UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: February 28, 2010oro
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period:Commission File Number: 000-50703





U.S. PRECIOUS METALS, INC.(Exact name of registrant as specified in its charter)





Delaware

14-1839426(State or other jurisdiction of

(I.R.S. Employer Identification No.)incorporation or organization)801 International Parkway, 5th FloorLake Mary, Florida

32746(Address of principal executive offices)

(Zip Code)(407) 566-9310(Registrant’s telephone number, including area code)N/A(Former name, former address and former fiscal year, if changed since last report)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes    x    No    o




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





Yes    o    No    o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes    o    No    x













APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY




PROCEEDINGS DURING THE PRECEDING FIVE YEARS:




Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.





Yes    o    No    o




APPLICABLE ONLY TO CORPORATE ISSUERS:




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 53,819,696shares of common stock issued and outstanding as of April 19, 2010.
  
 1







NOTE REGARDING FORWARD-LOOKING STATEMENTS




The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This quarterly report on Form 10-Q (this “ Quarterly Report ”) contains certain forward-looking statements that are subject to risks and uncertainties. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Quarterly Report, the words “anticipate,” “believe,” “plan,” “target,” “estimate,” “intend,” “expect” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our strategy, future plans for exploration and production, future expenses and costs, future liquidity and capital resources, and estimates of mineralized material. All forward-looking statements in this Quarterly Report are based upon information available to our management on the date of this Quarterly Report.




Forward-looking statements are subject to a number of risks and uncertainties and there can be no assurance that such statements will be accurate. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially and adversely from those described herein as anticipated, believed, planned, targeted, estimated, intended or expected. Although we believe the assumptions underlying and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Actual results could differ materially and adversely from those discussed in this Quarterly Report.




Factors that could affect the accuracy of our forward-looking statements include, but are not limited to, those factors discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009, filed with the Securities and Exchange Commission (“ SEC ”) on September 16, 2009 (the “ Annual Report ”) under “ Item 1A. Risk Factors .” More broadly, these factors include, but are not limited to:





·
decisions of foreign countries and banks within those countries;·
unexpected changes in business and economic conditions;·
change in interest rates and currency exchange rates;·
timing and amount of production, if any;·
technological changes in the mining industry;·
our costs;·
changes in exploration and overhead costs;·
access to and availability of materials, equipment, supplies, labor and supervision, power and water;·
results of future feasibility studies, if any;·
the level of demand for our products;·
changes in our business strategy;·
interpretation of drill hole results and the geology, grade and continuity of mineralization;·
the uncertainty of mineralized material estimates and timing of development expenditures;·
commodity price fluctuations; and·
changes in exploration results.




We qualify all of our forward-looking statements by the cautionary statements listed above, as well as those factors described in our Annual Report under “ Item 1A. Risk Factors .” The list above, together with the factors described in our Annual Report under “ Item 1A. Risk Factors ,” is not exhaustive of the factors that may affect the accuracy of our forward-looking statements. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially and adversely different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only as of the date of this Quarterly Report. Except as required by applicable law, including the securities laws of the United States, we assume no obligation to update any such forward-looking statements.







2







U.S. PRECIOUS METALS, INC.




(An Exploration Stage Company)




Form 10-Q




Table of Contents





PagePART I – FINANCIAL INFORMATIONItem 1. Financial Statements.Consolidated Balance Sheets at February 28, 2010 (unaudited) and at May 31, 2009 (audited).

4Consolidated Statements of Operations (unaudited) for the three months endedFebruary 28, 2010and  February 28, 2009.

5Consolidated Statements of Operations (unaudited) for the nine months ended February 28, 2010 andFebruary 28, 2009, and for the period January 21, 1998 (Date of Inception of Exploration Stage) toFebruary 28, 2010.

6Consolidated Statements of Cash Flows (unaudited) for the nine months endedFebruary 28, 2010and February 28, 2009, and for the period January 21, 1998 (Date of Inception of Exploration Stage) to February 28, 2010.

7Notes to Consolidated Financial Statements (unaudited).

8Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

14Item 3. Quantitative and Qualitative Disclosures About Market Risk.

16Item 4. Controls and Procedures.

16Item 4T. Controls and Procedures.

16PART II – OTHER INFORMATIONItem 1. Legal Proceedings.

17Item 1A. Risk Factors.

17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

17Item 3. Defaults Upon Senior Securities.

18Item 4. Submission of Matters to a Vote of Security Holders.

18Item 5. Other Information.

18Item 6. Exhibits.

19Signatures

20









3










U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




CONSOLIDATED BALANCE SHEETS






February 28, 2010


May 31, 2009ASSETS

(Unaudited)


(Audited)Current Assets:Cash

$
53,940


$
21,081Miscellaneous receivables


-



350Prepaid expenses


48,435



23,696Total current assets


102,375



45,127Property and Equipment:Vehicles


41,877



41,877Machinery and equipment


92,515



92,127Total property and equipment:


134,392



134,004Less: accumulated depreciation


(51,214
)


(37,784
)Net property and equipment


83,178



96,220Other Assets:Investment in mining rights


216,576



184,319Deposits


25,839



5,914Total other assets


242,415



190,233Total Assets

$
427,968


$
331,580LIABILITES AND STOCKHOLDERS' DEFICIENCYCurrent Liabilities:Accounts payable

$
2,037,974


$
1,171,481Accrued expenses


19,822



36,927Accrued compensation


276,884



140,986Loan from officers


21,700



-Convertible notes payable


1,302,184



-Total current liabilities


3,658,564



1,349,394Long Term Liabilities:Convertible notes payable


215,657



764,317Total Long Term liabilities


215,657



764,317Stockholders' DeficiencyPreferred stock: authorized 10,000,000 shares of  $.00001 par value;No shares issued and outstanding


-



-Common stock: authorized 100,000,000 shares of  $.00001 par value;Issued and outstanding 53,193,499 and 50,793,499 shares, respectively


532



508Additional paid in capital


13,374,195



12,144,622Deficit accumulated during exploration stage


(16,820,980
)


(13,927,261
)Total stockholders' deficiency


(3,446,253
)


(1,782,131
)Total Liabilities and Stockholders' Deficiency

$
427,968


$
331,580







The accompanying notes are an integral part of these financial statements.


4







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




CONSOLIDATED STATEMENTS OF OPERATIONS




(Unaudited)










Three Months Ended February 28,2010


2009Revenues

$
-


$
-Expenses


632,994



736,695Operating Loss


(632,994
)


(736,695
)Other Income (Expense):Interest income


-



137Interest expense


(45,382
)


(8,866
)Loss accumulated during theexploration stage

$
(678,376
)

$
(745,424
)Net Loss per ShareBasic and Diluted

$
(0.01
)

$
(0.01
)Weighted Average Numberof Shares Outstanding -Basic and Diluted


52,081,277



51,090,423








The accompanying notes are an integral part of these financial statements






5







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




CONSOLIDATED STATEMENTS OF OPERATIONS




(Unaudited)




January 21, 1998(Date of InceptionNine Months Ended February 28,


of Exploration Stage)

to February 28,2010


2009


2010Revenues

$
-


$
-


$
-Expenses


2,768,321



6,356,109



16,677,961Operating Loss


(2,768,321
)


(6,356,109
)


(16,677,961
)Other Income (Expense):Interest income


-



5,491



17,960Interest expense


(125,398
)


(8,866
)


(160,979
)Loss accumulated during theexploration stage

$
(2,893,719
)

$
(6,359,484
)

$
(16,820,980
)Net Loss per ShareBasic and Diluted

$
(0.06
)

$
(0.13
)Weighted Average Numberof Shares Outstanding -Basic and Diluted


51,143,563



49,483,559
















The accompanying notes are an integral part of these financial statements






6







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




CONSOLIDATED STATEMENTS OF CASH FLOWS




(Unaudited)





Nine Months Ended February 28,


January 21, 1998 (Date of Inception of Exploration Stage)

to February 28,2010


2009


2010Operating Activities:Net Loss

$
(2,893,719
)

$
(6,359,484
)

$
(16,820,980
)Adjustments required to reconcile net loss to cashused by operating activities:Depreciation


13,430



11,972



51,214Common stock issued for services


404,188



1,289,300



6,135,133Stock based compensation


636,656



2,770,000



3,406,656Bad debt expense


-



-



109,259Accrued interest on convertible notes


124,464



8,866



158,781Changes in operating assets and liabilities:Miscellaneous receivable


350



8,353



(2,985
)Prepaid expenses


17,261



(670
)


(6,435
)Deposits


(19,925
)


52,020



(25,839
)Accounts payable


866,493



677,246



2,037,974Accrued expenses


249,606



113,777



296,707Net Cash Used in Operating Activities


(601,196
)


(1,428,620
)


(4,660,515
)Investing Activities:Investment in mining rights


(32,257
)


(130,554
)


(201,576
)Loan to affiliated company


-



-



(361,275
)Repayment of loan by the affiliated company


-



-



253,000Acquisition of equipment


(388
)


(7,641
)


(134,392
)Net cash Used in Investing Activities


(32,645
)


(138,195
)


(444,243
)Financing Activities:Proceeds from sale of common stock


-



400,000



3,492,500Proceeds from exercises of warrants


-



185,000



267,498Proceeds from convertible notes


645,000



500,000



1,375,000Loan from affiliated company


-



-



70,000Repayment of loan to the affiliated company


-



-



(68,000
)Loans from officers


116,300



-



116,300Repayment of loans from officers


(94,600
)


-



(94,600
)Net Cash Provided by Financing Activities


666,700



1,085,000



5,158,698Net increase (decrease) in cash


32,859



(481,815
)


53,940Cash beginning of period


21,081



623,017



-Cash, end of period

$
53,940


$
141,202


$
53,940




The accompanying notes are an integral part of these financial statements.






7







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 28, 2010




(Unaudited)





1.
BASIS OF PRESENTATION




The unaudited interim consolidated financial statements of U.S. Precious Metals, Inc. and its subsidiary, U.S. Precious Metals de Mexico, S.A. de C.V. (collectively, the “ Company ”) as of February 28, 2010 and for the three and nine months ended February 28, 2010 and 2009, have been prepared in accordance with United States generally accepted accounting principles (“ GAAP ”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such comparable periods. The results of operations for the three and nine months ended February 28, 2010 and 2009 are not necessarily indicative of the results to be expected for the full fiscal year ending May 31, 2010.




Certain information and disclosures normally included in the notes to financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K as filed with the SEC on September 16, 2009.





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Exploration Stage Accounting




The Company is an exploration stage company, as defined in the Financial Accounting Standards Boards’ (“ FASB ”) Accounting Standards Codification (“ ASC ”) and Industry Guide 7 of the SEC. Generally accepted accounting principles govern the recognition of revenue by an exploration stage enterprise and the accounting for costs and expenses. From inception to February 28, 2010, the Company has been in the exploration stage and all its efforts have been devoted to acquiring mining rights, drilling, mapping, and assaying. No revenue has been realized through February 28, 2010. The Company has incurred cash and non-cash losses to February 28, 2010 of $16,820,980.




Consolidation Policy




The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.




Use of Estimates




The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimated.




Property and Equipment




Property and equipment are recorded at cost. Depreciation is calculated on the straight line basis, based on the useful or productive lives of assets, ranging from three years for computer equipment to seven years for machinery and equipment.




Investments in Mining Rights




Mining rights held for development are recorded at the cost of the rights, plus related acquisition costs. These costs will be amortized when extraction begins.






8







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 28, 2010




(Unaudited)




Fair Value of Financial Instruments




The Company estimates the carrying value of financial instruments, which include cash, miscellaneous receivables and accounts payable, at cost which approximates the fair value at the balance sheet date due to their short-term maturity. The fair value of the Company’s convertible notes payable, which bear interest at 16%, approximate their cost due to their relatively short term nature.




Revenue Recognition




Revenue will be recognized when the price is determinable, upon delivery and transfer of title to the customer and when there is a reasonable assurance of collection of the sales proceeds. The Company has not yet entered into any contractual obligation to deliver ore product or finished metals.




Mine Development Costs




Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines. Costs incurred before mineralized material is classified as proven and probable reserves are expensed as mine development costs. At the point the Company reaches its operating stage, such costs will be capitalized and will be written off as depletion expense as the mineralized material is mined.




Proven and Probable Reserves




The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. In addition, reserves cannot be considered proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable at the time of the reserve determination.




As of February 28, 2010, none of the Company’s mineralized material met the definition of proven or probable reserves.




Stock Based Compensation




The cost of equity instruments issued to non-employees in return for goods and services is measured at the fair value of the equity issued and expensed over the related service period. The cost of employee services received in exchange for equity instruments is based on the grant date fair value of the equity instruments issued.






9







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 28, 2010




(Unaudited)




Net Loss per Share




The Company computes basic and diluted net loss per common share by dividing the net loss available to common shareholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding during the period.




At February 28, 2010, there were outstanding options to purchase 9,000,000 shares of common stock. At February 28, 2009, there were warrants outstanding to purchase 4,427,500 shares of common stock and options to purchase 8,000,000 shares of common stock. The share equivalents of these were not included in the calculation of diluted earnings per share because their effect would have been anti-dilutive because the Company incurred losses from operations for all periods.




Foreign Currency Translation




The assets of the Company’s subsidiary are in Mexico. The subsidiary depends on the parent’s ability to raise cash and transfer it to the subsidiary to meet its operating cash needs. Therefore, the Company’s management has determined that the functional currency is the US dollar. As such, the Company remeasures its subsidiary financial statements into the US dollar functional currency. Any gains or losses are reflected on the Statements of Operations.




Impairment




The Company performs a review for potential impairment of long-lived assets at least annually in order to ensure that recorded amounts are recoverable. To date, the Company has not recorded any impairment charges.




Supplementary Cash Flows Information




There was no cash paid for income taxes during the nine month periods ended February 28, 2010 and 2009. During the nine months ended February 28, 2010 the Company paid $972 for interest. There was no interest paid during the comparable period for 2008.
 
 During the nine months ended February 28, 2010, the Company issued 400,000 shares of common stock to consultants as compensation for services; these shares were valued at $117,000.  Of the total, $42,000 was recorded as a prepaid expense and is being expensed over the life of the consulting contract.  In addition, the Company’s Board of Directors approved the issuance in the first calendar quarter of 2010 of 2,000,000 shares of its common stock to officers and directors as compensation for services; these shares were valued at $460,000.  Of the total, approximately $131,000 was recorded as an expense during the fiscal year ended May 31, 2009 and is included in accrued compensation at May 31, 2009.  During the nine months ended February 28, 2009, the Company issued 38,000 shares of common stock to consultants as compensation for services; these shares were valued at $24,300. In addition, the Company’s Board of Directors approved the issuance in the first calendar quarter of 2009 of 2,300,000 shares of its common stock to officers, directors, and former directors as compensation for services; these shares were valued at $1,265,000.
  During the nine months ended February 28, 2010, options to purchase 3,000,000 shares of common stock were issued for services valued at $600,000. In addition, during the nine months ended February 28, 2010, the Company modified outstanding options to purchase 1,000,000 shares of common stock and recorded additional compensation costs of $36,700. During the nine months ended February 28, 2009, options to purchase 9,000,000 shares of common stock were issued for services valued at $2,770,000.
  During the nine months ended February 28, 2010, one convertible note holder exercised his option to convert his note plus accrued interest totaling approximately $15,900 into 53,134 shares of common stock.  These shares were issued subsequent to February 28, 2010.
  During the year ended May 31, 2003, the Company issued 1,500,000 shares of common stock in exchange for mining rights of $15,000.


10







U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 28, 2010




(Unaudited)




New Accounting Pronouncements




Effective July 1, 2009, the FASB’s ASC became the single official source of authoritative, nongovernmental GAAP. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC. All other literature became non-authoritative. The ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the ASC effective for its November 30, 2009 consolidated financial statements.





3.
CONVERTIBLE NOTES PAYABLE




2009 Notes
  During the nine months ended February 28, 2010, the Company issued an additional $480,000 in convertible promissory notes and one convertible note holder exercised his option to convert his note plus accrued interest totaling approximately $15,900 into 53,134 shares of common stock.  As of February 28, 2010 there were a total of $1,195,000 outstanding convertible promissory notes (the “2009 Outstanding Notes”).
  The 2009 Outstanding Notes bear simple interest at an annual rate of 16% and may be converted into shares of the Company’s common stock at the option of the holder or automatically, each under certain circumstances as described below:
  Each holder of the 2009 Outstanding Notes has the option to convert the principal and outstanding interest under such holder’s 2009 Outstanding Notes into shares of the Company’s common stock at the applicable conversion price (ranging from $0.20 to $0.30 per share), subject to certain restrictions if the holder has been advised that (a) the Company is actively negotiating its next financing or (b) the Company has entered into a definitive agreement providing for a change of control.  The 2009 Outstanding Notes will automatically convert into shares of the Company’s common stock at the applicable conversion price, if the Company completes any financing that result in proceeds of at least $10,000,000 to the Company, or upon the occurrence of a change in control of the Company.  The 2009 Outstanding Notes mature on the earliest of (a) the date of an automatic conversion or (b) December 31, 2010, except for $50,000 of the notes for which this date is December 31, 2011. Interest expense of $157,841 has been accrued as of February 28, 2010 on the 2009 Outstanding Notes and is payable upon maturity.
  2010 Notes
  As of February 28, 2010, the Company has received $165,000 in convertible promissory notes dated March 1, 2010 (the “2010 Outstanding Notes”) pursuant to a private offering of up to $1,000,000 of notes, which is subject to commissions equal to ten percent (10%) of the gross proceeds of the notes and a warrant exercisable for ten percent (10%) of the common stock underlying the principal amount of the notes issued.
  The 2010 Outstanding Notes bear simple interest at an annual rate of 16% and may be converted into shares of the Company’s common stock at the option of the holder or automatically, each under certain circumstances as described below:
  Each holder of the 2010 Outstanding Notes has the option to convert the principal and outstanding interest under such holder’s 2010 Outstanding Notes into shares of the Company’s common stock at any time after September 1, 2010 and on or before the maturity date, at the lesser of (a) the fifteen (15) day trading average of the Company’s common stock or (b) $0.25 (the “Conversion Price”); calculated at the earliest of (i) the completion of the sale of all the notes; (ii) notification from the placement agent that it is terminating the offering; or (iii) if no notice from the placement agent, May 17, 2010 (the “Final Closing”); provided, however, that if the Company is actively negotiating its next financing or if the Company has entered into a definitive agreement providing for a change of control, optional conversion features will not be applicable.  If, prior to any optional conversion, the Company completes a Qualified Financing or experiences a change of control, the principal and outstanding interest will automatically convert into shares of the Company’s common stock at the Conversion Price.
  The maturity date of the 2010 Outstanding Notes is the earliest to occur of: (i) an offering of securities by the Company in a transaction or series of related transactions in which at least $10,000,000 in gross proceeds is received by the Company, (ii) a change of control; (iii) two (2) years from the Final Closing; or (iv) May 17, 2012.
  The Company has signed an agreement with Hudson Financial Partners (“Hudson”) in January 2010. Under this agreement Hudson will sell $1,000,000 convertible notes under the Company’s private placement memorandum, as described above. Subsequent to February 28, 2010 through April 19, 2010, the Company has sold through Hudson an additional $327,500 in convertible notes.




11




U.S. PRECIOUS METALS, INC.


(An Exploration Stage Company)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 28, 2010




(Unaudited)





4.
COMMON STOCK




During the nine months ended February 28, 2010, the Company issued 400,000 shares of common stock to consultants as compensation for services; these shares were valued at $117,000.  Of the total, $42,000 was recorded as a prepaid expense and is being expensed over the life of the consulting contract.  In addition, the Company’s Board of Directors approved the issuance in the first calendar quarter of 2010 of 2,000,000 shares of its common stock to officers and directors as compensation for services; these shares were valued at $460,000.  Of the total, approximately $131,000 was recorded as an expense during the fiscal year ended May 31, 2009 and is included in accrued compensation at May 31, 2009.
  During the nine months ended February 28, 2009, the Company issued 38,000 shares of common stock to consultants as compensation for services; these shares were valued at $24,300. In addition, the Company’s Board of Directors approved the issuance in the first calendar quarter of 2009 of 2,300,000 shares of its common stock to officers, directors, and former directors as compensation for services; these shares were valued at $1,265,000.
  During the nine months ended February 28, 2009, the Company sold 800,000 units for gross proceeds of $400,000. Each unit consisted of one share of common stock and one half of a warrant (or an aggregate of 800,000 shares of common stock and warrants to purchase 400,000 shares of common stock). Each whole warrant entitled the holder to purchase one share of common stock at an exercise price of $1.00 and had a one year exercise term. In addition, during the nine months ended February 28, 2009, the Company issued 440,000 shares of common stock for $110,000, upon exercise of a warrant.
  As of February 28, 2010 there are no warrants outstanding and as of February 28, 2009 there were 4,427,500 warrants outstanding.


5.
STOCK OPTIONS




During the nine months ended February 28, 2010, the Company granted its Chief Executive Officer and Chairman of the Board fully vested options to purchase 3,000,000 shares of common stock; these options were valued at $600,000. In addition, during the nine months ended February 28, 2010, the Company modified the exercise price of outstanding options to purchase 1,000,000 shares of common stock with all other terms remaining the same and recorded additional compensation costs of $36,700 which represented the excess of the fair value of the modified options issued over the original value on the date of the exchange.
 
 During the nine months ended February 28, 2009, the Company issued fully vested options to purchase 9,000,000 shares of common stock which had been granted prior to May 31, 2008. These 9,000,000 options were issued after the fiscal year ended May 31, 2008 because shareholder approval of the Company’s 2007 Stock Option Plan occurred after that date. The value of the option grants of $2,770,000 was charged to expense during August 2008. Of the total issued, 3,000,000 of these options were cancelled during fiscal year 2009.
  The following assumptions were used in the Black Scholes option pricing model to determine the share based employee compensation expense relating to stock options granted during the nine months ended February 28, 2010 and 2009: risk-free interest rate 1.36-2.20% and 2.68-3.39%, respectively, expected life of the options of 3.5-5 and 5 years, respectively, expected volatility of 137% and 134-141%, respectively, expected dividend yield of 0%.


6.
GOING CONCERN




The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has experienced continuing losses, has a working capital deficit of $3,556,189, accumulated losses of $16,620,980 since inception, recurring negative cash flows from operations and does not presently have sufficient resources to accomplish its objectives during the next twelve months. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation. The Company’s present plans, the realization of which cannot be assured, to overcome these difficulties include, but are not limited to, the continuing effort to raise capital in the public and private markets.




12






U.S. PRECIOUS METALS, INC.
 (An Exploration Stage Company)
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  February 28, 2010
  (Unaudited)





7.
RELATED PARTY TRANSACTIONS




Loans from an Officer
 
 During the nine months ended February 28, 2010, Michael Jack Kugler, the Company’s Chief Executive Officer and Chairman of the Board made several loans to the Company totaling $116,300 which bear simple interest of 6% annually. As of February 28, 2010, the Company repaid $94,600. The remaining loans outstanding of $21,700 have maturity dates expiring between January and February of 2011.
 
 Subsequent to February 28, 2010, Michael Jack Kugler was paid in full on the $21,700 balance including interest.
 
 Common Stock Issued for Services
 
 In October 2009, the Board approved a grant of 250,000 shares of common stock to a director in lieu of cash compensation for services rendered to the Company during calendar year 2009. These shares were issued in January 2010. (See Note 4).
 
 Common Stock Options Issued for Services
 
 In October 2009, the Board granted Michael Jack Kugler, the Company’s Chief Executive Officer and Chairman of the Board, an option to purchase 3,000,000 shares of common stock. (See Note 5).


8.
PLEDGE AGREEMENT




The Company requested its legal counsel to make certain accommodations to the Company regarding payment of outstanding legal fees. On or about January 7, 2010, in exchange for the allowance of such accommodations, the Company entered into an agreement with its law firm whereby the Mexican Subsidiary agreed to grant and pledge, as security for the payment of the debt, a security interest in and a lien on all of its rights to the Company’s mining concessions.
  9.
SUBSEQUENT EVENTS
 
 On March 11, 2010, the Company’s board of directors approved the officer and directors compensation for the calendar year 2010. The board approved the issuance of an aggregate of 1,500,000 shares of stock in July 2010 valued at $300,000 for compensation to the five board directors and one officer. The related expense will be recorded beginning in March 2010 over the remainder of the calendar year.
 
 On March 22, 2010, the Company’s Mexican subsidiary, as well as several officers of the Company, was served with a lawsuit by an ex-officer and director of the Company relating to his termination.   The case is currently in the preliminary stages and outside counsel has advised the Company that at this stage in the proceedings they cannot offer an opinion as to the outcome.  The Company believes the suit is without merit and intends to vigorously defend its position.






13






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




Management’s discussion and analysis of financial condition, changes in financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of the Company’s financial condition and results of operations.




Overview




We were formed as a mineral exploration company on January 21, 1998. We are engaged in the acquisition, exploration and development of mineral properties. We focus on gold and base minerals primarily located in the State of Michoacán, Mexico where we own exploration and exploitation concessions to approximately 37,000 contiguous acres of land (the “ Solidaridad Property ”).Mineral exploration requires significant capital and our assets and resources are limited. We have never earned revenue from our operations and have relied on equity and debt financing to fund our operations to date.




We are considered an exploration stage company for accounting purposes because we have not demonstrated the existence of proven or probable reserves. In accordance with accounting principles generally accepted in the United States of America, all expenditures for exploration and evaluation of our properties have been expensed as incurred. Furthermore, unless our mineralized material is classified as proven or probable reserves, substantially all expenditures have been or will be expensed as incurred. Since substantially all of our expenditures to date have been expensed and we expect to expense significant expenditures during the fiscal year 2010, most of our investment in mining properties does not appear as an asset on our balance sheet.




Liquidity and Capital Resources




There is no assurance that commercially viable mineral deposits exist in sufficient amounts in our areas of exploration to justify exploitation. While we have the legal right to exploit a portion of the property we must obtain an environmental impact study on the remaining portions before we can exploit those areas. Further exploration and data analysis will be required before we can make a final evaluation as to the economic and legal feasibility of mining the entire Solidaridad Property. Because we are still an exploration stage company, we have no revenues and have had only losses since our inception. Our plan of operations for the next 12 months is to continue the drilling program and begin a small exploitation program, provided that we receive sufficient funding to do so. However, we have made no commitments for capital expenditures over the next 12 months. Our management estimates that approximately $3,000,000 will be required over the next 12 months to maintain our current status. This amount does not include any exploitation or any additional exploration. We estimate these expenses to include approximately $864,000 for salaries, outsourced labor and consulting services, $480,000 for professional services, including work undertaken by the independent accountant and legal fees, $72,000 for rent, maintenance, and utilities, $130,000 for permits and expenses required to maintain our mining rights, $114,000 for taxes and insurance, $120,000 for office expenses, $20,000 for other miscellaneous expenses, including marketing and investor relations expenses and $1,200,000 for outstanding accounts payable.




Depending on market conditions and the options available to us, we may attempt to enter into a joint venture with an operating company or permit an operating company to undertake exploration work on the Solidaridad Property, or we may seek equity or debt financing (including borrowing from commercial lenders), we may consider a sale of the Company or its assets, or another option that may become available.




We do not intend to hire any additional employees at this time. All of the work related to our business will be conducted by our current employees and independent contractors. To the extent we receive funding, this is likely to change.




All of the Company’s plans are predicated on the Company’s ability to raise sufficient capital to implement and complete such plan, which we cannot assure you will occur in a timely manner, on terms acceptable to the Company, or at all. If we are not able to obtain additional funding, we will not be able to continue our drilling program or execute a small exploitation program.




Because the exploration phase of our business plan is essentially a research and development activity, the results of our exploration activities will have a significant effect on our future business model. This model can change substantially based upon our exploration activities, liquidity position or other factors. Accordingly, estimating expenditures is an imprecise process, made even more so by the unpredictable nature of our business plan. We believe it would, therefore, not be helpful to estimate beyond the next 12 months. Even these estimates are subject to change depending on our ability to raise additional capital and execute our business plan in accordance with our estimates.




To date, we have raised capital through the sale of shares of our common stock, sales of convertible promissory notes and short term loans. For the quarter and nine months ended February 28, 2010, we raised an additional $215,000 and $645.000, respectively, in convertible promissory notes which can be converted into shares of common stock of the Company at the option of the holder or automatically under certain circumstances as described above in Note 3 to the Consolidated Financial Statements. The Company’s Chief Executive Officer and Chairman of the Board made several loans to the Company as described in Note 7 to the Consolidated Financial Statements. As of February 28, 2010, the total aggregate outstanding principal amount of all short term loans to our Chief Executive Officer was $21,700. At this time, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock, through sales of additional convertible promissory notes or otherwise to meet our obligations over the next 12 months.




14







We must obtain additional funding to continue our operations. There can be no guarantee that we will be able to obtain additional funding on terms that are favorable to the Company or at all. As an exploration stage company, the Company has no current ability to generate revenue and no plans to do so in the foreseeable future. Our assets consist of prepaid expenses, nominal equipment and certain mineral property interests. There can be no assurance that we will obtain sufficient funding to continue operations, or if, we do receive funding, to generate revenues in the future or to operate profitably in the future. We have incurred net losses in each fiscal year since inception of our operations. These conditions raise substantial doubt about our ability to continue as a going concern.




As of the fiscal quarter ended February 28, 2010, we had total assets of $427,968 consisting of cash of $53,940 and various other assets.




Since we do not anticipate generating any revenue for the foreseeable future, we will have to continue to seek additional funding from outside sources. However, we are facing declining and volatile financial markets that may make it difficult to satisfy our need for additional capital to finance our plan of operations for fiscal 2010 through either debt or equity. As a result, we continue to seek appropriate opportunities that are likely to provide the Company with adequate fiscal resources to execute its plan of operations in the current fiscal year and beyond.




Because of the exploratory nature of our current business plan, we anticipate incurring operating losses for the foreseeable future. Our future financial results also are uncertain due to a number of factors, some of which are outside our control. These factors include, but are not limited to:





i.
our ability to raise sufficient additional funding;ii.
the results of our proposed exploration programs on the Solidaridad Property; andiii.
assuming significant mineral deposits, our ability to be successful in commercially producing mineral deposits, find joint venture partners for the development of our property interests or find a purchaser for the property interests.




Financial Information for Comparative Three and Nine Months Ending February 28, 2010 and 2009.




We have not earned any revenues and have had only losses since our inception, including during the nine months ending in February 28, 2010 and 2009.
 
 We incurred operating expenses in the amount of $632,994 and $736,695 during the quarters ended February 28, 2010 and 2009, respectively. The decrease in expenses of $103,701 consisted of a decrease in professional fees of $240,131, an increase in salaries and benefits of $91,181 and the aggregate net increase between other expenses such as, office maintenance, insurance and travel of $45,249.
 
 We incurred operating expenses in the amount of $2,768,321 and $6,356,109 during the nine months ended February 28, 2010 and 2009, respectively. The decrease in expenses of $3,587,788 consisted of decreases in share based compensation of $3,018,456, drilling and excavation expenses of $474,845, and the aggregate net decrease between other expenses such as professional fees, salaries and benefits, office maintenance, insurance and travel of $94,847.
 
 Interest expense for the three and nine months ended February 28, 2010 was $45,382 and $125,398, respectively.  Interest expense for both the three and nine months ended February 28, 2009 was $8,866.  Interest expense relates primarily to our convertible notes payable as described in Note 3 to the Consolidated Financial Statements.


15







Off-Balance Sheet Arrangements




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




Critical Accounting Policies and Estimates




The Company has determined from the significant accounting policies disclosed in Note 2 of the Company’s financial statements, that the following disclosures are critical accounting policies:




Proven and Probable Reserves




The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. In addition, reserves cannot be considered proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable at the time of the reserve determination.




Mine Development Costs




Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines. Costs incurred before the mineralized material is classified as proven and probable reserves are expensed and classified as mine development costs.




Revenue Recognition Policy




Revenue will be recognized when the price is determinable, upon delivery and transfer of title to the customer and when there is a reasonable assurance of collection of the sales proceeds. The Company has not yet entered into any contractual obligation to deliver ore product or finished metals.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.




We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) and are not required to provide the information required under this Item 3.




ITEM 4. CONTROLS AND PROCEDURES.




Not Applicable.




ITEM 4T. CONTROLS AND PROCEDURES.




Evaluation of Disclosure Controls and Procedures.




Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, as of the last day of the fiscal period covered by this report, February 28, 2010. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of February 28, 2010.







16




Changes in Internal Control over Financial Reporting.




During the fiscal quarter ended February 28, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




PART II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.




The Company is involved in legal proceedings from time to time arising out of the ordinary conduct of its business. On March 22, 2010, the Company’s Mexican subsidiary, as well as several officers of the Company, was served with a lawsuit by an ex-officer and director of the Company relating to his termination.   The case is currently in the preliminary stages and outside counsel has advised the Company that at this stage in the proceedings they cannot offer an opinion as to the outcome.  The Company believes the suit is without merit and intends to vigorously defend its position.


ITEM 1A. RISK FACTORS.




We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item 1A.




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.




We recorded the following unregistered sales or issuances of equity securities during the quarter ended February 28, 2010:
 
 We issued convertible promissory notes with an aggregate principal amount of $50,000 to two individuals (the “ Notes ”). The Notes bear simple interest at an annual rate of 16%. The Notes may be converted into shares of the Company’s common stock at the option of the holder or automatically, each under certain circumstances as described below:
 
 Any holder of the Notes has the option to convert the principal and outstanding interest under such holder’s Notes into shares of the Company’s common stock at an exercise price of $0.20 per share, subject to certain restrictions if the holder has been advised that (a) the Company is actively negotiating its next financing or (b) the Company has entered into a definitive agreement providing for a change of control.
 
 The Notes would automatically convert into shares of the Company’s common stock at a conversion price of $0.20 per share if the Company completes any financing that results in proceeds of at least $10,000,000 to the Company, or upon the occurrence of a change in control of the Company.
 
 The Notes mature on the earliest of (a) the date of an automatic conversion or (b) December 31, 2011.
 
 The Notes have not been (and will not be) registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
 We used the proceeds from all of the sales of securities for general working capital purposes.





17







ITEM 3. DEFAULTS UPON SENIOR SECURITIES.




None.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.




No matters were submitted to a vote of security holders during the second quarter ended February 28, 2010.




ITEM 5. OTHER INFORMATION.




None


18







ITEM 6. EXHIBITS.





Incorporation by ReferenceExhibit Number

Exhibit Description

Form

File

Number

Exhibit

File Date

Filed

herewith31.1

Certification of Principal Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended









X31.2

Certification of Principal Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended









X32.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)









X32.2

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)









X







19







SIGNATURES




Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





U.S. Precious Metals, Inc.By:
/s/ M. Jack KuglerName: M. Jack KuglerTitle: Chief Executive Officer and Chairman of the BoardDate: April 19, 2010





U.S. Precious Metals, Inc.By:
/s/ Jesus OliverasName: Jesus OliverasTitle: Chief Financial OfficerDate: April 19, 2010












20







INDEX TO ATTACHED EXHIBITS





EXHIBIT31.1

Certification of Principal Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Principal Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).32.2

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).