Silver Horn Mining Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Silver Horn Mining Ltd.; it does not identify Nextplat Corp. as the filer. Silver Horn was an exploration-stage company focused on Arizona mineral properties and had no operating revenue or proven or probable reserves.
Financial results and position
- Revenue: $0 for the three and nine months ended September 30, 2012 and the comparable 2011 periods.
- Net loss: $340,000 for Q3 2012, versus net income of $3,800,428 in Q3 2011; nine-month net loss was $4,602,018, versus $10,700,857 in 2011. The 2011 comparisons were materially affected by large gains from changes in derivative-liability fair value.
- Operating expenses: $312,494 for Q3 2012, down 43% year over year; $4,393,486 for the first nine months, up 183%. The nine-month increase was driven principally by a $3.5 million stock award to the CEO. Exploration expense was $83,701 for the nine months.
- Margins: Not meaningful because the company had no revenue.
- Cash flow: Operating cash use was $142,484 for the first nine months, compared with $572,761 in 2011. Financing provided $127,500. Cash declined by $14,984 during the period to just $63 at September 30.
- Liquidity and debt: Current assets were $15,563 and total liabilities were $1,564,320, resulting in a working-capital deficit of $1,548,757. Convertible debentures and notes had $243,382 face value ($174,264 net of debt discount); accounts payable and accrued expenses were $1,121,185. Derivative liabilities were $156,474.
- Equity and dilution: Stockholders’ deficit was $1,548,757. Common shares outstanding rose from 225,833,555 at December 31, 2011 to 253,033,555 at September 30, 2012. The company also had 36,750,000 outstanding warrants.
Material changes and notable items
- In February 2012, Silver Horn issued the CEO 25 million restricted shares valued at $3.5 million as compensation and cancelled his prior 30 million-share option.
- In February 2012, it issued convertible notes with $105,882 face value for $90,000 in proceeds. In May, it issued a $37,500 convertible debenture with a five-year warrant for 750,000 shares; the debenture’s down-round provision resulted in derivative accounting.
- Management attributed lower exploration spending to limited working capital. Nine-month general and administrative expense increased 45%, in part because of the management-services agreement with MJI.
- After quarter-end, in November 2012, Silver Horn authorized Series D preferred stock and sold 1 million shares for $50,000. Each share is convertible into five common shares, subject to a 9.99% beneficial-ownership limit.
Outlook, risks, and contingencies
- Going concern: The filing states that substantial doubt exists about Silver Horn’s ability to continue as a going concern. Management planned to seek additional capital, but gave no assurance it could obtain financing. It reported no available credit or other external working-capital source and warned that failure to raise funds could require curtailing or ceasing operations. Management did not expect profitability for the remainder of fiscal 2012.
- Exploration: The company had no established reserves or demonstrated commercial feasibility. It planned sampling, mapping, and assaying at its 76 and COD properties; exploration and property costs were expensed as incurred.
- Property dispute: Silver Horn filed suit to quiet title to claims at the COD property after a third party alleged overlapping claims. The company disputed the allegation. A separate default judgment of $47,362.29 for unpaid accounting services was recorded in accounts payable.
- Related-party obligations: Approximately $649,000 was payable to MJI for management fees, employee salaries, and reimbursable expenses. A five-year services and employee-leasing agreement provides for $25,000 monthly payments and can be terminated on 180 days’ notice.
- Controls: Management concluded disclosure controls were not effective at September 30, 2012, citing limited internal resources and insufficient levels of transaction review. Remediation was being considered, with no assurance of timely or adequate implementation.
- Other risks: Convertible securities and warrants may create dilution; fair-value measurements depend on significant unobservable assumptions. The filing also cautions that forward-looking statements are subject to risks and may differ materially from actual results.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Silver Horn Mining Ltd., not Nextplat Corp.
- Check the company’s ability to raise funds and meet near-term obligations, given $63 in cash and the reported going-concern uncertainty.
- Review the COD claims litigation, status of title to the mining claims, and any potential financial effect.
- Assess the terms and related-party nature of the MJI agreement and the approximately $649,000 payable balance.
- Verify the effects of the CEO stock award, convertible securities, warrants, and subsequent Series D preferred issuance on dilution and control.
- Monitor whether internal-control remediation occurs and whether the company establishes reserves or advances its exploration plans.