NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
Bonanza Goldfields Corp. (the “Company”) was incorporated under the laws of the State of Nevada onMarch 6, 2008 (Inception).The Company’s fiscal year ends on June 30. The Company has acquired 3 sets of mineral properties in the state of Arizona. The mineral properties are contiguous, therefore the three sets are consideredas one project. The first is federal mining claims on land managed by the Bureau of LandManagement totaling 458 acres. The second is 130.76 acres of patented landthe Company lease for an initial term of two years with an option to buy from Judgetown LLC. The lease agreement with Judgetown LLC was effective on October 15,2012. The third property is referred to as the Hull land and is approximately 20 acres of patented land which the Company purchased with funds borrowed fromFreedom Boat.
The recoverability of amounts from the properties or claims will be dependent upon the discovery of economically recoverable reserves, ability to process material,maintenance of the Company's interest in the underlying properties and/or claims, the ability of the Company to obtain necessary financing to satisfy the expenditurerequirements under the property and/or claim agreements and to complete the development of the properties and/or claims, and upon future profitable production orproceeds for the sale thereof.
The Company is an exploration stage company and that there is no assurance that a commercially viable mineral deposit exist on any of the Company’s propertiesand that further exploration will be required. The Company’s exploration target is to find exploitable minerals on the Company’s properties and to raise adequatefunding to begin processing the Company’s land. The Company’s success depends on achieving that target and becoming cash flow positive once productionbegins. There is the likelihood of our mineral claims containing little or no economic mineralization or reserves of gold and other minerals. There is the possibility thatthe Company’s claims do not contain any reserves and funds that the Company spends on exploration will be lost. Even if the Company complete its currentexploration program and are successful in identifying a mineral deposit, the Company will be required to spend substantial funds to bring its claims to production.The Company is unable to assure that it will be able to raise the additional funds necessary to implement any future exploration or extraction program even ifmineralization is found.
It is the Company’s objective to identify mineral prospect properties of merit, conduct preliminary exploration work, and if results are positive, to process mineralresources in a market where the Company believe capital is transitioning to the safety of gold. The management contends that this business model is timely in a worldof financial and currency instability with escalating mineral demand.The Company’s areas of exploration are in geopolitically stable North American areas.
The Judgetown lease, with an effective date of October 15, 2012, was executed on September 30, 2012 between the Company and Judgetown LLC, an Arizona LimitedLiability Company located in Arizona (“Lessor”). The leased premises consist of 130.76 acres in the county of Yavapai, Arizona in the Date Creek Mountain range.The lease is exclusive to the Company and its successors and assigns all of Lessors’ interest in and to all mining rights and minerals (hereafter the "MineralSubstance") beneath the surface of, within, or that may be produced from the Premises. The lease granted the following to the Company for a period of two yearsunless terminated pursuant to the lease; Mining and Access Rights, Cross Mining, Commingling, Deposit of Waste Materials, Treatment and Water Rights. Thelease amount, as amended, is $300,000 for the period commencing on January 15, 2013. An option to purchase the land was also granted for a price of $1,500,000 lesslease payments.
The Company’s leased lands consist of 38 lode claims covering 600 acres of patented, private property claims and BLM claims described above in the Date CreekMountains, Arizona consisting of both alluvial and mineralized quartz deposits, as well as the presence of certain rare earth elements. A
Preliminary GeologicalSurvey
as well as subsequent testing and assays of the leased claims were prepared by a third party.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. However, the Company has a working deficit and has not generated revenues since inception. During the three monthsendedSeptember 30, 2012,the Company incurred anet loss of $484,467 and as of September 30, 2012, has an accumulated deficit of $7,091,321. Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from private investors and the support of certain stockholders. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, Management is planning to raise any necessary additional funds through loans and additional sales of itscommon stock. There is no assurance that the Company will be successful in raising additional capital.
The Company's ability to meet its obligations and continue as a going concern is dependent upon its ability to obtain additional financing, achievement of profitable operations and/or the discovery, exploration, development and sale of mining reserves. The Company cannot reasonably be expected to earn revenue in the exploration stage of operations. Although the Company plans to pursue additional financing, there can be no assurance that the Company will be able to secure financing when needed or to obtain such financing on terms satisfactory to the Company, if at all.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-K for the year ended June 30, 2012. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
Management evaluates these estimates and assumptions on a regular basis.Actual results could differ from those estimates.
Exploration Stage Company
The Company's financial statements are prepared pursuant to SEC guidance and Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 915,
Development Stage Entities
, as it devotes substantially all of its efforts to acquiring and exploring mining interests that will eventually provide sufficient net profits to sustain the Company’s existence.
Mineral property rights
All direct costs related to the acquisition of mineral property rights are capitalized. Exploration costs are charged to operations in the period incurred until such time as it has been determined that a property has economically recoverable reserves, at which time subsequent exploration costs and the costs incurred to develop a property are capitalized. The Company reviews the carrying values of its mineral property rights whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts. An impairment loss is recognized when the carrying value of those assets is not recoverable and exceeds its fair value. As of September 30, 2012, management has determined that there was no impairment loss required for thethree months then ended.
At such time as commercial production may commence, depletion of each mining property will be provided on a unit-of-production basis using estimated proven and probable recoverable reserves as the depletion base. In cases where there are no proven or probable reserves, depletion will be provided on the straight-line basis over the expected economic life of the mine.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and other intangible assets are tested for impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Management has determined that there is no impairment loss required for the three months ended September 30, 2012.
Asset Retirement Obligations
The Company had no operating properties at September 30, 2012, but the Company’s mineral properties will be subject to standards for mine reclamation that are established by various governmental agencies. For these non-operating properties, the Company accrues costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Costs of future expenditures for environmental remediation are not discounted to their present value. Such costs are based on management's current estimate of amounts that are expected to be incurred when the remediation work is performed within current laws and regulations.
It is reasonably possible that due to uncertainties associated with defining the nature and extent of possible environmental contamination, application of laws and regulations by regulatory authorities, and changes in remediation technology, the ultimate cost of remediation and reclamation could change in the future. The Company continually reviews its accrued liabilities for such remediation and reclamation costs as evidence becomes available indicating that its remediation and reclamation liability has changed.
The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the associated long-lived assets and depreciated over the lives of the assets on a units-of-production basis. Reclamation costs are accreted over the life of the related assets and are adjusted for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate on the underlying obligation. There were no asset retirement obligations as of September 30, 2012 as there are presently no underlying obligations.
Property and Equipment
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.
The range of estimated useful lives used to calculated depreciation for principal items of property and equipment are as follow:
Asset Category
|
|
Depreciation/
Amortization Period
|
Furniture and Fixture
|
|
5 Years
|
Office equipment
|
|
3 Years
|
Leasehold improvements
|
|
5 Years
|
Income Taxes
Deferred income taxes are provided, to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows a two-step approach to ultimately recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At September 30, 2012, the Company did not record any liabilities for uncertain tax positions.
Concentration of Credit Risk
The Company maintains its operating cash balances in banks in Phoenix, Arizona. The Federal Depository Insurance Corporation (“FDIC”) insures accounts at each institution up to $250,000.
Share-Based Compensation
The measurement of the cost of services received in exchange for an award of an equity instrument is based on the grant-date fair value of the award. Compensation cost is recognized when the event occurs. The Black-Scholes option-pricing model is used to estimate the fair value of options granted.
Basic and Diluted Net Loss Per Common Share
Net loss per common share was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted net loss per share for the Company is the same as basic net loss per share, as during the period where a net loss is reported,the inclusion of common stock equivalents would be antidilutive and are therefore excluded from the calculation.
At September 30, 2012 and 2011, common stock equivalents consisted of warrants to purchase 25,500,000 and 12,000,000 shares of common stock, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.
The carrying amounts of the Company’s financial instruments, including cash, accounts payable and accrued liabilities, accrued interest and related party payable, approximate fair value due to their most maturities.
Certain prior year amounts have been reclassified to conform to the current period presentation for comparative purposes.
Recent Accounting Pronouncements
The Company’s management does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
NOTE 3 – MINING CLAIMS
The following is a detail of mining claimsatSeptember 30, 2012 and June 30, 2012:
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
Midas Placer Mining Claim (fully impaired)
|
|
$
|
565,700
|
|
|
$
|
565,700
|
|
Hull Lode Mining Claim (leased from Freedom Boat)
|
|
|
250,000
|
|
|
|
250,000
|
|
Osiris Gold Joint Venture (fully impaired)
|
|
|
50,000
|
|
|
|
50,000
|
|
Total mining and equipment activity
|
|
|
865,700
|
|
|
|
865,700
|
|
Accumulated impairment of mining claims
|
|
|
(615,700
|
)
|
|
|
(615,700
|
)
|
Total Mining Claims
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
The Company has impaired all claims except for the Hull Lode mining claim.
NOTE 4 – NOTES PAYABLE
The Company had the following notes payable outstanding as of September 30, 2012 andJune 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
Gold Exploration LLC (a)
|
|
|
|
|
|
|
Dated – June 1, 2008
|
|
$
|
52,699
|
|
|
$
|
52,699
|
|
|
|
|
|
|
|
|
|
|
Venture Capital International (b)
|
|
|
|
|
|
|
|
|
Dated – March 30, 2009
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
Venture Capital International (c)
|
|
|
|
|
|
|
|
|
Dated – May 7, 2009
|
|
|
17,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Advantage Systems Enterprises Limited (d)
|
|
|
|
|
|
|
|
|
Dated – July 3, 2009
|
|
|
17,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Advantage Systems Enterprises Limited (e)
|
|
|
|
|
|
|
|
|
Dated – August 7, 2009
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Venture Capital International (f)
|
|
|
|
|
|
|
|
|
Dated – October 15, 2009
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Venture Capital International (g)
|
|
|
|
|
|
|
|
|
Dated – October 27,2009
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
Advantage Systems Enterprises Limited (h)
|
|
|
|
|
|
|
|
|
Dated – November 9, 2009
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Venture Capital International (i)
|
|
|
|
|
|
|
|
|
Dated – November 23, 2009
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Strategic Relations Consulting, Inc. (j)
|
|
|
|
|
|
|
|
|
Dated – March 31, 2010
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Summit Technology Corporation, Inc.(k)
|
|
|
|
|
|
|
|
|
Dated – November 22, 2010
|
|
|
2,000
|
|
|
|
7,000
|
|
Gold Exploration LLC (l)
|
|
|
|
|
|
|
|
|
Dated – July 29, 2010
|
|
|
97,000
|
|
|
|
97,000
|
|
|
|
|
|
|
|
|
|
|
Freedom Boat, LLC (m)
|
|
|
|
|
|
|
|
|
Dated – February 7, 2011
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Dr. Linh B. Nguyen (n)
|
|
|
|
|
|
|
|
|
Dated – May 23, 2011
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Mr. Charles Chapman (o)
|
|
|
|
|
|
|
|
|
Dated – December 27, 2011
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Mr. Leroy Steury
|
|
|
|
|
|
|
|
|
Dated – March 12, 2012 (p)
|
|
|
76,875
|
|
|
|
76,875
|
|
Total notes and convertible note payable
|
|
|
671,574
|
|
|
|
671,574
|
|
Less current portion of long-term debt
|
|
|
(671,574
|
)
|
|
|
(671,574
|
)
|
Long term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
(a) The Company entered into a purchase agreement to purchase mining claims with Gold Exploration LLC inthe amount of $99,000 on June 1, 2008. The Companypaid $15,000 in cash and issued a note for $84,000 withan interest rate of 12% for the remaining balance. Pursuant to the purchase agreement, $7,000 is to be paideach 90 days until the full principal balance plus accrued interest is paid off. As of September 30, 2012 and June 30,2012, principal and interest payable to GoldExploration LLC for this note is $66,941 and $65,346, respectively. This note is presently in default.
(b) On March 30, 2009, the Company issued a $12,000 demand promissory note to Venture Capital International, Inc. The note is due on demand with an interest rateof 5%. As of September 30, 2012 and June 30, 2012, the Company principal and interest payable to Venture Capital International, Inc. related to this note is $14,083and $13,932, respectively.
(c) On May 7, 2009, the Company issued a $17,000 demand promissory note to Venture Capital International, Inc. The note is due on demand and has an interest rateof 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Venture Capital International, Inc. related to this note is $19,862 and $19,648,respectively.
(d) On July 3, 2009, the Company issued a $17,000 demand promissory note to Advantage Systems Enterprise Limited. The note is due on demand with an interestrate of 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Advantage Systems Enterprise Limited related to this note is $19,764 and$19,550, respectively.
(e) On August 7, 2009, the Company issued a $10,000 demand promissory note to Advantage Systems Enterprises Limited. The note is due on demand with aninterest rate of 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Advantage Systems Enterprise Limited, Inc. related to this note is$11,574 and $11,448, respectively.
(f) On October 15, 2009, the Company issued a $10,000 demand promissory note to Venture Capital International. The note is due on demand with an interest rate of5%. As of September 30, 2012 and J June 30, 2012, principal and interest payable to Venture Capital International related to this note is $11,479 and $11,353,
respectively.
(g) On October 27, 2009, the Company issued a $7,000 demand promissory note to Venture Capital. The note is due on demand with an interest rate of 5%. As ofSeptember 30, 2012 and June 30, 2012, principal and interest payable to Venture Capital International related to this note is $8,024 and $7,936, respectively.
(h) On November 9, 2009, the Company issued a $25,000 demand promissory note to Advantage Systems Enterprise Limited. The note is due on demand with aninterest rate of 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Advantage Systems Enterprise Limited related to this note is $28,637and $28,322, respectively.
(i) On November 23, 2009, the Company issued a $5,000 demand promissory note to Venture Capital International. The note is due on demand with an interest rate of5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Venture Capital International related to this note is $5,713 and $5,650, respectively.
(j) On March 31, 2010, the Company issued a $15,000 demand promissory note to Strategic Relations consulting, Inc. The note is due on demand with an interest rateof 5%. As of September 30, 2012 and June 30, 2012 principal and interest payable to Strategic Relations Consulting, Inc. related to this note is $16,878 and $16,689,respectively.
(k) On November 22, 2010, the Company issued a $7,000 demand promissory note to Summit Technologies Corporation, Inc. The note is due on demand with aninterest rate of 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Strategic Relations Consulting, Inc. related to this note is $2,336 and$2,311, respectively.
All of the above demand promissory notes issued by the Company were unsecured.
(l) On July 29, 2010, the Company issued 8,300,000 common shares to Gold Exploration LLC, valued at $83,000 (or $0.01 per share) based upon the closing price of theCompany’s stock on the date the agreement was executed, to partially repay $10,000 of principal on the promissory note held by Gold Exploration LLC initially issuedto Global Mineral Resources Corporation. This payment of common stock reduced the outstanding balance of the note held by Gold Exploration LLC to $97,000. TheCompany recognized a loss on debt conversion of $73,000. During fiscal year 2012, the note holder called the balance of the note and demanded payment. The noteholder claimed that the note was in default because the Company failed to maintain the Midas Placer Mining Claim, collateral which secured the note. Pursuant to thenote agreement, the note should accrue interest at 12% when due or declared due. The note is classified as a current liability on the balance sheets. As of September30, 2012 and June 30, 2012, principal and interest payable to Gold Exploration LLC related to this note is $111,574 and $108,640, respectively.
(m) On February 7, 2011, the Company issued a $250,000 promissory note with an interest rate of 12% per annum to Freedom Boat LLC (“Freedom Boat”). Payment of$2,500 is due monthly from July 5, 2011 through December 5, 2011 with a final payment of interest and principal of $260,000 that because due on February 7, 2012.Freedom Boat also has a right to royalties under certain conditions. The note is secured by the Hull Lode claim, The West Acre Hull tract, property held by DavidJanney, former officer, and 10,000,000 of the Company’s common shares currently held in escrow. Proceeds from the note were used to purchase the TarantulaMining Claim from Judgetown, LLC. As of September 30, 2012 and June 30, 2012, the remaining principal owed was $250,000. This note is presently in default but theCompany is negotiating with the holder for an extension of this note.
(n) The Company entered into a demand promissory note with Linh B. Ngnyen on May 23, 2011 in the amount of $25,000. The note is due on demand with an interestrate of 5%. As of September 30, 2012 and June 30, 2012, principal and interest payable to Linh B. Ngnyen related to this note is $26,692 and $26,377, respectively.
(o) On December 27, 2011, the Company issued a $50,000 promissory note to Mr. Charles Chapman. The note was due on February 15, 2012 with an interest rate of12%. Pursuant to the note agreement, Mr. Chapman has the right to receive 500,000 shares of the Company’s common stock in lieu of interest payments.On December 28, 2011, the Company issued 500,000 shares valued at $4,000 in lieu of the interest. On March 19, 2012, the note agreement was amended to extend thedue date to May 15, 2012. Pursuant to the amendment, the Company agreed to issue an additional 500,000 common shares valued at $15,500 which was recorded asdebt discount and fully amortized during fiscal year 2012. As of June 30, 2012, the 500,000 common shares related to the March 19, 2012 amendment have not beenissued and is recorded as stock payable of $15,500. On May 16, 2012, the Company entered into a second amendment to extend the loan to November 15, 2012.Pursuant to the second amendment, the Company will issue 100,000 shares of its common stock per month for a period of six months in lieu of interest. As of June 30,2012, the Company has issued 500,000 common shares valued at $11,000.
(p) On March 12, 2012, the Company issued a $75,000 convertible note to Mr. Leroy Steury. The note was due on June 12, 2012 with an interest rate of 10%. Mr.Leroy Steury has the right to receive 7.5 million shares of common stock in lieu of unpaid principal and interest before June 17, 2012. The Company recorded abeneficial conversion feature of $75,000 which was fully amortized during fiscal year 2012. On June 13, 2012, the Company amended the agreement to include theaccrued interest of $1,875 on the $75,000 in the principal and extended the note to September 13, 2012. On September 17, 2012, the Company entered into the secondamendment to extend the note to December 17, 2012. As of September 30, 2012 and June 30, 2012, principal and interest payable to Leroy Steury related to this note is78,230 and $77,780, respectively.
NOTE 5 – EQUITY
Common Stock
On March 31, 2011, the Company increased the authorized common shares to 500,000,000.
During the three months ended September 30, 2012, the Company received cash of $140,000 for the subscription of 8,730,945 common shares. The Company also received cash of $37,500 in October 2012 for the subscription of 2,062,500 common shares. These shares were recorded as subscription receivables.
During the three months ended September 30, 2012, the Company granted 13,000,000 shares of common stock for services of executives and a consultant. These shares were valued at $260,000 based on the trading price of the stock on the date granted. At September 30, 2012, these shares have not been issued and were recorded as stock payable.
Preferred Stock
On June 14, 2011, the Company authorized 20,000,000 shares of Series A Preferred Stock at $0.0001 par value. The Preferred Stock contains certain rights, preferences, privileges, restrictions and other characteristics. Specifically, the Preferred Stock has 100 votes per share, whereas, each share of Common Stock has 1 vote. Preferred Stock holders may vote with holders of the Company’s Common Stock on all matters which common stockholders may vote. On June 14, 2011, the Company issued 3,000,000 preferred shares valued at $300 to its former CEO/CFO. In August 2011, the former CEO/CFO returned those shares as a result of his resignation from the Company. The preferred shares were then cancelled.
Fraudulent Issuance of Stock by Past Management
During 2011, the Company issued 86,000,000 common shares to asignees of a $23,200 note originally issued to Venture Capital International.An opinion of counsel pursuant to Rule 144 was prepared and executed by attorney, John Thomas, Esq. for each of the issuances and sent to the Company withinstructions to issue the shares without restrictions. The former CEO and only director at the time forwarded the opinion, instructions and the corporate resolution tothe transfer agent directing that the share certificates be issued as new shares without a restriction to the designated shareholders. The transfer agent complied based upon the legal opinion and directions from the CEO. The above mentioned 86,000,000 shares are outstanding other than 12,000,000 shares that present management has been able to place in escrow with the transfer agent pending further review. The only note holder, VentureCapital International, never agreed to an assignment, did not receive payment from this above described transaction and the note is still outstanding. Presentmanagement believes the assignment was forged. The recipients of the 86,000,000 shares did not pay the Company or the note holder for the shares and the Company
believes, based on information from one of the parties who purchased the stock that the former CEO may have kept the funds received from the sale of the shares.
The Company does not believe that these shares are legally issued, fully paid or non-assessable in that the Rule 144 opinion of counsel is an attempt to issuenew shares directly from the issuer without a restriction. It is our understanding that Rule 144 provides a safe harbor from the definition of an underwriter such thatthe Section 4(1) exemption from registration would be available however, Section 4(1) exemption does not apply to an issuer. It is the Company’s understanding thatan exemption from registration was not available for the issuance of 86,000,000 shares. The holders of these shares must receivean opinion of counsel acceptable to the Company before they can be sold. The Company is attempting to contact the present holders at this time. All shares properlyissued by the Company that have not been registered through the available effective registration statements are restricted. It also appears to the Company that the
shares were issued in violation of the registration provisions of Section 5 of the Securities Act of 1933 and would normally be subject to rescission under Section l2(a)(l) of the Act. However, under the facts as we know them the Company was not a party to this transaction in that the former CEO in concert with unknown associates and acting outside his authority resulting in a breach of his fiduciary duty defrauded the Company. The Company is attempting to contact the recipients of the subject shares and will pursue all legal remedies available to correct this issue including but not limited to bringing an action in federal court to cancel the shares and for damages sustained by the Company.
The Company becameaware of the fraud as to the payment of debt and therefore could not make an accounting entry of debt reduction and from an accounting perspective treated
these shares as compensation to the initial holders. The accounting treatment of these shares will be reconciled upon the legal conclusion of these issues.
NOTE 6 – STOCK-BASED COMPENSATION
Effective June 18, 2008, the Board of Directors of the Company approved the 2008 Stock Option and Restricted Stock Plan (the "2008 Plan"). The Plan reserves 1,000,000 shares of common stock for grants of incentive stock options, nonqualified stock options, warrants and restricted stock awards to employees, non-employee directors and consultants performing services for the Company. Options and warrants granted under the Plan have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options expire 2 years from the date of grant whereas warrants generally expire 5 years from the date of grant. Restricted stock awards granted under the 2008 Plan are subject to a vesting period determined at the date of grant.
On June 6, 2011, the Board of Directors of the Company amended the 2008 Plan to increase the reserved grant shares from 1,000,000 common shares to 25,000,000 common shares. On August 17, 2012, the Board of Directors of the Company amended the 2008 Plan to increase the authorized shares to be granted from 25,000,000 common shares to 35,000,000 common shares.
The cost of all employee stock options, as well as other equity-based compensation arrangements, is reflected in the financial statements over the vesting period based on the estimated fair value of the awards.
A summary of warrant activity for the three months ended September 30, 2012 is presented below:
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares
Available for
Grant
|
|
|
Number of
Shares Granted
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
June 30, 2012
|
|
|
19,000,000
|
|
|
|
25,500,000
|
|
|
$
|
0.02
|
|
|
|
3.72
|
|
|
|
120,000
|
|
Grants
|
|
|
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
9,500,000
|
|
|
|
25,500,000
|
|
|
$
|
0.02
|
|
|
|
3.47
|
|
|
|
875,000
|
|
The Company values all warrants using the Black-Scholes option-pricing model. Critical assumptions for the Black-Scholes option-pricing model include the market value of the stock price at the time of issuance, the risk-free interest rate corresponding to the term of the warrant, the volatility of the Company’s stock price, dividend yield on the common stock, as well as the exercise price and term of the warrant. The warrants are not subject to any form of vesting schedule and, therefore, are exercisable by the holders anytime at their discretion during the life of the warrant. No discounts were applied to the valuation determined by the Black-Scholes option-pricing model.
On May 8, 2012, the Company granted Mr. Peter Cao, a member of the Company’s Board of Directors, 8,000,000 options to purchasecommon stock of the Company at a price of $0.025 per share. Options for 4 million common shares vested immediately. After six months of Mr. Cao’s employment with the Company, additional options to purchase 4,000,000 shares at $0.025 per share will vest. The options have a five-year expected life, and werevalued at $198,519. At September 30, 2012, unamortized value of this warrant was $33,087.
No warrants were issued in the three months ended September 30, 2012.
NOTE 7 – RELATED PARTY TRANSACTIONS
As of September 30, 2012 and June 30, 2012, the Company hadpayables to a related party of $0 and $18,000, respectively, for services provided.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
On May 8, 2012, the Company entered into an employment contract with Mr. Peter Cao, Chief Operating Officer. Pursuant to the agreement, the Company will pay monthly compensation of $1,000. Mr. Cao is also entitled to 2,000,000 common shares for the increase in the Company’s market value for every $15 million up to $100 million. Additionally, Mr. Cao was granted options to purchase a total of 8,000,000 common shares. Options for 4 million common shares are exercisable at $0.025 per share and vested immediately. After six months of Mr. Cao’s employment with the Company, additional options to purchase 4,000,000 shares at $0.025 per share will vest. The 8,000,000 options were valued at $198,519, which is being expensed over the vesting periods.On October 1, 2012, Mr. Cao entered into a new employment agreement with the Company to replace the agreement dated May 8, 2012. The October 1, 2012 agreement states the following:
(1)
|
Starting October 1, 2012 the Company will pay $4,000 per month;
|
(2)
|
8,000,000 share of common stock is granted immediately and valued at $232,000 based on the market price at October 1, 2012.
|
(3)
|
Salary will increase as the Company’s monthly production hits the operational milestones as follows:
|
i.
|
Production of 200 ounces: salary of $5,000 per month
|
ii.
|
Production of 400 ounces: salary of $6,000 per month
|
iii.
|
Production of 600 ounces: salary of $7,000 per month
|
iv.
|
Production of 800 ounces: salary of $8,000 per month
|
v.
|
Production of 1,000 ounces: salary of $9,000 per month
|
vi.
|
Production of 1,200 ounces: salary of $10,000 per month
|
vii.
|
At production of 1,200 ounces per month or another 4,000,000 shares will be granted.
|
(4)
|
Executive will be eligible for bonuses based on a combination of individual performance and company performance which will be determined by the CEO and Board of Directors.
|
On October 30, 2012, the Company amended the employment agreement to increase the monthly salary to $3,000 per month for the three months ended September 30, 2012. Mr. Cao also agreed that the 8 million common shares granted on October 1, 2012replace the 8,000,000 options granted on May 8, 2012.
On June 19, 2012, the Board of Directors appointed Mr. Michael Stojsavljevich as the new Chief Executive Officer, secretary and a member of the Board of Directors. Mr. Stojsavljevich wouldreceive $5,500 for the first two months and $11,000 per month from the third month of his employment. Mr. Stojsavljevich is entitled to 2,500,000 shares of common stock quarterly from July 1, 2012 and every quarter thereafter to a total of 10,000,000 shares. On August 1, 2012, Mr. Stojsavljevich entered into a new employment agreement with Company to replace the agreement dated June 19, 2012 as follows:
(1)
|
Starting August 1, 2012, the Company will pay $5,500 monthly salary;
|
(2)
|
10,000,000 shares of common stock is granted immediately and valued at $200,000 based on the market price at August 1, 2012. On October 30, 2012, Mr. Stojsavljevich entered into an amendment to the employment agreement to say that the term to issue 2,500,000 shares of common stock quarterly from July 1, 2012 and every quarter thereafter to a total of 10,000,000 shares stated in the June 19, 2012 agreement is replaced.
|
(3)
|
Salary will increase as the Company monthly production achieves operational milestones as described below:
|
i.
|
Production of 200 ounces: salary of $6,500 per month
|
ii.
|
Production of 400 ounces: salary of 7,500 per month
|
iii.
|
Production of 600 ounces: salary of $8,500 per month
|
iv.
|
Production of 800 ounces: salary of $9,500 per month
|
v.
|
Production of 1,000 ounces: salary of $10,500 per month
|
vi.
|
Production of 1,200 ounces: salary of 11,500 per month
|
vii.
|
At a monthly production of 1,200 ounces per month another 4,000,000 shares will be granted.
|
(4)
|
Mr. Stojsavljevich will be eligible for bonuses based on a combination of individual performance and company performance which will be determined by the Board of Directors.
|
On May 10, 2012, the Company entered into a two-year employment contract with Mr. Scott Geisler, Chief Executive Officer at that time. The agreement allows the immediate accrual of unpaid salary from August 29, 2011 at $100,000 per year. The Company also issued stock options to purchase a total of 17,000,000 common shares. Options for 8,500,000 common shares at an exercise price of $0.01 per share vested immediately. Additional options to purchase 8,500,000 common shares at an exercise price of $0.01 per share vested in August 2012. The 17,000,000 options are valued at $507,862. These options have a term of 5 years and canbe exercised on a cashless basis. On June 2, 2012, the Company entered into a mutual release agreement with Mr. Geisler. That mutual release agreement superseded the employment agreement dated May 10, 2012. Pursuant to the mutual release agreement, Mr. Geisler would receive $75,000 in the next 25 months commencing July 15, 2012, and 7,500,000 shares of the Company’s common stock. On June 1, 2012, Mr. Geisler resigned as Chief Executive Officer of the Company. The Company disputes both agreements as the Company believes information was not fully disclosed to the Board of Directors and was negotiated in bad faith. As of September 30, 2012 and June 30, 2012, a disputed payable of $221,250 was recorded related to this mutual release agreement. As of the date of this report, the parties are continuing negotiations.
On October 30, 2012, management learned that former President and CEO, Mr. Scott Geisler, filed suit against the Company on September 20, 2012, in the Circuit Courtof the Sixth Judicial District in the State of Florida. The Company has not yet been served with the summons and complaint or filed an answer. Mr. Geisler asserts thatthe Company is in default with respect to payments under a Settlement and Mutual Release Agreement entered into upon his resignation as an officer and director ofthe Company and effective June 8, 2012. Mr. Geisler claims monetary damages "in excess of $15,000," attorneys' fees, court costs and seeks the issuance of 7,500,000shares of common stock that is provided for under the Settlement and Mutual Release Agreement. We have engaged legal counsel to represent the Company in thisdispute and counsel has identified defenses to the claims and setoffs. We are optimistic that a settlement of the dispute will be reached in the near future withouthaving a materially adverse effect on our financial condition or results of operations.
Currently, the Company is carrying the amount of $293,450 as disputed payables until resolved, which include other disputed payables.
The Company entered into a purchase agreement to purchase mining claims from Gold Exploration LLC in the amount of $99,000 on June 1, 2008. The agreement requires the Company to make royalty payments equal to 2% of the Net Smelter Returns (“NSR”) per year. The Company had no NSR for the three months ended September 30, 2012 and no royalties were paid. The agreement does not have any commitment dates of when production is to begin.
On February 7, 2011 the Company entered into a $250,000 promissory note agreement with Freedom Boat which bears interest rate at 12%. The agreement includes a royalty payment which includes 5% in royalty of its gross profits from gold extraction form the Tarantula Placer Mine and 5% royalty payment from Hull Placer Mine.
On February 7, 2011, David Janney, former officer, entered an agreement with Amazon Holding LLC to pay a finder’s fee for raising $250,000 in the acquisition of mining property. On January 19, 2012, Amazon Holding LLC demanded the Company make the payment. The dispute is still pending but the Company believes that it is not likelythat Amazon Holding LLC will prevail if a suit is filed against the Company relatedto this agreement.
NOTE 9 – LOSS ON SETTLEMENT OF LITIGATION
On February 26, 2012, the Company entered into a settlement agreement with David Janney (former CEO/CFO) for his actions related to wrongfully issued common stock of the Company, among many other things. The settlement agreement includes the following terms:
a.
|
The Company agreed to issue 5 million shares of restricted Bonanza Goldfields common stock to Mr. Janney as a form of compensation. The shares will be paid in two tranches. The first 2,500,000 shares should be issued upon the execution of the settlement and was issued on March 19, 2012. The second 2,500,000 shares were to be issued six months from the execution date of the settlement but have not been issued.
|
b.
|
The funds held in escrow by Christine Wright at the Wright Law Firm, P.A. on behalf of Freedom Boat, LLC for a loan under Mr. Janney’s name will be considered payment in full for Mr. Janney's return of 20,000,000 shares to the treasury on August 29, 2011.
|
c.
|
Mr. Janney agreed not to sell any more than 1,000,000 shares of his personal holdings of Bonanza Goldfields common stock in the open market in any thirty-day period.
|
d.
|
Mr. Janney agreed to return to the Company all of the Company’s property in his possession or in the possession of his family or agents including without limitation Bonanza's files and all documentation (and all copies thereof) dealing with the finances, operations and activities of the Company, its clients, employees or suppliers.
|
The Company recorded a loss of $59,000 on this settlement during the year ended June 30, 2012.
During the year ended June 30, 2012, the Company learned that the title of Midas Placer Claim which the Company purchased from Global Minerals, Inc., a company controlled by Mr. David Janney, was never transferred to the Company. As such, the Company is currently in dispute with Mr. Janney.
NOTE 10 – SUBSEQUENT EVENTS
On October 1, 2012, the Company entered into a new employment agreement with Peter Cao (see Note 8).On October 25, 2012, the Company amended the employment agreements of Peter Cao and Michael Stojsavljevich to clarify certain terms in the new employment agreements (see Note 8).
On October 1, 2012, the Company entered into a Secured Convertible Promissory Note and Warrant Purchase Agreement with Tonaquint, Inc., a Utah corporation("Tonaquint"), whereby the Company issued (i) a Secured Convertible Promissory Note of the Company in the principal amount of $1,660,000 with a conversion priceof $0.05 per share and an annual interest rate of 8% and (ii) a warrant to purchase 158,953,080 shares of the Company’s common stock. The warrant has an exerciseprice of $0.075 per share and can be exercised at any time within five years after October 1, 2012. Tonaquint has the right to convert, subject to restrictions describedin the promissory note, all or a portion of the outstanding amount of the promissory note that is eligible for conversion into shares of the Company’s common stock.The promissory note is due on April 1, 2015 and the interest is payable monthly. The promissory note, if prepaid, has a penalty of 135% prepayment obligation. Thetotal amount to be funded is $1,500,000, representing the principal amount of $1,660,000 less an original issuance discount of $150,000 and the payment of $10,000 tocover Tonaquint’s fees. The shares of common stock underlying the Secured Convertible Promissory Note and Warrant were to be registered by a registrationstatement pursuant to the terms and conditions of a registration rights agreement. The registration statement has been withdrawn with Tonaquint’s consent.Tonaquint's ability to fund the Company is evidenced by three Buyer Mortgage Notes, in the principal amount of $50,000, $150,000, and $400,000. The BuyerMortgage Notes are secured by certain real property owned by Tonaquint located in Cook County, Illinois. Tonaquint’s obligation to fund the Company is furtherevidenced by a promissory note in the amount of $750,000.
Pursuant to the purchase agreement, the Company reserved 75,000,000 shares of common stock. The Company has agreed not to enter into any equity line of creditor financing arrangement or other transaction that involves issuing securities that are convertible into common stock (including without limitation selling convertibledebt, warrants or convertible preferred stock), or otherwise issue common stock (a) with conversion, exercise or similar mechanics or reset provisions that varyaccording to the market price of the common stock without a floor at or higher than $0.01 or (b)at a fixed price which is lower than $0.01, without the prior writtenconsent of Tonaquint. The Company agrees not to declare or make any dividend or other distributions of its assets.
The Company’s default status on that Freedom Boat note existed prior and during negotiations on the transaction with Tonaquint. The intent of the Tonaquinttransaction was that the Company does not default on any notes in the future.
Beginning on March 30, 2013, and each month thereafter, the Company shall pay to Tonaquint principal payments of $69,167 plus the sum of any accrued and unpaidinterest due on such date by converting such amount at a conversion price equals to the lower of the (i) conversion price in effect ($0.05 per share if no anti-dilutionadjustment) (ii) 65% of the arithmetic average of the three lowest volume-weighted average prices of the stock price during the 20 consecutive trading day periodimmediately preceding the date of the payment date; provided, however, the Company may, at its option as described in the agreement, pay all or any part of suchinstallment amount by redeeming such installment amount in cash or by any combination of a Company conversion and a Company redemption.
* * * * * * * * * * *
In this Quarterly Report on Form 10-Q, “Company,” “our company,” “us,” and “our” refer to Bonanza Goldfields Corporation, unless the context requires otherwise.