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LSTG > SEC Filings for LSTG > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for LONE STAR GOLD, INC.

Form 10-Q for LONE STAR GOLD, INC.


19-Nov-2012

Quarterly Report


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

Special Note on Forward-Looking Statements

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

General Overview

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

Agreements

La Candelaria Project

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

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

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

Exploration is currently halted until the late fall of 2012 when plans are in place to combine the $100,000 remaining under the Company's commitment to the 2012 Work Plan with the $150,000 that the Company has agreed to provide for the 2013 Work Plan. This total commitment of $250,000 will be used to perform deep core drilling, which is expected to be complete by mid-February 2013. The Company and the consultants working with Metales decided to spend the combined amounts for the 2012 and 2013 Work Plans to avoid duplicating the cost of transporting the drilling equipment and set up costs. Metales will decide whether to perform further drilling after the new data from the drilling campaign has been analyzed.

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

Tailings Project

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

The Company is obligated to fund $250,000 for the benefit of the processing operation before January 26, 2013, under the work commitment established for the Tailings Project. For the nine months ending September 30, 2012, the Company made payments totaling $260,000 pursuant to the Work Commitment. See "Results of Operations" below.

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

Approximately 6,000 tons of the Tailings material has been sent to the processing plant in Parral, Mexico. As of the date of this Quarterly Report, this shipment has not been fully processed. The first processing plant selected in Parral, Mexico closed unexpectedly for the last few months, although the Company anticipates that it may re-open in November 2012. The plant is expected to resume processing in the near future, and process the Tailings material that have been sent to the plant. The plant's management has agreed to receive and process 200 tons per day (tpd) of the Company's Tailings material. In addition, the Company is negotiating an agreement with a second nearby processing plant. The second plant continues to receive small amounts of the Company's washed concentrate and is currently fine-tuning and determining the optimal processing route for the material. The Company has no revenues from the Tailings as of the date of filing.

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

No Proven or Probable Reserves

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

Fairhills Investment Agreement

On April 30, 2012, the Company entered into an Investment Agreement (as amended, the "Fairhills Investment Agreement") with Fairhills Capital Offshore Ltd., a Cayman Islands exempted company ("Fairhills"), as amended by Amendment No. 1 to Investment Agreement dated June 25, 2012 and Amendment No.2 to Investment Agreement dated September 21, 2012. Under the Fairhills Investment Agreement, Fairhills agreed to purchase shares of Common Stock for an aggregate purchase price of up to $15,000,000. The Fairhills Investment Agreement was filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed on May 14, 2012, Amendment No. 1 was filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the Commission on October 16, 2012, and Amendment No. 2 was filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 filed with the Commission on October 16, 2012.

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

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

The Company filed a Registration Statement on Form S-1 on October 16, 2012, covering the resale of 20,000,000 shares of Common Stock subject to the Fairhills Investment Agreement, and 653,595 shares of Common Stock issued under a Securities Purchase Agreement with Fairhills, which is described in Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds." The Company may not sell Common Stock to Fairhills under the Fairhills Investment Agreement until the Registration Statement is declared effective by the Commission.

Results of Operations

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

Three months ended September 30, 2012 and 2011, respectively

For the periods below, we had the following expenses:

                                 For the              For the
                               Three Months         Three Months
                                   Ended                Ended
                               September 30,        September 30,
                                   2012                 2011

General and administrative   $         94,221     $         92,699
Exploration                            10,000              453,750
Management fees                       279,999              259,179
Total operating expenses     $        384,220     $        805,628

Included in exploration expenses of $10,000 for the three months ended September 30, 2012 are costs of $10,000 related to the Tailings Project related to management costs. The Company incurred exploration costs for the three months ended September 30, 2011 of $453,750. The decrease is due to efforts to curtail development in the La Candelaria project as management conducts a review of the viability of the La Candelaria Project and a slowdown in the work on the Tailings Project as the Company waits for the owner of the processing plant in Parral to complete repairs on the processing facility.

For the three months ended September 30, 2012, we incurred general and administrative expenses totaling $94,221. This increase of $1,522 was due to increases (decreases) as compared to the three months ended September 30, 2011 as follows: accounting and auditing fees of $20,576, legal and professional fees of ($3,823), travel of ($11,174), telephone expense of $1,864, rent expense of ($2,993), and general expenses of ($2,928).

During the three months ended September 30, 2012, the Company paid management fees totaling $30,000 to our sole officer and director and recognized $249,999 in expenses related to the stock grant under Mr. Ferris' Employment Agreement. During the three months ended September 30, 2011, the Company paid management fees totaling $30,000 to our sole officer and director and recognized $229,179 in expenses related to the stock grant under Mr. Ferris' Employment Agreement. The difference of $20,820 between the amount of expense related to the stock grant recognized in the three months ended September 30, 2012 and that recognized during the three months ended September 30, 2011 is due to the fact that the grant was made during the quarter ending September 30, 2011 and was not outstanding for a full three months, resulting in the recognition of less than three months of related amortization expense in the quarter ending September 30, 2011 when compared to the quarter ending September 30, 2012.

Nine months ended September 30, 2012 and 2011, respectively

For the periods below, we had the following expenses:

                                                                         Accumulated
                                                                         Deficit from
                                 For the              For the            November 26,
                               Nine months           Nine months             2007
                                   Ended                Ended                 to
                               September 30,        September 30,        September 30,
                                   2012                 2011                 2012

General and administrative   $        310,137     $        217,799     $        931,383
Exploration                           475,196              453,750            1,028,394
Management fees                       839,997              259,179            1,396,451
Total operating expenses     $      1,625,330     $        930,728     $      3,356,228

Included in Exploration expenses of $475,196 for the nine months ended September 30, 2012 are costs of $185,195 related to the La Candelaria Project and costs of $260,000 related to the Tailings Project. With respect to the La Candelaria Project, we paid a total of $60,195 under the Work Plan for La Candelaria, and made $125,000 in payments to Homero Gonzalez under the Option Agreement. With respect to the Tailings Project, the Company made payments of $260,000 under the Work Committment, which includes approximately $60,000 for construction of the wash plant, $122,500 for equipment and trucks, and $77,500 for repairs, fuel, taxes, insurance, office and management costs.

The Company incurred $453,750 in exploration costs in the first nine months of 2011 consisting of expenditures under the Work Plan, as follows: $303,000 in stock compensation to Gonzalez, $126,250 in payments to North American related to the Option Agreement and $24,500 related to the Work Plan.

For the nine months ended September 30, 2012, we incurred general and administrative expenses totaling $310,137. This increase of $92,338 from the $217,799 in general and administrative costs incurred during the nine months ended September 30, 2011 was due to increases (decreases) as compared to the first nine months of 2011 as follows: accounting and auditing fees of $35,705, legal and professional fees of $56,977, travel of ($14,373), depreciation expense of $6,508, telephone expense of $6,597, rent expense of $911, and general expenses of $13.

During the nine months ended September 30, 2012, the Company paid management fees totaling $90,000 to our sole officer and director and recognized $749,997 in expenses related to the stock grant under Mr. Ferris' Employment Agreement. The Company paid $40,000 in management fees in the first nine months of 2011 and recognized $219,179 in expenses related to the stock grant.

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