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NOTE 7 – Commitments and Contingencies
In connection with the agreements described in Note 3a related to the Mkuvia Gold Project, it has come to the Company’s attention that Handeni and Maita have been permitting a third party to continuously conduct prospecting activities and allegedly conveyed certain of the prospecting licenses and joint venture rights acquired as part of the Mkuvia transactions to third parties, at a date subsequent to the effective dates of the initial transaction, in violation of the Company’s ownership of exclusive mineral and mining rights. Regarding this matter, Handeni has previously disclosed in its Form 10-Q for the quarter ended November 30, 2011 filed with the SEC on January 17, 2012, that it “is currently investigating through local counsel the registration particulars of prospecting licenses numbered 5664/2009 and 5669/2009, which form a part of the current Joint Venture Company project [which refers to the joint venture with Ruby Creek]. This investigation relates to the reported registration of prospecting licenses numbered 5664/2009 and 5669/2009 to a third party without the Company’s (Handeni’s) approval, in unclear circumstances.” On February 8, 2012 the Company filed a Summons with Notice in the Supreme Court of the State of New York against Handeni (Douglas Lake Minerals, Inc. as the named defendant) for breach of contract, fraud and breach of fiduciary duty in connection with the violation of joint venture agreements. The relief sought was for compensatory and consequential damages in the amount of $10,000,000. On April 2, 2012, the Company further filed a Complaint in the Supreme Court of the State of New York against Handeni (Douglas Lake Minerals, Inc. as the named defendant). In that complaint the Company is seeking damages caused by Handeni for their violation of the parties agreements and fraud. The Company is seeking $17,000,000 in damages, exclusive of interest, costs and legal fees. As a consequence of the foregoing, the Company has not obtained an initial mining license on the Mkuvia property nor received the required environmental study which would have triggered a series of payments. Further, as a result of Handeni’s breaches, the Comapany has not made a $450,000 payment originally due on June 1, 2011 to Handeni pursuant to the May 24, 2010 agreement, among other things. In the opinion of the Company’s Tanzanian counsel, the Company has good interest in the prospecting licenses (“PL”) free and clear of any liens and encumbrances and under Tanzanian law any dealings relating to the PL’s and the joint venture rights made subsequent to the dates when the Commissioner of the Ministry of Energy and Mining issued the Certificates of Acknowledgment of the joint venture agreements would not be recognized and they would not affect the rights of the Company in the PL’s. Further, counsel advises that there are no provisions under Tanzanian law in relation to mineral rights which would permit the PL’s to be forfeited or otherwise withdrawn in the event of a change of ownership.
On February 23, 2012, Handeni filed a Notice of Claim against the Company in the Supreme Court of British Columbia claiming breaches of the agreements between the parties and seeking (i) payments as stipulated in the preceding paragraph of $450,000, (ii) 20% of certain private placement proceeds received by the Company ($917,100), (iii) consent of the Company to remove the restrictive resale legend affixed to the 4,000,000 restricted common shares of the Company issued as partial consideration for the properties.and (iv) the right to market and sell the property to third parties. These amounts are included in the liabilities discussed in the next paragraph which have been offset in the determination of the impairment.
Management believes that the Company has suffered significant damages and while it is confident of the merits of its position and that the Company will ultimately be successful in its lawsuit, management has provided an impairment of the Mkuvia assets acquired offset by the recorded amount of the corresponding liabilities, to a nominal value of $1 as of February 29, 2012. A charge of $1,930,682 is reflected in the accompanyng statement of operations for the three and six month periods ended Februay 29, 2012. Offsetting the liabilities to Handeni is appropriate and consistent with the position of impairing the assets, since the obligation to make any payments is tied to proper title to the assets purchased.
B. Commitments
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a. |
Effective June 4, 2010, the Company entered into an Advisory Agreement with Maita (“Advisor”), the original owner of the prospecting licenses of the Mkuvia property Project. The initial term of the agreement is for a three year period. The Advisor or the Company may terminate this Agreement at any time by giving the other party ninety (90) days prior written notice of termination. This Agreement may be renewed for successive one-year periods on mutually acceptable terms. Compensation is comprised of $1,000 for each Director’s meeting the Advisor attends and
300,000 shares of common stock of the Company as follows: 50,000 shares vested upon signing, 75,000 shares issuable on June 4, 2011; 75,000 shares issuable on June 4, 2012 and 100,000 shares on June 4, 2013. In the year ended August 31, 2010, the Company recognized $2,000 in fees paid and $19,500 in stock based compensation, which was the fair market value of the 50,000 shares issued. In the year ended August 31, 2011 the Company incurred $1,000 in fees under this arrangement. As result of matters described in Note 7A, the Company did not make the June 4, 2011 share issuance. |
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b. |
The Company entered into an arrangement with a company affiliated with a significant shareholder and current director for the use of a portion of its office space and facilities in New York City for a one year period commencing June 1, 2011 for a gross fee of $36,000. This amount was satisfied by the issuance of 48,000 common shares of the Company valued at $0.75 per share, the fair value at the date of the arrangement. This fee was recognized as rent expense ratably over the terms of each arrangement. |
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c. |
On December 4, 2010, effective July 28, 2010, the Company entered into an employment agreement with a Director of Corporate Communications, Strategic and Technical Advisor with a term of two years, automatically renewable for successive one year terms unless terminated by either party on 60 days advance notice. The contractual annual salary is $93,600 plus bonuses at the discretion of the Board of Directors. The employee is entitled to 200,000 common shares of the Company, 100,000 vesting on commencement and 100,000 vesting six months thereafter. These shares had a fair market value of $100,000 on the date of grant. In addition, the employee was granted non-qualified stock options to purchase 300,000 shares of common stock, which vest at the rate of 37,500 options per quarter from the effective date. The options granted are exercisable at $0.60 per share and have a five year life. The Company estimated the fair value of the stock options to be $132,522 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of five years, risk-free interest rate of 0.61%, a dividend and forfeiture rate of 0% and a volatility of 143.7%. The amount is being amortized ratably over the initial expected two year term of service. Results of operation include stock based compensation in the amount of $29,065 and $58,130 for the three months and six months ended February 29, 2012, respectively for these arrangements. |
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d. |
On December 16, 2010, effective on September 21, 2010, the Company entered into an Advisory Agreement with a Consultant to advise and provide assistance to Company management on matters relating to mining projects and properties in Tanzania and in surrounding regions. The initial term is for two years and may be renewed for successive one-year periods thirty days prior to any expiration. Compensation under the agreement is comprised of (i) $1,000 for any Director's meeting the Advisor is attends at management's request and (ii) 100,000 shares of common stock of the Company issued on the effective date, 100,000 shares on June 1, 2011, 100,000 shares on January 1, 2012 and 100,000 shares on October 1, 2012. The initial 100,000 shares were valued at the closing market price on the OTC BB on their grant date of $0.70 per share. The June 1, 2011 100,000 shares were valued at the closing market price on the OTC BB on that date of $1.03 per share. The January 1, 2012 100,000 shares were valued at the closing market price on the OTC BB on that date of $1.30 per share. For the three and six month periods ended February 29, 2012, $44,143 and $87,746 were included in amortization expense and a balance of $101,112 was included in deferred compensation at February 29, 2012. |
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e. |
On April 29, 2011, effective May 1, 2011, the Company entered into an executive agreement with a current member of its Board of Directors (“Director”) for advisory services with respect to strategic, financial and regulatory issues. The term of the agreement is two years, subject to termination for cause. The contractual base compensation is $6,000 per month, increasing to $9,000 per month immediately after the Company reports two consecutive quarters of positive cash flow from operations and further increasing to $12,000 per month immediately after the Company reports two consecutive quarters of positive net income. Bonuses are payable at the discretion of the Board of Directors. In addition, 200,000 shares of common stock are issuable upon the attainment of certain gold production levels as defined in the agreement and upon the attainment of the aforementioned operating results, up to an aggregate of 1,000,000 shares. Under the agreement, the director was granted non-qualified stock options to purchase 1,375,000 shares of common stock – 375,000 vesting on execution, and 250,000 vesting at the end of each successive six month period commencing on the effective date. The options include a cashless exercise provision. The options granted have an exercise price of $0.50 per share and a five year life. The Company estimated the fair value of the stock options to be $1,118,334 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of three and one half years,
risk-free interest rate of 1.01%, a dividend and forfeiture rate of 0% and a volatility of 116.5%. The $305,276 value of the options vesting on grant was expensed on grant and the remainder is being amortized ratably over the two year vesting term. Results of operation include stock based compensation in the amount of $101,632 and $203,624 for the three and six month periods ended February 29, 2012. |
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f. |
On April 29, 2011, effective May 1, 2011, the Company entered into an executive agreement with the now former CEO. The term of the agreement was for two years. The contractual base compensation was $14,000 per month, with future increases based upon financial results. Under the agreement, the director was granted non-qualified stock options to purchase 1,375,000 shares of common stock - 375,000 vesting and exercisable on execution, and 250,000 becoming exercisable at the end of each successive six month period commencing on the effective date. The options include a cashless exercise provision. The options granted were exercisable at $0.50 per share and had a five year life. The Company estimated the fair value of the stock options to be $1,118,334 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of three and one half years, risk-free interest rate of 1.01%, a dividend and forfeiture rate of 0% and a volatility of 116.5%. The $305,276 value of the options vesting on grant was expensed, and the remainder was being amortized ratably over the two year vesting term. Results of operation include stock based compensation in the amount of $101,632 and $169,387 for the three month and six month periods ended February 29, 2012. On Janaury 31, 2012, the Company and the former CEO entered into a consulting agreement expiring May 31, 2012, which terminated and superceded the executive agreement in its entirety. Under the consulting agreement the former CEO will receive $14,000 per month; retained 625,000 of his original options which became fully vested and are exercisable through May 1, 2014; and was granted additional options to purchase 250,000 common shares exercisable for three years at $0.75 per share. The Company estimated the fair value of the 250,000 stock options to be $120,773 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of two years, risk-free interest rate of 1.01%, a dividend and forfeiture rate of 0% and a volatility of 81.7%. These options include a cashless exercise provision and vest in the event that the agreement is not terminated for Cause, as defined in the agreement, prior to the end of the term of the consulting ageement. Duties include assistance with respect to overall strategy and strategic advice to the Board of Directors and officers in its relations in Tanzania and transaction assistance to the new CEO, only as directed in writing by the Board. Further, the former CEO is required to complete other corporate actions as stipulated in the agreement. No stock based compensation expense was required with respect to modification of the original options since the fair value of the modified options was less than the original options. |
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g. |
On June 27, 2011, effective on February 1, 2011, the Company entered into an agreement with a consultant to continue to assist management on a part time basis in the role of interim chief financial officer (“Consultant”) through May 31, 2012. Compensation for these services is at the rate of $4,800 per month based upon 40 hours per month plus additional compensation at the rate of $120 per hour in excess of 40 hours. The Consultant shall have the right to receive compensation in shares valued at $0.75 per share, at his option. This hourly rate shall increase to $200 per hour immediately after the Company reports two consecutive quarters of positive cash flow from operations. Under the agreement, the Consultant was granted non-qualified stock options to purchase 150,000 shares of common stock – 60,000 vesting on execution, and 7,500 vesting each month commencing on June 1, 2011 for the remaining term of the agreement. The options granted are exercisable at $0.75 per share and have a five year life. The options include a cashless exercise provision. The Company estimated the fair value of the stock options to be $114,889 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of three and one half years, risk-free interest rate of 1.04%, a dividend and forfeiture rate of 0% and a volatility of 116.5%. The $46,002 value of the options vesting on grant was expensed, and the remainder is being amortized ratably over the one year term. Results of operation include stock based compensation in the amount of 17,222 and $34,443 related to these options for the three months and six months ended February 29, 2012. For the three months and six months ended February 29, 2012, in accordance with the terms of his agreement the Consultant elected to receive payment for services rendered in shares of common stock of the Company in the amount of $44,781 and $58,997, respectively, which includes $9,999 and $18,685 representing the excess of the fair value of the shares issued over the issuance price, respectively. |
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Effective on June 6, 2011 the Company entered into a two year employment agreement with a Controller. Base compensation is payable at the rate of $100,000 per annum, and $125,000 per annum after the initial 90 day period for the remainder of the agreement. The Controller was granted non-qualified common stock purchase options to purchase 200,000 shares of the Company’s common stock at $0.75 per share. These options have a five-year life and include a
cashless exercise feature. The options vest with respect to 25,000 shares on September 6, 2011 and 25,000 at the end of each three months thereafter commencing on December 6, 2011 until fully vested. The Company estimated the fair value of the stock options to be $159,048 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of three and one half years, risk-free interest rate of 0.74%, a dividend and forfeiture rate of 0% and a volatility of 112.4%. Further, on September 6, 2011, after the expiration of the initial 90 day period, the Company was obligated to grant the Controller 25,000 shares of restricted common stock of the Company, of which 10,000 vested on the grant date and 15,000 on December 6, 2011. The Controller is also entitled (i) to participate in all Company sponsored benefit plans (ii) to an annual bonus at the discretion of the Board of Directors; and (iii) a salary increase once the Company attains positive operating cash flow. Results of operation include stock based compensation in the amount of $23,162 and $46,324 for the three and six months ended February 29, 2012. Effective on January 31, 2012, the Board of Directors elected the Controller as CEO. An agreement is currently being negotiated. |
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i. |
On July 15, 2011, the Company entered into an independent Director Agreement with a new director for an initial term expiring July 15, 2013. The Company is obligated to pay a $20,000 annual retainer and grant 200,000 non-qualified stock options to purchase 200,000 shares of common stock exercisable at $0.50 per share and with a five year life. The options include a cashless exercise provision. These options vest at the rate of 25,000 options per quarter beginning on July 15, 2011. The Company estimated the fair value of the stock options to be $179,024 at the date of grant, using the Black-Scholes option pricing model with the following assumptions: expected life of three and one half years, risk-free interest rate of 1.01%, a dividend and forfeiture rate of 0% and a volatility of 113%. The fair value of the options is being amortized ratably over the two year vesting term. Results of operation include stock based compensation in the amount of $22,378 and $44,756 for the three and six months ended February 29, 2012. |
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