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SFMI > SEC Filings for SFMI > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for SILVER FALCON MINING, INC.

Form 10-Q for SILVER FALCON MINING, INC.


20-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Disclosure Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward looking statements ("Forward Looking Statements"). All statements other than statements of historical fact included in this report are Forward Looking Statements. In the normal course of its business, the Company, in an effort to help keep its shareholders and the public informed about the Company's operations, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company's proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors ("Important Factors") and other factors could cause actual results to differ materially from the Company's expectations are disclosed in this report. All prior and subsequent written and oral Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Company's expectations as set forth in any Forward Looking Statement made by or on behalf of the Company.

Overview

On September 14, 2007, GoldLand acquired an interest in 174.82 acres of land on War Eagle Mountain, consisting of a 100% interest in 103 acres, and a 29.166% interest in 71.82 acres. GoldLand also has five placer claims on War Eagle Mountain from the U.S. Bureau of Land Management, each of which covers approximately 20 acres, or approximately 100 acres in total.

On October 11, 2007, GoldLand leased its mineral rights on War Eagle Mountain to us. Under the lease, we are responsible for all mining activities on War Eagle Mountain, and we are obligated to pay GoldLand annual lease payments of $1,000,000, payable on a monthly basis, a monthly non-accountable expense reimbursement of $10,000 during any month in which minerals are mined from the leased premises, and a royalty of 15% of all amounts we receive from the processing of minerals mined from tailing piles on the premises or through shafts or adits located on the premises. The lease, as amended, provides for a deferral of lease payments for two years commencing on January 1, 2014.

On September 21, 2008, we acquired from Mineral Extraction, Inc. all mineral, mining and access rights to two mining claims on War Eagle Mountain, covering 18.877 total acres, as well as claims for four mill site locations and the Sinker Tunnel location.

We began actual operations in May 2010. Initially, as described below, actual operations consists of processing dump material left on the mine site from prior mining operations. Later, after we complete an exploration program to prove up and locate reserves on our property, and make further capital improvements to the mine site, we plan to begin mining and processing raw minerals.

Our plan to develop our mining properties into an active mine will take place in three phases.

Start-up Phase

Our initial phase involved completing construction of a mill, and using the mill to process tailings left over from prior mining operations. We were successful in our negotiations to purchase a parcel of land about half way between Highway 78 and the Sinker Tunnel entrance where we have constructed our mill. We closed on the purchase of this site in December 2009. We have purchased all of the milling equipment we need, which is currently installed and operating in Murphy, Idaho. As the mill is up and running, we plan to haul sufficient dump material, leftover from 6 prior mill sites on the mountain, during the summer months, to our mill site for processing during the summer and winter. Our testing indicates that, as a result of milling techniques used in the 1800's which failed to extract all of the gold and silver from the raw material, there are sufficient quantities of gold and silver remaining in the dump material to justify further processing. We elected to build the mill on private property that we own, rather than BLM property, because of lower reclamation costs, even though the offsite property will entail higher transportation costs. In early 2011, we began construction of a metallurgical lab at our mill site. A temporary smelter became operational in July 2011, although we still need to complete a building to house the smelter and lab. In the fall of 2013, we plan to install a chemical leaching facility at our mill site in order to improve the yields from our raw material.

The installation and startup of the mill and the working capital to begin transport of raw material to the mill for processing has necessitated an investment of approximately $3.46 million, as follows:

The purchase and the preparation of property for mill use cost about $549,375;

The installation and certification of the mill cost about $517,283;

Completing the purchase mill equipment cost about $1,617,368;

Moving raw material to stockpile at the mill in 2010 cost about $352,911;

The purchase and installation of smelter equipment;

Start-up mill salaries to the end of 2010 cost $425,238.

We have also made a number of improvements that we initially expected would not occur until the development phase. In particular, in 2010, the roads to the Sinker Tunnel Complex were upgraded to allow 25-ton trucks access to the site, and an area 300x400 feet was prepared to act as a staging area at the 5,200 foot level. The Sinker Tunnel was aerated in its entire length and the entrance to the Sinker Tunnel was permanently extended to avoid land or snow slides to block access to the Sinker Tunnel. Permanent drainage pipes are being laid in the tunnel as it was determined that the Sinker Tunnel is the main drain for the War Eagle complex. Exploring and shoring or rock bolting of some weak points in the top wall is underway. Permitting for exploration of the Sinker Tunnel is underway with training for underground personnel and safety measures being installed as per the latest mining rules and regulations.

We need approximately $1,900,000 in capital to complete the start-up phase, of which about $1,800,000 is attributable to working capital and $100,000 is the estimated cost of completing our permanent metallurgical lab. In addition, we estimate that our leaching facility will cost an estimated $2,000,000.

Exploration Phase

During 2010, we substantially revised the scope and cost of our exploration phase. Our exploration phase refers to a program to prove up and locate reserves on our property. We need to obtain a satisfactory estimate of the remaining reserves on the property and their location in order to devise a comprehensive plan for the full development of the mine site. The program will involve building a three dimensional map of War Eagle Mountain showing the precise location of veins, shafts and tunnels. Through exploratory drilling and core sampling, we hope to obtain as much information as possible about the location, thickness and quality of the vein systems near the main shafts, and later throughout the entire mountain. The map will be a valuable tool in analyzing the extent of the remaining reserves, mineralization trends, and other pertinent geological and mining information. The most significant change to the exploration phase contemplates a more comprehensive set of core samples, both from the surface of the mountain and from the inside of the mountain using the Sinker Tunnel, and associated costs, including locating drilling equipment at the site, and logistical costs for the crew, such as vehicles, meals, shelter on the mountain, and accommodations for a geologist, field technician and drill crew. We decided to expand the scope of the exploration phase in order to obtain a National Instrument 43-101, which is a report developed by the Canadian Securities Administrators for mining companies. A National Instrument 43-101 is necessary for listing our common stock on any exchange overseen by the Canadian Securities Authority, including the Toronto Stock Exchange.

Another aspect of the exploration phase will involve devising a plan to use the Sinker Tunnel to mine the interior of the mountain on a year round basis. The plan will involve accessing and draining the mine shafts on the top of the mountain from the Sinker Tunnel, as well as relocating and collaring old shafts on the mountain. We estimate that the exploration phase will take about 18 months from mid-April 2013, and will cost approximately $10,000,000. We began preliminary work on the exploration phase in mid-2010.

Development Phase

The development phase involves transitioning the mine from processing tailings leftover from prior mining activities to extracting and processing raw material or minerals from the mountain, assuming that the exploration phase demonstrates that there are economically viable reserves in War Eagle Mountain. We believe that full scale mining of raw material or minerals will be profitable. In particular, historical records of mining on the site, and subsequent reports of the geology of the mountain, indicate that veins containing gold and silver extend much further vertically than could be mined when the site was last mined in the 1880's. In addition, historical records indicate that gold and silver exists in the veins in sufficient densities to warrant mining using modern extraction and milling techniques. The scope of the development phase will depend on the outcome of the exploration phase, which is designed to test the accuracy of our analysis. The development phase will not take place unless that exploration phase demonstrates that there are reserves in War Eagle Mountain that can be extracted and processed in an economically viable fashion. Our goal is to devise a drilling program that reaches as many reserves as possible at the lowest cost. Among the improvements to the mine site that we anticipate making in the development phase are:

We plan to connect the mine shafts on the top of the mountain to the Sinker Tunnel in order to provide drainage to those shafts;

We plan to install a transportation system in the Sinker Tunnel (either tire mounted trams, narrow gauge railway, or conveyor system) to move raw material or minerals out of the Sinker Tunnel for transport to our mill site; and

Additional improvements include housing, storage, food preparation facilities, generators for power, etc.

In addition to the improvements identified above, we expect that we will need to make other improvements necessary to access the highest quality mineral veins, which improvements are not known at this time but which will be identified in our National Instrument 43-101 report. In 2010, we started (and have since completed) some improvements to the mine site that were previously part of our development phase, including improving about four miles of the county road linking State Route 78 with Silver City, 1.8 miles of access road to the Sinker Tunnel Complex from the county road, and about 1.6 miles of access road to the Oro Fino vein outcrop area to permit heavier loads and year round access, as well improvements to the physical facilities at the milling location site and mine site to accommodate our workers.

Our revenue, profitability, and future growth rate depend substantially on factors beyond our control, including our success in the commencement of mining operations, as well as economic, political, and regulatory developments and fluctuations in the market prices of minerals processed from raw material or minerals derived from our mining operations.

Results of Operations

Three months ended March 31, 2014 and 2013

We are in the exploration stage and generated revenues of $10,440 and $0 in the three months ended March 31, 2014 and 2013, respectively. Our revenues in the three months ended March 31, 2014 are not representative of our revenues in the future. Our primary operations during the period consisted of processing ore for third party miners. We have ceased processing our own tailings until we complete our metallurgical lab and leaching facility. In 2011, we completed a temporary smelter on our mill site and began shipping dore bars in limited quantities to a refiner on a regular basis. We expect to report increased revenues from our milling operation when our metallurgical lab and our leaching facility are completed. The leaching facility will increase the percentage of valuable minerals that are extracted from the raw materials, and the completion of the metallurgical lab will increase the rate at which we can complete dore bars for shipment to refiners. Until the metallurgical lab and leaching facility are completed, our revenues may not differ materially from what we have generated to date in 2014.

We reported losses from operations during the three months ended March 31, 2014 and 2013 of ($1,090,564) and ($1,665,824), respectively. The decreased loss in 2014 as compared to 2013 was attributable to the following factors:

Consulting fees decreased from $320,419 in 2013 to $273,500 in 2014 as a result of decreased use of consultants in 2014. The material components of expenses charged to consulting services in both years were as follows:

                 Type of Services                 2014              2013

      Shareholder relations services                 6,000            25,611
      Locating and due diligence services on
      future acquisition opportunities             281,065           292,633

Compensation expense related to Mill administrative decreased from $119,446 in 2013 to $4,584 in 2014 as a result of a reduction of payroll during the period.

Depreciation expense decreased from $105,000 in 2013 to $91,174 in 2014 as a result of an adjustment of depreciation in the first quarter of 2013.

Exploration and improvement costs decreased from $69,352 in 2013 to $17,655 in 2014 as a result of decreased work on the Sinker Tunnel.

Lease payment fees decreased from $250,000 in 2013 to $0 in 2014 as a result of the lease deferral effective January 1, 2014.

Stock compensation expense declined from $428,129 in 2013 to $357,032 in 2014.

Mill operating expenses decreased from $137,127 in 2013 to $45,765 in 2014 due to a significant reduction in milling activity.

General and administrative expenses increased to $311,294 in 2014 as compared to $236,351 in 2013 as a result of the write-off of prepaid rent of $194,250 on the terminated lease offset by decreased expenses related to the mill general and administrative expenses.

We reported net losses during the three months ended March 31, 2014 and 2013 of ($1,377,324) and ($2,028,153), respectively. The decreased loss in 2014 as compared to 2013 was largely attributable to lower interest expense in 2014 of $36,941, as compared to $271,058 in 2013, and by a decrease in the loss from operations, offset by an increase in debt conversion expense from ($91,271) in 2013 as compared to ($249,819) in 2014.

Liquidity and Sources of Capital

The following table sets forth the major sources and uses of cash for the three
months ended March 31, 2014 and 2013:

                                             Three months ended March 31,
                                            2014                    2013
  Net cash provided by (used) in
  operating activities                    $   (20,137)             $   (226,506)
  Net cash provided by (used) in
  investing activities                               -                  (42,376)
  Net cash provided by (used) in
  financing activities                          20,339                   265,741
  Net (decrease) increase in
  unrestricted cash and cash
  equivalents                              $       202              $    (3,141)

Comparison of 2014 and 2013

In the three months ended March 31, 2014 and 2013, we financed our operations primarily through the issuance of convertible notes and the issuance of common stock for services.

Operating activities used ($20,137) of cash in 2014, as compared to ($226,506) of cash in 2013. Major non-cash items that affected our cash flow from operations in 2014 were non-cash charges of $116,545 for depreciation and amortization, non-cash debt conversion costs of $249,819, $287,064 for the value of common stock issued for services, and $357,032 for the value of common stock issued for compensation. Other non-cash items include changes in operating assets and liabilities of $346,345, most of which resulted from an decrease in prepaid expenses of $194,250, a decrease in payroll liabilities of ($4,611), an increase in due from related parties of $134,901 and accrued interest of $6,459.

Major non-cash items that affected our cash flow from operations in 2013 were non-cash charges of $193,813 for depreciation and amortization, non-cash debt conversion costs of $91,271, $367,111 for the value of common stock issued for services and $1,100,061 for the value of common stock issued for compensation.
Other non-cash items include changes in operating assets and liabilities of ($252,306), most of which resulted from a decrease in prepaid expenses of

($640,849), an increase in due from related party of $119,468 and an increase in accrued payroll of $46,718, offset by a reduction of ($8,496) of accounts payable and accrued expenses.

Investing activities used ($42,376) of cash in 2013, as compared to $0 of cash in 2014. The decrease in cash used in investing activities was attributable to lower expenditures for equipment and improvements to our mill property.

Financing activities supplied $265,741 of cash in 2013 as compared to $20,339 of cash in 2014. Substantially all of the cash supplied in both years derived from the issuance of notes, net of sums spent to repay notes. In 2013, we issued $301,741 in notes, as compared to 2014 when we issued $20,339 of notes.

Liquidity

Our balance sheet as of March 31, 2014 reflects current assets of $2,541,596, current liabilities of $3,245,159, and working capital deficit of ($703,563).

We will need substantial capital over the next year. We project that we will need about $1,900,000 of working capital pending the building of a leaching unit, about $2,000,000 to build a leaching unit to improve the yields from our tailings, and about $10,000,000 to complete the exploration phase. In addition, we financed a lot of prior activities by the issuance of convertible notes that mature two years after their issuance. Finally, we are in default to substantially all of our vendors. As a result, the Internal Revenue Service and the State of Idaho have filed tax liens for over $300,000, and various creditors have obtained judgments against us for over $700,000.

As of March 31, 2014, we had the following debts that have matured or mature in the near future:

$864,949 in two year notes payable, of which $544,932 is due within one year of March 31, 2014. As of May 14, 2014, we had failed to pay all interest owed on the notes, and we are in default thereunder. We do not face any legal action from any of the note holders at this time, and we do not have any formal agreement to waive our default thereunder. We have been in contact with all of our noteholders, and informed them of the status of financing and our ability to pay their notes. To date, none of the noteholders have filed a lawsuit against the Company. We have offered the noteholders the option of converting their notes into common stock at the current market price, instead of the conversion price stated in the notes, and a number of noteholders have accepted the offer.
The remaining noteholders have elected to hold their notes and allow us time to raise the financing we need to complete our facilities and repay their notes.

$53,328 owed to Iliad Research & Trading, LP. As of May 14, 2014, we were not in default to Iliad;

$848,286 owed to JMJ. We settled litigation with JMJ on December 13, 2013.
Under our settlement, we were supposed to begin paying off the balance through fourteen equal monthly payments starting on April 14, 2014. We did not make the first two payments. Instead, JMJ and we have orally agreed that JMJ may convert and sell up to $3,500 of shares per day until the debt is paid.

Also, beginning January 1, 2012, we began to make monthly payments of $83,333 to GoldLand under our lease of its mining interests on War Eagle Mountain. We pay the monthly liability to Goldland by issuing shares of our Class A Common Stock to GoldLand employees for compensation on behalf of GoldLand, and applying the value of the shares against our liability to GoldLand. In the quarter ending March 31, 2014, we reached an agreement with Goldland to defer lease payments for two years commencing on January 1, 2014.

The amount of capital that we currently have the capacity to raise is not sufficient to pay all of the capital expenses that we need to pay to commence operations, and pay our other liabilities as they come due. However, we have a number of options that we believe will enable us to continue with our business plan despite insufficient capital. For example, we plan to continue paying most of the salaries of our management by issuing shares of Class A Common Stock. We also plan to continue paying certain accounts payable with common stock, and have reached an agreement with Goldland to defer monthly lease payments to GoldLand for two years. In the event we are able to raise some, but not all, of the capital that we need, we plan to request that note holders extend the maturity of their notes or convert their notes into shares of common stock.

As of March 31, 2014, we are obligated to issue approximately 1,228,973,500 shares of Class A Common Stock upon conversion of outstanding notes. Our contingent obligation to issue new shares of Class A Common Stock, combined with our plans to issue shares of Class A Common Stock to satisfy certain recurring liabilities, may impair our ability to raise capital by issuing shares of Class A Common Stock or securities convertible into Class A Common Stock, because future investors may be worried about future dilution.

Notwithstanding the fact that we are able to satisfy many of our liabilities by the issuance of shares, there are still many liabilities and capital expenditures that we cannot satisfy through the issuance of shares, including most of the construction cost to complete our metallurgical lab and leaching facility. We are actively seeking investment banking professionals to assist us in raising capital as well as advice on how we can be restructured to make the company sufficiently attractive to induce new investors to provide the capital we need. In the event we are not able to raise new cash capital, we will not be able to complete our business plan, and may be forced to consider a sale of the entire company.

Going Concern

Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, we incurred a net operating loss in the three months ended March 31, 2014, and have minimal revenues at this time. These factors create an uncertainty about our ability to continue as a going concern. We are currently trying to raise capital through a private offering of convertible notes and to solicit existing convertible note holders to convert their notes into common stock. Our ability to continue as a going concern is dependent on the success of this plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Estimates

Our significant accounting policies are described in Note 2 of Notes to Financial Statements. At this time, we are not required to make any material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. However, as we begin actual mining operations, we will be required to make estimates and assumptions typical of other companies in the mining business.

For example, we will be required to make critical accounting estimates related to future metals prices, obligations for environmental, reclamation, and closure matters, mineral reserves, and accounting for business combinations. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future.

Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

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