10-Q 1 jun10.txt 10-Q FOR THE PERIOD ENDED 6-30-10 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 1934 For the quarterly period ended JUNE 30, 2010 or ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ To __________ Commission file number 1-7375 COMMERCE GROUP CORP. (Exact name of registrant as specified in its charter) WISCONSIN 39-6050862 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 6001 NORTH 91ST STREET MILWAUKEE, WISCONSIN 53225-1795 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 462-5310 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [x] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x] 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 [] 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 (Sec. 229.405 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 [ ] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [x] Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 30,750,869 common shares of the Company's common stock, $0.10 par value, were issued and outstanding as of August 13, 2010. 1 COMMERCE GROUP CORP. FORM 10-Q FOR THE FIRST QUARTER ENDED JUNE 30, 2010 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements have been prepared by Commerce Group Corp. ("the Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed and omitted pursuant to such SEC rules and regulations. These consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company's Form 10-K for the year ended March 31, 2010. Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Cash Flows 6 Notes to the Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Default Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24 2 SIGNATURES: Registrant's Signature Page 24 Certification of Chief Executive Officer (Section 302) 25 Certification of Chief Financial Officer (Section 302) 26 Certification of Chief Executive Officer (Section 906) 27 Certification of Chief Financial Officer (Section 906) 28 CAUTIONARY STATEMENT FOR PURPOSED OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The matters discussed in this quarterly report on Form 10-Q, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such factors include, among others, the speculative nature of mineral exploration, commodity prices, production and reserve estimates, environmental and governmental regulations, availability of financing, force majeure events, and other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise. 3 COMMERCE GROUP CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 06/30/10 (Unaudited) 03/31/10 ----------- -------- ASSETS ------ Current assets Cash $ 9,334 $ 5,965 Other current assets 40,000 40,000 Accounts receivable - related, net of allowances 251,611 250,582 Supplies held for sale 6,928 6,928 Prepaid items and deposits 11,236 11,236 ------------ ------------ Total current assets 319,109 314,711 Property, plant and equipment, net 76,323 76,323 ------------ ------------ Total assets $ 395,432 $ 391,034 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- Current liabilities Accounts payable $ 2,948 $ 2,947 Accounts payable - related 338,182 322,631 Notes and accrued interest payable to related parties 28,837,762 27,661,381 Notes and accrued interest payable to others 382,623 377,238 Accrued salaries 3,939,881 3,895,631 Accrued legal fees 553,208 546,233 Other accrued expenses - related parties 585,400 576,400 Other accrued expenses - other 423,879 421,125 ------------ ------------ Total current liabilities 35,063,883 33,803,586 ------------ ------------ Total liabilities 35,063,883 33,803,586 ------------ ------------ Commitments and contingencies Shareholders' Deficit Preferred Stock Preferred stock, $0.10 par value: Authorized 250,000 shares; Issued and outstanding - none $ - $ - Common stock, $0.10 par value: Authorized 50,000,000 shares; 30,750,869 issued and outstanding: 3,075,087 3,075,087 Capital in excess of par value 19,579,827 19,579,827 Accumulated deficit (57,323,365) (56,067,466) ------------ ------------ Total shareholders' deficit (34,668,451) (33,412,552) ------------ ------------ Total liabilities and shareholders' equity $ 395,432 $ 391,034 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 COMMERCE GROUP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2010 2009 ------------ ------------ Revenues: $ - $ - ------------ ------------ Expenses: General and administrative $ 115,960 188,254 ------------ ------------ Total expenses 115,960 188,254 ------------ ------------ Net loss from operations $ (115,960) $ (188,254) ------------ ------------ Other income (expense) Interest expense (1,139,939) (965,173) ------------ ------------ Total other income (expense) (1,139,939) (965,173) ------------ ------------ Net loss (1,255,899) (1,153,427) Income tax expense - - Net loss (1,255,899) (1,153,427) ============ ============ Net loss per share basic/diluted $ (.04) $ (.04) ============ ============ Weighted average basic/diluted common shares outstanding 30,750,869 30,750,869 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 COMMERCE GROUP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2010 2009 ------- ------- OPERATING ACTIVITIES: Net loss $(1,255,899) $(1,153,427) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Changes in assets and liabilities: Decrease (increase) in mining supplies - - Decrease (increase) in accounts receivable and other current assets/liabilities (1,029) - Decrease (increase) in prepaid items and deposits - 2,852 Increase in accounts payable and other accrued expenses 15,551 6,682 Increase in accrued interest to related parties 1,134,553 959,788 Increase in accrued interest to others 5,385 5,385 Increase in accrued legal fees 6,975 5,771 Increase in accrued salaries 44,250 44,250 Increase in other accruals to related parties 9,000 13,800 Increase in other accruals 2,754 3,712 Net cash used in ----------- ------------ operating activities (38,460) (111,187) INVESTING ACTIVITIES: Cash received, scrap metal - 24,000 ---------- ----------- Net cash provided by investing activities - 24,000 FINANCING ACTIVITIES: Cash received, related party notes payable 41,829 75,869 ---------- ---------- Net cash provided by financing activities 41,829 75,869 Net increase (decrease) in cash and cash equivalents 3,369 (11,318) Cash - beginning of the period 5,965 38,827 ---------- ----------- Cash - end of the period $ 9,334 $ 27,509 ========== =========== Supplemental disclosures of cash information: --------------------------------------------- June 30, 2010 June 30, 2009 ------------------ ------------------ Cash information Shares Amount Shares Amount ------ ------ ------ ------ 1. Interest expense paid in cash - - - - 2. Income taxes paid - - - - The accompanying notes are an integral part of these consolidated financial statements. 6 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS GENERAL Commerce Group Corp., a Wisconsin-based corporation organized in 1962 ("Commerce," the "Company" and/or "Registrant") and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc., a Nevada corporation organized in 1968 ("Sanseb"), have formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of performing gold mining, the sale of gold, and related activities, including, but not limited to, exploration, exploitation, development, extraction and processing of precious metals in the Republic of El Salvador, Central America. CONSOLIDATED STATEMENTS The Joint Venture and the following subsidiaries are all majority-owned by the Company and are included in the consolidated financial statements of the Company. All significant intercompany balances and transactions have been eliminated. Not included in the consolidated statements is Mineral San Sebastian, S.A. de C.V. (Misanse) as the Company does not have corporate control of Misanse because the majority of Misanse's elected directors must be El Salvadoran shareholders. Charter/Joint Venture --------------------- Included in the Consolidated Statements % Ownership Place Date --------------------------------------- ----------- ----- ---- Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & El Salvador 09/22/1987 Not included in the Consolidated Statements ------------------------------------------- Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960 NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has recurring net losses, negative working capital and negative cash flow from operations, and is dependent upon raising capital to continue operations. The Company's ability to continue as a going concern is subject to its ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of its securities, increasing sales or obtaining loans and grants from various financial institutions where possible. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the past five years, the Company and its shareholders and officers have been able to provide the capital necessary to continue the operations of the Company, the maintenance of the mine and related equipment, and perform limited exploration on its exploration license areas. However, there is no guarantee that the Company can continue to provide the required capital and to keep the Company's assets maintained. If the Company was unable to raise sufficient funds, the Company would be unable to pay its employees in El Salvador, which could result in loss of assets or impairment thereof. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 7 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL STATEMENTS The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 2010 and 2009 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company's March 31, 2010 audited financial statements. The results of operations for the periods ended June 30, 2010 and 2009 are not necessarily indicative of the operating results for the full year. ACCOUNTING METHOD The Company recognizes income and expenses on the accrual basis of accounting. The Company has elected a March 31 year end. MINORITY INTEREST During the first quarter periods ended June 30, 2010 and 2009, there were no expenses in the entities wherein minority interests existed. Minority interest as a whole is immaterial in these financial statements and therefore has not been presented. OTHER CURRENT ASSETS Other current assets consist primarily of stock of the Company held for reimbursement of medical and other expenses incurred by employees of the Company in El Salvador. The Company is required by the El Salvadoran government to set aside assets for the payment of medical and other expenses of El Salvadoran employees. During the year ended March 31, 2010, the Company revalued those assets held aside for reimbursement of expenses at current market values. As such, the Company recognized a loss on valuation of assets of $61,529. Other current assets as of the periods ended June 30, 2010 and March 31, 2010 were $40,000 and $40,000, respectively. 8 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE - RELATED The accounts receivable - related balance consists of advances to Mineral San Sebastian S.A. (Misanse), which is 52% owned by the Company. These advances are an offset for the past and future Misanse rental charges that are included in the accounts payable. An accounting is as follows: Misanse Others Total -------- ------- -------- Accounts receivable $251,611 $ 0 $251,611 Accounts payable - related parties $251,611 $86,571 $338,182 The Company is of the opinion that it is appropriate to record the fact that Misanse owes the Company $597,868 and that the Company owes Misanse $251,611 as Misanse is not consolidated with the Company's financial records. If gold production commences, the 5% royalty payable to Misanse for rent of the San Sebastian Gold Mine property based on the gross proceeds from the sale of gold and the accounts payable offset will reduce this receivable until it is paid in full. Due to the fact that the country of El Salvador where the Company is planning to mine revoked its mining permits and the Company is in the process of challenging that decision, management determined that the collectability of the Misanse-related receivable is uncertain. Therefore, it set up an allowance of $346,257 for bad debts during its fiscal year ended March 31, 2009 and as of June 30, 2010 left a balance of $251,611 in accounts receivable. SUPPLIES HELD FOR SALE Supplies held for sale consist of consumable items used in processing mineralized material. The Company is in the process of liquidating its consumables and has reduced the value to the amount it anticipates to recover. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 9 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MINING RESOURCES INVESTMENT The Company, in order to avoid expense and revenue unbalance expenses all costs directly associated with acquisition, exploration and development of specific properties. Gains or losses resulting from the sale or abandonment of mining properties will be included in operations. The Joint Venture expenses its costs. REVENUE RECOGNITION Revenue from the sale of gold will be recognized when delivery has occurred, title and risk of loss passes to the buyer, and collectability is reasonably assured. Gold sales will be made in accordance with sales contracts where the price is fixed or determinable. No revenue has been recognized for the years presented. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at the lower of cost or estimated net realizable value. Mining properties, development costs and plant and equipment are depreciated using the straight-line method over estimated useful lives ranging from three to ten years. Depreciation and amortization expenses include the amortization of assets acquired, if any, under capital leases. Replacements and major improvements are capitalized. Maintenance and repairs will be charged to expense based on average estimated equipment usage. Interest costs incurred in the construction or acquisition of property, plant, and equipment are expensed when incurred. The Company did not impair the plant and equipment for the amount of $76,323 which represents the cost of land that management believes is fully recoverable. IMPAIRMENTS OF LONG-LIVED ASSETS The Company evaluates the carrying value of the unamortized balances of long-lived assets to determine whether any impairment of these assets has occurred or whether any revision to the related amortization periods should be made, in accordance with GAAP, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Those long-lived assets include the mine development, mineral interest, mining properties, and property, plant and equipment. This evaluation is based on management's projections of the undiscounted future cash flows associated with each asset. If management's evaluation were to indicate that the carrying values of these assets were impaired, such impairment would be recognized by a write down of the applicable asset. All other assets are fully impaired. 10 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOSS PER COMMON SHARE The computation of loss per share of common stock is based on the weighted average number of shares outstanding during the period. SUBSQUENT EVENTS The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined that there are no events that would have a material impact on the financial statements. NOTE 4 - NOTES PAYABLE AND ACCRUED INTEREST 06/30/10 03/31/10 -------- -------- Related Parties Mortgage and promissory notes to related parties, interest ranging from one percent to four percent over prime rate, but not less than 16%, payable monthly, due on demand, using the Misanse lease, real estate and all other assets owned by the Company, its subsidiaries and the Joint Venture as collateral. (Note 5) $28,837,762 $27,661,381 Other Short-term notes and accrued interest (June 30, 2010, $247,623 and March 31, 2010, $242,238) issued to other non related parties, interest rates of varying amounts, in lieu of actual cash payments and includes a mortgage on a certain parcel of land pledged as collateral located in El Salvador. 382,623 377,238 ----------- ----------- Total: $29,220,385 $28,038,619 11 NOTE 5 - RELATED PARTY TRANSACTIONS The Company, in an attempt to preserve cash, had prevailed on its late President to accrue his salary for the past 26.58 years, including vacation pay, for a total of $3,455,786 and $3,455,786 at June 30, 2010 and March 31, 2010, respectively. The current President has also agreed to accrue his salary and vacation pay beginning April 1, 2008, which totals $404,479 and $363,229 as of June 30, 2010 and March 31, 2010, respectively. In addition, with the consent and approval of the Directors, the late President of the Company, as an individual and not as a Director or Officer of the Company, entered into the following financial transactions with the Company, the status of which is reflected as of June 30, 2010 and March 31, 2010: The amount of cash funds which the Company has borrowed from its late President from time to time, together with accrued interest, amounts to $19,168,560 and $18,413,742 at June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $754,818 and $642,484 respectively. To evidence this debt, the Company has issued to its late President a series of open-ended, secured, on-demand promissory notes, with interest payable monthly at the prime rate plus two percent, but not less than 16% per annum. The Company had borrowed an aggregate of $2,054,490 and $1,973,589 at June 30, 2010 and March 31, 2010, respectively, including accrued interest, from the Company's late President's Rollover Individual Retirement Account (ELM RIRA). The interest for the three months ended June 30, 2010 and June 30, 2009 was $80,902 and $68,862 respectively. These loans are evidenced by the Company's open-ended, secured, on-demand promissory note, with interest payable monthly at the prime rate plus four percent per annum, but not less than 16% per annum. Also with the consent and approval of the Directors, a company in which the late President has a 55% ownership, General Lumber & Supply Co., Inc. (GLSCO), entered into the following agreements, and the status is reflected as of June 30, 2010 and March 31, 2010: The Company leased approximately 4,032 square feet on a month-to-month basis for its corporate headquarters' office; the monthly rental charge was $2,789. The same related company provides administrative services, use of its vehicles, and other property, as required by the Company. In lieu of cash payments for the office space rental and for the consulting, administrative services, etc., these amounts due are added each month to this related company's open-ended, secured, on-demand promissory note issued by the Company. In addition, this related company does from time to time use its credit facilities to purchase items needed for the Company or for the Joint Venture's mining needs. 12 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED) This related company has been issued an open-ended, secured, on-demand promissory note, which amounts to $5,360,224 and $5,136,655 at June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $210,740 and $169,554 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. The Company's Directors have consented and approved the following transactions of which the status of each are reflected as of June 30, 2010 and March 31, 2010: The late President's wife's Rollover Individual Retirement Account (SM RIRA) has the Company's open-ended, secured, on-demand promissory note in the sum of $1,291,398 and $1,240,546 at June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $50,853 and $47,912 respectively. The annual interest rate is three percent plus the prime rate, but not less than 16%, and it is payable monthly. The Directors also have acknowledged that the wife of the late President is to be compensated for her consulting fees due to her from October 1, 1994 through September 30, 2000 or 72 months at $2,800 a month, and thereafter at $3,000 per month. The Company owes her as an individual and as a consultant, the sum of $552,600 and $543,600 at June 30, 2010 and March 31, 2010, respectively, for services rendered from October 1994. The second oldest son of the late President and his son's wife have the Company's open-ended, on-demand promissory note in the sum of $421,436 and $404,841 at June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $16,595 and $14,126 respectively. The annual interest rate is three percent plus the prime rate, but not less than 16%, and it is payable monthly. The Law Firm which represents the Company in which the second oldest son of the late President is a principal is owed the sum of $553,208 for 2,459 hours of legal services rendered from July 1980 through May 31, 2010. By agreement on the date of payment, these fees are to be adjusted to commensurate with the current hourly fees charged by the Law Firm. The current President, who has controlling ownership of a company called Circular Marketing, Inc., has the Company's open-ended, secured, on-demand promissory note in the sum of $517,288 and $468,601 at June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $19,687 and $16,034 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. 13 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED) The late President's half brother has a promissory note in the sum of $24,366 and $23,407 as of June 30, 2010 and March 31, 2010, respectively; the interest for the three months ended June 30, 2010 and June 30, 2009 was $959 and $817 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. The Directors, by their agreement, have deferred cash payment of their Director fees beginning on January 1, 1981, until such time as the Company's operations are profitable. Effective from October 1, 1996 to March 31, 2009, the Director fees were $1,200 for each quarterly meeting and $400 for attendance at any other Directors' meeting. The Executive Committee Director fees were $400 for each meeting. At a Board of Directors' meeting held in June of 2009, the Directors agreed to amend the Director fees to be $600 for attendance at any meeting retroactive to April 1, 2009. The Directors and Officers have an option to receive cash at such time as the Company has profits and an adequate cash flow, or to at any time exchange the amount due to them for the Company's common shares. The Chairman/President does not receive any Director fees. The accrued amount due for Director fees for the periods ended June 30, 2010 and March 31, 2010 was $32,800 and $32,800 respectively. The other salary accruals as of June 30, 2010 and March 31, 2010 are $79,616 and $76,616 respectively. NOTE 6 - LITIGATION There is no pending litigation in the United States with the exception of the CAFTA proceedings described below. The Company's El Salvadoran legal counsel on December 6, 2006, filed a complaint with the El Salvadoran Supreme Court Administrative Division claiming that the El Salvadoran Office of the Ministry of Environment and Natural Resources (MARN) has revoked two of its El Salvadoran environmental permits for mining exploitation, without any prior notice, without a right to a hearing and the right of due process, based on misguided assertions, and contrary to El Salvadoran law. In addition, the Company's legal counsel stated that there is a lack of legal foundation for the sanctions and excess authority exercised by MARN. Reference is made to Exhibit 10.20 of the Company's Form 10-K/A for its fiscal year ended March 31, 2007, for an English translation of that complaint. Also, in October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's previous request for an extension of the exploration permits at the San Sebastian and Nueva Esparta areas and has challenged the Government of El Salvador's action. The Company has been notified that on April 29, 2010 the El Salvadoran Supreme Court issued a notice to counsel rejecting the Company's appeal. The Company has initiated arbitration proceedings where it contends that the Government of El Salvador frustrated its effort to develop its mining interests in the Country of El Salvador in violation of the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR). On March 17, 2009, the Company served a written notice of its intent to submit a claim to arbitration on the Republic of El Salvador under CAFTA-DR. The parties had 90 days to resolve their dispute amicably, after which the Company had the right to commence arbitration proceedings against the Government of El Salvador to claim significant monetary damages. When the Company received no response to the Notice of Intent, on July 2, 2009 it submitted to the International Centre for Settlement of Investment Disputes (ICSID) a notice of arbitration to commence international arbitration proceedings against the Government of El Salvador under CAFTA-DR. The request for arbitration was registered with the ICSID on August 21, 2009. On July 1, 2010 the Company received notice from the ICSID that the three nominations for arbitrators in the Company's action under CAFTA-DR have all accepted their appointments. As a result, the Arbitral Tribunal was therefore deemed to have been constituted under ICSID Arbitration Rule 6. On July 29, 2010, the tribunal conducted an initial scheduling conference. Based on discussions at the conference, it is anticipated that El Salvador will file preliminary objections to these arbitration proceedings which the tribunal will rule upon in late 2010 or early 2011. 14 COMMERCE GROUP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2010 NOTE 7 - BUSINESS SEGMENTS The Company presently has two reportable segments: mining and other. The mining segment was engaged in the exploitation and exploration of precious metals. The other segments are those activities that are combined for reporting purposes. Mining El Salvador, Corporate Central America Headquarters ---------------------- ------------ Fiscal period ended 06/30/10 Sales and revenues $ - $ - Depreciation & amortization - - Operating income (loss) - (1,255,899) Total assets 271,036 48,073 Capital expenditures - - Fiscal period ended 06/30/09 Sales and revenues $ - $ - Depreciation & amortization - - Operating income (loss) - (1,153,427) Total assets 310,067 249,034 Capital expenditures - - NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS The Company has reviewed the recent accounting pronouncements and does not believe the provisions of any will have a material effect on the financial position, results of operations or cash flows of the Company. 15 COMMERCE GROUP CORP. AND SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report. The following discussion provides information on the results of operations and the financial condition, liquidity and capital resources for the first quarter periods ended June 30, 2010 and 2009. The financial statements of the Company and the notes thereto contain detailed information that should be referred to in conjunction with this discussion. OVERVIEW All of the Company's mining interests are located in the Republic of El Salvador, Central America. The Government of El Salvador (GOES) via the Ministry of Economy's office issued three concessions/licenses which have now been revoked or suspended. At the present time, the Government of El Salvador has for all intents and purposes, prohibited precious metal mining in the Republic of El Salvador. The Company is unable to predict if and when this policy will change. This has hampered not only mining activities, but also, the Company's ability to find a suitable investment partner. The Company has invoked the legal process to challenge the actions taken by the Government of El Salvador against the Company. If the Company succeeds in its legal challenges or the Government of El Salvador changes its policy, and the Company obtains the funds to do so, the Company intends to resume its activities in the Republic of El Salvador which are now suspended. Primarily, the Company is determined to obtain the permissions needed from El Salvador and to enter into a business arrangement through which gold will be produced at an open-pit, heap-leach operation constructed on its San Sebastian Gold Mine site which is located approximately two and one half miles off of the Pan American highway northwest of the City of Santa Rosa de Lima in the Department of La Union, El Salvador. The Company does not have a final feasibility study completed within the past five years, therefore, a determination that the property contains valid reserve estimates is not possible at this time. 16 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) In the past, the Company had the following exploitation/exploration licenses, and is pursuing legal remedies in an effort to reinstate the licenses: Acres ----- Exploitation/Exploration Department or Exploi- Explor- Concessions/Licenses Location tation ation Total ------------------------ ------------- ------ ------- ----- Renewed San Sebastian Gold Mine La Union 304 1,394 1,698 New San Sebastian Gold Mine La Union/Morazan 8,372 8,372 Nueva Esparta La Union/Morazan 11,115 11,115 --- ------ ------ Total Acreage 304 20,881 21,185 FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES The Company has no revenues because it is not in production and it requires funds to purchase the necessary equipment, inventory and working capital to commence processing mineralized material. If the Company's permits to conduct mining activity are restored, the Company will need to raise adequate funds from outside sources for this operation; the amount required is dependent on the targeted daily volume of production. However, the Company estimates that at least $30 million (net) in funding is needed for the expansion of exploration opportunities and to resume production of gold and silver from its San Sebastian Gold Mine located near the City of Santa Rosa de Lima, Republic of El Salvador, Central America. The Company continues to rely on its directors, officers, related parties and others for its funding needs. It believes that the funding needed to proceed with the exploration of the other exploration targets for the purpose of identifying potential gold ore reserves will be greatly enhanced if the price of gold stays at the current or higher level. These exploration programs will involve airborne geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The Joint Venture believes that it may be able to joint venture or enter into other business arrangements to share these exploration costs with other entities. DEBT Most of the debt is owed to related parties as follows: Related Parties Others Total --------------- ------ ----- Accounts payable - Commerce $ 86,571 $ 20 $ 86,591 Accounts payable - Comseb 251,611 2,928 254,539 Notes payable and accrued interest 28,837,762 382,623 29,220,385 Accruals - salaries 3,939,881 3,939,881 Accruals - legal fees 553,208 553,208 Accruals - other - Commerce 585,400 198,058 783,458 Accruals - other - Comseb 225,821 225,821 ----------- -------- ----------- Total $34,254,433 $809,450 $35,063,883 Although the majority of the short-term obligations are due on demand, most of the obligations have the attributes of being long-term obligations as most of the debt is due to related parties who have not called for payment during the past five or more years. 17 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) RESULTS OF OPERATION FOR THE THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO JUNE 30, 2009 There are no revenues as the Company has suspended its gold production until it is able to enter into a business arrangement. The price of gold has stabilized at a price level that could assure a profitable operation. The Company recorded a net loss of $1,255,899 or $.04 cents per share for the three months ended June 30, 2010. This compares to a net loss of $1,153,427 or $.04 cents per share for the three months ended June 30, 2009. There was no current or deferred provision for income taxes during the three months ended June 30, 2010 or 2009. Additionally, even though the Company has an operating tax loss carry forward, the Company has previously recorded a net deferred tax asset due to an assessment of the "more likely than not" realization criteria required by FASB ASC 740-10 (formerly the Statement of Financial Accounting Standards No. 109, Accounting for Taxes). Since the Company was not in production, inflation did not have a material impact on operations in the three months ended June 30, 2010 or 2009. The Company does not anticipate that inflation will have a material impact on continuing operations during the next fiscal year unless the Company is producing gold and silver. Based on past experience, the costs for fuel will be a significant operating expense when production commences. It is expected that continued high fuel costs and increased costs of hiring and retaining qualified mining personnel with the required specialized skills to operate and manage a mining operation will have a potential significant impact on continuing operations in the future. The Company recorded interest expense in the sum of $1,139,939 during this three-month period compared to $965,173 for the same period in 2009, and in the past it was eliminated with the interest income earned from the Joint Venture. As stated above, the interest expense is now included in the net loss. Almost all of the costs and expenses incurred by the Company are allocated and charged to the Joint Venture. 18 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's financial condition and results of operations are based on the Company's consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-Q. The preparation of the Company's financial statements requires that the Company make estimates and assumptions that affect the amounts reported in its financial statements and the accompanying notes. The Company has identified certain policies that it believes are important to the portrayal of its financial condition and results of operations. These policies require the application of significant judgment by the Company's management. The Company bases its estimates on historical experience, industry standards, and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on the Company's financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Further information on these assumptions and on the Company's accounting policies can be found in the notes to the Company's financial statements contained in its Form 10-K for its fiscal year ended March 31, 2010. There have been no significant changes to these policies during the period discussed in this report on Form 10-Q. RISK FACTORS The Company's right to explore for gold and silver and to conduct mining at its properties in El Salvador is dependent upon permission from the Government of El Salvador. At the present time, the Government of El Salvador has for all intents and purposes, prohibited precious metal mining in the Republic of El Salvador. The Company is unable to predict if and when this policy will change. This has hampered not only mining activities, but also, the Company's ability to find a suitable investment partner. On or about September 13, 2006, the El Salvador Ministry of the Environment delivered to Commerce's El Salvadoran legal counsel its revocation of the environmental permits issued for the SSGM and SCMP. In October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's previous request for an extension of the exploration permits at the San Sebastian and Nueva Esparta areas. The Company has challenged the Government of El Salvador's actions. Reference is made to note 6. The Company's main objective and plan has been to operate a moderate tonnage, low-grade, open-pit, heap-leaching operation to mine gold on its SSGM site. Since the death of Commerce's long-time Chairman Edward L. Machulak on October 21, 2007, the Company has been directing most of its efforts toward finding a compatible acquisition, merger, or other business arrangement. At the present time, the Company cannot proceed with its plans because the government of El Salvador has revoked the necessary permits. If the Company's permits to conduct mining activity are restored, the Company will need to raise adequate funds from outside sources for its proposed operations. There have been and will be no revenues for so long as the Company is not in production. The Company has recurring net losses, negative working capital and negative cash flow from operations, and is dependent upon raising capital to continue operations. The Company's ability to continue as a going concern is subject to its ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of its securities, increasing sales or obtaining loans and grants from various financial institutions where possible. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 19 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK COMMODITY PRICES The Company's future revenues, earnings and cash flow may be strongly influenced by changes in gold prices, which fluctuate widely and over which the Company has no control. The Company, if market conditions justify, may enter into gold price protection arrangements in the future, if necessary, to ensure that it generates enough cash flow to support its growth and exploration plans and any debt related to the potential financing. The risks associated with price protection arrangements include opportunity risk by limiting unilateral participation in upward prices; production risk associated with the requirement to deliver physical ounces against a forward commitment; and credit risk associated with counterparties to the hedged transaction. At present, the Company's future earnings and cash flow may be significantly impacted by changes in the market price of gold and silver. Gold and silver prices can fluctuate widely and are affected by numerous factors, such as demand, inflation, interest rates and economic policies to central banks, producer hedging, and the strength of the U.S. dollar relative to other currencies. The Company expects gold to be its primary product in the future, but the Company cannot currently reasonably estimate its future production and therefore it cannot comment on the impact that changes in gold prices could have on its projected pre-tax earnings and cash flows during 2008. FOREIGN CURRENCY The price of gold is denominated in U.S. dollars, and the Company's current gold production operations and significant properties are located in the Republic of El Salvador. The Republic of El Salvador converted its money into the U.S. dollar system on January 12, 2001 therefore, the Republic of El Salvador's national currency is the U.S. dollar. ITEM 4. CONTROLS AND PROCEDURES REPORT ON CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. 20 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our chief executive officer and our chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: * pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; * provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and * provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our chief executive officer and our chief financial officer assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 21 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART I - FINANCIAL INFORMATION (CONTINUED) Based on our assessment, our chief executive officer and our chief financial officer believe that, as of June 30, 2010, our internal control over financial reporting was not effective as of the evaluation date due to the factors stated below. Management assessed the effectiveness of the Company's internal control over financial reporting as of evaluation date and identified the following material weaknesses: INSUFFICIENT RESOURCES: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. INADEQUATE SEGREGATION OF DUTIES: We have an inadequate number of personnel to properly implement control procedures. Management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities and (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel. Management, including our president, has discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected. This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of this fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 22 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART II - OTHER INFORMATION Item 1. Legal Proceedings There is no pending litigation in the United States with the exception of the CAFTA proceedings described below. The Company's El Salvadoran legal counsel on December 6, 2006, filed a complaint with the El Salvadoran Supreme Court Administrative Division claiming that the El Salvadoran Office of the Ministry of Environment and Natural Resources, (MARN) has revoked its El Salvadoran environmental permits for mining exploitation, without any prior notice, without a right to a hearing and without the right of due process, based on misguided assertions, and contrary to El Salvadoran law. In addition, the Company's legal counsel stated that there is a lack of legal foundation for the sanctions and excess authority exercised by MARN. Reference is made to Exhibit 10.20 of the Company's Form 10-K/A for its fiscal year ended March 31, 2007, for an English translation of that complaint. Also, in October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's previous request for an extension of the exploration permits at the San Sebastian and Nueva Esparta areas and has challenged the Government of El Salvador's action. The Company has been notified that on April 29, 2010 the El Salvadoran Supreme Court issued a notice to counsel rejecting the Company's appeal. The Company has initiated arbitration proceedings where it contends that the Government of El Salvador frustrated its effort to develop its mining interests in the Country of El Salvador in violation of the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR). On March 17, 2009, the Company served a written notice of its intent to submit a claim to arbitration on the Republic of El Salvador under CAFTA-DR. The parties had 90 days to resolve their dispute amicably, after which the Company had the right to commence arbitration proceedings against the Government of El Salvador to claim significant monetary damages. When the Company received no response to the Notice of Intent, on July 2, 2009 it submitted to the International Centre for Settlement of Investment Disputes (ICSID) a notice of arbitration to commence international arbitration proceedings against the Government of El Salvador under CAFTA-DR. The request for arbitration was registered with the ICSID on August 21, 2009. On July 1, 2010 the Company received notice from the ICSID that the three nominations for arbitrators in the Company's action under CAFTA-DR have all accepted their appointments. As a result, the Arbitral Tribunal was therefore deemed to have been constituted under ICSID Arbitration Rule 6. On July 29, 2010, the tribunal conducted an initial scheduling conference. Based on discussions at the conference, it is anticipated that El Salvador will file preliminary objections to these arbitration proceedings which the tribunal will rule upon in late 2010 or early 2011. Item 2. Changes in Securities None, except as disclosed in the Consolidated Statements of Changes in Shareholders' Equity. Item 3. Default Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None during this period. Item 5. Other Information None. 23 COMMERCE GROUP CORP. AND ITS SUBSIDIARIES SEC FORM 10-Q - JUNE 30, 2010 PART II - OTHER INFORMATION (CONTINUED) Item 6(a). Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description of Exhibit ---------- ---------------------- 31.1* Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Vice President, Treasurer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Vice President, Treasurer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Filed herewith (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant/Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE GROUP CORP. Registrant/Company Date: August 16, 2010 /s/ Edward A. Machulak ------------------------------------- President and Chief Executive Officer 24