The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Notes to the Consolidated
Financial Statements
NOTE 1– ORGANIZATION
AND DESCRIPTION OF BUSINESS
Applied Minerals, Inc. (the “Company”
or “Applied Minerals” or “we” or “us”) (OTCQB: AMNL) owns the Dragon Mine in central Utah.
From the mine we extract, process, or have processed by a third party, halloysite clay and iron oxide for sale to a range of end
markets. We market the minerals directly and through distributors and also under a profit-sharing arrangement with the Kaolin business
unit of BASF Corp. (“BASF”).
We also engage in research and
development and frequently work collaboratively with potential customers, consultants, distributors, and BASF to process and enhance
our halloysite clay products to improve the performance of existing and new products.
Our halloysite clay, which we
market under the DRAGONITE™ trade name, is an aluminosilicate mineral with a hollow tubular shape. DRAGONITE can utilize
halloysite’s morphology, high surface area, and reactivity to add significant functionality to a number of applications such
as, but not limited to, reinforcement additives for polymer composites, flame retardant additives for polymers, catalysts, controlled
release carriers for paints and coatings, strength reinforcement additives for cement, concrete, mortars and grouts, advanced ceramics,
rheology additives for drilling fluids, environmental remediation media, and carriers of agricultural agents. The Company
sells its halloysite products at negotiated prices.
Our iron oxide, which we market
under the AMIRON™ trade name, is a high purity product. We have sold it on an exclusive basis to one customer at a negotiated
price for use in an oilfield application and we are continuing to offer AMIRON to that customer on an exclusive basis. Currently,
we are not selling AMIRON™ to customers on a continuing basis for use in any other application.
The Company is classified as
an “exploration stage” company for purposes of Industry Guide 7 of the U.S. Securities and Exchange Commission (“SEC”)
Under Industry Guide 7, companies engaged in significant mining operations are classified into three categories, referred to as
“stages” - exploration, development, and production. Exploration stage includes all companies that do not have established
reserves in accordance with Industry Guide 7. Such companies are deemed to be “in the search for mineral deposits.”
Notwithstanding the nature and extent of development-type or production-type activities that have been undertaken or completed,
a company cannot be classified as a development or production stage company unless it has established reserves in accordance with
Industry Guide 7.
In 2017, we entered into a tolling
agreement with BASF under which BASF will process the Company’s halloysite product, utilizing a water-based system. The BASF
system is capable of eliminating impurities, such as iron oxide, and chemically treating the surface of halloysite to achieve desired
functionality
.
We have a mineral processing
plant with a capacity of up to 45,000 tons of mineralization per annum for certain applications. The plant is currently dedicated
to processing its halloysite products.
Additionally, the Company has
a second processing facility with a capacity of up to 10,000 tons per annum. This smaller plant is currently dedicated to processing
the Company’s halloysite. This smaller plant processes halloysite using a dry-based, micronizing system. This dry-based
system does not eliminate impurities, such as iron oxide, as effectively as a water-based system but is useful in situations where
the removal of impurities is not necessary.
For the three months ended March
31, 2019, the largest customer during the period accounted for 80% of total revenue and amounts owed by the largest customer represented
85
% of accounts receivable. For the three months ended March 31, 2018, the largest customer during the period accounted
for 47% of total revenue and amounts owed by the largest customer represented 0% of accounts receivable.
Applied Minerals is a publicly
traded company incorporated in the state of Delaware. The common stock trades on the OTCQB under the symbol AMNL.
Exploration Agreement
On December 22, 2017, the Company
and Continental Mineral Claims, Inc. (“CMC”) entered into an Exploration Agreement with Option to Purchase (“Agreement”).
The Company granted to CMC the exclusive right and option to enter upon and conduct mineral exploration activities (the “Exploration
License”) for Metallic Minerals on the Company’s Dragon Mine minesite in Utah (the “Mining Claims”).
Metallic Minerals are defined to include minerals with a high specific gravity and metallic luster, such as gold, silver, lead,
copper, zinc, molybdenum, titanium, tungsten, uranium, tin, iron, etc., but shall exclude any such Metallic Minerals that are intermingled
within any economically-recoverable, non-metallic mineral deposits located at or above an elevation of 5,590 feet above sea level.
Non-metallic minerals include clay and iron oxide, the minerals mined by the Company. The Company believes that all economic
recoverable non-metallic mineral deposits are well above 5,590 feet above sea level. The Exploration License is for a period of
ten years.
In consideration of the Exploration License, CMC has paid the Company $350,000 and paid it $150,000 on the
first anniversary of the Effective Date of the Exploration License. CMC will pay the Company $250,000 on each subsequent anniversary
of the Effective Date of the Exploration License during the remaining term of the Exploration License unless the Exploration License
is terminated earlier by CMC by exercising the option or failing to make the required payment for the Exploration License.
CMC may exercise the option at
any time during the Exploration License term. Upon exercise of the Option and the completion of the closing, CMC shall acquire
100% of the Metallic Rights within the Mining Claims from the Company, subject to the terms and conditions of the Agreement.
The consideration to be paid
by CMC to the Company after exercising the option for the acquisition of the Metallic Rights shall be payable as follows: $3,000,000;
and, CMC shall grant to the Company a five percent (5%) Net Profits Interest (“NPI”) royalty over the Metallic Minerals
produced from the Mining Claims. The NPI royalty shall be initially capped at $20,000,000 (the “NPI Cap”). The
NPI Cap shall be subject to reduction in the event the Company elects to take the Share Contribution, as set forth below.
Upon exercise of the option,
the Company shall retain the all rights and title to (1) the surface interest (with exception of those rights associated with the
Metallic Rights), and (2) all non-metallic minerals (expressly including all industrial minerals including clays and iron oxides).
It is anticipated that CMC will
acquire rights similar to the Metallic Rights with respect to contiguous and nearly properties and such rights will be contributed
to a new company formed or designated by CMC to own and operate CMC’s Tintic District project, which would involve the Metallic
rights and similar rights regarding adjacent or nearby properties (“PubCo”) that intends to go public.
The Company shall have the right,
at its sole election, to convert a portion of its NPI royalty interest into $2,000,000 worth of shares in PubCo up to a maximum
of Two Percent (2%) net value of PubCo (the “Share Contribution”), through a reduction of the NPI Cap. The Company
shall make the determination whether to take the Share Contribution or not, and so notify CMC, within ninety (90) days, of the
completion (and delivery to the Company) of a feasibility study by CMC for the Tintic District project. If the Company elects
not
to take the Share Contribution, the Company’s NPI royalty shall remain unchanged, including the NPI Cap, which
will remain at $20,000,000.
The Agreement contains protections
in favor of the Company against unreasonable interference of its current and future mining operations by CMC. CMC may not do anything
that may, at the Company’s determination, adversely impact the Company’s Mining Operations. “Mining Operations”
shall mean the activities incident to mineral extraction, permitting, and any operations by CMC or the Company relating to the
removal of minerals, respectively, that are or may reasonably be conducted on the Mining Claims, including the exploration for,
and development, active mining, removing, producing and selling of any minerals, including the Metallic Minerals. The Agreement
states that the parties understand that the Company is willing to enter into the Agreement only if it is assured that CMC will
not have any right to unreasonably interfere with the Company’s current mining operations and possible future Mining Operations
on the Mining Claims.
There are no assurances that
CMC will exercise its option to purchase 100% of the Metallic Rights.
NOTE 2 - LIQUIDITY AND
BASIS OF PRESENTATION
The Company has a history of recurring
losses from operations and the use of cash in operating activities. For the three months ended March 31, 2019, the Company’s
net loss was $1,342,581 and cash used in operating activities was $1,013,802. As of March 31, 2019, the Company had current assets
of $2,159,525 and current liabilities of $1,313,616 of which $376,292 was accrued PIK Note interest expected to be paid in additional
PIK Notes. The Company’s current liabilities also include (i) $200,000 of accrued directors fee as determined by the Company’s
Board, (ii) $155,487 of a note payable related to the financing of the Company’s D&O and G/L policies, (iii) $119,269
of payables to a compounder for which it has agreed to satisfy in halloysite product and (iv) $133,000 of disputed or erroneously
accrued expenses for which the Company believes it will eventually reverse.
Management believes that in order
for the Company to meet its obligations arising from normal business operations through May 15, 2020 that the Company may be required
(i) to raise additional capital either in the form of a private placement of common stock or debt and/or (ii) generate additional
sales of its products that will generate sufficient operating profit and cash flows to fund operations. Without additional
capital or additional sales of its products, the Company’s ability to continue to operate may be limited.
Based on the Company’s
current cash usage expectations, management believes it may not have sufficient liquidity to fund its operations through May 15,
2020. Further, management cannot provide any assurance that it is probable that the Company will be successful in accomplishing
any of its plans to raise debt or equity financing or generate additional product sales. Collectively these factors raise substantial
doubt regarding the Company’s ability to continue as going concern. These financial statements do not include any adjustments
to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should
the Company not be able to continue as a going concern.
NOTE
3 – BASIS OF REPORTING AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Applied Minerals, Inc. have been prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements.
In the opinion of management, these
interim unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature which
are considered necessary for a fair presentation of the financial position of the Company and the results of its operations and
cash flows for the periods presented. The results of operations for the three months ended March 31, 2019 are not necessarily indicative
of the operating results for the entire year. These financial statements should be read in conjunction with the financial statements
and related disclosures for the year ended December 31, 2018, included in the Annual Report of Applied Minerals, Inc. on Form 10-K
filed with the SEC on April 16, 2019.
The accompanying interim unaudited consolidated financial statements reflect the application of certain significant accounting policies as described below
and elsewhere in these notes. As of May 15, 2019, the Company’s significant accounting policies and estimates remain unchanged
from those detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Receivables
Trade receivables are reported
at outstanding principal amounts, net of an allowance for doubtful accounts.
Management evaluates the collectability
of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and
financial condition, as well as current and projected economic and market conditions, in determining the amount of the allowance.
Receivable balances are written off when management determines that the balance is uncollectable. No allowance was required at
March 31, 2019 and December 31, 2018.
Property and Equipment
Property and equipment are carried
at cost net of accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method
over the estimated useful lives of the assets, or the life of the lease, whichever is shorter, as follows:
|
|
Estimated
|
|
|
|
Useful Life (years)
|
|
Building and Building Improvements
|
|
|
5 – 40
|
|
Mining equipment
|
|
|
2 – 7
|
|
Office and shop furniture and equipment
|
|
|
3 – 7
|
|
Vehicles
|
|
|
5
|
|
Depreciation expense for the
three months ended March 31, 2019 and 2018 totaled $0 and $323,144, respectively.
Impairment of Long-lived
Assets
The
Company periodically reviews the carrying amounts of long-lived assets to determine whether current events or circumstances warrant
adjustment to such carrying amounts. Long-lived assets are tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset to its carrying amount. If this comparison indicates
that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows
where observable fair values are not readily determinable. Considerable management judgment is necessary to estimate the fair
value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value,
less cost to sell. The Company has determined that there was no impairment of its long-lived assets as of March 31, 2019. The
Company determined there was an impairment of its long-lived assets at December 31, 2018.
Stock Options and Warrants
The Company follows ASC 718 (Stock
Compensation) and 505-50 (Equity-Based Payments to Non-employees), which provide guidance in accounting for share-based awards
exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service
period. The Company instituted a formal long-term and short-term incentive plan on November 20, 2012, which was approved by its
shareholders. Prior to that date, we did not have a formal equity plan, but all equity grants, including stock options and warrants,
were approved by our Board of Directors. We determine the fair value of the stock-based compensation awards granted to non-employees
as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement
assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity
instruments is reached, or (2) the date at which the counterparty’s performance is complete. Beginning in the quarter ended
June 30, 2013 the Company began using the simplified method to determine the expected term for any options granted because the
Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The
Company previously utilized the contractual term as the expected term.
Effective January 1, 2019 the Company
adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The guidance expands the scope of ASC 718 to include
share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations
and supersedes the guidance in ASC 505-50. The adoption of ASU 2018-07 had no material impact on the Company’s financial results.
Environmental Matters
Expenditures for ongoing compliance
with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures resulting
from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are
expensed. Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs
can be reasonably estimated.
Estimates of such liabilities
are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs. These
amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released
by The Environmental Protection Agency or other organizations. Such estimates are by their nature imprecise and can be expected
to be revised over time because of changes in government regulations, operations, technology and inflation. Recoveries are evaluated
separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated
liability.
Based upon management’s
current assessment of its environmental responsibilities, it does not believe that any reclamation or remediation liability exists
at March 31, 2019.
Recently Adopted Accounting
Standards
Leases
In February 2016, the Financial
Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a
right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term
lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain
adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be
classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases
under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under
the prior accounting standard). Lessor accounting is similar to the prior model, but updated to align with certain changes to the
lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard
that was adopted in 2018.
The Company adopted this new accounting
standard on January 1, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect
adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to
be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients
permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward
the existing lease classification. The new standard had a material impact on the unaudited consolidated balance sheet,
but did not materially impact the Company’s consolidated operating results and had no impact on the Company’s cash
flows.
The following is a discussion
of the Company’s lease policy under the new lease accounting standard:
The Company determines if an
arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of
the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable,
the Company utilizes its incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The
operating lease right-of-use assets also include lease payments made before commencement and exclude lease incentives.
Impact of New Lease Standard
on Balance Sheet Line Items
As a result of applying the new
lease standard using a modified retrospective method, the following adjustments were made to accounts on the consolidated
balance sheet as of January 1, 2019:
|
|
Impact of Change in Accounting Policy
|
|
|
|
As reported
December 31,
2018
|
|
|
Adjustments
|
|
|
Adjusted
January 1, 2019
|
|
Operating lease right-of-use assets
|
|
$
|
-0-
|
|
|
$
|
325,255
|
|
|
$
|
325,255
|
|
Total assets
|
|
|
4,136,978
|
|
|
|
325,255
|
|
|
|
4,462,233
|
|
Current portion of operating lease liabilities
|
|
|
-0-
|
|
|
|
92,396
|
|
|
|
92,396
|
|
Total current liabilities
|
|
|
1,430,323
|
|
|
|
92,396
|
|
|
|
1,522,719
|
|
Long-term operating lease liabilities
|
|
|
-0-
|
|
|
|
241,808
|
|
|
|
241,808
|
|
Deferred rent
|
|
|
8,949
|
|
|
|
(8,949
|
)
|
|
|
-0-
|
|
Total long-term liabilities
|
|
|
36,825,341
|
|
|
|
232,859
|
|
|
|
37,058,200
|
|
Total liabilities
|
|
|
38,255,664
|
|
|
|
325,255
|
|
|
|
38,580,919
|
|
See Note 4 for additional information
ASU 2017-11, Part I accounting
for Certain Financial Instruments with Down Round Features
In July 2017, the FASB issued
ASU 2017-11 to simplify the accounting for equity contracts (e.g., freestanding warrants) or equity-linked embedded features (e.g.,
conversion options in convertible instruments) with down round features. Under the new guidance, entities are no longer required
to consider down round features when determining whether these financial instruments containing a down round feature are indexed
to the issuer’s own stock pursuant to ASC 815-40. Being indexed to an entity’s own stock is required for a freestanding
financial instrument to be classified in shareholders’ equity and may exempt an embedded feature from bifurcation and derivative
accounting.
The Company adopted ASU 2017-11 on January
1, 2019 on a modified retrospective basis and applied the new standard to all financial instruments with down round features through
a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated
and continues to be reported under the accounting standards in effect for those periods. On January 1, 2019, the Company recorded
a transition adjustment to reduce retained earnings by $4,950,396. The new standard had a material impact on the unaudited consolidated
balance sheet, but did not materially impact the Company’s consolidated operating results and had no impact on the Company’s
cash flows.
Impact of ASU 2017-11 on Balance
Sheet Line Items
As a result of applying ASU 2017-11 using a modified retrospective method, the following adjustments were made to accounts on the consolidated
balance sheet as of January 1, 2019:
|
|
Impact of Change in Accounting Policy
|
|
|
|
As reported
on December 31,
2018
|
|
|
Adjustments
|
|
|
Adjusted as of
January 1, 2019
|
|
PIK Note payable, net
|
|
$
|
35,036,320
|
|
|
$
|
6,730,468
|
|
|
$
|
41,766,788
|
|
PIK Note derivative
|
|
|
1,780,072
|
|
|
|
(1,780,072
|
)
|
|
|
-0-
|
|
Total Long-Term Liabilities
|
|
|
36,825,341
|
|
|
|
4,950,396
|
|
|
|
41,775,737
|
|
Total liabilities
|
|
|
38,255,664
|
|
|
|
4,950,396
|
|
|
|
43,206,060
|
|
Accumulated deficit
|
|
|
(87,810,354
|
)
|
|
|
(4,950,396
|
)
|
|
|
(92,760,750
|
)
|
Total shareholders’ deficit
|
|
$
|
(34,118,686
|
)
|
|
$
|
(4,950,396
|
)
|
|
$
|
(39,069,082
|
)
|
See Note 6 for additional information
Recently Issued Accounting
Pronouncements
In August 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement
(Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates,
modifies and adds disclosure requirements for fair value measurements. The amendments in this ASU are effective for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company
is currently evaluating the effects of this ASU on its financial statements and related disclosures.
In August 2018, the SEC adopted
amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The
Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial
position, results of operations, cash flows or shareholders’ equity.
NOTE 4 –
LEASES
On March 16, 2017, the Company entered into a 5-year operating lease agreement for permanent office space, base rent payment
is approximately $9,000 per month, subject to annual adjustments.
Supplemental cash flow information related to leases for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
Operating cash flows paid for operating leases
|
|
$
|
26,883
|
|
Non-cash lease expense
|
|
$
|
1,520
|
|
|
|
|
|
|
Supplemental balance sheet information related to leases as of March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
Operating lease Right-of-use assets
|
|
$
|
310,705
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
94,600
|
|
Long-term operating lease liabilities
|
|
|
217,625
|
|
Total operating lease liabilities
|
|
$
|
312,225
|
|
|
|
|
|
|
Weighted average remaining operating lease term
|
|
|
3 years
|
|
Weighted average discount rate
|
|
|
6
|
%
|
The following table summarizes the maturity of lease liabilities
under operating leases as of March 31, 2019:
2019 (remaining nine months)
|
|
|
$
|
83,070
|
|
2020
|
|
|
|
113,253
|
|
2021
|
|
|
|
116,649
|
|
2022
|
|
|
|
29,376
|
|
Total lease payments
|
|
|
|
342,348
|
|
Less: imputed interest
|
|
|
|
(30,123
|
)
|
Total lease liabilities
|
|
|
$
|
312,225
|
|
NOTE 5 - NOTES PAYABLE
Notes payable at March 31, 2019
and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note payable for equipment, payable $5,443 - $25,936 monthly (a)
|
|
$
|
155,487
|
|
|
$
|
246,496
|
|
|
|
|
|
|
|
|
|
|
Less: Current Portion
|
|
|
155,487
|
|
|
|
246,496
|
|
Notes Payable, Long-Term Portion
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
(a)
|
On October 2018 the Company signed two note payable with interest rate of 4.89% with an insurance company for liability
insurance, payable in 10 monthly installments which started on November 17, 2018
|
During the three months ended
March 31, 2019 and 2018, the Company's interest payments totaled $9,156 and $5,501, respectively.
NOTE 6 – CONVERTIBLE
DEBT (PIK NOTES)
The Company raised $23 million
of financing through the issuance of two series of Paid-In-Kind (“PIK”)-Election Convertible Notes in 2013 (“Series
2023 Notes”) and 2014 (“Series A Notes”). The original terms of the Series A Notes included among other things:
(i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually
and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of the Series
2023 Notes included among other things: (i) a maturity of August 1, 2023, (ii) a stated interest rate of 10% paid semi-annually
and (iii) a conversion price of $1.40, adjusted downward based on an anti-dilution provision. On December 14, 2017, an amendment
agreement, entered into between the Company and the holders of the Series A Notes and Series 2023 Notes, went into effect. The
agreement resulted in changes to certain terms of the Series A and Series 2023 Notes. The key terms of the Series A and Series
2023 Notes, as amended, are highlighted in the table below:
Key Terms
|
|
Series 2023 Notes
|
|
|
Series A Notes
|
|
Inception Date
|
|
08/01/2013
|
|
|
11/03/2014
|
|
Cash Received
|
|
$10,500,000
|
|
|
$12,500,000
|
|
Principal (Initial Liability)
|
|
$10,500,000
|
|
|
$19,848,486
|
|
Maturity (Term)
|
|
Matures on August 1, 2023, but convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
|
|
|
Matures on May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are still outstanding. Convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
|
|
Exercise Price
|
|
$0.59, adjusted downward based on anti-dilution provisions/downround protection
|
|
|
$0.40, adjusted downward based on anti-dilution provisions/down-round protection;
|
|
Stated Interest
|
|
10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually;
|
|
|
10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually;
|
|
Derivative Liability
|
|
$2,055,000 established at inception due to the existence of down-round protection; revalued every quarter using Monte Carlo model
|
|
|
$9,212,285 established at inception due to existence of down-round protection; revalued every quarter using a Monte Carlo model
|
|
As of March 31, 2019, the liability
components of the PIK Notes on the Company’s balance sheet are listed in the following table:
|
|
Series 2023 Notes
|
|
|
Series A Notes
|
|
|
Total
|
|
PIK Note Payable, Gross
|
|
$
|
16,640,608
|
|
|
$
|
27,622,913
|
|
|
$
|
44,263,521
|
|
Less: Discount
|
|
|
-0-
|
|
|
|
(1,737,445
|
)
|
|
|
(1,737,445
|
)
|
Less: Deferred Financing Cost
|
|
|
(151,106
|
)
|
|
|
(250,832
|
)
|
|
|
(401,938
|
)
|
PIK Note Payable, Net
|
|
$
|
16,489,502
|
|
|
$
|
25,634,636
|
|
|
$
|
42,124,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK Note Derivative Liability
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
As of December 31, 2018,
the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:
|
|
Series 2023 Notes
|
|
|
Series A Notes
|
|
|
Total
|
|
PIK Note Payable, Gross
|
|
$
|
16,394,688
|
|
|
$
|
27,622,913
|
|
|
$
|
44,017,601
|
|
Less: Discount
|
|
|
(1,297,416
|
)
|
|
|
(7,259,175
|
)
|
|
|
(8,556,591
|
)
|
Less: Deferred Financing Cost
|
|
|
(158,179
|
)
|
|
|
(266,511
|
)
|
|
|
(424,690
|
)
|
PIK Note Payable, Net
|
|
$
|
14,939,093
|
|
|
$
|
20,097,227
|
|
|
$
|
35,036,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK Note Derivative Liability
|
|
$
|
253,215
|
|
|
$
|
1,526,857
|
|
|
$
|
1,780,072
|
|
Series A Notes (Amended)
On November 3, 2014 (“Issue
Date”), the Company issued, in a private placement pursuant to investment agreements, $19,848,486 principal amount of 10%
PIK-Election Convertible Notes due 2018 ("Series A Notes") in exchange for $12,500,000 in cash and the cancellation of
previously-issued warrants held by one investor.
The original terms of the Series
A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated
interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision.
The original terms of both the Series A notes and Series 2023 Notes can be as exhibits to Forms 8-K filed on November 5, 2014.
During the three months ended
March 31, 2019, the Company amortized $104,358 of debt discount and deferred financing cost relating to the Series A Notes Payable.
The carrying value of the Series A Notes Payable as of March 31, 2019 was $25,634,636.
As of March 31, 2019, the Company
was in compliance with the covenants of the Series A Notes.
As of March 31, 2019, Samlyn Offshore
Master Fund, Ltd. and Samlyn Onshore Fund, LP owned $9,073,812 and $4,843,078, respectively, of principal of the Series A Notes.
Samlyn Offshore Master Fund, Ltd. and Samlyn Onshore Fund, LP are managed by Samlyn Capital, LLC. As of March 31, 2019, Michael
Barry, a director of the Company, was the General Counsel and Chief Compliance Officer of Samlyn Capital, LLC.
As of March 31, 2019, The IBS
Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. owned $1,316,560, $2,643,794
and $256,880, respectively, of principal of the Series A Notes. The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited
Partnership) and The IBS Opportunity Fund, Ltd. are managed by IBS Capital, LLC. At March 31, 2019, IBS Capital, LLC owned 13.7%
of the shares of the common stock of the Company.
As of March 31, 2019, M. Kingdon
Offshore Master Fund, LP, a fund managed by Kingdon Capital Management, LLC, owned $4,217,239 of principal of the Series A Notes.
As of March 31, 2019, Michael Pohly, a director of the Company, was an employee of Kingdon Capital, Management, LLC.
Series 2023 Notes (Amended)
In August 2013, the Company received
$10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes").
The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes
with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such
notes. The Company can also elect to pay interest in cash. In February, 2019, the Company issued $245,920 in additional Series
2023 Notes to the holders to pay the semi-annual interest.
During the three months ended
March 31, 2019, the Company amortized $7,073 of deferred financing cost relating to the Series 2023 Notes Payable and issued
additional PIK Notes of $245,920 in lieu of cash interest payments, increasing the Series 2023 Notes Payable carrying value to
$16,489,502 as of March 31, 2019.
As of March 31, 2019, the Company
was in compliance with the covenants of the Series 2023 Notes.
As of March 31, 2019, M. Kingdon
Offshore Master Fund, LP, a fund managed by Kingdon Capital Management, LLC, owned $3,962,050 of principal of the Series 2023 Notes.
As of March 31, 2019, Michael Pohly, a director of the Company, was an employee of Kingdon Capital, Management, LLC.
NOTE 7 – STOCKHOLDERS’
EQUITY
Preferred Stock
The Company is authorized to
issue 10,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share. At March 31,
2019 and December 31, 2018, no shares of preferred stock were outstanding.
Common Stock
On December 7, 2017, stockholders
of the Company approved to increase the authorized shares of common stock from 250,000,000 to 400,000,000 shares, $0.001 par value
per share. At March 31, 2019 and December 31, 2018, 175,513,549 shares were issued and outstanding.
2019
During the three months ended
March 31, 2019, there were no activities.
2018
During the three months ended
March 31, 2018 the Company (i) issued 1,500,000 shares of common stock at a price of $0.04 per share to a consultant for investor
relation services to be performed, (ii) sold 3,625,000 shares of common stock at a price of $0.04 per share, (iii) sold 3,000,000
shares of common stock at a price of $0.05 per share, (iv) sold 1,000,000 shares of common stock at a price of $0.10 per share
and (iii) sold 500,000 shares of common stock at a price of $0.04 per share upon the exercise of a warrant to purchase shares of
common stock.
NOTE 8 – OPTIONS AND WARRANTS TO PURCHASE
COMMON STOCK
Outstanding Stock Warrants
A summary of the status and changes
of the warrants issued for the three months ended March 31, 2019:
|
|
|
Shares Issuable
upon exercise of
|
|
|
|
|
|
|
|
upon Exercise of
|
|
|
Weighted Average
|
|
|
|
|
Outstanding Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
|
26,688,373
|
|
|
$
|
0.15
|
|
Issued
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
|
26,688,373
|
|
|
$
|
0.15
|
|
At March 31, 2019, the intrinsic
value of the outstanding warrants was $0.
A summary of the status of the
warrants outstanding and exercisable at March 31, 2019 is presented below:
|
|
|
Warrants Outstanding and Exercisable
|
|
|
|
|
Shares Issuable
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
upon Exercise of
|
|
|
Remaining
|
|
|
Weighted Average
|
|
Exercise Price
|
|
|
Outstanding Warrants
|
|
|
Contractual Life (years)
|
|
|
Exercise Price
|
|
$
|
1.15
|
|
|
|
461,340
|
|
|
|
2.08
|
|
|
$
|
1.15
|
|
$
|
0.25
|
|
|
|
3,283,283
|
|
|
|
2.24
|
|
|
$
|
0.25
|
|
$
|
0.04
|
|
|
|
2,068,750
|
|
|
|
3.44
|
|
|
$
|
0.04
|
|
$
|
0.10
|
|
|
|
11,000,000
|
|
|
|
3.71
|
|
|
$
|
0.10
|
|
$
|
0.15
|
|
|
|
9.875,000
|
|
|
|
2.23
|
|
|
$
|
0.15
|
|
|
|
|
|
|
26,688,373
|
|
|
|
2.93
|
|
|
$
|
0.15
|
|
Outstanding Stock Options
On November 20, 2012, the shareholders
of the Company approved the adoption of the Applied Minerals, Inc. 2012 Long-Term Incentive Plan (“LTIP”) and the Short-Term
Incentive Plan (“STIP”) and the performance criteria used in setting performance goals for awards intended to be performance-based.
Under the LTIP, 8,900,000 shares are authorized for issuance. The STIP does not refer to a particular number of shares under the
LTIP, but would use the shares authorized in the LTIP for issuance under the STIP. The CEO, the CFO, and named executive officers,
and directors, among others are eligible to participate in the LTIP and STIP. Prior to the adoption of the LTIP and STIP, stock
options were granted under individual arrangements between the Company and the grantees, and approved by the Board of Directors.
In May, 2016, the Company adopted
the 2016 Long-Term Incentive Plan (“2016 LTIP”). The number of shares of common stock for issuance or for reference
purposes subject to the 2016 LTIP was 2,000,000.
On December 7, 2016, the stockholders
of the Company approved the 2016 Incentive Plan. The purpose of the 2016 Incentive Plan is to enhance the profitability and value
of the Company for the benefit of its stockholders by enabling the Company to offer eligible employees, consultants, and non-employee
directors incentive awards in order to attract, retain and reward such individuals and strengthen the mutuality of interests between
such individuals and the Company’s stockholders. The aggregate number of shares of Common Stock that may be issued or
used for reference purposes under the 2016 Incentive Plan or with respect to which awards may be granted may not exceed 15,000,000
shares, which may be either (i) authorized and unissued Common Stock or (ii) Common Stock held in or acquired for the treasury
of the Company.
The Compensation Committee of
the Company Board of Directors has full authority to administer and interpret the 2016 Incentive Plan, to grant awards under the
2016 Incentive Plan, to determine the persons to whom awards will be granted, to determine the types of awards to be granted, to
determine the terms and conditions of each award, to determine the number of shares of Common Stock to be covered by each award
and to make all other determinations in connection with the 2016 Incentive Plan and the awards thereunder as the Committee, in
its sole discretion, deems necessary or desirable.
On December 14, 2017, the Board
of Directors approved the 2017 Incentive Plan (“2017 IP”). Forty million (40,000,000) shares of Common Stock are subject
to the 2017 IP.
The fair value of each of the
Company's stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions
noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The
risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon
U.S. Treasury Bond on the date the award is granted with a maturity equal to the expected term of the award.
The significant assumptions relating
to the valuation of the Company's options issued during the three months ended March 31, 2019 were as follows on a weighted average
basis:
Dividend Yield
|
|
0.0%
|
|
|
Expected Life (in years)
|
|
2.52 - 7.50
|
|
|
Expected Volatility
|
|
69.13% - 167.28%
|
|
|
Risk Free Interest Rate
|
|
1.42% - 3.07%
|
|
|
A summary of the status and changes
of the options granted under stock option plans and other agreements during the three months ended March 31, 2019:
|
|
|
Shares Issued
|
|
|
Weighted
|
|
|
|
|
Upon Exercise of
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
|
54,866,845
|
|
|
$
|
0.29
|
|
Granted
|
|
|
|
2,433,334
|
|
|
$
|
0.06
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
(1,773,611
|
)
|
|
|
0.06
|
|
Outstanding at March 31, 2019
|
|
|
|
55,526,568
|
|
|
$
|
0.29
|
|
During the three months ended
March 31, 2019, the Company granted 2,433,334 options to purchase the Company’s common stock with a weighted average exercise
price of $0.06.
A summary of the status of the
options outstanding at March 31, 2019 is presented below:
Options Outstanding
|
|
|
Options Exercisable
|
|
Number Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
1,000,000
|
|
|
|
9.8
|
|
|
$
|
0.05
|
|
|
|
0
|
|
|
$
|
0.05
|
|
|
35,808,334
|
|
|
|
8.3
|
|
|
$
|
0.06
|
|
|
|
28,808,334
|
|
|
$
|
0.06
|
|
|
545,289
|
|
|
|
8.7
|
|
|
$
|
0.075
|
|
|
|
545,289
|
|
|
$
|
0.075
|
|
|
377,777
|
|
|
|
4.4
|
|
|
$
|
0.11
|
|
|
|
352,777
|
|
|
$
|
0.11
|
|
|
3,173,611
|
|
|
|
4.1
|
|
|
$
|
0.12
|
|
|
|
3,173,611
|
|
|
$
|
0.12
|
|
|
500,000
|
|
|
|
2.4
|
|
|
$
|
0.16
|
|
|
|
500,000
|
|
|
$
|
0.16
|
|
|
81,395
|
|
|
|
4.9
|
|
|
$
|
0.21
|
|
|
|
81,395
|
|
|
$
|
0.21
|
|
|
100,000
|
|
|
|
1.5
|
|
|
$
|
0.22
|
|
|
|
100,000
|
|
|
$
|
0.22
|
|
|
1,066,155
|
|
|
|
2.1
|
|
|
$
|
0.24
|
|
|
|
1,066,155
|
|
|
$
|
0.24
|
|
|
2,087,500
|
|
|
|
3.5
|
|
|
$
|
0.25
|
|
|
|
2,087,500
|
|
|
$
|
0.25
|
|
|
35,595
|
|
|
|
4.0
|
|
|
$
|
0.27
|
|
|
|
35,595
|
|
|
$
|
0.27
|
|
|
474,815
|
|
|
|
5.1
|
|
|
$
|
0.28
|
|
|
|
474,815
|
|
|
$
|
0.28
|
|
|
234,506
|
|
|
|
3.9
|
|
|
$
|
0.285
|
|
|
|
234,506
|
|
|
$
|
0.285
|
|
|
81,522
|
|
|
|
1.8
|
|
|
$
|
0.30
|
|
|
|
81,522
|
|
|
$
|
0.30
|
|
|
200,000
|
|
|
|
5.9
|
|
|
$
|
0.66
|
|
|
|
200,000
|
|
|
$
|
0.66
|
|
|
150,000
|
|
|
|
5.9
|
|
|
$
|
0.68
|
|
|
|
150,000
|
|
|
$
|
0.68
|
|
|
100,000
|
|
|
|
0.3
|
|
|
$
|
0.70
|
|
|
|
100,000
|
|
|
$
|
0.70
|
|
|
488,356
|
|
|
|
6.1
|
|
|
$
|
0.73
|
|
|
|
488,356
|
|
|
$
|
0.73
|
|
|
3,104,653
|
|
|
|
2.9
|
|
|
$
|
0.83
|
|
|
|
3,104,653
|
|
|
$
|
0.83
|
|
|
975,000
|
|
|
|
5.2
|
|
|
$
|
0.84
|
|
|
|
975,000
|
|
|
$
|
0.84
|
|
|
300,000
|
|
|
|
4.4
|
|
|
$
|
1.10
|
|
|
|
300,000
|
|
|
$
|
1.10
|
|
|
300,000
|
|
|
|
4.2
|
|
|
$
|
1.15
|
|
|
|
300,000
|
|
|
$
|
1.15
|
|
|
65,000
|
|
|
|
4.2
|
|
|
$
|
1.35
|
|
|
|
65,000
|
|
|
$
|
1.35
|
|
|
300,000
|
|
|
|
3.2
|
|
|
$
|
1.55
|
|
|
|
300,000
|
|
|
$
|
1.55
|
|
|
3,077,060
|
|
|
|
3.6
|
|
|
$
|
1.66
|
|
|
|
3,077,060
|
|
|
$
|
1.66
|
|
|
900,000
|
|
|
|
2.4
|
|
|
$
|
1.90
|
|
|
|
900,000
|
|
|
$
|
1.90
|
|
|
55,526,568
|
|
|
|
6.8
|
|
|
$
|
0.29
|
|
|
|
47,501,568
|
|
|
$
|
0.32
|
|
Compensation expense of $65,323
was recognized for vested options for the three months ended March 31, 2019. The aggregate intrinsic value of the outstanding options
at March 31, 2019 was $0. At March 31, 2019, (i) $35,195 of unamortized compensation expense for time-based unvested options will
be recognized over the next 2.44 years on a weighted average basis; (ii) $223,105 of unamortized compensation expense for performance-based
unvested options will be recognized as the performance targets are achieved.
On August 18, 2017, the Company’s
management was granted performance-based options to purchase 27.5 million shares of the Company’s common stock at $0.06 per
share. The options expire on August 18, 2027. On November 1, 2017, the first fifty percent (50%) of the performance-based options
vested as management was able to (i) close the sale of an aggregate of $600,000 of units (consisting of a share of common
stock of the Company and a warrant to buy 0.25 of a share of common stock of the Company) at $0.04 per unit and (ii) establish
toll processing arrangements with two toll processors of halloysite that, in management’s good faith belief, can process
halloysite to the Company’s specifications. An additional twenty-five percent (25%) of the performance-based options vested
on January 18, 2018 when management generated $900,000 of additional cash proceeds through (i) the sale of common stock and (ii)
the licensing of a right to explore the Dragon Mine property for certain precious metals. The vesting of the remaining 8.3%, 8.3%
and 8.4% of the performance-based options occurs when (i) EBITDA is positive over a twelve-month period, (ii) EBITDA is at or greater
than $2 million over a twelve-month period and (iii) EBITDA is at or greater than $4 million over a twelve-month period, respectively.
At March 31, 2019, management, based on its financial expectations for 2019, did not consider the vesting of the remaining 25%
of the option grant to be probable.
NOTE 9 - PER SHARE DATA
The computation of basic earnings (loss)
per share of common stock is based on the weighted average number of shares outstanding during the year. The computation of diluted
earnings per common share is based on the weighted average number of shares outstanding during the year plus the common stock
equivalents that would arise from the exercise of stock options and warrants outstanding under the treasury method and the average
market price per share during the year as well as the conversion of notes. At March 31, 2019, the weighted average shares outstanding
excluded options to purchase 55,526,568 shares of common stock of the Company, warrants to purchase 26,688,373 shares of common
stock of the Company and 98,265,956, shares of common stock of the Company issuable upon the conversion of notes because their
effect would be anti-dilutive. At March 31, 2018, the weighted average shares outstanding excluded options to purchase 59,825,123
shares of common stock of the Company, warrants to purchase 18,313,373 shares of common stock of the Company and 95,382,396 shares
of common stock of the Company issuable upon the conversion of notes payable because their effect would be anti-dilutive.
NOTE 10 – SUBSEQUENT
EVENTS
On April 25, 2019 the Company granted to its directors options to purchase a total of 4,000,000 shares of
common stock at $0.04 per share. The options vested upon grant expire ten years (10) after the date of grant.