NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
NOTE 1
–
ORGANIZATION AND BASIS OF PRESENTATION
Organization, History and Business
MineralRite Corporation (“the Company”) was incorporated in Nevada on October 22, 1996 under its original name PSM Corp. The Company changed its emphasis to the exploration and development of natural resources and on November 23, 2005 changed its name to Royal Quantum Group, Inc. On October 18, 2012, the Company again changed its name from Royal Quantum Group, Inc. to MineralRite Corporation. On August 31, 2012, the Company declared a 50-for-1 reverse stock split of its common stock. All references in the accompanying financials to the number of shares outstanding and per-share amounts have been restated to reflect this stock split.
On March 1, 2013, the Company acquired 100% of the total shares outstanding of Goldfield International, Inc. (“Goldfield”) in exchange for issuing 2,000,000 shares of its common stock. The acquisition was based the fair value of the shares issued amounting to $900,000. The accompanying unaudited condensed financial statements include the accounts and balances of the Company and also of Goldfield since the date of its acquisition. Goldfield is in the business of manufacturing gold mining equipment.
On April 24, 2013, the Company entered into a joint venture agreement with CSI Export and Import (“CSI”) to mine copper ore on leased acreage in Chiapas, Mexico. For $100,000, the Company acquired a 50% in the joint venture which has a 25% participation interest in the production and sale of the indicated copper ore. The Company accounts for its investment in with CSI under the equity method pursuant to ASC Topic 323-30.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 2013, and the results of its operations and cash flows for the three and six months ended June 30, 2013 and 2012. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. However, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company
’
s Annual Report on Form 10-K for the year ended December 31 2012 filed with the Commission on April 16, 2013.
Going Concern
The Company
’
s unaudited consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and has a working capital deficit, which history and circumstance raise substantial doubt as to the Company
’
s ability to continue as a going concern. For the six months ended June 30, 2013, the Company had a net loss of $766,422 and accumulated deficit of $7,032,453. The Company has raised sufficient funds through the private sale of participating units to acquire working interests in nine oil and gas wells. Six of the wells are currently producing as of June 30, 2013. Total gross revenue generated from these six wells during the six months ended June 30, 2013 amounted to $85,885. In addition, the Company on March 1, 2013
7
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
acquired Goldfield International, Inc. which had net sales for the four months ended June 30, 2013 of $194,490 and gross profit during the four month period of $18,865. The net revenue generated from current operations in not sufficient to pay Company debts currently due or to fund future operations. The Company is seeking to raise additional funds; however, there is no assurance that the necessary funds will be raised or even if the funds are raised, that the funds received will be to sufficient to fund future operations until such time that the Company
’
s operations become profitable. Until such time as funding is obtained and/or positive results from operations materialize, doubt about the Company
’
s ability to continue as a going concern may remain.
NOTE 2
–
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain reclassifications have been made to conform the 2012 amounts to the 2013 classifications for comparative purposes.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MineralRite Corporation and its wholly-owned subsidiary, Goldfield International, Inc. (acquired on March 1, 2013. see Note 3) Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
Use of Estimates
The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are reported at the customer
’
s outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.
Allowance for Doubtful Accounts
An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. Management has determined that as of June 30, 2013, no allowances were required.
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
Revenue Recognition
Oil and gas production revenues are recognized at the point of sale. Sales and related costs are recognized on the completed contracts method at the time the product is shipped and title passes to the customer.
Oil and Gas Properties
The Company uses the full cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized until such time as the aggregate of such costs net of accumulated depletion and oil and natural gas related deferred income taxes, on a country-by-country basis, equals the sum of 1) the discounted present value (at 10%), using prices as of the end of each reporting period on a constant basis, of the Company
’
s estimated future net cash flows from estimated production of proved oil and natural gas reserves as determined by independent petroleum consultants, less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed unless subsequent market price changes eliminate or reduce the indicated write-down in accordance with U.S. SEC Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using the units-of-production method whereby capitalized costs, net of estimated salvage values, plus estimated future costs to develop proved reserves and satisfy asset retirement obligations, are amortized over the total estimated proved reserves on a country-by-country basis. Investments in major development projects are not depleted until either proved reserves are associated with the projects or impairment has been determined.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the five-year estimated useful life of the assets computed on the straight-line method.
Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred. Depreciation expense for the three months ended June 30, 2013, and 2012 amounted to $3,158 and $0, respectively, Depreciation expense for the six months ended June 30, 2013, and 2012 amounted to $4,776 and $0, respectively,
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the period and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders
’
deficit.
Convertible Debentures
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt using the effective interest method.
9
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
Derivative Financial Instruments
In the case of non-conventional convertible debt, the Company bifurcates its embedded derivative instruments and records them under the provisions of ASC Topic 815-15 “Embedded Derivatives.” The Company
’
s derivative financial instruments consist of embedded derivatives related to non-conventional convertible notes (see Note 7). The embedded derivative includes the conversion feature of the notes. The accounting treatment of derivative financial instruments requires that the Company record the derivatives at their fair values as of the inception date of the respective agreement and at fair value as of each subsequent balance sheet date. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.
Concentrations of Credit Risk
The Company
’
s revenue is dependent upon the successful efforts of the respective well
’
s operator. Currently production from the Company
’
s six wells is sold to one customer.
Loss per Share of Common Stock
The Company reports earnings (loss) per share in accordance with Accounting Standards Codification “ASC” Topic 260-10,
"
Earnings per Share
."
Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of June 30, 2013 that have been excluded from the computation of diluted net loss per share consist of Unit holders
’
options to convert their respective oil revenue interests into a total 10,900 (post-split) shares of the Company
’
s common stock. Potential common shares as of June 30, 2012 that have been excluded from the computation of diluted net loss per share consist of (a) warrants to purchase 14,000 (post-split) shares of the Company
’
s common stock and (b) Unit holders
’
options to convert their respective oil revenue interests into a total 36,030 (post-split) shares of the Company
’
s common stock.
Asset Retirement Obligations
The Surface Mining Control and Reclamation Act of 1977 and similar state statutes require mine properties to be restored in accordance with specified standards. Accounting Standards Codification (“ASC”) Topic 410-20 requires recognition of an asset retirement obligation (“ARO”) for eventual reclamation of disturbed acreage remaining after mining has been completed. The Company records its reclamation obligations on a permit-by-permit basis using requirements as determined by the Office of Surface Mining of the U.S. Department of the Interior (“OSM”). The liability is calculated based upon the reclamation activities remaining after removal ceases, assuming that reclamation activities have been contemporaneous within state and federal guidelines during mining. A liability is recorded for the estimated future cost that a third party would incur to perform the required reclamation and mine closure discounted at the Company
’
s credit-adjusted risk-free rate. A corresponding increase in the asset carrying value of mineral rights is also recorded. The ARO asset is amortized on the units-of-production method over the proven and probable reserves associated with that permit.
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC No. 360, “Property, Plant and Equipment.” ASC No. 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset
’
s carrying value and fair value or disposable value. As of June 30, 2013, the Company does not believe there has been any impairment of its long-lived assets.
Fair Value of Financial Instruments
Pursuant to ASC No. 820,
“
Fair Value Measurements and Disclosures,
”
the Company is required to estimate the fair value of all financial instruments included on its balance sheet as of June 30, 2013. The Company
’
s financial instruments consist of cash, accounts receivables, payables, and other obligations. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to the short-term nature of the respective instrument.
Income Taxes
The Company accounts for its income taxes under the provisions of ASC No. 740 “Income Taxes.
”
The method of accounting for income taxes under ASC No. 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities.
Recent Accounting Pronouncements
The Company
’
s management has evaluated all recent accounting pronouncements since the last audit through the issuance date of these financial statements. In the Company
’
s opinion, none of the recent accounting pronouncements will have a material effect on the financial statements.
NOTE 3
–
ACQUISITION OF GOLDFIELD INTERNATIONAL, INC.
On March 1, 2013, the Company acquired the outstanding stock of Goldfield International, Inc., a manufacture of gold mining equipment and parts located in Lindon, Utah. The acquisition was a stock purchase and therefore encompasses all of Goldfield
’
s business operations.
In exchange for Goldfield
’
s outstanding stock, the Company issued 2,000,000 shares of its common stock. The Company valued the acquisition at the fair value of the shares it issued amounting to $900,000.
11
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
In addition, the Company entered into separate agreement to acquire the personal goodwill of the seller for $100,000 payable in three installments of $33,000 due April 1, 2013, $33,000 due May 1, 2013 and $34,000 due June 1, 2013. Interest accrues on any payment that is not paid within 10 days of its respective due date. As of August 8, 2013, no payments have been paid under this agreement and the Company accrued interest of $1,301 on this obligation during the three month ended June 30, 2013, which was charged to operations
We valued the assets acquired and liabilities assumed as follows:
|
|
|
|
|
|
Current assets (including cash)
|
|
$
|
226,809
|
|
|
Property and equipment
|
|
|
104,600
|
|
|
Intangibles and goodwill
|
|
|
886,877
|
|
|
Current liabilities, including
|
|
|
|
|
|
above indicating $100,000 debt
|
|
|
(318,286
|
)
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
900,000
|
|
Management is still in the process of determining the intangibles acquired and their respective fair values.
NOTE 4
–
INVESTMENT IN OIL & GAS PROPERTY
In March 2011, the Company acquired an 8% working interest (6.4% Net Revenue Interest [“NRI”]) in the Haggard #5-17 well located in Noble County, Oklahoma, USA. The Company capitalized $35,844 in development of this well. The well
’
s production commenced in 2011 and is still currently producing. A royalty consisting of 60% of the net revenue received from the production of the well will be distributed proportionally to the well
’
s investors.
In April and May 2011, the Company raised a total of $95,000 towards its share of the drilling and completion of the Bond #4 well through the issuance of 38 units. The Company has a 20% NRI in the Bond #4 well and each of the 38 units was priced at $2,500 per unit totaling $95,000 cash and consisted of 5,000 restricted common shares, a pro rata share of 60% of the net revenue generated from the production of the well, and warrants to purchase 10,000 shares of the Company
’
s common stock at $0.25 per share with an expiration date of October 2012. Each unit holder was granted the option to surrender their pro rata interest in the revenue from the well back to the company in exchange for 5,000 restricted common shares per unit surrendered. This option is exercisable for a period of 36 months from the date the investor receives the first revenue check. Of the $95,000 received, the Company allocated $20,936 towards the value of the investors
’
60% interest in the Company
’
s share of the well
’
s net revenue and credited this amount against the $93,332 it has currently paid and capitalized towards the drilling cost of the well. A consulting fee in connection with the offering was paid through the issuance of 3.4 units. The capitalized cost of the well was further reduced by the consultant
’
s allocated share in the well
’
s net revenue by $1,873. In November 2011, the Company received a refund of $7,771 from the well operator of costs related to this well, which reduced the capitalized cost allocated to this well. Total capitalized costs related to this well are $60,732.
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
In August 2011, the Company raised a total of $65,000 towards its share of the drilling and completion of the Chuck #1 well through the issuance of 26 units. The Company has a 20% NRI in the Chuck #1 well and each of the 26 units was priced at $2,500 per unit totaling $65,000 cash and consisted of 5,000 restricted common shares, a pro rata share of 60% of the net revenue generated from the production of the well, and warrants to purchase 10,000 shares of the Company
’
s common stock at $0.25 per share with an expiration date of February 2013. Each unit holder was granted the option to surrender their pro rata interest in the revenue from the well back to the company in exchange for 5,000 restricted common shares per unit surrendered. This option is exercisable for a period of 36 months from the date of acceptance of the Subscription Agreement. Of the $65,000 received, the Company allocated $15,394 towards the value of the investors
’
60% interest in the Company
’
s share of the well
’
s net revenue and credited this amount against the $59,015 it has currently paid and capitalized towards the drilling cost of the well. A consulting fee in connection with the offering was paid through the issuance of 2.6 units. The capitalized cost of the well was further reduced by the consultant
’
s allocated share in the well
’
s net revenue by $1,539. As of the date of this report, the Chuck #1 well is not in production. Total capitalized costs related to this well are $42,779.
As of June 30, 2013, the Company
’
s accrued asset retirement obligation totaled $12,366. Accretion of the obligation charged to cost of oil and gas activities for the three months ended June 30, 2013 and 2012 amounted to $255 and $0, respectively. Accretion of the obligation charged to cost of oil and gas activities for the six months ended June 30, 2013 and 2012 amounted to $372 and $0, respectively. Depletion expense is also included in cost of oil and gas activities as reflected in the accompanying statements of operations. Depletion expense for the three months ended June 30, 2013 and 2012 amounted to $7,738 and $16,321, respectively. Depletion expense for the six months ended June 30, 2013 and 2012 amounted to $17,786 and $35,528, respectively.
NOTE 5
–
PREPAID SERVICES
On February 4, 2013, the Company issued a total of 7,000,000 (post-split) shares of its common stock of to five individuals and five entities in exchange for consulting services, valued at $2,450,000. The $2,450,000 is being charged to operations over the three-year term of the respective agreement. Mr. Guy Peckham, the Company
’
s president, received 2,000,000 of the 7,000,000 shares issued. The 2,000,000 shares were valued at $700,000.
On October 30, 2012, the Company issued a total of 33,000,000 (post-split) shares of its common stock of to five individuals and five entities in exchange for consulting services, valued at $429,000. The $429,000 is being charged to operations over the three-year term of the respective agreement. As indicated in Note 6, Mr. Guy Peckham, the Company
’
s president, received 11,500,000 of the 33,000,000 shares issued. The 11,500,000 shares were valued at $149,500.
Consulting fees charged to operations during the three months ended June 30, 2013 and 2012 relating to these two transactions amounted to $239,917 and $0, respectively. Consulting fees charged to operations during the six months ended June 30, 2013 and 2012 relating to these two transactions amounted to $398,726 and $0, respectively. The unamortized balance at June 30, 2013 was $2,456,328. Amortization expense over the remaining terms of the respective consulting agreement is as follows:
|
|
|
|
|
|
2014
|
|
$
|
959,667
|
|
|
2015
|
|
|
959,666
|
|
|
2016
|
|
|
536,995
|
|
|
|
|
$
|
2,456,328
|
|
13
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
NOTE 6
–
RELATED PARTY TRANSACTIONS
The Company has entered into a month-to-month lease agreement with Trio Gold for an office in Calgary, Alberta, Canada. Trio Gold
’
s President is the father of Ron Ruskowsky, the former President and CEO of the Company, who is still operating the Company
’
s oil and gas operations. This lease can be canceled on one month
’
s written notice. The lease agreement was amended in February 2011 which increased rental payments from approximately $450 to $1,300 per month plus applicable taxes. For the three months ended June 30, 2013 and 2012, rent expense amounted to $4,393 and $3,969 respectively. For the six months ended June 30, 2013 and 2012, rent expense amounted to $8,332 and $3,986, respectively.
The Company
’
s manufacturing facilities are being leased from the former sole shareholder of Goldfield on a month-to-month basis at $8,000 per month.
In October 2012, Mr. Guy Peckham, the Company
’
s President, personally assumed $200,000 of the obligation the Company
’
s owes Santeo Financial for unpaid management fees. The $200,000 debt was not forgiven and the Company
’
s records indicate the $200,000 debt as being owed to Mr. Peckham as of December 31, 2012. The $200,000 is non-interest bearing, unsecured, and due on demand. Mr. Ruskowsky, the Company
’
s former president, provided services through a consulting agreement that the Company had with Santeo Financial Corp (“Santeo”). Mr. Ruskowsky owns a controlling interest in Santeo.
Under the terms a consulting agreement, the Company was required to pay Santeo $15,000 per month. The $15,000 monthly fee was accrued by the Company and was reduced by amounts actually paid. The consulting agreement terminated in August 2012. In October 2012, the balancing owing Santeo amounted to $397,193, of which $200,000 was personally assumed by Mr. Guy Peckham. The balance owed to Santeo as of the termination date, net of the assumed $200,000, amounted $197,193, which is being paid in monthly installments of $8,500. The remaining balance became fully due and payable on May 1, 2013 and remains unpaid and the Company is in default under the agreement. The balance owed at June 30, 2013 amount to $132,193. Santeo consulting fees expensed for the three months ended June 30, 2013 and 2012 amounted to $0 and $45,000 respectively. Santeo consulting fees expensed for the six months ended June 30, 2013 and 2012 amounted to $0 and $90,000 respectively.
On October, 30 2012, the Company issued Mr. Guy Peckham, the Company
’
s current president 11,500,000 shares of its common stock for services. The 11,500,000 shares were valued at $149,500, which is being charged to operations over the three year term of the underlying agreement.
On February 4, 2013, the Company issued Mr. Guy Peckham, the Company
’
s current president 2,000,000 shares of its common stock for services. The 2,000,000 shares were valued at $700,000, which is being charged to operations over the three year term of the underlying agreement.
As of June 30, 2013, the Company owed Roger Janssen, an officer and director of the Company, $1,345 for services previously performed.
During the six months ended June 30, 2013, Mr. Guy Peckham has advanced the Company a total of $30,700 of which $28,954 was repaid during the same period. The advances are due on demand and bear interest at annual rate of 8% per annum. Interest accrued during the three months and six months ended June 30, 2013 amounted to $264 and $681, which have been paid accordingly.
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
As of June 30, 2013, certain shareholders have advanced the Company a total of $19,845 that is payable on demand and is non-interest bearing.
In connection with the acquisition of Goldfield, the Company entered into a consulting agreement with the former shareholder of Goldfield, whereby commencing May 1, 2013, the Company will pay him a consulting fee of $5,000 per month over the 30 month term of the agreement. The Company has not made any payments towards this obligation and $10,000 has been accrued and charged to expenses as of June 30, 2013.
As discussed in Note 3, the Company entered into an agreement to acquire the personal goodwill of the former shareholder of Goldfield for $100,000 payable in three installments of $33,000 due April 1, 2013, $33,000 due May 1, 2013 and $34,000 due June 1, 2013. Interest accrues on any payment that is not paid within 10 days of its respective due date. The Company has not made any payments toward this obligation and has accrued $1,304 of interest as of June 30, 2013, which was charged to operations. The balance of this obligation as of June 30, 2013 is $101,301.
NOTE 7
–
CONVERTIBLE DEBT
a.
On April 17, 2013, the Company borrowed $100,000 through the issuance of a convertible note. Under the terms of the note, the loan is assessed interest at a rate of 12% per annum and matures on April 17, 2014. The outstanding balance including principal and accrued interest is convertible in the Company
’
s common shares at a conversion price equal to the lessor of a) $0.20 per share; or b) 80% of the 30-day weighted average trading price of the Company
’
s common stock. As additional consideration, the lender was granted 5% of the Company
’
s net profits from its investment in CSI Imports & Export up to $50,000. The Company may prepay any portion owed with the payments first being applied to accrued interest and then to the net profit up to $50,000.
The Company accounted for the financing under ASC Topic 470-20 “Debt with Conversion and Other Options.” The proceeds of the financing are required to be bifurcated between the fair value of the 5% net profit participating interest and the fair value of the convertible note using a relative fair value approach based upon the total amount of the $100,000 debt. The fair value of the net profit participating interest amounted to $22,471, which was classified to paid-in capital with an offset to discount. As the outstanding balance of the note is convertible into a number of variable common shares, the conversion feature accounted for under ASC Topic 815-15 “Embedded Derivative”. The derivative component of the obligation was initially valued at $26,887 and classified under derivative liabilities with an offset to discounts on convertible debt. The total discount is being amortized to interest expense over the one-year term of the loan. In determining the indicated values, the Company used the Black Scholes Option Model with a risk-free interest rate of 0.13%, volatility of 200%, a trading price of $0.17 per share and conversion price to $0.2085 per share.
Interest accrued on the above convertible debt and charged to interest expense for the three and six months ended June 30, 2013 was $2,433. Amortization of the discount for the three months and six month ended June 30, 2013 totaled $10,376 which was charged to interest expense. The balance of the convertible note at June 30, 2013, including accrued interest, net of the discount was $63,451.
15
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
b.
The Company entered into an agreement with an unrelated third party to borrow up to a maximum of $315,000. On June 19, 2013 (the effective date of the agreement), the Company received the initial advance $65,000. Additional advances are solely at the discretion of the lender. In consideration for the funds borrowed, the Company is assessed a loan fee equal to 10% of the funds advanced and a closing and due diligence fee equal to 8% of the amount advanced. The outstanding balance including principal, accrued interest, and fees are convertible in the Company
’
s common shares at a conversion price equal to the lessor of a) $0.05 per share; or b) 60% of the lowest trade price in the 25 trading days prior to conversion. There is no interest charged for the first ninety days. However If the amounts due under this obligation is not fully paid with the ninety days, the total amount outstanding including accrued interest and fees will be assessed a one-time interest charge of 12%.
The Company accounted for the financing under ASC Topic 470-20 “Debt with Conversion and Other Options.” The proceeds of the financing are required to be bifurcated based upon the fair value of the convertible note using a relative fair value approach based upon the total amount of the $76,700 debt ($65,000 advance plus fees totaling $11,700). As the outstanding balance of the note is convertible into a number of variable common shares, the conversion feature accounted for under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation was initially valued at $65,000 (the fair value cannot initially exceed the amount of the advance) and classified under derivative liabilities with an offset to discounts on convertible debt. The discount along with the loan fees are being amortized to interest expense over the one year term of the loan. In determining the indicated values, the Company used the Black Scholes Option Model with a risk-free interest rate of 0.13%, volatility of 193.86%, a trading price of $0.05 per share and conversion price to $0.016 per share.
Amortization of the discount for the three months and six month ended June 30, 2013 totaled $2,372 which was charged to interest expense. The balance of the convertible note at June 30, 2013, including fees, net of the discount amounted to $2,372.
The Company valued the derivative liabilities at June 30, 2013 at $211,566 and recognized the change of $119,679 to operations. In determining the indicated values, the Company used the Black Scholes Option Model with a risk-free interest rate of 0.15%, volatility of 186.65%, a trading price of $0.04 per share and a conversion price ranging from $0.0373 to $0.016 per share.
NOTE 8
–
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Current expense - Benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total current expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Benefit
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total deferred benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S statutory rate
|
|
|
34.00
|
%
|
|
$
|
34.00
|
%
|
|
Less valuation allowance
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
422,672
|
|
|
|
-
|
|
|
Net operating losses
|
|
|
339,765
|
|
|
|
1,391,787
|
|
|
|
|
|
762,437
|
|
|
|
1,391,787
|
|
|
Less valuation allowance
|
|
|
(762,437
|
)
|
|
|
(1,391,787
|
)
|
|
Deferred tax asset - net valuation allowance
|
|
$
|
--
|
|
|
$
|
--
|
|
The net change in the valuation allowance for 2013 was $(559,218).
The Company
’
s net operating loss for income tax reporting purposes was significantly impacted by the change in control which occurred on October 30, 2012. The Company has a net operating loss carryover at June 30, 2013 of approximately $340,000 that is available to offset future income for income tax reporting purposes, which will expire in various years through 2033, if not previously utilized.
The Company adopted the provisions of ASC 740-10-50, formerly FIN 48, “Accounting for Uncertainty in Income Taxes.” The Company had no material unrecognized income tax assets or liabilities for the six months ended June 30, 2013 and 2012.
17
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
The Company
’
s policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the years ended December 31, 2012 and 2011, there were no income taxes, or related interest and penalty items in the income statement, or liability on the balance sheet. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2009. The Company is not currently involved in any income tax examinations.
NOTE 9
–
COMMON STOCK AND WARRANTS
For the three months ended June 30, 2013
During the three months ended June 30, 2013, the Company issued 1,080,000 shares of its common stock for $54,000.
During the three months ended June 30, 2013, the Company issued 600,000 shares of its common stock for past amounts due for accounting and legal services. The shares were valued $15,000. No gain or loss was recognized on the issuances.
For the three months ended June 30, 2012
The Company did not issue any common shares during the three months ended June 30, 2012.
On November 20, 2012, the Company adopted its 2012 Stock Incentive Plan (the “Plan”). Under the Plan, the Company reserved 5,000,000 shares of its common stock to be issued to employees, directors, consultants and advisors. The exercise price under the Plan is $0.001 per share. As of June 30, 2013, the Company issued 3,100,000 common shares through the Plan.
Options
The following table sets forth common share purchase warrants (post-split) outstanding as of June 30, 2013:
|
|
|
|
|
|
|
|
|
|
Warrants
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
5,710
|
|
|
$
|
12.50
|
|
|
Warrants granted
|
|
|
-
|
|
|
|
-
|
|
|
Warrants expired
|
|
|
(5,710
|
)
|
|
$
|
(12.50
|
)
|
|
Balance, June 30, 2013
|
|
|
-
|
|
|
$
|
-
|
|
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
NOTE 10
–
FAIR VALUE
The Company
’
s financial instruments at June 30, 2013 consist principally of convertible debentures and derivative liabilities. Convertible debentures are financial liabilities with carrying values that approximate fair value. The Company determines the fair value of convertible debentures based on the effective yields of similar obligations.
The Company believes all other financial instruments
’
recorded values at June 30, 2013 and 2012 approximate fair market value because of their nature and respective durations.
The Company complies with the provisions of ASC No. 820-10 (“ASC 820-10”), “Fair Value Measurements and Disclosures.” ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity
’
s own assumptions, about market participant assumptions, which are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as follows:
June 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
-
|
|
|
$
|
65,823
|
|
|
|
-
|
|
|
$
|
65,823
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
$
|
211,566
|
|
|
|
-
|
|
|
$
|
211,566
|
|
19
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
NOTE11
–
SEGMENT REPORTING
The Company
’
s operations are classified into two reportable segments that provide difference products. Separate management of each segment is required because each business unit is subject to different marketing, production, and technology.
For the six months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Segment operating earnings
|
|
|
Depreciation depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
$
|
85,885
|
|
|
$
|
6,794
|
|
|
$
|
18,158
|
|
|
Manufacturing *
|
|
|
194,490
|
|
|
|
18,865
|
|
|
|
4,131
|
|
|
|
|
$
|
280,375
|
|
|
$
|
25,659
|
|
|
$
|
22,289
|
|
|
|
|
*
|
Consist of only four months ended June 30, , 2013
|
Segment operating earnings reflect revenues net of operating costs and depreciation, depletion, and amortization and are reconciled to loss from operations before income tax as follows:
|
|
|
|
|
|
|
|
|
|
Six months
|
|
|
Six months
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012 **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings
|
|
$
|
25,659
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(659,090
|
)
|
|
|
|
|
|
Operating loss
|
|
|
(633,431
|
)
|
|
|
|
|
|
Other income
|
|
|
4,039
|
|
|
|
|
|
|
Interest expense
|
|
|
(17,351
|
)
|
|
|
|
|
|
Change in fair value of derivative
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
(119,679
|
)
|
|
|
|
|
|
Net loss before income taxes
|
|
$
|
(766,422
|
)
|
|
|
|
|
|
|
|
|
|
**
|
Total activity during the six months ended June 30, 2012 pertain to oil and gas.
|
|
|
Table of Contents
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
For the three months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Segment operating earnings
|
|
|
Depreciation depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
$
|
27,345
|
|
|
$
|
(7,923
|
)
|
|
$
|
7,991
|
|
|
Manufacturing
|
|
|
167,174
|
|
|
|
6,329
|
|
|
|
2,672
|
|
|
|
|
$
|
194,519
|
|
|
$
|
(1,594
|
)
|
|
$
|
10,663
|
|
Segment operating earnings reflect revenues net of operating costs and depreciation, depletion, and amortization and are reconciled to loss from operations before income tax as follows:
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
Three months
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012 **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating losses
|
|
$
|
(1,594
|
)
|
|
|
|
|
|
Other operating expenses
|
|
|
(417,680
|
)
|
|
|
|
|
|
Operating loss
|
|
|
(419,274
|
)
|
|
|
|
|
|
Other income
|
|
|
3,466
|
|
|
|
|
|
|
Interest expense
|
|
|
(16,747
|
)
|
|
|
|
|
|
Change in fair value of derivative
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
(119,679
|
)
|
|
|
|
|
|
Net loss before income taxes
|
|
$
|
(552,234
|
)
|
|
|
|
|
|
|
|
**
|
Total activity during the three-month ended June 30, 2012 pertain to oil and gas.
|
Identifiable assets by industry segment are as follows:
|
|
|
|
|
|
Oil and gas
|
|
$
|
298,854
|
|
|
Manufacturing
|
|
|
202,595
|
|
|
Other
|
|
|
3,563,221
|
|
|
|
|
$
|
4,064,670
|
|
21
MINERALRITE CORPORATION
(FORMERLY ROYAL QUANTUM GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
NOTE 12
–
SUBSEQUENT EVENTS
On July 11, 2013, the Company issued Mr. Lloyd McEwan 300,000 shares of its common. The proceeds from the sale of these shares are to be used to reduce the amount due Mr. MCEwan for consulting fees due him (See Note 6.)
On July 16, 2013, the Company received $21,500 in exchange of issuing a non-conventional convertible note maturing on July 16, 2014. Under the terms of the loan, the Company was required to reserve 6,000,000 of its common stock for full conversion of the obligation,
On July 17, 2013, the Company received $30,000 in exchange of issuing a non-conventional convertible note maturing on July 31, 2014.
During July, 2013, the Company issued 600,000 shares of its common stock for past amounts due for accounting and legal services.
Table of Contents
