock, all of which vested immediately, at an exercise price of $0.215 per share. The fair value of the option was determined to be $200,983 using the Black-Scholes option pricing model, and was expensed as stock-based compensation during the nine months ended June 30, 2013. The significant assumptions used in the valuation were: the exercise price of $0.215, the market value of the Company’s common stock on the date of grant, expected volatility of 102.528%, risk free interest rate of 0.359%, expected term of 2.5 years and expected dividend yield of zero.

 

On November 30, 2012, El Capitan amended the expiration date of an aggregate of 1,500,000 outstanding common stock options. The options were originally scheduled to expire on February 7, 2013. The expiration date of 1,000,000 of the options was extended to February 7, 2018 and the expiration date of 500,000 of the options was extended to June 22, 2013. The incremental increase in the fair value of the option was determined to be $65,275 using the Black-Scholes option pricing model, and was expensed as stock-based compensation during the nine months ended June 30, 2013. The significant assumptions used in the valuation were: the exercise price of $1.02, the market value of the Company’s common stock on the date of amendment, expected volatility of 95.22%, risk free interest rate of 0.34%, expected term of 2.6 years and expected dividend yield of zero.

 

 

On July 6, 2012, a new Director of the Company was awarded a ten-year 500,000 share stock option at an exercise price of $0.21 per share that vests in 12 equal monthly installments commencing on the one month anniversary of the grant date and has a cashless exercise provision. The fair value of the option was determined to be $90,878 using the Black-Scholes option pricing model. The significant assumptions used in the valuation were: the exercise price of $0.21, the market value of the Company’s common stock on July 6, 2012, expected volatility of 133.12%, risk free interest rate of 0.64%, expected term of five years and expected dividend yield of zero. Stock-based compensation was recorded related to this grant during the year ended September 30, 2012, of $22,720 and $68,159 was expensed in the nine months ended June 30, 2013. 

 

The following table sets forth certain terms of the Company’s outstanding options and exercisable options for the nine months ended June 30, 2013: 

 

		Options Outstanding								Options Exercisable
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Balance, September 30, 2012			4,650,000			$	0.57				4,275,000			$	0.60
Granted			1,950,000				0.215				1,950,000				0.215
Vested			—				—				375,000				0.21
Exercised			—				—				—				—
Expired/Cancelled			(500,000	)			1.02				(500,000	)			1.02
Balance, June 30, 2013			6,100,000			$	0.42				6,100,000			$	0.42
Weighted average contractual life in years			4.95								4.95
Aggregate intrinsic value		$	—							$	—

 

The intrinsic value of each option share is the difference between the fair market value of the common stock and the exercise price of such option share to the extent it is "in-the-money.” Aggregate intrinsic value represents the pretax value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.13 closing stock price of the Company’s common stock on June 30, 2013, and there were no options in-the-money on the date of measurement. The intrinsic value amounts change based on the market price of the Company’s stock.

 

The Company has a 2005 Stock Incentive Plan under which 30,000,000 shares are reserved and registered for stock and option grants. There were 12,135,913 shares available for grant under the Plan at June 30, 2013, excluding the 6,100,000 options outstanding.

 

NOTE 5 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2013, and through August 12, 2013, El Capitan sold an aggregate of 1,502,807 shares to Southridge Partners under the Equity Purchase Agreement for aggregate cash proceeds of $150,000.

 

 

 

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, 2012, filed with the U.S. Securities and Exchange Commission (SEC) on December 14, 2012.

 

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 Securities and Exchange Commission 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 Securities and Exchange Commission.  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 because 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 initial results attained, 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. 

 

As disclosed in our February 2013 press release, we have obtained results from a well-respected metallurgical lab which used pre-treatment of the ore and the industry accepted method of cyanide vat leaching. The resulting assays, which were obtained under “Chain of Custody” procedures, demonstrated significant values of gold along with lesser amounts of other precious metals. To maximize the recovery of all precious metals the Company is now working with the metallurgical lab to further develop an encompassing recovery process that will include both cyanidation recovery as well as the silver-lead process. The Company has engaged Dr. Clyde Smith, a well-known and highly respected geologist, to be its “Qualified Person” (QP) and is responsible for monitoring and overseeing both processes with the highest level of credibility.

 

Based on the recommendations made to El Capitan by its investment banker, the Company undertook to have its QP direct an analytic project to determine what and how much precious metals could be recovered with an “industry standard” cyanide leaching recovery method. The QP selected the sample materials that are broadly representative of the property and included blanks (no precious metal) and standards (known amounts of precious metals). These were delivered, under chain of custody, to the designated laboratories.

 

 

The initial analyses conducted to determine precious metals content at one of the labs failed to accurately describe the contents of the blanks and standards which rendered all results unreliable and unusable. This test in no way depicts anything about the El Capitan ore samples. Significant time, effort and related costs were expended and the QP has directed that the tests be conducted again at an Arizona laboratory and those tests are currently being conducted and include chain of custody ore samples and the required blanks and standards. The testing is anticipated to take total of three weeks for each batch. The analytics will continue through the month of August. Results will be scrutinized for purposes of updating the major research report previously provided to our investment banker and expect to publish a summary of those results for the purpose of informing our shareholders of the findings.

 

The Company believes that the potential recovery of gold utilizing a standard recovery method along with the recovery of silver using the Sundancer Method could significantly increase the value of the property and enhance shareholder value. 

 

Financial Condition, Liquidity and Capital Resources

 

Historically we have relied on equity and debt financings to finance our ongoing operations.  To continue our metallurgical and recovery program efforts on the El Capitan project and continue our business strategies for our fiscal year 2013, we plan to continue to utilize the Equity Purchase Agreement (the “Agreement”) that we entered into with Southridge Partners II, LP (“Southridge”) in July 2011. The original term of the Agreement was two years, and can be terminated by the Company at any time.  Under the Agreement, we have the right, but not an obligation to sell newly-issued shares of our common stock to Southridge. The shares to be sold under the Agreement will be made pursuant to our effective registration statement on Form S-3 filed with the Securities and Exchange Commission (SEC File No. 333-175038).  Southridge’s purchase commitment under the 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. On April 3, 2013, we entered into an amendment (the “Amendment”) to the Agreement pursuant to which the parties agreed to extend Southridge’s purchase commitment under the Agreement for an additional year, expiring July 11, 2014. The maximum amount of Southridge’s aggregate purchase commitment under the Agreement remains unchanged at $5,000,000. As of August 12, 2013, we have sold Southridge shares of common stock for aggregate proceeds of $3,200,000 and have the right, subject to certain conditions, to sell to Southridge $1,800,000 of newly-issued shares of El Capitan common stock pursuant to the Agreement.

 

A further description of the Agreement is set forth in Note 4 of the Notes to Consolidated Financial Statements – “Equity Purchase Agreement.” We expect that the proceeds received from the Agreement will provide adequate funding that will permit us to continue our business strategy of preparing to present the El Capitan property to sell to or entering into a joint venture with a producing mining company with the assistance of our investment banker. In that regard, we currently anticipate utilizing the funds to finalize recovery process demonstrations for the El Capitan deposit, complete any additional permitting requirements that may be required on the El Capitan project (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 the marketing of the El Capitan property.

 

As of June 30, 2013, we had cash on hand of $245,390 and an accumulated deficit of $201,554,107. Based upon our budgeted burn rate as of such date, we have operating capital for approximately two and one-third months, excluding any cash received by the Company upon the sale of its shares of common stock under the terms of the Agreement subsequent to the quarter ended June 30, 2013. If management’s plans are not successful, operations and liquidity may be adversely impacted.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

 

Revenues

 

We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until our property is sold or a joint venture is entered into for development and deployment of the El Capitan property. There is no guarantee that we will achieve proven commercially viable recovery of precious metals at the El Capitan site.

 

 

Expenses and Net Loss

 

Our operating expenses decreased $84,579 from $439,968 for the three months ended June 30, 2012 to $355,389 for the three months ended June 30, 2013. The decrease is mainly attributable decreases in professional fees aggregating $100,184 and administrative consulting fees of $15,000. These decreases were offset mainly by increases in exploration costs of $21,672 and other general and administrative of $11,368.

 

The decrease in professional fees is directly related to decreased cost incurred for investor relations of $101,900. The decrease in administrative consulting fees is a result of one less consultant. The increase in exploration expenses was in the areas of mine legal costs of $10,931, assay related costs of $54,126, freight associated with the transporting of the El Capitan concentrates of $23,000 and was offset by decreases in costs associated with mine outside consulting of $40,043 and mineral extraction activities of $29,725. Other general and administrative increased due to necessary equipment rental at the El Capitan property site aggregating $12,088.

 

Our net loss for the three months ended June 30, 2013 decreased to $355,328 from a net loss of $439,915 incurred for the comparable three month period ended June 30, 2012. The decrease in net loss of $84,587 for the current period is attributable to the aforementioned net decrease in operating expenses.

 

Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

 

Revenues

 

We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until our property is sold or a joint venture is entered into for development and deployment of the El Capitan property. There is no guarantee that we will achieve proven commercially viable recovery of precious metals at the El Capitan property.

 

Expenses and Net Loss

 

Our operating expenses increased $57,125 from $1,418,445 for the nine months ended June 30, 2012 to $1,475,570 for the nine months ended June 30, 2013. The increase is mainly attributable to increases in other general and administrative of $298,740. The increase was offset mainly by decreases in professional fees of $168,338, administrative consulting fees of $50,000 and legal and accounting of $32,585.

 

The decrease in professional fees is directly related to costs associated with investment banker activities of $53,000 and costs associated with investor relations of $120,873. The decrease in legal and accounting is due to a decrease in legal fees incurred during the period of $36,314. The increase in other general and administrative was attributable to an increase in costs associated with options of $295,281.

 

Our net loss for the nine months ended June 30, 2013 increased to $1,475,364 from a net loss of $1,418,276 incurred for the comparable nine month period ended June 30, 2012. The increase in net loss of 57,088 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, 2012, filed with the SEC on December 14, 2012.  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.

 

Off-Balance Sheet Arrangements

 

During the three months ended June 30, 2013, 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 June 30, 2013, 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, 2012, filed with the SEC on December 14, 2012, 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 no debt outstanding nor do we have any 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 June 30, 2013, 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, 2012, filed with the U.S. Securities and Exchange Commission on December 14, 2012, 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).

(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.

 

 

 

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:   August 13, 2013	By:	/s/  Charles C. Mottley
		Charles C. Mottley Chief Executive Officer, President and Director (Principal Executive Officer)

 

Dated:   August 13, 2013	By:	/s/  John F. Stapleton
		John F. Stapleton Chief Financial Officer and Director (Principal Financial Officer)