Santa Fe Gold CORP - Quarter Report: 2020 March (Form 10-Q)

FORM 10-Q

Commission file number:  001-12974

SANTA FE GOLD CORPORATION

(Exact name of registrant as specified in its charter)

3544 Rio Grande Blvd. NW

Albuquerque, NM 87107

(Address of Principal Executive Offices)

(505) 255-4852

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

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 ¨ No þ

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 (Sec.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 ¨ No þ

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

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

As of October 26, 2020, the registrant had 427,504,214 shares of its common stock, par value $0.002 per share, outstanding.

1

2

This Form 10-Q contains certain “forward-looking” statements as such term is defined by the Securities and Exchange Commission in its rules, regulations and releases, which represent the Company’s expectations or beliefs, including but not limited to, statements concerning the Company’s strategy, operations, economic performance, financial condition, resource drilling 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,” “intent,” “could,” “estimate,” “might,” “plan,” “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. This Form 10-Q contains forward-looking statements, many assuming that the Company secures adequate financing and is able to continue as a going concern, including statements regarding, among other things: our ability to continue as a going concern; including but not limited to statements regarding the following:

•exploration for minerals is highly speculative and involves greater risk than many other businesses; as such, most exploration programs fail to result in the discovery of economic mineralization; 

•our mineralized material calculations at various projects are only estimates and are based principally on historic data; 

•actual capital costs, operating costs, production and economic returns may differ significantly from those that we have anticipated; 

•exposure to all of the risks associated with restarting and establishing new mining operations, if the development of one or more of our mineral projects is found to be economically feasible; 

•title to some of our mineral properties may be uncertain or defective; 

•land reclamation and mine closure may be burdensome and costly; 

•significant risk and hazards associated with mining operations; 

•we will require additional financing in the future to develop a mine at any other projects; 

•the requirements that we obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process and may be opposed by local environmental group; 

•our anticipated needs for working capital; 

•our ability to secure financing; 

•claims and legal proceedings against us; 

•our lack of necessary financial resources to complete development of our projects and the uncertainty of our future financing plans; 

•our exposure to material costs, liabilities and obligations because of environmental laws and regulations (including changes thereto) and permits; 

•changes in the price of silver and gold; 

•extensive regulation by the U.S. government as well as state and local governments; 

•our projected sales and profitability; 

•our business growth strategies; 

•anticipated trends in our industry; 

•the lack of commercial acceptance of our product or by-products; 

•problems regarding availability of materials and equipment; 

•failure of equipment to process or operate in accordance with specifications, including expected throughput, which could prevent the production of commercially viable output; and 

•our ability to seek out and acquire high quality gold, silver and/or copper properties. 

3

Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Except as may be required by securities or other law, the Company does not intend to undertake to update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events, or other circumstances.

We are considered an “exploration stage” company under the U.S. Securities and Exchange Commission (“SEC”) Industry Guide 7, Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations (“Industry Guide 7”), because we do not have reserves as defined under Industry Guide 7.  Reserves are defined in Industry Guide 7 as that part of a mineral deposit which can be economically and legally extracted or produced at the time of the reserve determination.  The establishment of reserves under Industry Guide 7 requires, among other things, certain spacing of exploratory drill holes to establish the required continuity of mineralization and the completion of a detailed cost or feasibility study.

Because we have no reserves as defined in Industry Guide 7, we have not exited the exploration stage and continue to report our financial information as an exploration stage entity as required under Generally Accepted Accounting Principles (“GAAP”).  Although for purposes of FASB Accounting Standards Codification Topic 915, Development Stage Entities, we have exited the development stage and no longer report inception to date results of operations, cash flows and other financial information, we will remain an exploration stage company under Industry Guide 7 until such time as we demonstrate reserves in accordance with the criteria in Industry Guide 7.

Because we have no reserves, we have and will continue to expense all mine construction costs, even though these expenditures are expected to have a future economic benefit in excess of one year.  We also expense our reclamation and remediation costs at the time the obligation is incurred.  Companies that have reserves and have exited the exploration stage typically capitalize these costs, and subsequently amortize them on a units-of-production basis as reserves are mined, with the resulting depletion charge allocated to inventory, and then to cost of sales as the inventory is sold.  As a result of these and other differences, our financial statements will not be comparable to the financial statements of mining companies that have established reserves and have exited the exploration stage.

The following definitions are taken from the mining industry guide entitled “Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations” contained in the Securities Act Industry Guides published by the United States Securities and Exchange Commission, as amended.

4

FINANCIAL INFORMATION

*The balance sheet at June 30, 2019 has been derived from the audited consolidated financial statement at that date.

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

5

SANTA FE GOLD CORPORATION

(Unaudited)

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

6

SANTA FE GOLD CORPORATION

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

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

7

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

8

SANTA FE GOLD CORPORATION

(Unaudited)

NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION

Santa Fe Gold Corporation (the “Company”, “our” or “we”) is a U.S. mining company incorporated in Delaware in August 1991. Our general business strategy is to acquire, explore, develop and mine mineral properties. The Company elected on August 26, 2015, to file for Chapter 11 Bankruptcy protection, Case # 15-11761 (MFW) and that case was dismissed on June 15, 2016. The Summit Silver-Gold Project, the Lordsburg Copper Project, Black Canyon Mica Project, Planet MIO Project, all claims and other assets were lost in the process. After the Company emerged from the bankruptcy with a management team of two with no assets, we developed a business plan to raise equity funds to acquire new mining claims, a potential processing plant or arrangements with a processing plant in an acceptable geographic location to potential new mining claims.

In August 2017, the Company acquired all the capital stock of Bullard’s Peak Corporation and the related patented and unpatented claims in the Black Hawk district of New Mexico from Black Hawk Consolidated Mines Company for a purchase price of $3,115,365. The mine property is known as the Alhambra mine site. The transaction was finalized and closed in April 2019. The mining property acquired is an asset of Mineral Acquisitions, LLC, one of the Company’s five wholly owned subsidiaries.

In January 2019 the Company has acquired right of use on two properties in western New Mexico, consisting of eight (8) patented claims and two unpatented claims, all located in the Steeple Rock Mining District, Grant County, New Mexico and a related water rights lease agreement. The two properties are known as the Billali Mine and the Jim Crow Imperial Mine. The Company has begun improvements to the Jim Crow Imperial mine to start mining operations during the third calendar quarter of 2020.

We are considered an “exploration stage” company under the U.S. Securities and Exchange Commission (“SEC”) Industry Guide 7.

Recent Development

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

At this time, we cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business plans and financial condition may be materially and adversely affected as a result of the potential deteriorating economic outlook or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment and cause our business to suffer in ways that we cannot predict at this time and that may materially and adversely impact our business plans, financial condition and results of operations.

Interim Financial Statements

The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of March 31, 2020 and June 30, 2019, the consolidated results of operations for the three and nine months ended March 31, 2020 and 2019, the consolidated statements of shareholders’ deficit for the nine months ended March 31, 2020 and 2019 and, consolidated cash flows for the nine months ended March 31, 2020 and 2019. The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. The accounting policies followed by the Company are set forth in Note 2 to the Company’s financial statements included in Form 10-K for the fiscal year ended June 30, 2019. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2019 Annual Report on Form 10-K filed on July 15, 2020.

9

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Going Concern

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

The Company has recorded net loss of $1,876,518 for the nine months ended March 31, 2020, and has a total accumulated deficit of $95,355,188 and a working capital deficit at March 31, 2020 of $4,811,112. The Company used in operating activities approximately $1.26 million. The Company currently has no source of generating revenue.

To continue as a going concern, the Company is dependent on continued capital financing for project development, repayment of various debt facilities and payment of current operating expenses until the Company has put into production an acceptable source to generate mineralized ore to generate a revenue stream. Currently we have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries AZCO Mica, Inc., a Delaware corporation, The Lordsburg Mining Company, a New Mexico corporation, and Santa Fe Gold Barbados Corporation, a Barbados corporation, Santa Fe Acquisitions Company, a New Mexico Limited Liability Company,  Mineral Acquisitions, a New Mexico Limited Liability Company and Bullard’s Peak Corporation, a New Mexico Corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

Significant estimates are used when accounting for the Company's carrying value of mineral properties, fixed assets, depreciation and amortization, accruals, derivative instrument liabilities, valuation of warrants, taxes and contingencies, and stock-based compensation.

Fair Value Measurements

The carrying values of cash and cash equivalents, accounts payable and accrued liabilities approximated their related fair values as of March 31, 2020, and June 30, 2019, due to the relatively short-term nature of these instruments. The carrying value of the Company's convertible notes payable approximates the fair value based on the terms at which the Company could obtain similar financing and the short-term nature of these instruments.

Cash and Cash Equivalents

The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash balances.

Property and Equipment

Property and equipment are carried at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.  Expenditures for new property or equipment and expenditures that extend the useful lives of existing

10

property and equipment are capitalized and recorded at cost. Upon retirement, sale or other disposition, the cost and accumulated amortization are eliminated and the gain or loss is included in operations.  Depreciation is taken over the estimated useful lives of the assets using the straight-line method. The estimated useful lives of the equipment are shown below. Land is not depreciated.

Derivative Financial Instruments  

The Financial Accounting Standards Board (“FASB”) provides guidance that requires derivative instruments to be recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use and resulting hedge designations. For derivative instruments designated as hedges, the changes in fair value are recorded in the balance sheets as a component of accumulated other comprehensive income (loss). Changes in the fair value of derivative instruments not designated as hedges are recorded in the consolidated statements of operations, generally as a component of other income (expense).

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2016-02. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.  The Company adopted Topic 842 as of July 1, 2019 and at this time the new standard will not have an impact on our consolidated financial statements until significant a lease agreement is entered.

Warrants

in connection with certain financing, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period.

The Company assessed the classification of its common stock purchase warrants as of the date of each equity offering and determines that such instruments meet the criteria for equity classification, as the settlement terms indicate that the instruments are indexed to the entity’s underlying stock.

Net Income (Loss) Per Share

Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. For the three and nine months ended March 31, 2020 and 2019, the impact of outstanding stock equivalents has not been included as they would be anti-dilutive.

Stock-Based Compensation

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2016-02. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.  The Company adopted Topic 842 as of July 1, 2019 and at this time the new standard will not have an impact on our consolidated financial statements until significant a lease agreement is entered.

Share based payments to nonemployees are valued at the earlier or a commitment date or completion of services. The Company had stock-based compensation to non-employees of $46,937 and $132,213 in the nine months ending March 31, 2020 and 2019, respectively.

11

New Accounting Standards

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact on its Consolidated Financial Statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future financial position, results of operations or cash flows.

Mine Development

Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure in an underground mine. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.

Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body or converting non-reserve mineralization to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.

As of March 31, 2020, the Company has not established proven or probable reserves or established the commercial feasibility of any of our exploration projects and all exploration costs are being expensed.

Mineral Rights

Costs of exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. The Company expenses all mineral exploration costs as incurred as it is still in the exploration stage. If the Company identifies proven and probable reserves in its investigation of its properties and upon development of a plan for operating a mine, it would enter the development stage and capitalize future costs until production is established.

Acquired mineral rights are considered tangible assets under ASC 930-805. As a result, the direct costs to acquire mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with acquiring patented and unpatented mining claims.

When a property reaches the production stage, the related capitalized costs are amortized on a units-of-production basis over the proven and probable reserves following the commencement of production. The Company assesses the carrying costs of the

12

capitalized mineral properties for impairment under ASC 360-10, “Impairment of long-lived assets”, and evaluates the carrying value under ASC 930-360, “Extractive Activities - Mining”, annually. An impairment is recognized when the sum of the expected undiscounted future cash flows is less than the carrying amount of the mineral properties. Impairment losses, if any, are measured as the excess of the carrying amount of the mineral properties over its estimated fair value.

Reclamation Costs

Reclamation obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to accretion expense. The asset retirement cost is capitalized as part of the asset’s carrying value and depreciated over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. The reclamation obligation is based on when spending for an existing disturbance will occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site in accordance with the provisions of ASC 440, “Asset Retirement and Environmental Obligations”, which establishes the standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other disposal of long-lived tangible assets arising from the acquisition, construction or development and for normal operations of such assets.  No reclamation costs were required for the nine months ended March 31, 2020.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at March 31, 2020 and June 30, 2019:

During the nine-month periods ended March 31, 2020 and 2019, the Company recognized depreciation expense of $26,320 and $0, respectively.

The Company during the current fiscal year, began maintenance and repair activities at the Jim Crow mine site along with geological work on the site and related mine ore material. The Company during this quarter purchased the required materials and equipment to perform the required activities under our mine manager. During the quarter our major mining equipment purchases aggregated $200,375. The significant acquisitions were mainly a crusher, generators, wheel loader, conveyors, capitalized repairs and freight on related heavy equipment purchases. We also purchased a site for a storage yard for our mine inventory for $35,000 and is accessible to our Billali and Jim Crow mines. The property consist of 1.64 acres, has water and electricity to the property, a night security lighting and security fencing with a truck access gate.

13

NOTE 4 –MINERAL PROPERTIES

The Company has capitalized acquisition costs on mineral properties as follows:

Exploration Status

We have not established that the Alhambra - Blackhawk project or Billali Mine - Jim Crow Mine rights projects contain proven or probably reserves, as defined under Industry Guide 7.  Minimal exploration activities have commenced to date and minimal exploration costs have been incurred and expensed. To date, the Company has not (i) commenced or adopted plans to conduct any exploration, (ii) prepared drilling plans, proposals, timetables or budgets for exploration work, or (iii) identified engineers and other personnel that will conduct or assist in any exploration work.  The Company will need to raise funds to conduct exploration work and it currently lacks a firm financing commitment for any exploration activities.

The Company commenced development of the Jim Crow mine in late 2019. Work to date has consisted of beginning the upgrading of the surface facilities, rehabilitating the shaft, expanding the hoisting capability and underground development on three levels. A crushing plant was purchased and installed at Duncan, Arizona, in late 2019. The Company has the right to cancel the Agreement at any time.

Acquired mineral rights are considered tangible assets under ASC 930-805. ASC 930-805 requires that mineral rights be recognized at fair value as of the acquisition date.  Mining assets include mineral rights. The payments made under the Billali Mine - Jim Crow Mine Agreement are capitalized by the Company and when a revenue stream is attained the capitalized balance will amortized.

NOTE 5 – ACCRUED LIABILITIES

Accrued liabilities consist of the following at March 31, 2020 and June 30, 2019:

NOTE 6 – NOTES PAYABLE

Installment Note

On June 1, 2012, the Company entered into an installment sales contract for $593,657 to purchase certain equipment. The term of the agreement is for 48 months at an interest rate of 5.75%, with the equipment securing the loan. The balance owed on the note was $398,793 at March 31, 2020 and June 30, 2019. The Company has been unable to make its monthly payments since November 2013, and has been in default since that time. The equipment has been returned to the vendor for sale and remains unsold at March 31, 2020. Interest expense for the nine months ended March 31, 2020 and 2019 was $17,198, respectively. Accrued interest on the note at March 31, 2020 and June 30, 2019 was $127,816 and $110,618, respectively.

14

Note Payable

An individual during the prior fiscal year loaned Company $239,750 of which the Company paid back $40,000 during that current fiscal year and $40,000 was paid back during the current fiscal year. The loan is at an annual interest rate of  6%, has no stated due date and is payable on demand by the lender. Accrued interest on the loan at March 31, 2020 and June 30, 2019 was $15,337 and $7,793, respectively. Balance of the loan at March 31, 2020 and June 30, 2019 was $159,750 and $199,750, respectively. Interest expense on the loan for the nine months ended March 31, 2020 and 2019 is $7,544 and $4,226, respectively.

NOTE 7 – LEASE OBLIGATION

We signed a finance lease purchase agreement effective January 1, 2020, for the acquisition of a non-mineral property for our processing plant site to house our crusher and related future milling operations.

The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes an right of use (“ROU”) asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised.

The components of lease expense and supplemental cash flow information related to lease for the period are as follows:

15

Lease associated costs were $5,168 during the nine months ended March 31, 2020 , and there were no associated lease costs during the nine months ended March 31, 2019.

NOTE 8 – FAIR VALUE MEASUREMENTS

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  A slight change in unobservable inputs such as volatility can significantly have a significant impact on the fair value measurement of the derivatives liabilities.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

The Company determined the Agreement on the Billali and Jim Crow/Imperial mines is a lease and is cancellable at any time by the Company. Costs of lease, exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. The Company expenses all mineral exploration costs as incurred as it is still in the exploration stage. If the Company identifies proven

16

and probable reserves in its investigation of its properties and upon development of a plan for an operating a mine, it would enter the development stage and capitalize future costs until production is established.

As of March 31, 2020, the Company has not established the commercial feasibility of any of our exploration projects; therefore, all exploration costs are being expensed. As of March 31, 2020, we have paid $450,000 under the Agreement in the current fiscal year. Acquired mineral rights are considered tangible assets under ASC 930-805. As a result, the direct costs to acquire mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with acquiring patented and unpatented mining claims.

Payments under the Amended Agreement No. 4 dated effective October 7, 2020, on the Billali and Jim Crow/Imperial project are as follows:

The Total Purchase Price of $10,000,000 will be paid as follows:

(i)Six Hundred Thousand Dollars ($600,000) has been paid by Buyer to Seller as of the date of this Amendment. 

(ii)Commencing November 1, 2020 and continuing on the first day of each subsequent month thereafter, a monthly payment of $25,000 will be paid until (A) the mill processing plant to create concentrate is in operation and (B) we received our first payment for shipment of such concentrate from the mill (satisfaction of these two items is referred to as “Milestone”).  Upon satisfaction of this Milestone and commencing on the first day of the following month and continuing the first day of each subsequent month thereafter, Buyer will pay to Seller the sum of Fifty Thousand Dollars ($50,000) until a total of  One Million Six Hundred Thousand Dollars  ($1,600,000  is paid.  

(iii)Commencing 30 days after the last payment in (ii) above and continuing with 48 subsequent payments every 30 days thereafter, Buyer will pay to Seller the sum of One Hundred Seventy-Five Thousand Dollars ($175,000.00) per period. 

(iv)Each payment made hereunder will be allocated Twenty-Five per cent (25%) to the Billali and Seventy-Five percent (75%) to the Jim Crow, Imperial. 

Office and Real Property Leases

On August 1, 2015, the Company moved the office to a single room located in Albuquerque, NM, at the home of the CFO for a monthly rent of $500 until the Company is required to lease increased office space due to additional personnel requirements. Rental expense totaled $4,500 for the nine months ended March 31, 2020 and 2019, respectively.

Title to Mineral Properties

Although the Company has taken steps, consistent with industry standards, to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.

NOTE 10 - STOCKHOLDERS' DEFICIT

For the nine months ended March 31, 2020:

Stock Warrants

During the nine months ended March 31, 2020, the Company issued 1,500,000 warrants and no warrants expired.

Stock Options

During nine months ended March 31, 2020, no options were granted and 100,000 options expired.

17

Stock option and warrant activity, for the nine months ended March 31, 2020, are as follows:

Stock options and warrants outstanding and exercisable at March 31, 2020 are as follows:

As of March 31, 2020, the aggregate intrinsic value of all stock options and warrants vested was $280,350. 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 or warrant share to the extent it is "in-the-money". Aggregate intrinsic value represents the 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 $0.0589 closing stock price of the common stock on March 31, 2020.

The total intrinsic value associated with options exercised during the nine months ended March 31, 2020, was $0. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option or warrant holder to exercise the options.

NOTE 11 – RELATED PARTY TRANSACTIONS

On August 1, 2015, the Company leased a home office space from the Company’s CFO for $500 a month for the corporate administrative office in Albuquerque, NM until such time growth requires a larger corporate administrative office.

The board authorized on June 16, 2016, the hiring of Nataliia Mueller, wife of the Company’s CFO, with a current annual wage of $60,000 as an assistant to the CFO.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

18

All legal proceedings were stayed with the filing of Chapter 11 bankruptcy.

Boart Long year Company v. Lordsburg Mining Company, Case No. D-2-2-CV-2015- 06048, County of Bernalillo, NM; Boart Longyear Company v. Lordsburg Mining Company, Case No. D-721-CV-2015- 00058, County of Sierra, NM; and Boart Longyear Company v. Lordsburg Mining Company, Case No. D-608-CV- 201500165, County of Quintero, NM.  There are a series of collection cases by Boart Longyear Company, a company that obtained Utah judgments for equipment delivered to Lordsburg Mining Company in the aggregate amounts of $158,480 and has an interest rate of 5.25% per annum. Accrued interest on the obligation at March 31, 2020  and June 30, 2019 was $34,607 and $28,339 respectively. Interest on the obligation for the nine months ended March 31, 2020 and 2019 was $6,268 respectively.

Wagner Equipment Co. v. Lordsburg Mining Company, Case No. D-2014-02372, County of Bernalillo, NM 28 is a collection case by Wagner equipment, who obtained judgment for equipment delivered to Lordsburg Mining Company in the amount of $115,789 and has a rate of interest of 8.75% per annum. During the nine months ended March 31, 2020  and 2019. Company interest on the obligation was $7,634, respectively. Accrued interest on the obligation at March 31, 2020 and June 30, 2019 was $55,205 and $47,571, respectively.

In November 2017, the Company entered into substantially identical agreements with Fortune Graphite, Inc. and Worldwide Graphite Producers, Ltd. to acquire a total of four placer claims for aggregate consideration of Can$400,000 and the issuance of 10,000,000 shares of Company common stock.  The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock.  To date, the Company has paid Can$260,000.  The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock. Based upon our subsequent scrutiny and analysis of the transaction, the Company in February 2019 initiated an arbitration proceeding against the seller to void and rescind the purchase of these British Columbia properties, including requesting additional remedies.  The Company cannot predict the outcome of this arbitration, and there can be no assurance that the Company will not lose its interest in these claims, or owe seller the remaining outstanding amounts. In connection with this arbitration, the Company’s legal position is to void the transaction and, due to the uncertainty of the outcome, has provided an impairment of the amount at June 30, 2019, in the amount of $210,116.

In November 2018, Santa Fe filed a complaint in Luna County District Court, State of New Mexico, requesting a $930,000 money judgment against Mr. and Mrs. Laws for misappropriation of Company funds, in addition to foreclosing on the mortgage Mr. and Ms. Laws granted to Santa Fe on real property to secure the promissory note located in Luna County, New Mexico.  

In November 2018, Santa Fe filed a similar complaint in Grant County District Court, State of New Mexico, as Mr. and Mrs. Laws and XYZ Ranch Estates, LLC granted Santa Fe a deed of trust and a mortgage, respectively, on several pieces of real property in Grant County, New Mexico. Mr. Laws also granted Santa Fe a security agreement on an airplane located in Grant County, New Mexico.  The complaint in Grant County requested a money judgment in the amount of $930,000 against Mr. and Mrs. Laws, in addition to a request to foreclose on the assets pledged to us located in Grant County, New Mexico.  

Subsequent review of these transactions for the fiscal year ended June 30, 2017, resulted in a restatement of assets and operating costs in the amount of $971,099 and charged to the former chief executive officer. Subsequent professional costs including legal, auditing, forensic accounting and related filing costs related to this event have been added to the amounts owed by Mr. Laws. At the time of filing this report, we have determined costs associated with Mr. Laws action currently aggregates $1,651,263, of which we have collected $485,966 as of the date of filing this report.

As of the filing of this report, Mr. Laws has pleaded guilty to various charges brought against him by the U. S. District Attorney for the District of New Mexico, which include the Company allegations. Mr. Laws is currently awaiting sentencing on the plead to charges. The Company attorneys have filed all required documents for future monetary settlements to be determined by the court and the Company does not anticipate receiving a substantial reimbursement of the remaining Laws costs.

19

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. Other than the above-described litigation, as of March 31, 2020, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our financial statements.

Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on its financial statements in any given reporting period. However, in the opinion of Management, after consulting with legal counsel, the ultimate liability related to the current outstanding litigation is not expected to have a material adverse effect on its financial statements.

Recent Issuances of Unregistered Securities

20

As of the filing of this report, Mr. Laws has pleaded guilty to various charges brought against him by government officials, which include the Company allegations. Mr. Laws is currently awaiting sentencing on the charges he plead to. The Company attorneys have filed all required documents for future monetary settlements to be determined by the court.

The Company signed employment agreements with the new Chief Financial Officer and Managing Director of Mining Operations. The agreements are a one-year employment agreement with the Company, with automatic successive one-year renewals provided that neither  party has provided notice of termination prior to 30 days from the end of such applicable term.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Statement on Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risk factors described in this report and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Overview

We are an exploration company that owns certain mining and mineral rights at our Alhambra-Blackhawk project and have right-of-use mineral rights comprising the Billali and Jim Crow-Imperial mine project in southwest New Mexico.

During the nine-months ended March 31, 2020, the Company focused primarily on repair and improvement projects work at the Jim Crow mine site and continued and expanded our exploratory program at the mine sites.  

Basis of Presentation and Going Concern

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

The Company has recorded a net loss of $1,876,518 for the nine months ended March 31, 2020, and has a total accumulated deficit of $95,355,188 and a working capital deficit at March 31, 2020 of $4,811,112. The Company used in operating activities, approximately $1.26 million. The Company currently has no source of generating revenue.

To continue as a going concern, the Company is dependent on continued capital financing for project development, repayment of various debt facilities and payment of current operating expenses until the Company has put into production an acceptable source to generate mineralized ore to generate a revenue stream. Currently we have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company.

At March 31, 2020, the Company was in default on delinquent payments of approximately  $3.2 million on accounts payable, $399 on a note payable and $696 thousand on accrued liabilities.

The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

21

Operating Results for the Three Months Ended March 31, 2020 and 2019

Revenue

During the three months ended March 31, 2020 and 2019, the Company had no revenue in the periods of measurement.

Operating Costs and Expenses

Our operating expenses incurred in three months ended March 31, 2020, decreased $1,356,968 from $1,867,931 in the three months ended March 31, 2019 to $510,963 for the current period of measurement. The decreases in operating expenses in the current period of measurement are attributable increased exploration and mine related costs of $206,053 and is offset by a decrease in general and administrative of $1,563,021.

The increase in exploration and mine related costs were incurred on the Jim Crow mine and consisted mainly of increases of $133,397 in wages and payroll burden costs, depreciation of $14,526 and other mine related costs of $58,130. The decrease in general and administrative of $1,563,021 was mainly attributable to decreases in: consulting fees related to working capital raises of $143,913, audit fees and accounting of $30,000 and costs associated with warrants of $1,433,655. These decreases were mainly offset by increases in salaries and related payroll burden of $9,835 and legal fees of $37,656.

Other Income (Expense)

Other income (expense) for three months ended March 31, 2020, was $(15,030) as compared to $(350,213) for three months ended March 31, 2019, a decrease in other expense of $335,053. The net decrease in other expense for the current period measurement is mainly comprised of the following expense components: decrease in financing costs on commodity supply agreements of $60,830, a decrease in interest expense of $142,942 and a decrease in interest on mandatory redemption shares by a related party of $127,800. The decreased interest expense and financing costs on commodity supply agreements are a result of debt write-off at our fiscal year ended June 30, 2019 and the mandatory shares were returned in the current period of measurement.

Operating Results for the Nine Months Ended March 31, 2020 and 2019

Revenue

During the nine months ended March 31, 2020 and 2019, the Company had no revenue in the periods of measurement.

Operating Costs and Expenses

Our operating expenses incurred in nine months ended March 31, 2020, decreased $533,452 from $2,394,410 in the nine months ended March 31, 2019 to $1,860,958 for the current period of measurement. The decreases in operating expenses in the current period of measurement are attributable to increased exploration and mine related costs of $863,480, and decreased general and administrative of $1,396,932.

The increase in exploration and mine related costs were incurred on the Jim Crow mine and consisted mainly of $518,207 in wages and payroll burden costs, depreciation of $30,888 and other mine related costs of $314,385. The decrease in general and administrative was mainly attributable to decreased costs attributable to warrants issued of $1,433,655, in consulting fees related to working capital raises of $218,954, vehicle operating costs of $11,281 and transfer agent fees of $19.417. These decreases were offset by increases in the following: salary compensation and payroll burden of $56,471, property and liability insurance of $15,154, audit and accounting fees of $104,289, and legal fees of $107,069.

Other Income (Expense)

Other income (expense) for nine months ended March 31, 2020, was $(15,560) as compared to $(294,380) for nine months ended March 31, 2019, a decrease in other expense of $278,690. The net decrease in other expense for the current period of measurement is mainly comprised of decreases in following income components: gain on debt extinguishment of $112,625 and recovery of misappropriated funds of $350,521 and by offset by decreases in the following other expenses consisting of: interest on mandatory redemption shares by a related party of $127,800,  financing costs on commodity supply agreement of $166,725 and interest expense of $444,466. The decreased interest expense and financing costs on commodity supply agreements are a result of debt write-off at our fiscal year ended June 30, 2019 and the mandatory shares were returned in the current period of measurement.

22

Liquidity and Capital Resources; Plan of Operation

The Company has recorded a net loss of $1,876,518 for the nine months ended March 31, 2020, and has a total accumulated deficit of $95,355,188 and a working capital deficit at March 31, 2020 of $4,811,112. The Company used in operating activities, approximately $1.26 million. The Company currently has no source of generating revenue.

To continue as a going concern, the Company is dependent on continued capital financing for project development, repayment of various debt facilities and payment of current operating expenses until the Company has put into production an acceptable source to generate mineralized ore to generate a revenue stream. Currently we have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company.

At March 31, 2020, the Company was in default on approximate payments on delinquent accounts payable of $3.2 million, on a note payable of $399 thousand and accrued liabilities of $696 thousand.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures

Due to the Company’s continuing financial condition, the Company had limited personnel which resulted in a lack of segregation of duties and a lack of formal reviews at multiple levels. A significant weakness existed that our then current Chief Executive Officer, also a CPA, insisted on maintaining various original detail financial records at his office and not the corporate office. The lack of not receiving these original documents and related reviews, resulted in the Company uncovering a misappropriation of Company funds by the then current Chief Executive Officer.

At the beginning of the current fiscal year, new formal policies were initiated for review of  material transactions by an outside accounting professional with a CPA and CFO background and all disbursements reviewed and approved by the Chairman of the Board. Any discrepancies will be reported directly to the Board of Directors. These policies are intended for multiple reviews on all material transactions and assist in eliminating a material weakness described above.

Inherent Limitations over Internal Controls

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

23

However, we have concluded that due to the Company’s small size and limited personnel available to perform control functions, and the weakness described above, the Company was precluded from applying adequate segregation of duties in financial transactions. The Company has taken steps to assure all original financial documents are received and maintained at the corporate office. The material weaknesses described are common to companies of our similar size and staffing in our industry. We expect these material weakness conditions to continue for the foreseeable future, or until Company growth results in additional personnel to perform segregated financial functions.

Management, including the Company’s Chairman and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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 three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II     

OTHER INFORMATION

All legal proceedings were stayed with the filing of Chapter 11 bankruptcy.

Boart Long year Company v. Lordsburg Mining Company, Case No. D-2-2-CV-2015- 06048, County of Bernalillo, NM; Boart Longyear Company v. Lordsburg Mining Company, Case No. D-721-CV-2015- 00058, County of Sierra, NM; and Boart Longyear Company v. Lordsburg Mining Company, Case No. D-608-CV- 201500165, County of Quintero, NM.  There are a series of collection cases by Boart Longyear Company, a company that obtained Utah judgments for equipment delivered to Lordsburg Mining Company in the aggregate amounts of $158,480 and has an interest rate of 5.25% per annum. Accrued interest on the obligation at March 31, 2020 and June 30, 2019 was $34,607 and $28,339 respectively. Interest on the obligation for the nine months ended March 31, 2020 and 2019 was $6,268 respectively.

Wagner Equipment Co. v. Lordsburg Mining Company, Case No. D-2014-02372, County of Bernalillo, NM 28 is a collection case by Wagner equipment, who obtained judgment for equipment delivered to Lordsburg Mining Company in the amount of $115,789 and has a rate of interest of 8.75% per annum. During the nine months ended March 31, 2020 and 2019. Company interest on the obligation was $7,634, respectively. Accrued interest on the obligation at March 31, 2020 and June 30, 2019 was $55,205 and $47,571, respectively.

The bankruptcy court set up a Trust fund that will be funded by the activities of the Summit mine for five (5) years after reopening of the mine and the trust funds will be distributed by an independent trustee to all credit holders on record.  Currently all debts at the time of the bankruptcy are currently due and in default. None of the claims have been reopened since June 2016.

In November 2017, the Company entered into substantially identical agreements with Fortune Graphite, Inc. and Worldwide Graphite Producers, Ltd. to acquire a total of four placer claims for aggregate consideration of Can$400,000 and the issuance of 10,000,000 shares of Company common stock.  The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock.  To date, the Company has paid Can$260,000.  The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock.  Based upon our subsequent scrutiny and analysis of the transaction, the Company in February 2019 initiated an arbitration proceeding against the seller to void and rescind the purchase of these British Columbia properties, including requesting additional remedies.  The Company cannot predict the outcome of this arbitration, and there can be no assurance that the Company will not lose its interest in these claims, or owe seller the remaining outstanding amounts. In connection with this arbitration, the Company’s legal position is to void the transaction and, due to the uncertainty of the outcome, has provided an impairment of the amount at June 30, 2019, in the amount of $210,116.

24

In November 2018, Santa Fe filed a complaint in Luna County District Court, State of New Mexico, requesting a $930,000 money judgment against Mr. and Mrs. Laws for misappropriation of Company funds, in addition to foreclosing on the mortgage Mr. and Ms. Laws granted to Santa Fe on real property to secure the promissory note located in Luna County, New Mexico.  

In November 2018, Santa Fe filed a similar complaint in Grant County District Court, State of New Mexico, as Mr. and Mrs. Laws and XYZ Ranch Estates, LLC granted Santa Fe a deed of trust and a mortgage, respectively, on several pieces of real property in Grant County, New Mexico. Mr. Laws also granted Santa Fe a security agreement on an airplane located in Grant County, New Mexico.  The complaint in Grant County requested a money judgment in the amount of $930,000 against Mr. and Mrs. Laws, in addition to a request to foreclose on the assets pledged to us located in Grant County, New Mexico.  

Subsequent review of these transactions for the fiscal year ended June 30, 2017, resulted in a restatement of assets and operating costs in the amount of $971,099 and charged to the former chief executive officer. Subsequent professional costs including legal, auditing, forensic accounting and related filing costs related to this event have been added to the amounts owed by Mr. Laws. At the time of filing this report, we have determined costs associated with Mr. Laws action currently aggregates $1,651,263, of which we have collected $485,966 as of the date of filing this report.

As of the filing of this report, Mr. Laws has pleaded guilty to various charges brought against him by the U. S. District Attorney for the District of New Mexico , which include the Company allegations. Mr. Laws is currently awaiting sentencing on the pleaded to charges. The Company attorneys have filed all required documents for future monetary settlements to be determined by the court and the Company does not anticipate receiving a substantial reimbursement of the remaining Laws costs.

The DOJ and the SEC have each initiated investigation into the Company, resulting from the Laws transactions.  The SEC has obtained a formal order to investigate the Company.  The DOJ investigation found no wrong doings by the Company.  These types of investigations are expensive, time-consuming for management, and unpredictable – often resulting in other aspects of the Company’s operations becoming subject to regulatory scrutiny.  The SEC investigations are ongoing and no prediction can be made regarding the timing or outcome of such matters including remedial action pursued against the Company and current officers and directors.  These types of remedial actions may result in additional costs and expenses to be incurred by the Company.

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. Other than the above-described litigation, as of March 31, 2020, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our financial statements.

Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on its financial statements in any given reporting period. However, in the opinion of Management, after consulting with legal counsel, the ultimate liability related to the current outstanding litigation is not expected to have a material adverse effect on its financial statements.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our annual report for Fiscal 2019, although we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with on Form 10-K for our year fiscal ended June 30, 2019, in addition to the other information included in this quarterly report. If any of the risks described actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

25

Company’s most current risk factors are disclosed in our Annual Report filed with the Commission on Form 10-K for the fiscal year ended June 30, 2019 to the SEC on July 15, 2020 and are incorporated herein by reference.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company, on January 1, 2020, approved the issuance of 175,439 shares of restricted common stock for consulting fees with a value of $14,895 on the issuance date.

The issuances of the restricted common shares during the three months ended March 31,2020, were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a) (2) thereof and/or Regulation S promulgated thereunder and/or because such issuances did not involve a public offering and/or because such sales were to non-US-persons. The cash proceeds were utilized for working capital by the Company. In connection with transactions referenced above, other than issuances to the Company’s officers, directors, employees and consultants for services, the Company obtained representations from each investor that (i) such investor was an “accredited investor” within the meaning of Rule 501 of Regulation D, (ii) such investor was acquiring the securities for its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (iii) such investor understands that the purchased securities or shares underlying such securities are subject to transfer restrictions under the Securities Act and any applicable state securities laws, (iv) such investor has knowledge and experience in financial and business matters such that such investor is capable of evaluating the merits and risks of an investment in us, and (v) such investor has considered the risk factors contained in SEC filings.  

With the filing of bankruptcy protection on August 26, 2015, all debt securities are in default and all but Waterton remain after the dismissal of the proceedings on June 15, 2016.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS  

(a)The following exhibits are filed as part of this report: 

26

SIGNATURES:

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

27