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MX Gold Corp. — Management Reports 2020
Apr 22, 2020
46454_rns_2020-04-22_d6a73570-6ea7-4ea5-8876-6c9745bc1be3.pdf
Management Reports
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MX GOLD CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2019
General
This management’s discussion and analysis (this “MD&A”) is prepared as of April 16, 2020 and provides a review of the performance of MX Gold Corp. (the “Company” or “MX Gold”). The MD&A should be read in conjunction with the Company’s audited consolidated financial statements and notes for the fiscal year ended December 31, 2019 and 2018 (the “Financial Statements”). All monetary amounts, unless otherwise indicated, are expressed in Canadian dollars. Additional information relating to the Company can be found on the SEDAR website at www.sedar.com.
The Company’s head office and principal address is MX Gold Corp., dba/ Winnipeg MX Gold, 1300 Redonda Street, Winnipeg, MB, R2C 3T7.
The MD&A was approval by the board of directors of the Company (the “Board”) on April 16, 2020.
The Financial Statements and related notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Financial Statements follow the same accounting policies and methods of application as the most recent financial statements of the Company, except as may be noted herein.
Management is responsible for the preparation and integrity of the Financial Statements, including the maintenance of appropriate information systems, procedures and internal controls. Management is also responsible for ensuring that information disclosed externally, including the Financial Statements and the related MD&A, is complete and reliable.
Forward-Looking Statements
This MD&A contains "forward-looking information"; as such term is defined in applicable Canadian securities legislation. Forward-looking information is necessarily based on a number of estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies. All statements other than statements which are reporting results as well as statements of historical fact set forth or incorporated herein by reference, are forward looking information that may involve a number of known and unknown risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or predict. Forward-looking information can be identified by the use of words such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “intends”, “continue”, or the negative of such terms, or other comparable terminology.
This information includes, but is not limited to, statements regarding:
-
the Company’s recent transition from a mineral exploration company;
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the Company’s business strategy;
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the Company’s future expenses;
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the risks related to the Company’s holdings of certain marketable securities; and
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the Company’s ability to obtain financing to fund future expenditures and capital requirements on favorable terms or at all.
Many factors could cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. By their nature, forward-looking statements involve numerous assumptions, and known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the
predictions, forecasts, projections and other forward-looking information will not be realized. See “ Risks Factors ” for more information.
Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that any forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated. The reader is cautioned not to place undue reliance on any forward-looking statements contained in this MD&A. Such forward-looking statements are presented for the purpose of assisting investors in understanding the Company’s expected financial and operating performance and the Company’s plans and objectives in making an investment decision and may not be appropriate for other purposes. All forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events, except as required by applicable laws.
Company
The Company was incorporated on October 13, 1999 under the laws of British Columbia. The Company has registered its operations in the Province of Manitoba under the operating name Winnipeg MX Gold. The head office and principal address of the Company is located at 1300 Redonda Street, Winnipeg, MB, R2C 3T7.
The Company’s common shares were approved for listing on the TSX Venture Exchange (the “Exchange”) and commenced trading on October 30, 2009. Effective at Friday, October 25, 2019, the listing of the Company’s common shares was transferred to NEX Board of the Exchange (“NEX”) and its Tier classification was changed from Tier 2 to NEX.
The Company was primarily focused on junior natural resource exploration and mining however, during the fourth quarter of the year ended December 31, 2017, the Company began discussing a change in direction for the Company from mining to cryptocurrency. The Board approved the purchase of cryptomining equipment in October 2017 and executed the purchase of Bitcoin mining machines in December 2017. During this time, the Company began to explore opportunities to divest its entire mining portfolio in order to focus on the cryptocurrency line of business.
During the year ended December 31, 2018, the Company’s main emphasis was on internally developing its pilot cryptocurrency mining operations. MX Gold then focused on providing investors with exposure to Bitcoin via digital asset mining units to generate a portfolio of cryptocurrency.
Overview
On January 10, 2018, the British Columbia Securities Commission (“BCSC”) issued a Cease Trade Order against the Company (the “CTO”) as a result of the Company not filing technical reports under National Instrument 43101 - Standards of Disclosure for Mineral Projects to support first time disclosure of the results of a preliminary economic assessment on its Max Molybdenum property (the “MAX Property”) and to support first time disclosure of mineral reserves on its Magistral property. As a result of the CTO, the Exchange suspended the Company’s common shares from trading on the Exchange on January 11, 2018.
On May 11, 2018, the Company announced that it had entered into a definitive agreement dated May 9, 2018 (the “Magistral Agreement”) whereby, subject to the closing thereof, the Company had agreed to sell its 50% beneficial interest in the Mexican Magistral Project (the “Magistral Project”) for a purchase price of US$4.5 million. The Magistral Agreement was in addition to four other agreements entered into as announced by the Company on April 9, 2018, namely the Reimbursement Agreement related to the Magistral Agreement, the FortyTwo Metals Share Purchase Agreement, the Midas Property Purchase and Sale Agreement, and the Willa Property Purchase, Sale and Assignment Agreement. These five agreements collectively proposed to sell the Company’s entire mining portfolio in an arm’s length transaction to a private company for the aggregate purchase price of approximately $14,952,000.
On July 10, 2018, the Company announced that Magistral Agreement dated May 9, 2018 had been terminated as the buyer was unable to fund the purchase price prior to the deadline stipulated in the definitive agreement. In connection with the termination of the Magistral Agreement, the Company also announced the expiration of the Reimbursement Agreement dated April 5, 2018, the FortyTwo Metals Share Purchase Agreement dated April 5, 2018, the Midas Property Purchase and Sale Agreement dated April 5, 2018, and the Willa Property Purchase, Sale and Assignment Agreement dated April 5, 2018, as each of these agreements were subject to the closing of the Magistral Agreement. Accordingly, each agreement expired according to its respective terms with no further obligations on either party.
On August 24, 2018, the Company announced that it had closed the sale to an arm’s length purchaser 12 mineral claims that comprise the Midas Property (the “Claims”) in British Columbia for cash consideration of $40,000 and the purchaser’s assumption of a net smelter royalty on the Claims. The Company agreed to the sale terms due to the fact that the Claims were to expire shortly after the date of the agreement.
On September 11, 2018, the Company received a complaint dated September 9, 2018 that was filed in the United States District Court for the District of Nevada (the “Complaint”) naming GracePoint Mining Corp., a Nevada corporation (“GracePoint”), as plaintiff, and the Company as one of the defendants. The Complaint alleged breach
of contract and breach of the implied covenant of good faith and fair dealing and sought, among other things, general damages of US$12 million. The Complaint related to an Initial Purchase Agreement dated October 21, 2016, as amended, among the Company, Gracepoint, American Metal Mining, S.A. de C.V., a Mexican corporation (“AMM”), and Proyecto Magistral, S. de R.L. de C.V., a Mexican corporation (“Projecto Magistral”), whereby the Company agreed to pay US$2.5M to purchase a 50% participating ownership interest and a 45% net profit participating interest under a joint venture with respect to the Magistral Project located in Santa Maria Del Oro, Mexico. Both AMM and Projecto Magistral are affiliates of Gracepoint with Projecto Magistral the registered owner of the Magistral Project. The Company encountered cost overruns and financing difficulties with respect to the Magistral Project. These issues combined with the CTO and receipt of the Complaint resulted in the Company’s decision to enter into a mutual release dated November 24, 2018 among the Company, Gracepoint, AMM and Proyecto Magistral. In addition to a mutual release of all claims, the Company agreed to relinquish its interest in the Magistral Project. The related assets previously classified as held for sale at December 31, 2017 were written-off to $Nil at December 31, 2018.
On September 28, 2018, the Company announced that it had entered into a binding letter of intent dated September 21, 2018 (the “LOI”) with an arm’s length private British Columbia corporation (the “Purchaser”). Under the terms of the LOI, the Company agreed to grant the Purchaser an exclusive 90 day period to finalize and enter into a definite agreement, whereby the Company agrees to sell all the shares in the capital of FortyTwo Metals Inc. (“FortyTwo Metals”), and a 100% interest in the Willa Property consisting of 5,662 hectares located in the Slocan Mining Division, British Columbia, subject to a net smelter return (the “Willa Property”).
In March 2019, the sale of FortyTwo Metals and the Willa Property closed. The net assets related to the subsidiary previously classified as held for sale at December 31, 2017 and sold in March 2019 were written-down to the estimated recoverable amount of $788,000 (including $150,000 in cash and $650,000 in estimated fair value of 5,000,000 common shares of the Purchaser less estimated costs to sell of $12,000), and the Willa Property was written-down to $Nil at December 31, 2018. The $788,000 is the recoverable amount of the net of the $3,491,651 of assets held for sale and the $2,494,965 liabilities held for sale which relates to this asset grouping.
The Company no longer holds any mineral or mining properties with the exception of a 50% net profit interest (the “NPI”) granted to the Company as part of the sale of FortyTwo Metals to the Purchaser, which NPI relates solely to the Max Property and is payable on gross cash income from the MAX Property to the Company (less all expenses incurred to produce such income which is payable only once the Purchaser has recouped from net profits its capital investment in the MAX Property and all pre-production costs).
On October 23, 2019, the Company filed an application with the BCSC for a full revocation of the CTO. Effective on Friday, October 25, 2019, the listing of the Company’s common shares was transferred to the NEX and its Tier classification will change from Tier 2 to NEX.
Subsequent Events
On January 9, 2020, 20,800,000 share purchase warrants exercisable at $0.20 expired unexercised.
On January 20, 2020, the CTO was revoked by the BCSC. As a condition for the receipt of the revocation order, the Company provided the BCSC with an undertaking to hold its annual shareholders’ meeting within three months of the issuance of the revocation order.
On March 12, 2020, the Exchange issued a bulletin announcing the reinstatement of trading of the Company’s common shares on the NEX at market open on Monday, March 16, 2020.
Outlook
In order to position itself for future opportunities, the Company’s priority during the year ended December 31, 2019 was to remove the CTO. The Company was successful in its resource property divestiture which was the primary reason for the CTO. The Company’s future opportunities are dependent on the capital markets and debt as its source of operating capital and the Company’s capital resources are largely determined by its ability to compete for investor support of its projects.
Selected Annual Financial Information
The following is selected financial information about the Company, for its 2019, 2018, and 2017 fiscal years:
| Years ended December 31, | Years ended December 31, | 2019 | 2018 | 2017 |
|---|---|---|---|---|
| $ | $ |
$ |
||
| Revenue | Nil$ | 321,305 | Nil$ | |
| Loss from continuing operations | 1,062,451 | 1,758,831 | 10,428,367 | |
| Net Loss | 1,070,561 | 16,153,944 | 11,428,581 | |
| Total assets | 101,110 | 3,846,360 | 19,237,191 | |
| Total long-term |
financial | Nil$ | (56,246) | (144,074) |
| liabilities | ||||
| Distribution or Dividends | Nil$ | Nil$ | Nil$ | |
| Loss per share | (0.00) | (0.06) | (0.05) |
The variations are driven by the Company’s decision to change its direction away from exploration and natural resource mining. During 2018 and 2019, the Company, with the exception of the NPI, divested all of its mineral or mining properties which resulted in losses on assets held for sale of $13,827,648 in 2018 and $7,047,109 in 2017.
The Company completed its final property divestiture in early 2019 upon closing the sale of the Willa Property and shares of FortyTwo Metals. Thereafter expenses were mainly limited to general administrative items and revaluation of marketable securities held.
Shares in Cameo Industries Corp. were received, in 2019, as part of the consideration on the disposal of the Willa Property and shares of FortyTwo Metals. These shares have significantly devalued since receipt which has resulted in the Company losing a large portion of its asset base on the revaluation of the shares to fair market value.
The Company extinguished its lease obligations upon the disposal of the related equipment. No non-current financial liabilities are held at the 2019-year end.
Selected Quarterly Financial Information
The selected financial information provided below is derived from the Company’s unaudited quarterly financial statements for each of the last eight quarters:
| Q4- | Q3- | Q2- | Q1- | Q4- | Q3- | Q2- | Q1- | |
|---|---|---|---|---|---|---|---|---|
| 2019 | 2019 | 2019 | 2019 | 2018 | 2018 | 2018 | 2018 | |
| Revenue | - | - | - | - | (16,911) | 60,266 | 116,286 | 161,664 |
| Net Loss | 236,050 | 325,527 | 401,911 | 107,073 | 2,897,137 | 10,502,019 | 2,122,503 | 632,285 |
| Loss per share | (0.00) | (0.00) | (0.00) | (0.00) | (0.01) | (0.04) | (0.01) | (0.01) |
Given the Company’s shift away from mineral exploration and mining, the historic patterns of expenditures cannot be used as an indication of future expenditures.
An aggregate loss on assets held for sale of $13,715,167 from Q2-Q4 in 2018 was recorded to adjust the balance on the Company’s mineral properties and various assets to their respected net realizable value. With the related assets disposed of by Q1 2019, the Company’s ongoing expenditures have declined significantly.
Until the Company has identified its future opportunities, expenditures are expected to remain low or decline further. The Company’s future expenses are expected to be related to ongoing compliance and administration.
Results of Operations
Revenue
During the three months and year ended December 31, 2019, the Company did not undertake any revenue generating activities.
The Company’s revenue for the three months ended December 31, 2019 and 2018 is summarized in the table below:
| Three Months ended December 31, | 2019 | 2018 | Change | % Change |
|---|---|---|---|---|
| Revenue | - | (16,911) | N/A | N/A |
| The Company’s revenue for the years ended December 31, 2019 and 2018 is summarized in the | table below: | |||
| Year ended December 31, | 2019 | 2018 | Change | % Change |
| Revenue | - | 321,305 | (321,305) | (100%) |
The Company generated revenue in 2018 (Q1-Q3) from its pilot cryptocurrency operations, specifically through mining Bitcoins. The Company has not mined any Bitcoin subsequent to Q3 2018, as it was not viable with the Company’s equipment which became obsolete.
The Company’s focus in 2019 was the removal of the CTO, which will allow the Company to evaluate future opportunities.
General and Administrative Expenses
The changes in general and administrative expenses by category for the three months ended December 31, 2019 and 2018 are reflected in the following table:
| Three Months ended December 31, | 2019 | 2018 | Change | % Change |
|---|---|---|---|---|
| Professional, management and consulting fees | 30,117 | 66,093 | (35,976) | -54.4% |
| Insurance, office, and other miscellaneous | 164,083 | 54,113 | 109,970 | 203.2% |
| Depreciation | 1,107 | 100,279 | (99,172) | -98.9% |
| Salaries and benefits | - | (14,590) | 14,590 | N/A |
| Finance costs | 1,631 | 8,863 | (7,232) | -81.6% |
| Investor relations and public company costs | 11,888 | (47,126) | 59,014 | N/A |
| Lease expense | - | (1,990) | 1,990 | N/A |
| Generaland administrative expenses | 208,826 | 165,642 | 43,184 | 26.1% |
The increase in miscellaneous expenses is related to two adjustments (i) the Company’s increased estimate of the liability associated with the flow through share issue of $120,264 and (ii) the Company’s estimate of potential ITCs to be declined on its 2018 GST return of $25,000 due to the Company’s activity in the cryptocurrency space and the uncertainty surrounding how the Canada Revenue Agency plan’s to assess these businesses.
Depreciation expenses have significantly declined as the Company has fully amortized, impaired, or disposed of all of its capital assets at December 31, 2019.
The changes in general and administrative expenses by category for the year ended December 31, 2019 and 2018 are reflected in the following table:
| Year ended December 31, | 2019 | 2018 | Change | % Change |
|---|---|---|---|---|
| $ | $ | $ | % | |
| Professional, management and consulting fees | 276,167 | 601,267 | (325,100) | -54.1% |
| Insurance, office, and other miscellaneous | 209,225 | 481,871 | (272,646) | -56.6% |
| Depreciation | 9,298 | 259,678 | (250,380) | -96.4% |
| Salaries and benefits | - | 60,238 | (60,238) | -100% |
| Finance costs | 7,616 | 9,924 | (2,308) | -23.3% |
| Investor relations and public company costs | 21,035 | 54,332 | (33,297) | -61.3% |
| Lease expense | - | 11,368 | (11,368) | -100% |
| Share-based payments | - | 5,939 | (5,939) | -100% |
| Generaland administrative expenses | 523,341 | 1,484,617 | (961,276) | -64.8% |
The major general and administrative expenses during the year ended December 31, 2019 were incurred for the following:
Professional, management and consulting fees of $276,167 (2018: $601,267), of which $115,000 was paid or accrued for audit and related services fees, $41,167 for legal services, and $120,000 was accrued to the Company’s CEO for management and consulting services rendered. The decrease in professional, management and consulting fees from December 31, 2018 is attributed to the divestiture of the Company’s resource properties resulting in less ongoing expenditures.
The Company incurred $209,225 (2018: $481,871) for insurance, office rent and miscellaneous expenses. The expense is primarily associated with directors and officer’s liability insurance $45,270, office rent of $12,000, and adjustments for estimated liabilities associated with the flow through share issue $120,265 and 2018 GST ITCs of $25,000.
Depreciation expenses have significantly declined as the Company has fully amortized, impaired, or disposed of
all of its capital assets at December 31, 2019.
The Company had no employees throughout the year ended December 31, 2019 and activities have been limited to compliance and administration.
Other Items
The changes in other income (expense) items by category for the three months ended December 31, 2019 and 2018 are reflected in the following table:
| Three Months ended December 31, | 2019 | 2018 | Change |
|---|---|---|---|
| $ | $ | $ | |
| Loss on sale of digital assets | - | - | - |
| Impairment of property and equipment | - | (596,628) | 109,970 |
| Gain (loss) from disposal of equipment | - | (1,243) | (99,172) |
| Other expenses | - | (408) | 14,590 |
| Loss on sale of marketable securities | - | - | (7,232) |
| Revaluation loss on marketable securities | (39,000) | - | 59,014 |
| 24,148 | (2,455,850) | 43,184 |
The three months ended December 31, 2018 included impairment of mining and cryptocurrency equipment to its net realizable value. Also, the mining and resource assets were written down to the recoverable amount they were sold for in Q1 2019.
Activity in the three months ended December 31, 2019 was driven by the fair value revaluation of the marketable securities which the Company holds.
| Year ended December 31, | 2019 | 2018 | Change |
|---|---|---|---|
| $ | $ | $ | |
| Loss on sale of digital assets | - | (22,567) | - |
| Impairment of property and equipment | - | (596,628) | 109,970 |
| Gain (loss) from disposal of equipment | 5,640 | (2,916) | (99,172) |
| Other expenses | - | (408) | 14,590 |
| Loss on sale of marketable securities | (86,110) | - | (7,232) |
| Revaluation loss on marketable securities | (458,640) | - | 59,014 |
| (539,110) | (622,519) | 43,184 |
During the year ended December 31, 2019, the Company’s major other items included adjustments related to the Loss and Revaluation loss on marketable securities the Company holds in the Purchaser of the Willa Property and FortyTwo Metals shares. Throughout the year the market value of the securities declined significantly.
Net Loss and Comprehensive Loss
The loss and comprehensive losses for the three months and year ended December 31, 2019 and 2018 are reflected in the following tables:
| Three Months ended December 31, | 2019 | 2018 | Change |
|---|---|---|---|
| Loss and comprehensive loss | (236,050) | (2,897,137) | 2,661,087 |
| Basic and dilutedloss pershare | (0.00) | (0.01) | 0.01 |
| Year ended December 31, | 2019 | 2018 | Change |
| Loss and comprehensive loss | (1,070,561) | (16,153,944) | 15,083,383 |
| Basic and dilutedloss pershare | (0.00) | (0.06) | 0.06 |
Discontinued Operations
The company classified expenses related to resource and exploration mining as discontinued operations for the years ended December 31, 2019, 2018 and 2017.
The changes in discontinued operations by category for the year ended December 31, 2019 and 2018 are reflected in the following table:
| Year ended December 31, | 2019 | 2018 | Change |
|---|---|---|---|
| $ | $ | $ | |
| Depreciation of property plant and equipment | 37,929 | 64,779 | (26,850) |
| Insurance, office and miscellaneous | 13,076 | 15,023 | (1,947) |
| Professional, consulting fees and investor relations | - | 10,964 | (10,964) |
| Lease expenses | 4,100 | 8,975 | (4,875) |
| Finance costs | - | 433,005 | (433,055) |
| (Gain) loss on assets held for sale | (46,995) | 13,827,648 | (13,874,643) |
| Interest ontax liabilities | - | 7,719 | (7,719) |
| 8,110 | 14,368,113 | (14,360,003) |
During the year ended December 31, 2018, the Company recorded a loss on assets held for sale of $13,827,648 related to the following projects:
-
(a) Investment in Mexican Projects - $10,071,856
-
(b) Midas Property - $1,543,792
-
(c) Willa Property and FortyTwo Metals - $2,212,000
The above properties have been disposed.
Expenses related to discontinued operations are significantly lower in 2019 as the remaining mineral and resource properties were disposed of in Q1 2019 and all equipment was disposed of by the end of Q3 2019.
As a result, the Company does not expect further expenses related to its prior mineral and resource business.
Liquidity, Capital Resources, and Going Concern
The Company has historically financed its operations primarily from proceeds for the sale of shares.
As at December 31, 2019, the Company had a working capital deficit of $1,335,338 (December 31, 2018: $420,118). The Company does not have any commitments for material capital expenditures however, the ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of the actions taken or planned, of which some are described above in the Company Overview and Outlook.
The Company requires funds for future opportunities, as well as to meet its current obligations. The revocation of the CTO on January 28, 2020 and reinstatement of trading effective Monday, March 16, 2020 allows the Company to begin exploring equity financing activities. There can be no assurance that financing, whether debt or equity, will be available to the Company in the amount required at any particular time or if available, that it can be obtained on terms satisfactory to the Company. Given this, there is a material uncertainty that may cast doubt upon the Company’s ability to continue as a going concern. The Company’s Financial Statements have been prepared on a going concern basis however, in the event the use of the going concern is not appropriate, material adjustments could be required.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements.
Related Party Transactions
During the year ended December 31, 2019, Trappers Transport Ltd. which is controlled by the Company’s CEO, charged the following amounts to the Company for supplies and office rent.
| December | December 31, | |
|---|---|---|
| 31, | ||
| 2019 | 2018 | |
| $ | $ | |
| Fuel costs | 5,879 | 5,722 |
| Supplies | 46 | 9,908 |
| Equipment and equipment repairs | - | 4,419 |
| Equipment, office, and premises rent | 12,000 | 339,369 |
| 17,925 | 359,418 |
During the year ended December 31, 2019, the Company disposed of assets with a carrying value of $373,045 for proceeds of $407,500 to companies which are controlled by the Company’s CEO.
These transactions are in the normal course of operations and have been measured in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Due to related parties
| December 31, | December 31, | |
|---|---|---|
| 2019 | 2018 | |
| $ | $ | |
| Due to the Company’s directors and officers | - | 31,932 |
| Due to companies controlled by an officer | 370,664 | 606,487 |
| 370,664 | 638,419 |
Key management compensation
Key management includes directors (executive and non-executive) senior officers and financial consultants of the Company.
| December 31, | December 31, | |
|---|---|---|
| 2019 | 2018 | |
| $ | $ | |
| Salaries and benefits | - | 60,000 |
| Managementfees | 120,000 | 268,273 |
| 120,000 | 328,273 |
The management fees are accrued to the Company’s CEO pursuant to the management agreement dated the 9[th] of July 2015. These transactions are in the normal course of operations and have been measured in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
New Accounting Standards
IFRS 16 Leases (“IFRS 16”)
On January 1, 2019, the Company adopted the requirements of IFRS 16, Leases. On January 13, 2016, the IASB published a new standard, IFRS 16, Leases. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Under the new standard, a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly. The liability accrues interest. This will typically produce a frontloaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses). The standard is effective for annual periods beginning on or after January 1, 2019. There was no impact to the financial statements upon adopting IFRS 16 as upon adoption of leases were already classified and accounted for as finance leases.
Significant Accounting Policies
The preparation of financial statements in accordance with IFRS requires the Company to select accounting principles and to make estimates and assumptions that determine the reported amounts of assets and liabilities, and reported costs and expenditures during the reporting period. Management believes that the estimates and assumptions which the Company uses are reasonable based upon information available at the time these estimates and assumptions are made. Estimates and assumptions may be revised as new information is acquired and are subject to change.
In addition to the going concern assumption described within Liquidity, Capital Resources, and Going Concern, management believes that its most significant accounting policies and estimates relate to the following areas. For a comprehensive list of accounting policies, refer to Note 3 Significant Accounting Policies in the December 31, 2019 financial statements.
Marketable Securities
The Company has classified all of its marketable securities as fair value through profit or loss therefore, securities are recorded at fair market value and any associated unrealized gain or loss, are included in the net loss in the year in which they arrive.
Assets held for sale
Non-current assets and disposal groups are classified as assets held for sale if it is highly probably that the value of these assets will be recovered primarily through the sale rather than through continuing use. They are recorded at the lower of the carrying amount and the fair value less costs to sell. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the income statement.
Once classified as held for sale, property, plant, and equipment are no longer amortized. The assets and liabilities are presented as held for sale in the balance sheet when the sale is highly probably, the asset or disposal group is available for immediate sale in its present condition and management is committed to the sale, which should be expected to be completed within one year from the date of classification.
Provisions
Provisions for legal or construction obligations are recognized when the Company has a present legal or constructive obligation that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
Financial Instruments and Risk Management
The Company classifies its fair value measurements in accordance with the three level fair value hierarchies as follows:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Company’s financial instruments include cash and cash equivalents, restricted cash, marketable securities, reclamation bonds, accounts payable, and due to related parties. The carrying amounts of cash and cash equivalents, restricted cash, marketable securities, reclamation bonds, accounts payable, and due to related parties approximate their fair values because of the short-term nature of these instruments.
The following table summarizes the carrying values of the Company’s financial instruments:
| December 31, | December 31, | |||
|---|---|---|---|---|
| 2019 | 2018 | |||
| $ | $ | |||
| Financial | assets at FVTPL(i) | 51,126 | 10,437 | |
| Other financial liabilities(ii) | 979,215 | 994,800 | ||
| (i) (ii) |
Cash and cash equivalents, restricted cash, and marketable securities. Accounts payable and accrued liabilities, and due to related parties. |
The Company has classified the above noted financial instruments as Level 1.
The risks associated with financial instruments and the policies on how the Company mitigates these risks are discussed below. The following should be read in conjunction with Note 17 of the December 31, 2019 financial statements:
Credit risk
Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. The Company’s cash and cash equivalents, restricted cash and reclamation bonds are subject to credit risk for a maximum of the amounts shown on the statements of financial position. The Company limits its exposure to credit risk on cash and cash equivalents and reclamation bonds by depositing only with reputable financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's objective to managing liquidity risk is to ensure that it has sufficient liquidity available to meet its liabilities when due. The Company uses cash to settle its financial obligations as they fall due. The ability to do this relies on the Company maintaining sufficient cash on hand through debt or equity financing.
As at December 31, 2019, the company does not have sufficient current assets ($101,110) to settle its current liabilities ($1,436,448). The Company requires funds to meet its current obligations and intends to explore equity financing options.
Shares, Options and Warrants
The Company’s issued and outstanding shares, options, and warrants is as follows:
| April 16, 2020 | December 31, 2019 | December 31, 2018 | |
|---|---|---|---|
| Common shares issued and outstanding Options outstanding(i) Warrants outstanding(ii) |
285,447,252 5,000,000 126,124,001 |
285,447,252 5,000,000 146,924,001 |
285,447,252 5,000,000 164,151,434 |
~~(i)~~ 5,000,000 stock options each which entitles the holder thereof to acquire one common share at an exercise price of $0.13 per share.
(ii) 126,124,001 warrants each of which entitles the holder thereof to acquire one common share at an exercise price ranging from $0.15 - $0.20 per warrant.
A detailed summary of the Company’s share capital can be found in Note 14 of the accompanying audited financial statements.
Private placements
During the prior year, on January 3, 2018, the Company completed a private placement of 29,193,334 units at $0.075 per unit for $2,189,500. Each unit consists of one common share of the Company and one common share purchase warrant, entitling the holder to purchase one share at $0.15 for five years from the closing date. The common shares acquired by the subscribers are subject to a hold period of four months plus one day from the closing date. 8,893,334 units were issued to related parties to settle the amounts payable of $767,000. The Company used the proceeds for general working capital and its Magistral Project in Mexico.
During the year ended December 31, 2019, there were no private placements undertaken by the Company due to the CTO issued by the BCSC.
Risks Factors
There are inherent risks related to the business of the Company, some of which are beyond its control. Shareholders must rely on the ability, expertise, judgment, discretion, integrity and good faith of the management of the Company.
The following is a summary of risks and uncertainties that management believes to be material to the Company’s business and therefore the value of the common shares. It is possible that other risks and uncertainties that affect the business of the Company will arise or become material from time to time.
Insufficient Capital
The Company does not currently have any revenue producing operations and may, from time to time, report a working capital deficit. To maintain its activities, the Company will require additional funds which may be obtained either by the sale of equity capital or by entering into an option or joint venture agreement with a third party providing such funding. There is no assurance that the Company will be successful in obtaining such additional financing.
Lack of Operating Cash Flow
The Company currently has no source of operating cash flow and is expected to continue to do so for the foreseeable future. The Company’s failure to achieve profitability and positive operating cash flows could have a material adverse effect on its financial condition and results of operations. If the Company sustains losses over an extended period of time, it may be unable to continue its business. It may be several years before the Company may generate any revenues from operations, if at all. There can be no assurance that the Company will realize revenue or achieve profitability.
Additional Funding Requirements
The further development of the Company’s business and operations will require substantial additional capital. When such additional capital is required, the Company will need to pursue various financing transactions or arrangements, including debt financing, equity financing or other means. Additional financing may not be available when needed or, if available, the terms of such financing might not be favorable to the Company and might involve substantial dilution to existing shareholders. The Company may not be successful in locating suitable financing transactions in the time period required or at all. A failure to raise capital when needed would have a material adverse effect on the Company’s business, financial condition and results of operations.
Additionally, any future issuance of securities to raise required capital will likely be dilutive to existing shareholders. In addition, debt and other debt financing may involve a pledge of assets and may be senior to interests of equity holders. The Company may incur substantial costs in pursuing future capital requirements, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. The ability to obtain needed financing may be impaired by a number of factors outside the Company’s control.
Dilution
Shares, including rights, warrants, special warrants, subscription receipts and other securities to purchase, to convert into, or to exchange into common shares, may be created, issued, sold and delivered on such terms and conditions and at such times as the Board may determine. In addition, the Company may issue additional common shares from time to time pursuant to common shares purchase warrants and the options to purchase common shares issued from time to time by the Board. The issuance of these common shares could result in dilution to holders of common shares.
Volatility of the Common Shares
The share price of publicly traded smaller companies can be highly volatile. The value of the common shares may go down as well as up and, in particular, the share price may be subject to sudden and large falls in value given the restricted marketability of the common shares.
Reliance on Management
The Company is relying solely on the past business success of its directors and officers. The success of the Company is dependent upon the efforts and abilities of its directors, officers and employees. The loss of any of its directors, officers or employees could have a material adverse effect upon the business and prospects of the Company.
Current Market Volatility
The securities markets in the United States and Canada have recently experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual fluctuations in price will not occur. It may be anticipated that any market for the common shares will be subject to market trends generally, notwithstanding any potential success of the Company. The value of the common shares distributed hereunder will be affected by such volatility.
COVID-19 Coronavirus Outbreak
The current global uncertainty with respect to the spread of COVID-19, the rapidly evolving nature of the pandemic and local and international developments related thereto, including its effect on the broader global economy and capital markets, may have a negative effect on the Company and its operations. While the precise impact of the COVID-19 outbreak on the Company remains unknown, rapid spread of COVID-19 and declaration of the outbreak as a global pandemic has resulted in travel advisories and restrictions, certain restrictions on business operations, social distancing precautions and restrictions on group gatherings which are having both direct and indirect impacts on businesses in Canada and around the world and could result in certain disruptions to the business and operations of the Company as well as a diversion of management attention which, in turn, could have a material adverse effect on the Company generally. The spread of COVID-19 may also have a material adverse effect on global economic activity and could result in volatility and disruption to global supply chains and the financial and capital markets, which could affect the business, financial condition, results of operations and other factors relevant to the Company, including its ability to raise additional financing. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing the Company’s ability to access capital, which could in the future negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of the Company’s securities.