NOTE 7 – LOAN TO OPERATOR OF MOLEJON GOLD MINE PROJECT

Pursuant to an agreement dated January 22, 2016, we have acquired a limited royalty on the first 2,000 ounces of gold that may be produced per month at Petaquilla Minerals Ltd.’s Molejon Gold Mine located in Donoso District, Colon Province, Republic of Panama. Our royalty right is contingent on our advancing to Blendcore LLC, as borrower and as the operator of certain proposed operations at the Molejon Gold Mine, the final tranche of a loan in the total principal amount of $250,000. The funds are to be advanced in accordance with a budget for the restart of processing of stockpiled ore at the Mine, which has been annexed to the loan agreement dated January 22, 2016 among our Company, Blendcore and Petaquilla Minerals’ subsidiary, Petaquilla Gold, S.A. As of January 31, 2017, our Company had advanced $215,000 to Blendcore under the loan agreement. Subsequent to our advancing the monies to Blendcore progress has been slow in advancing the restart. Separate and apart from the issues arising with respect to the loan to Blendcore, we have engaged a law firm in Panama to pursue the acquisition of the Molejon Gold Mine. Representatives of this firm are in discussions with a committee formed by the Panamanian government to oversee the transfer of interests of the Molejon Gold Mine.

Valuation of Derivative

As the loan agreement with Blendcore contains a royalty component, there is an embedded derivative in its value. Currently, the Company has elected to account for the entire instrument as a derivative at fair value, with changes in fair value presented in earnings. The fair value of the derivative is determined by using a discounted cash flow analysis related to various expected future cash flows to be received based on weighted probabilities due to the uncertainty of the potential royalty streams. This asset is classified as a Level 3 asset within the fair value hierarchy as our valuation estimates utilize significant unobservable inputs, including estimates as to the probability and timing of future gold production. Transaction related fees and costs are expensed as incurred.

The changes in the estimated fair value from the derivative along with cash receipts each reporting period are presented together on the Statement of Operations as a component of revenue under the caption, “Derivative – change in fair value”.

Allowance for Doubtful Account