ECPN El Capitan Precious Metals Inc (CE)

Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2012
¨		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

 

Commission file number:   333-56262

 

(Exact name of registrant as specified in its charter)

 

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

 

15225 North 49th Street Scottsdale, AZ		85254
(Address of principal executive offices)		(Zip Code)

 

  (602) 595-4997

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 250,403,222 share s of common stock, par value $0.001, of the issuer were issued and outstanding as of August 8, 2012.

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

Table of Contents

 

			Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets – June 30, 2012 and September 30, 2011 (Unaudited)		3
	Consolidated Statements of Expenses – Three and nine months ended June 30, 2012 and 2011 and for the period from July 26, 2002 (inception) through June 30, 2012 (Unaudited)		4
	Consolidated Statement of Stockholders’ Equity (Deficit) – September 30, 2010 through June 30, 2012 (Unaudited)		5
	Consolidated Statements of Cash Flows – Nine months ended June 30, 2012 and 2011 and for the period from July 26, 2002 (inception) through June 30, 2012 (Unaudited)		6
	Notes to the Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		17
Item 1A.	Risk Factors		17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3.	Defaults Upon Senior Securities		17
Item 4.	Mine Safety Disclosures		17
Item 5.	Other Information		17
Item 6.	Exhibits		17
SIGNATURES			19

P ART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

 

 EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)  

 

		June 30,				September 30,
		2012				2011
ASSETS
CURRENT ASSETS:
Cash		$	182,748			$	319,939
Prepaid expenses			36,293				35,389
Total Current Assets			219,041				355,328
Furniture and equipment net of accumulated depreciation of $36,625 and $34,197, respectively			2,539				3,707
Mineral property			1,879,608				1,879,608
Deposits			22,440				22,440
Total Assets		$	2,123,628			$	2,261,083
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	132,865			$	111,406
Accrued liabilities			45,700				54,141
Total Current Liabilities			178,565				165,547
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding			–				–
Common stock, $0.001 par value; 300,000,000 shares authorized; 249,931,571 and 245,582,461 issued and outstanding, respectively			249,932				245,582
Additional paid-in capital			201,273,946				200,010,493
Deficit accumulated during the exploration stage			(199,578,815	)			(198,160,539	)
Total Stockholders’ Equity			1,945,063				2,095,536
Total Liabilities and Stockholders’ Equity		$	2,123,628			$	2,261,083

 

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

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF EXPENSES

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,								Period From July 26, 2002 (Inception) Through June 30,
		2012				2011				2012				2011				2012
OPERATING EXPENSES:
Professional fees		$	137,982			$	34,400			$	317,133			$	75,209			$	3,820,412
Officer compensation expense			–				–				–				–				2,863,833
Administrative consulting fees			65,000				65,000				205,000				192,500				2,375,766
Management fees, related party			–				–				–				–				320,500
Legal and accounting fees			35,305				23,876				151,942				201,456				1,853,289
Exploration expenses			148,275				92,219				501,717				355,669				3,501,183
Other general and administrative			53,406				376,617				242,653				1,227,631				6,753,123
Write-off of accounts payable and accrued interest			–				–				–				(7,000	)			(63,364	)
Loss on impairment of mineral property			–				–				–				–				176,567,424
Loss on asset dispositions			–				–				–				–				34,733
Total Operating Expenses			439,968				592,112				1,418,445				2,045,465				198,026,899
LOSS FROM OPERATIONS			(439,968	)			(592,112	)			(1,418,445	)			(2,045,465	)			(198,026,899	)
OTHER INCOME (EXPENSE):
Interest income			53				671				169				2,023				39,417
Other income			–				13,574				–				11,074				18,632
Forgiveness of debt			–				–				–				–				115,214
Interest expense:
Related parties			–				–				–				–				(68,806	)
Other			–				–				–				–				(308,740	)
Loss on extinguishment of liabilities			–				–				–				–				(222,748	)
Gain on derivati ve instrument liability			–				19,007				–				7,203				7,203
Accretion of notes payable discounts			–				–				–				–				(1,132,088	)
Total Other Income (Expense)			53				33,252				169				20,300				(1,551,916	)
NET LOSS		$	(439,915	)		$	(558,860	)		$	(1,418,276	)		$	(2,025,165	)		$	(199,578,815	)
Net loss per common share, basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted average number of common shares outstanding, basic and diluted			249,121,239				244,580,999				247,444,091				184,602,381

 

 

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

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

September 30, 2010 through June 30, 2012

(Unaudited)

 

		Common Stock Shares				Common Stock Amount				Stock Subscriptions				Additional Paid-in Capital				Deficit Accumulated During the Exploration Stage				Total
Balances at September 30, 2010			95,790,069			$	95,790			$	–			$	20,461,702			$	(19,239,497	)		$	1,317,995
Common stock issued for services			183,000				183				–				175,757				–				175,940
Common stock issued for the acquisition of Gold and Minerals Company, Inc.			148,127,043				148,127				–				177,604,325				–				177,752,452
Common stock issued for exercise of warrants			366,667				367				–				212,300				–				212,667
Common stock issued under settlement agreement			332,285				332				–				328,683				–				329,015
Common stock sold in private placement			783,396				783				–				514,836				–				515,619
Costs associated with options			–				–				–				745,213				–				745,213
Gold and Minerals Company, Inc. merger rounding shares			1				–				–				1				–				1
Stock issuance costs for the acquisition			–				–				–				(32,324	)			–				(32,324	)
Net loss			–				–				–				–				(178,921,042	)			(178,921,042	)
Balances at September 30, 2011			245,582,461			$	245,582			$	–			$	200,010,493			$	(198,160,539	)		$	2,095,536
Common stock issued for services			420,000				420				–				112,380				–				112,800
Common stock sold in private placement			3,908,915				3,910				–				1,046,090				–				1,050,000
Costs associated with options			–				–				–				105,003				–				105,003
Gold and Minerals Company, Inc. merger rounding shares			20,195				20				–				(20	)			–				–
Net loss			–				–				–				–				(1,418,276	)			(1,418,276	)
Balances at June 30, 2012		$	249,931,571			$	249,932			$	–			$	201,273,946			$	(199,578,815	)		$	1,945,063

 

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

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended June 30,								July 26, 2002  (Inception) Through June 30,
		2012				2011				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,418,276	)		$	(2,025,165	)		$	(199,578,815	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Warrant and option expense			105,003				892,085				4,926,794
Beneficial conversion feature of notes payable			–				–				225,207
Non-cash expense with affiliate			–				–				7,801
Stock-based compensation			112,800				111,940				6,717,933
Non-cash merger related costs			–				1				1
Accretion of discounts on notes payable			–				–				1,132,088
L oss on sale of fixed assets			–				–				34,733
(Gain) on derivative instruments liability			–				(7,203	)			(7,203	)
Loss on impairment of mineral property			–				–				176,567,424
Write-off accounts payable and accrued interest			–				(7,000	)			(63,364	)
Forgiveness of debt			–				–				(115,214	)
(Gain) on conversion of debt			–				–				(2,459	)
Provision for uncollectible note receivable			–				–				62,500
Non-cash litigation settlement			–				214,642				214,642
Depreciation			3,028				4,229				82,624
Changes in operating assets and liabilities:
Miscellaneous receivable			–				(1,583	)			4,863
Interest receivable			–				–				(13,611	)
Prepaid expenses and other current assets			(904	)			23,636				(34,566	)
Advances on behalf of affiliated company			–				(28,117	)			(562,990	)
Accounts payable			21,459				(49,224	)			142,285
Accounts payable - related party			–				–				364
Accrued liabilities			(8,441	)			(259,303	)			266,006
Interest payable, other			–				–				49,750
Net Cash Used in Operating Activities			(1,185,331	)			(1,131,062	)			(9,943,207	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property interest			–				–				(100,000	)
Purchase of furniture and equipment			(1,860	)			(600	)			(150,600	)
Proceeds from sale of fixed assets			–				–				32,001
Deposits			–				–				(22,440	)
Issuance of notes receivable			–				–				(249,430	)
Payments received on notes receivable			–				37,500				129,450
Cash received in acquisition of Gold and Minerals Company, Inc.			–				89,902				89,902
Costs associated with acquisition share issuance			–				(32,324	)			(32,324	)
Cash paid in connection with acquisition of DML Services, Inc.			–				–				(50,000	)
Net Cash (Used in) Provided by Investing Activities			(1,860	)			94,478				(353,441	)

  (Continued)

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

 EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 

		Nine Months Ended June 30,								July 26, 2002 (Inception) Through June 30,
		2012				2011				2012
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock			1,050,000				15,619				6,511,591
Costs associated with the sale of stock			–				–				(19,363	)
Proceeds from notes payable, related parties			–				–				219,900
Proceeds from warrant exercise			–				212,667				1,550,742
Proceeds from notes payable, other			–				–				2,322,300
Increase in finance contracts			–				–				117,479
Repayment of notes payable, related parties			–				–				(61,900	)
Payments on finance contracts			–				–				(117,479	)
Repayment of notes payable, other			–				–				(43,874	)
Net Cash Provided by Financing Activities			1,050,000				228,286				10,479,396
NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS			(137,191	)			(808,298	)			182,748
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			319,939				955,023				–
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	182,748			$	146,725			$	182,748
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	–			$	–			$	172,917
Cash paid for income taxes			–				–				–
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fixed assets disposed for accrued liabilities		$	–			$	–			$	1,991
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of interest in El Capitan, Ltd.			–				–				8
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of the COD property			–				–				3,600
Issuance of common stock to Gold and Minerals Company, Inc. in connection with the purchase of the Weaver property			–				–				3,000
Net non-cash advances from affiliated company			–				–				562,990
Notes payable and accrued interest converted to equity			–				–				2,495,544
Accounts payable and accrued liabilities converted to equity			–				–				31,176
Issuance of common stock to former Company officers under a settlement			–				329,015				329,015
Issuance of common stock to Gold and Minerals Company, Inc. stockholders in connection with the merger of Gold and Minerals Company, Inc.			–				177,752,452				177,752,452

  

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

EL CAPITAN PRECIOUS METALS, INC.

(An Exploration Stage Company)  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited interim financial statements of El Capitan Precious Metals, Inc. (“El Capitan” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, the financial statements do not include all information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed interim financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending September 30, 2012, or for any subsequent period. These interim financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2011, included in the Company’s Annual Report on Form 10-K, filed December 29, 2011 and Form 10-K/A filed February 24, 2012. The consolidated balance sheet at September 30, 2011, has been derived from the audited financial statements included in the 2011 Annual Report.

 

Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2011 as reported in the Form 10-K have been omitted. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Principles of Consolidation

 

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

 

New Accounting Pronouncements

 

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

 

Management Estimates and Assumptions

 

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

 

NOTE 2 – MINERAL PROPERTY COSTS

 

Mineral property exploration costs are expensed as incurred until such time as economic reserves are quantified. To date El Capitan has not established any proven or probable reserves on its mineral properties. The Company has capitalized $1,879,608 of mineral property acquisition costs reflecting its investment in the El Capitan site as of June 30, 2012.

 

NOTE 3 – STOCKHOLDERS’ EQUITY

 

Equity Purchase Agreement

 

On July 11, 2011, the Company entered into an Equity Purchase Agreement (the “Agreement”) with Southridge Partners II, LP (“Southridge”), pursuant to which the Company may from time to time, in its discretion, sell newly-issued shares of its common stock to Southridge for aggregate gross proceeds of up to $5,000,000. Unless terminated earlier, Southridge’s purchase commitment will automatically terminate on the earlier of July 11, 2013 or the date on which aggregate purchases of shares of common stock by Southridge under the Agreement total $5,000,000. El Capitan has no obligation to sell any shares under the Agreement. The Agreement may be terminated by the Company at any time. Southridge will have no obligation to purchase shares under the Agreement to the extent that such purchase would cause Southridge to own more the 9.99% of the El Capitan’s common stock.

 

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

 

As of June 30, 2012, the Company has received aggregate proceeds of $1,550,000 ($1,050,000 during the nine months ended June 30, 2012) under the Agreement and $100,000 subsequent to June 30, 2012. As of August 8, 2012, the Company has remaining options to sell to Southridge $3,350,000 in shares of common stock of the Company under the Agreement.

 

Issuances of Common Stock, Warrants and Options

 

Common Stock

 

During the quarter ended June 30, 2012, the Company recorded a rounding share variance of 20,195 on the conversion of the Gold and Minerals, Inc. stock into the Company’s common stock due to the rounding up provision in the Merger Agreement.

 

During the quarter ended June 30, 2012, El Capitan issued 1,760,712 shares of common stock at prices ranging from $0.252 to $0.17 per share under the terms of Equity Purchase Agreement and received cash proceeds of $350,000.

 

On May 8, 2012, the Company issued 100,000 shares of S-8 common stock pursuant to our 2005 Stock Incentive Plan for outside consulting services valued at $26,000, the value of the closing price of the stock on the date of issuance.

 

On May 3, 2012, the Company issued 120,000 shares of S-8 common stock pursuant to our 2005 Stock Incentive Plan for outside consulting services valued at $28,800, the value of the closing price of the stock on the date of issuance.

 

On April 16, 2012, the Company issued 100,000 shares of S-8 common stock pursuant to our 2005 Stock Incentive Plan for outside consulting services valued at $25,000, the value of the closing price of the stock on the date of issuance.

 

During the quarter ended March 31, 2012, El Capitan issued 873,084 shares of common stock at prices ranging from $0.337 to $0.213 per share under the terms of Equity Purchase Agreement and received cash proceeds of $250,000.

 

On March 6, 2012, the Company issued 100,000 shares of S-8 common stock pursuant to our 2005 Stock Incentive Plan for outside consulting services valued at $33,000, the value of the closing price of the stock on the date of issuance.

 

During the quarter ended December 31, 2011, El Capitan issued 1,275,119 shares of common stock at prices ranging from $0.421 to $0.281 per share under the terms of Equity Purchase Agreement and received cash proceeds of $450,000.

Warrants

 

During the nine months ended June 30, 2012, the Company did not issue any warrants.  There were no warrants outstanding as of September 30, 2011 or June 30, 2012.

 

Options

 

On January 31, 2012, pursuant to the 2005 Stock Incentive Plan, the Company granted to the chairman of the board of directors a two-year stock option to purchase 500,000 shares of the Company common stock, which vested immediately, at an exercise price of $0.38 per share. The fair value of the options was determined to be $80,375, using the Black-Scholes option pricing model and was expensed as stock-based compensation during the nine months ended June 30, 2012. The significant assumptions used in the valuation were: the exercise price $0.38, on January 31, 2012, the market value of the Company’s common stock on the date of grant, expected volatility of 111.377%, risk free interest rate of 0.22%, expected term of one year and expected dividend yield of zero.

 

On November 1, 2011, pursuant to the 2005 Stock Incentive Plan, the Company granted to a consultant a two-year stock option to purchase 100,000 shares of the Company common stock, at an exercise price of $0.42 per share. The option became fully vested upon the execution of the engagement agreement between the Company and specified investment banker or one of its affiliates that occurred on January 31, 2012. The fair value of the options was determined to be $24,628, using the Black-Scholes option pricing model, and was expensed as stock-based compensation during the nine months ended June 30, 2012. The significant assumptions used in the valuation were: the exercise price $0.42, on November 1, 2011, the market value of the Company’s common stock, expected volatility of 115.379%, risk free interest rate of 0.23 %, expected term of two years and expected dividend yield of zero.

 

The following table sets forth certain terms of the Company’s outstanding options and exercisable options for the nine months ended June 30, 2012:

 

		Options Outstanding							Options Exercisable
		Number of  Shares				Weighted Average  Exercise Price			Number of  Shares				Weighted Average  Exercise Price
Balance, September 30, 2011			2,450,000			$ 0.84				2,450,000			$ 0.84
Granted			600,000			$ 0.39				600,000			$ 0.39
Exercised			–			–				–			–
Expired/Cancelled			–			–				–			–
Balance, June 30, 2012			3,050,000			$ .0.75				3,050,000			$ 0.75
Weighted average contractual life in years			1.55							1.55
Aggregate intrinsic value		$	–						$	–

 

The intrinsic value of each option or warrant 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 pretax value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.22 closing stock price of the Company’s common stock on June 30, 2012, and there were options in-the-money on the date of measurement. The intrinsic value amounts change based on the market price of the Company’s stock.

 

The Company has a 2005 Stock Incentive Plan under which 30,000,000 shares are reserved and registered for stock and option grants. There were 14,999,469 shares available for grant under the Plan at June 30, 2012, excluding the 3,050,000 options outstanding.

 

NOTE 4 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2012, and through August 8, 2012, El Capitan sold an aggregate of 471,651 shares to Southridge Partners under the Equity Purchase Agreement for aggregate cash proceeds of $100.000. 

 

On July 6, 2012, pursuant to the 2005 Stock Incentive Plan, the Company granted to a consultant a ten-year stock option to purchase 100,000 shares of the Company’s common stock, which vested immediately, at an exercise price of $0.21 per share. The fair value of the options was determined to be $20,287, using the Black-Scholes option pricing model.

 

On July 6, 2012, pursuant to the 2005 Stock Incentive Plan, the Company granted to two directors of the Company each a ten-year stock option to purchase 500,000 shares of the Company’s common stock, which vested immediately, at an exercise price of $0.21 per share. The fair value of the options was determined to be $181,756, using the Black-Scholes option pricing model.

 

On July 6, 2012, pursuant to the 2005 Stock Incentive Plan, the Company granted to a new director of the Company a ten-year stock option to purchase 500,000 shares of the Company’s common stock, which will vest in 12 monthly installments in equal amounts on the last calendar day of each month commencing on July 31, 2012 and ending on June 30, 2013, at an exercise price of $0.21 per share. The fair value of the options was determined to be $90,878, using the Black-Scholes option pricing model and will be expensed over the vesting period.

 

Item 2.

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

 

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with our audited financial statements and the “Risk Factors” section included in our Form 10-K for the year ended September 30, 2011, filed with the U.S. Securities and Exchange Commission on December 29, 2011, as amended in our Form 10-K/A filed on February 24, 2012.

 

Cautionary Statement on Forward-Looking Statements

 

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

 

Company Overview

 

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

 

We are concentrating on the exploration of our El Capitan property. After completing further testing to determine the existence and concentration of commercially extractable precious metals or other minerals at this property site, and if the results of such testing are positive, we anticipate formalizing plans for the development of the asset by either selling or entering into a joint venture with a producing mining company.

 

Financial Condition, Liquidity and Capital Resources

 

Historically we have relied on equity and debt financings to finance our ongoing operations.  To continue our exploration, metallurgical and recovery program efforts on the El Capitan project and continue our business strategies for our fiscal year 2012, on July 11, 2011, we entered into an Equity Purchase Agreement (the “Agreement”) with Southridge Partners II, LP (“Southridge”). The term of the Agreement is two years, and can be terminated by the Company at any time.  The Agreement permits the Company to sell newly-issued shares of our common stock for aggregate proceeds of up to $5,000,000.  We have no obligation to sell any shares under the Agreement. The shares to be sold under the Agreement will be made pursuant to our effective registration statement on Form S-3 filed with the Securities and Exchange Commission.  As of August 8, 2012, we have sold Southridge shares of common stock for aggregate proceeds of $1,650,000 and have the right, subject to certain conditions, to sell to Southridge $3,350,000 in shares of common stock of the Company under the Agreement.  A further description of the Agreement is set forth in Note 3 of the Notes to Consolidated Financial Statements – “Equity Purchase Agreement.” The Company expects that the proceeds received from the Agreement will permit the Company to continue its business strategy of preparing to present the El Capitan property to sell to or enter into a joint venture with a producing mining company with the assistance of the Company’s investment banker.

 

We expect that the Agreement will provide the Company with adequate funding to sustain its planned operations and provide a source of funds for the final phases of our business plan strategy. At this time, the Company plans to utilize the funds to finalize the recovery process demonstration project for the El Capitan deposit, complete any additional exploration and metallurgical efforts that may be required on the El Capitan project (no further exploration plans exist at this time) and pay for necessary corporate personnel and general and administrative operating costs and expenses to be incurred in the marketing of the El Capitan property.

 

As of June 30, 2012, we had cash on hand of $182,748 and an accumulated deficit of $199,578,815. Based upon our budgeted burn rate as of such date, we have operating capital for approximately 1.8 months, excluding any cash received by the Company upon the sale of its shares of common stock under the terms of the Agreement. If management’s plans are not successful, operations and liquidity may be adversely impacted.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

 

Revenues

 

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

 

Expenses and Net Loss

 

Our operating expenses decreased $152,144 from $592,112 for the three months ended June 30, 2011 to $439,968 for the three months ended June 30, 2012. The decrease is mainly attributable to decreases in other general and administrative aggregating $323,211 and was offset mainly by increases in professional fees of $103,582 and exploration costs of $56,056.

 

The decrease in other general and administrative is mainly attributable to non-cash warrant and option costs of $322,440 and stockholder’s meeting expenses of $27,313 incurred in the prior year period of measurement and were offset by increases in the current period of measurement of $8,720 in D&O insurance, $6,777 in web site maintenance, travel and related costs of $4,850 and office related operating costs of $2,665.

 

The increase in professional fees is mainly attributable to increased public relations expenses of $91,603, of which $79,800 was non-cash stock compensation and investment banker expenses of $4,033.

 

The increase in exploration expenses resulted from increased activities on our precious metals recovery project by outside companies and increased time incurred on this project by our outside independent mine consultants.

 

Our net loss for the three months ended June 30, 2012 decreased to $439,915 from a net loss of $558,860 incurred for the comparable three month period ended June 30, 2011. The decrease in net loss of $118,945 for the current period is attributable to the aforementioned net decrease in operating expenses and no current period gain on a derivative instrument liability or other income.

 

Nine Months Ended June 30, 2012 Compared to Nine Months Ended June 30, 2011

 

Revenues

 

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

 

Expenses and Net Loss

 

Our operating expenses decreased $627,020 from $2,045,465 for the nine months ended June 30, 2011 to $1,418,445 for the nine months ended June 30, 2012. The decrease is mainly attributable to decreases in legal and accounting aggregating $49,514 and other general and administrative of $984,978. These decreases were offset mainly by increases in professional fees of $241,924, exploration costs of $146,048 and administrative consulting fees of $12,500.

 

The decrease in accounting and legal is a result of the costs related to our merger with Gold and Minerals Company, Inc. that were incurred in the prior year period of measurement.

 

The decrease in other general and administrative is mainly attributable costs incurred in the prior year of settlement costs with two former officers aggregating $214,642 and a decrease in option and warrant related costs of $787,082 and were offset by increased costs of D&O insurance of $21,522 in the current period of measurement.

 

The increase in professional fees is mainly comprised of $108,320 related to investment banker activities, $60,000 to oversight of El Capitan site project and $65,985 related to investor relation activities.

 

The increase in exploration expenses resulted from increased time incurred by our outside mine consultants in preparing documentation for an investment bank presentation, supervising final testing procedures on the extraction process for the El Capitan property ore and costs incurred with outside companies involved in the processing of the chain-of-custody ore to be utilized in our future recovery demonstrations.

 

Our net loss for the nine months ended June 30, 2012 decreased to $1,418,276 from a net loss of $2,025,165 incurred for the comparable nine month period ended June 30, 2011. The decrease in net loss of $606,889 for the current period is attributable to the aforementioned net decrease in operating expenses and no current period gain on a derivative instrument liability or other income.

 

Factors Affecting Future Operating Results

 

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

 

The price of gold and other precious metals has experienced an increase in value over the past three years. Any significant drop in the price of gold, other precious metals or iron ore prices may have a materially adverse effect on our ability to market the sale of the El Capitan property site for a competitive price, or the future results of our potential operations unless we are able to offset such a price drop by substantially decreased estimated costs of extraction of production if involved in a joint venture.

 

We currently are continuing to have geological and metallurgical work performed on samples from our site and with our outside independent  quality control person developing the demonstration process for precious metals recovery with chain-of-custody ore from the El Capitan property, which will used by our investment banker in marketing the El Capitan property for sale.

 

Off-Balance Sheet Arrangements

 

During the three months ended June 30, 2012, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.

 

Contractual Obligations

 

As of June 30, 2012, we had no contractual obligations (including long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations and other long-term liabilities reflected on our balance sheet under GAAP) that are expected to have an adverse effect on our liquidity and cash flows in future periods.

 

Critical Accounting Policies

 

Our unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Note 1, “Business, Basis of Presentation and Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 30, 2011 (as amended by our Annual Report on Form 10-K/A), describe our significant accounting policies which are reviewed by management on a regular basis.

 

New Accounting Pronouncements

 

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

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

 

We have no debt outstanding nor do we have any investment in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.

  

Item 4.

Controls and Procedures

 

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

 

As of as of the end of period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act).  The evaluation included certain control areas which are material to the Company and its size as an Exploration Stage Company. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by it in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  In addition, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in 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 quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

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

 

Item 1A.

Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended September 30, 2011, filed with the U.S. Securities and Exchange Commission on December 29, 2011 , as amended by our Annual Report on Form 10-K/A, filed on February 24, 2012 , in addition to the other information included in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time prior to investing in our common stock.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

(a)

Exhibits

 

Exhibit Number		Description
2.1		Agreement and Plan of Merger between the Company, Gold and Minerals Company, Inc. and MergerCo, dated June 28, 2010 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 7, 2010).
3.1		Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010) .
3.2		Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form S-4 Registration Statement #333-170281 filed on November 2, 2010) .
4.1		Rights Agreement dated August 25, 2011 between the Company and OTR, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 31, 2011) .
10.1		Equity Purchase Agreement dated July 11, 2011 between the Company and Southridge Partners II, LP (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 12, 2011).
10.2		2005 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Form S-8 Registration Statement #333-177417 filed on October 20, 2011) .

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

 __________________

*

Filed herewith.

**

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

SIGNATURES

 

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

 

	EL CAPITAN PRECIOUS METALS, INC.
Dated:   August 8, 2012	By:	/s/  Charles C. Mottley
		Charles C. Mottley Chief Executive Officer, President and Director (Principal Executive Officer)

 

Dated:   August 8, 2012	By:	/s/  John F. Stapleton
		John F. Stapleton Chief Financial Officer and Director (Principal Financial Officer)