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 September 30, 2014
| ¨ | 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 000-30995
SEARCHLIGHT MINERALS CORP.
(Exact name of registrant as specified
in its charter)
Nevada
(State or other jurisdiction of incorporation or organization) |
98-0232244
(I.R.S. Employer Identification No.) |
|
|
#100 - 2360 West Horizon Ridge Pkwy.
Henderson, Nevada
(Address of principal executive offices) |
89052
(Zip code) |
(702) 939-5247
(Registrant’s telephone number, including area code)
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes x 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. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large
accelerated filer ¨ |
Accelerated
filer ¨ |
|
|
Non-accelerated
filer ¨ |
Smaller reporting company x |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of November 13, 2014, the registrant
had 140,796,818 outstanding shares of common stock.
SEARCHLIGHT MINERALS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
ASSETS |
| |
| | |
| |
Current assets | |
| | | |
| | |
Cash | |
$ | 351,075 | | |
$ | 2,065,824 | |
Prepaid expenses | |
| 78,686 | | |
| 137,603 | |
Assets held for sale | |
| 227,500 | | |
| - | |
| |
| | | |
| | |
Total current assets | |
| 657,261 | | |
| 2,203,427 | |
| |
| | | |
| | |
Property and equipment, net | |
| 8,093,356 | | |
| 9,455,439 | |
Searchlight mining claims | |
| - | | |
| 16,947,419 | |
Slag project | |
| 121,814,377 | | |
| 121,759,811 | |
Land - smelter site and slag pile | |
| 5,916,150 | | |
| 5,916,150 | |
Land | |
| 1,696,242 | | |
| 3,300,000 | |
Deferred financing fees | |
| 103,282 | | |
| 120,236 | |
Deposits and other assets | |
| 14,566 | | |
| 14,241 | |
Assets held for sale, non-current portion | |
| 227,500 | | |
| - | |
| |
| | | |
| | |
Total non-current assets | |
| 137,865,473 | | |
| 157,513,296 | |
| |
| | | |
| | |
Total assets | |
$ | 138,522,734 | | |
$ | 159,716,723 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 1,055,264 | | |
$ | 195,541 | |
Accounts payable - related party | |
| 275,321 | | |
| 46,535 | |
Derivative warrant liability | |
| - | | |
| 81,574 | |
VRIC payable, current portion - related party | |
| 429,311 | | |
| 290,156 | |
| |
| | | |
| | |
Total current liabilities | |
| 1,759,896 | | |
| 613,806 | |
| |
| | | |
| | |
Long-term liabilities | |
| | | |
| | |
VRIC payable, net of current portion - related party | |
| 480,650 | | |
| 713,965 | |
Convertible notes, net of discount | |
| 3,030,749 | | |
| 2,798,506 | |
Derivative liability - convertible debt | |
| 507,853 | | |
| 755,709 | |
Deferred tax liability | |
| 28,575,908 | | |
| 37,322,971 | |
| |
| | | |
| | |
Total long-term liabilities | |
| 32,595,160 | | |
| 41,591,151 | |
| |
| | | |
| | |
Total liabilities | |
| 34,355,056 | | |
| 42,204,957 | |
| |
| | | |
| | |
Commitments and contingencies - Note 16 | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity | |
| | | |
| | |
Common stock, $0.001 par value; 400,000,000 shares | |
| | | |
| | |
authorized, 135,768,318 and 135,768,318 shares, | |
| | | |
| | |
respectively, issued and outstanding | |
| 135,768 | | |
| 135,768 | |
Common stock subscribed | |
| 701,700 | | |
| - | |
Additional paid-in capital | |
| 154,400,156 | | |
| 154,268,204 | |
Accumulated deficit | |
| (51,069,946 | ) | |
| (36,892,206 | ) |
| |
| | | |
| | |
Total stockholders' equity | |
| 104,167,678 | | |
| 117,511,766 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 138,522,734 | | |
$ | 159,716,723 | |
See Accompanying
Notes to these Consolidated Financial Statements
SEARCHLIGHT MINERALS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
| |
For the three months ended | | |
For the nine months ended | |
| |
September 30, 2014 | | |
September 30, 2013 | | |
September 30, 2014 | | |
September 30, 2013 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Mineral exploration and evaluation expenses | |
| 396,409 | | |
| 588,832 | | |
| 1,482,176 | | |
| 1,829,621 | |
Mineral exploration and evaluation | |
| | | |
| | | |
| | | |
| | |
expenses - related party | |
| 75,983 | | |
| 75,249 | | |
| 231,543 | | |
| 184,691 | |
Administrative - Clarkdale site | |
| 34,080 | | |
| 36,450 | | |
| 83,912 | | |
| 146,799 | |
General and administrative | |
| 504,629 | | |
| 537,816 | | |
| 1,662,929 | | |
| 1,791,838 | |
General and administrative - related party | |
| 40,636 | | |
| 31,827 | | |
| 129,352 | | |
| 114,172 | |
Loss on asset dispositions and impairment | |
| 18,095,234 | | |
| - | | |
| 18,140,349 | | |
| - | |
Depreciation | |
| 378,181 | | |
| 387,159 | | |
| 1,136,174 | | |
| 1,071,555 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 19,525,152 | | |
| 1,657,333 | | |
| 22,866,435 | | |
| 5,138,676 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (19,525,152 | ) | |
| (1,657,333 | ) | |
| (22,866,435 | ) | |
| (5,138,676 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Rental revenue | |
| 6,105 | | |
| 5,790 | | |
| 21,775 | | |
| 18,405 | |
Other expense | |
| (18,659 | ) | |
| - | | |
| (18,659 | ) | |
| - | |
Change in fair value of derivative liabilities | |
| 125,635 | | |
| (1,150 | ) | |
| 329,430 | | |
| 273,556 | |
Interest expense | |
| (131,735 | ) | |
| (17,714 | ) | |
| (391,430 | ) | |
| (20,067 | ) |
Interest and dividend income | |
| - | | |
| 215 | | |
| 516 | | |
| 2,131 | |
| |
| | | |
| | | |
| | | |
| | |
Total other income (expense) | |
| (18,654 | ) | |
| (12,859 | ) | |
| (58,368 | ) | |
| 274,025 | |
| |
| | | |
| | | |
| | | |
| | |
Loss before income taxes | |
| (19,543,806 | ) | |
| (1,670,192 | ) | |
| (22,924,803 | ) | |
| (4,864,651 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income tax benefit | |
| 7,440,766 | | |
| 603,502 | | |
| 8,747,063 | | |
| 1,748,108 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (12,103,040 | ) | |
$ | (1,066,690 | ) | |
$ | (14,177,740 | ) | |
$ | (3,116,543 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive loss | |
$ | (12,103,040 | ) | |
$ | (1,066,690 | ) | |
$ | (14,177,740 | ) | |
$ | (3,116,543 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share - basic and diluted | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (0.09 | ) | |
$ | (0.01 | ) | |
$ | (0.10 | ) | |
$ | (0.02 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding - | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Basic | |
| 135,768,318 | | |
| 135,768,318 | | |
| 135,768,318 | | |
| 135,768,318 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted | |
| 135,768,318 | | |
| 135,768,318 | | |
| 135,768,318 | | |
| 135,768,318 | |
See Accompanying
Notes to these Consolidated Financial Statements
SEARCHLIGHT MINERALS
CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
| |
For the nine months ended | |
| |
September 30, 2014 | | |
September 30, 2013 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net loss | |
$ | (14,177,740 | ) | |
$ | (3,116,543 | ) |
| |
| | | |
| | |
Adjustments to reconcile net loss | |
| | | |
| | |
to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 1,136,174 | | |
| 1,071,555 | |
Stock based expenses | |
| 62,947 | | |
| 256,568 | |
Loss on asset dispositions and impairment | |
| 18,140,349 | | |
| - | |
Amortization of prepaid expense | |
| 263,493 | | |
| 260,070 | |
Amortization of debt financing fees and debt discount | |
| 180,197 | | |
| 8,381 | |
Deferred income taxes | |
| (8,747,063 | ) | |
| (1,748,108 | ) |
Change in fair value of derivative liabilities | |
| (329,430 | ) | |
| (273,556 | ) |
Loss on interest settled in shares | |
| 19,005 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Prepaid expenses | |
| (204,576 | ) | |
| (180,024 | ) |
Deposits and other assets | |
| (325 | ) | |
| (3,664 | ) |
Accounts payable and accrued liabilities | |
| 1,236,483 | | |
| (122,388 | ) |
| |
| | | |
| | |
Net cash used in operating activities | |
| (2,420,486 | ) | |
| (3,847,709 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Proceeds from property and equipment disposition, net | |
| 245,943 | | |
| - | |
Purchase of property and equipment | |
| (64,206 | ) | |
| (133,283 | ) |
| |
| | | |
| | |
Net cash provided by (used) in investing activities | |
| 181,737 | | |
| (133,283 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from common stock subscribed | |
| 575,000 | | |
| - | |
Proceeds from convertible notes | |
| 69,000 | | |
| 4,000,000 | |
Convertible notes issuance costs | |
| - | | |
| (126,446 | ) |
Payments on VRIC payable - related party | |
| (120,000 | ) | |
| (270,000 | ) |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 524,000 | | |
| 3,603,554 | |
| |
| | | |
| | |
NET CHANGE IN CASH | |
| (1,714,749 | ) | |
| (377,438 | ) |
| |
| | | |
| | |
CASH AT BEGINNING OF PERIOD | |
| 2,065,824 | | |
| 3,931,591 | |
| |
| | | |
| | |
CASH AT END OF PERIOD | |
$ | 351,075 | | |
$ | 3,554,153 | |
| |
| | | |
| | |
SUPPLEMENTAL INFORMATION | |
| | | |
| | |
| |
| | | |
| | |
Interest paid, net of capitalized amounts | |
$ | 154,735 | | |
$ | 2,353 | |
| |
| | | |
| | |
Income taxes paid | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Accounts payable satisfied by contribution of capital | |
$ | 50,000 | | |
$ | - | |
| |
| | | |
| | |
Common stock subscribed in satisfaction of accrued interest | |
$ | 126,700 | | |
$ | - | |
See Accompanying Notes to these Consolidated Financial Statements
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES
Description of business
- Searchlight Minerals Corp. (the “Company”) has been in the exploration stage since its formation, and the Company
has not yet realized any revenues from its planned operations. The Company is primarily focused on the exploration, acquisition
and development of mining and mineral properties. Upon the location of commercially minable reserves, the Company plans to prepare
for mineral extraction and enter the development stage.
History - The Company
was incorporated on January 12, 1999 pursuant to the laws of the State of Nevada under the name L.C.M. Equity, Inc. From 1999 to
2005, the Company operated primarily as a biotechnology research and development company with its headquarters in Canada and an
office in the United Kingdom (the “UK”). On November 2, 2001, the Company entered into an acquisition agreement with
Regma Bio Technologies, Ltd. pursuant to which Regma Bio Technologies, Ltd. entered into a reverse merger with the Company with
the surviving entity named “Regma Bio Technologies Limited”. On November 26, 2003, the Company changed its name from
“Regma Bio Technologies Limited” to “Phage Genomics, Inc” (“Phage”).
In February 2005, the
Company announced its reorganization from a biotechnology research and development company to a company focused on the
development and acquisition of mineral properties. In connection with its reorganization the Company entered into mineral
option agreements to acquire an interest in the Searchlight mining claims. Also in connection with its corporate
restructuring, its Board of Directors approved a change in its name from Phage to "Searchlight Minerals Corp.”
effective June 23, 2005.
Going concern - The accompanying
unaudited condensed consolidated financial statements were prepared on a going concern basis in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The going concern basis of presentation assumes that
the Company will continue in operation for the next twelve months and will be able to realize its assets and discharge its liabilities
and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s
inability to continue as a going concern. The Company’s history of losses, working capital deficit, capital deficit, minimal
liquidity and other factors raise substantial doubt about the Company’s ability to continue as a going concern. In order
for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in
the normal course of business it must raise additional equity or debt capital and continue cost cutting measures. There can be
no assurance that the Company will be able to achieve sustainable profitable operations or obtain additional funds when needed
or that such funds, if available, will be obtainable on terms satisfactory to management.
If the Company continues to
incur operating losses and does not raise sufficient additional capital, material adverse events may occur including, but not limited
to, 1) a reduction in the nature and scope of the Company’s operations and 2) the Company’s inability to fully implement
its current business plan. There can be no assurance that the Company will successfully improve its liquidity position. The accompanying
unaudited condensed consolidated financial statements do not reflect any adjustments that might be required resulting from the
adverse outcome relating to this uncertainty.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES (continued)
As of September 30, 2014, the
Company had cumulative net losses of $51,069,946 from operations and had not commenced its commercial mining and mineral processing
operations; rather it is still in the exploration stage. For the nine month period ended September 30, 2014, the Company incurred
a net loss of $14,177,740, had negative cash flows from operating activities of $2,420,486 and will incur additional future losses
due to planned continued exploration expenses. In addition, the Company had a working capital deficit totaling $1,102,635 at September
30, 2014.
To address liquidity constraints,
the Company will seek additional sources of capital through the issuance of equity or debt financing. Additionally, the Company
has reduced expenses and elected to defer payment of certain obligations. Cash conservation measures include, but are not limited
to, the deferred payment of outsourced consulting fees where available, deferred payment of current and future board fees and reduction
of staffing levels. The Company has deferred payment of officer salaries, monthly legal retainer fees, and the Verde River Iron
Company, LLC (“VRIC”) monthly payable. These activities have reduced the required cash outlay of the Company’s
business significantly. The Company is focused on continuing to reduce costs and obtaining additional funding. There is no assurance
that such funding will be available on terms acceptable to the Company, or at all. If the Company raises additional funds by selling
additional shares of capital stock, securities convertible into shares of capital stock or the issuance of convertible debt, the
ownership interest of the Company’s existing common stock holders will be diluted.
Basis of presentation
- The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. The Company’s fiscal year-end is December 31.
These condensed consolidated
financial statements have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”). In the opinion of management, all adjustments and disclosures necessary for the fair presentation
of these interim statements have been included. All such adjustments are, in the opinion of management, of a normal recurring nature.
The results reported in these interim condensed consolidated financial statements are not necessarily indicative of the results
that may be reported for the entire year. These interim condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2013, filed with the SEC on March 28, 2014.
Principles of consolidation
- The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Clarkdale
Minerals, LLC (“CML”) and Clarkdale Metals Corp. (“CMC”). Significant intercompany accounts and transactions
have been eliminated.
Use of estimates - The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates are subject
to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.
Significant areas requiring management’s estimates and assumptions include the valuation of stock-based compensation and
derivative liabilities, impairment analysis of long-lived assets, and realizability of deferred tax assets. Actual results could
differ from those estimates.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES (continued)
Capitalized interest cost
- The Company capitalizes interest cost related to acquisition, development and construction of property and equipment which is
designed as integral parts of the manufacturing process. The capitalized interest is recorded as part of the asset it relates to
and will be amortized over the asset’s useful life once production commences.
Mineral properties -
Costs of acquiring mineral properties are capitalized upon acquisition. Exploration costs and costs to maintain mineral properties
are expensed as incurred while the project is in the exploration stage. Once mineral reserves are established, development costs
and costs to maintain mineral properties are capitalized as incurred while the property is in the development stage. When a property
reaches the production stage, the related capitalized costs are amortized using the units-of-production method over the proven
and probable reserves.
Mineral exploration and development
costs - Exploration expenditures incurred prior to entering the development stage are expensed and included in mineral exploration
and evaluation expense.
Property and equipment
- Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets, which are generally 3 to 39 years. The cost of repairs and maintenance is
charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition
of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operating
expenses.
Impairment
of long-lived assets - The Company reviews and evaluates
its long-lived assets for impairment at each balance sheet date due to its planned exploration stage losses and documents such
impairment testing. Mineral properties in the exploration stage are monitored for impairment based on factors such as the Company’s
continued right to explore the property, exploration reports, drill results, technical reports and continued plans to fund exploration
programs on the property.
The tests for long-lived assets
in the exploration, development or production stage that would have a value beyond proven and probable reserves would be monitored
for impairment based on factors such as current market value of the mineral property and results of exploration, future asset utilization,
business climate, mineral prices and future undiscounted cash flows expected to result from the use of the related assets. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net cash flows
expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts.
The Company's policy is to record
an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable either by impairment
or by abandonment of the property. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds
its fair value.
Deferred financing fees
– Deferred financing fees represent fees paid in connection with obtaining debt financing. These fees are amortized using
the effective interest method over the term of the financing.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION
OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)
Convertible notes –
derivative liabilities – The Company evaluates the embedded features of convertible notes to determine if they are required
to be bifurcated and recorded as a derivative liability. If more than one feature is required to be bifurcated, the features are
accounted for as a single compound derivative. The fair value of the compound derivative is recorded as a derivative liability
and a debt discount. The carrying value of the convertible notes is recorded on the date of issuance at its original value less
the fair value of the compound derivative.
The derivative liability is
measured at fair value on a recurring basis with changes reported in other income (expense). Fair value is determined using a model
which incorporates estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The debt
discount is amortized to non-cash interest expense using the effective interest method over the life of the notes. If a conversion
of the underlying note occurs, a proportionate share of the unamortized amount is immediately expensed.
Reclamation and remediation
costs - For its exploration stage properties, the Company accrues the estimated costs associated with environmental remediation
obligations in the period in which the liability is incurred or becomes determinable. Until such time that a project life is established,
the Company records the corresponding cost as an exploration stage expense. The costs of future expenditures for environmental
remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule.
Future reclamation and environmental-related
expenditures are difficult to estimate in many circumstances due to the early stage nature of the exploration project, the uncertainties
associated with defining the nature and extent of environmental disturbance, the application of laws and regulations by regulatory
authorities and changes in reclamation or remediation technology. The Company periodically reviews accrued liabilities for such
reclamation and remediation costs as evidence indicating that the liabilities have potentially changed becomes available. Changes
in estimates are reflected in the consolidated statement of operations in the period an estimate is revised.
The Company is in the exploration
stage and is unable to determine the estimated timing of expenditures relating to reclamation accruals. It is reasonably possible
that the ultimate cost of reclamation and remediation could change in the future and that changes to these estimates could have
a material effect on future operating results as new information becomes known.
Fair value of financial instruments
- The Company’s financial instruments consist principally of derivative liabilities and the VRIC payable. Assets and liabilities
measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs
are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input
that is significant to the fair value measurement. The hierarchy is prioritized into three levels defined as follows:
Level 1 |
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2 |
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
Level 3 |
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES (continued)
The Company’s financial
instruments consist of the VRIC payable (described in Note 10) and derivative liabilities. The VRIC payable is classified within
Level 2 of the fair value hierarchy. The fair value approximates carrying value as the imputed interest rate is considered to approximate
a market interest rate.
The Company calculates the fair
value of its derivative liabilities using various models which are all Level 3 inputs. The fair value of the derivative warrant
liability (described in Note 7) is calculated using the Binomial Lattice model, and the fair value of the derivative liability
- convertible notes (described in Note 9) is calculated using a model which incorporates estimated probabilities and inputs calculated
by both the Binomial Lattice model and present values. The change in fair value of the derivative liabilities is classified in
other income (expense) in the consolidated statement of operations. The Company generally does not use derivative financial instruments
to hedge exposures to cash flow, market or foreign currency risks.
There have been no changes in
the valuation techniques used for the derivative liabilities. The Company does not have any non-financial assets or liabilities
that it measures at fair value. During the nine month periods ended September 30, 2014 and 2013, there were no transfers of assets
or liabilities between levels.
Per share
amounts - Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common
shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect
the effect of potentially dilutive securities. Potentially dilutive shares, such as stock options and warrants, are excluded from
the calculation when their inclusion would be anti-dilutive, such as when the exercise price of the instrument exceeds the fair
market value of the Company’s common stock and when a net loss is reported. The dilutive effect of convertible debt securities
is reflected in the diluted earnings (loss) per share calculation using the if-converted method. Conversion of the debt securities
is not assumed for purposes of calculating diluted earnings (loss) per share if the effect is anti-dilutive. At September 30, 2014
and 2013, 37,054,430 and 36,727,113 stock options, warrants and common shares issuable upon the conversion of notes were outstanding,
respectively, but were not considered in the computation of diluted earnings per share as their inclusion would be anti-dilutive.
Stock-based
compensation - Stock-based compensation awards are recognized in the consolidated financial statements based on the grant date
fair value of the award which is estimated using the Binomial Lattice option pricing model. The Company believes that this model
provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and
interest rates, and to allow for the actual exercise behavior of option holders. The
compensation cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise,
shares issued will be newly issued shares from authorized common stock.
The fair value of performance-based
stock option grants is determined on their grant date through the use of the Binomial Lattice option pricing model. The total value
of the award is recognized over the requisite service period only if management has determined that achievement of the performance
condition is probable. The requisite service period is based on management’s estimate of when the performance condition will
be met. Changes in the requisite service period or the estimated probability of achievement can materially affect the amount of
stock-based compensation recognized in the financial statements.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES (continued)
The Company accounts for stock
options issued to non-employees based on the estimated fair value of the awards using the Binomial Lattice option pricing model.
The measurement of stock-based compensation to non-employees is subject to periodic adjustments as the underlying equity instruments
vest, and the resulting change in value, if any, is recognized in the Company’s consolidated statements of operations during
the period the related services are rendered.
Income taxes - The Company
follows the liability method of accounting for income taxes. This method recognizes certain temporary differences between the financial
reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates
either a net deferred income tax liability or asset as measured by the statutory tax rates in effect. The effect of a change in
tax rates is recognized in operations in the period that includes the enactment date. The Company records a valuation allowance
against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred income tax asset will not be realized.
For acquired properties that
do not constitute a business, a deferred income tax liability is recorded on GAAP basis over income tax basis using statutory federal
and state rates. The resulting estimated future income tax liability associated with the temporary difference between the acquisition
consideration and the tax basis is computed in accordance with Accounting Standards Codification (“ASC”) 740-10-25-51,
Acquired Temporary Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, and
is reflected as an increase to the total purchase price which is then applied to the underlying acquired assets in the absence
of there being a goodwill component associated with the acquisition transactions.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT
POLICIES (continued)
Recent accounting standards
- From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”)
that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact
of recently issued standards did not or will not have a material impact on the Company’s consolidated financial statements
upon adoption.
In August 2014, the FASB issued
Accounting Standard Update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern. The new standard
requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability
to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether
its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim
periods within annual periods beginning after December 15, 2016. Adoption of the new guidance is not expected to have an impact
on the consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued
ASU No. 2014-10, Development Stage Entities (Topic 915) Elimination of Certain Financial Reporting Requirements, Including
an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. This ASU does the following, among other things:
a) eliminates the requirement to present inception-to-date information on the statements of income, cash flows, and shareholders’
equity, b) eliminates the need to label the financial statements as those of a development stage entity, c) eliminates the need
to disclose a description of the development stage activities in which the entity is engaged, and d) amends FASB ASC 275, Risks
and Uncertainties, to clarify that information on risks and uncertainties for entities that have not commenced planned principal
operations is required. The amendments in ASU No. 2014-10 are effective for public companies for annual and interim reporting
periods beginning after December 15, 2014. Early adoption is permitted. The Company has elected early adoption of the new
standard applied retrospectively. Adoption of the new guidance had no impact on the consolidated financial position, results of
operations or cash flows.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
Cost | | |
Accumulated Depreciation | | |
Net Book
Value | | |
Cost | | |
Accumulated Depreciation | | |
Net Book
Value | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Furniture and fixtures | |
$ | 38,255 | | |
$ | (37,323 | ) | |
$ | 932 | | |
$ | 38,255 | | |
$ | (35,759 | ) | |
$ | 2,496 | |
Lab equipment | |
| 249,061 | | |
| (245,789 | ) | |
| 3,272 | | |
| 249,061 | | |
| (240,258 | ) | |
| 8,803 | |
Computers and | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
equipment | |
| 91,002 | | |
| (74,457 | ) | |
| 16,545 | | |
| 91,002 | | |
| (67,775 | ) | |
| 23,227 | |
Income property | |
| - | | |
| - | | |
| - | | |
| 309,750 | | |
| (18,311 | ) | |
| 291,439 | |
Vehicles | |
| 47,675 | | |
| (45,283 | ) | |
| 2,392 | | |
| 47,675 | | |
| (44,758 | ) | |
| 2,917 | |
Slag conveyance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
equipment | |
| 300,916 | | |
| (284,882 | ) | |
| 16,034 | | |
| 300,916 | | |
| (230,124 | ) | |
| 70,792 | |
Demo module building | |
| 6,630,063 | | |
| (3,698,109 | ) | |
| 2,931,954 | | |
| 6,630,063 | | |
| (3,200,854 | ) | |
| 3,429,209 | |
Grinding circuit | |
| 913,678 | | |
| (9,167 | ) | |
| 904,511 | | |
| 913,678 | | |
| (1,666 | ) | |
| 912,012 | |
Extraction circuit | |
| 938,352 | | |
| (228,277 | ) | |
| 710,075 | | |
| 898,909 | | |
| (89,891 | ) | |
| 809,018 | |
Leaching and filtration | |
| 1,300,618 | | |
| (975,464 | ) | |
| 325,154 | | |
| 1,300,618 | | |
| (780,371 | ) | |
| 520,247 | |
Fero-silicate storage | |
| 4,326 | | |
| (1,622 | ) | |
| 2,704 | | |
| 4,326 | | |
| (1,298 | ) | |
| 3,028 | |
Electrowinning building | |
| 1,492,853 | | |
| (559,820 | ) | |
| 933,033 | | |
| 1,492,853 | | |
| (447,856 | ) | |
| 1,044,997 | |
Site improvements | |
| 1,675,906 | | |
| (560,277 | ) | |
| 1,115,629 | | |
| 1,651,143 | | |
| (467,306 | ) | |
| 1,183,837 | |
Site equipment | |
| 360,454 | | |
| (331,347 | ) | |
| 29,107 | | |
| 360,454 | | |
| (309,051 | ) | |
| 51,403 | |
Construction in progress | |
| 1,102,014 | | |
| - | | |
| 1,102,014 | | |
| 1,102,014 | | |
| - | | |
| 1,102,014 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
$ | 15,145,173 | | |
$ | (7,051,817 | ) | |
$ | 8,093,356 | | |
$ | 15,390,717 | | |
$ | (5,935,278 | ) | |
$ | 9,455,439 | |
Depreciation
expense was $378,181 and $387,159 for the three month periods ended September 30, 2014 and 2013, respectively and $1,136,174 and
$1,071,555 for the nine month periods ended September 30, 2014 and 2013, respectively. At September 30, 2014, construction in
progress included the gold, copper, and zinc extraction circuits and electrowinning equipment at the Clarkdale Slag Project.
During the third quarter of
2014, the Company completed the sale of a building and a lot that was previously classified as assets held for sale. An impairment
loss of $45,115 was recorded to operations during the three month period ended June 30, 2014. On July 10, 2014, the Company completed
the sale and the loss was reduced to $44,172.
3. ASSETS HELD FOR SALE
As of September 30, 2014, the Company had three parcels of land that were being marketed for sale. The
land included the approximately 60 acres of land the Company had been leasing to the Town of Clarkdale for disposal of Class B
effluent. The value of the three parcels of land were originally included in “land” on the consolidated balance sheet
and have been reclassified as assets held for sale. Upon completion of the sale, $227,500 representing half of the net proceeds
is designated for operating purposes and is classified within current assets. The remaining $227,500 is designated for debt collateral
and is included in “assets held for sale, non-current portion”.
Prior to its reclassification,
the land had a book value of $1,603,758. The selling price of the land is $459,000 and costs to complete the sale are estimated
at $4,000. An impairment loss of $1,148,758 was recorded to operations during the three month period ended September 30, 2014.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
4. CLARKDALE SLAG PROJECT
On February 15, 2007, the Company
completed a merger with Transylvania International, Inc. (“TI”) which provided the Company with 100% ownership of the
Clarkdale Slag Project in Clarkdale, Arizona, through its wholly owned subsidiary CML. This acquisition superseded the joint venture
option agreement to acquire a 50% ownership interest as a joint venture partner pursuant to Nanominerals Corp. (“NMC”)
interest in a joint venture agreement (“JV Agreement”) dated May 20, 2005 between NMC and VRIC. One of the Company’s
former directors was an affiliate of VRIC. The former director joined the Company’s board subsequent to the acquisition.
The Company also formed a second wholly owned subsidiary,
CMC, for the purpose of developing a processing plant at the Clarkdale Slag Project.
The Company believes the acquisition
of the Clarkdale Slag Project was beneficial because it provides for 100% ownership of the properties, thereby eliminating the
need to finance and further develop the projects in a joint venture environment.
This merger was treated as a
statutory merger for tax purposes whereby CML was the surviving merger entity.
The Company applied Emerging
Issues Task Force (“EITF”) 98-03 (which has been superseded by ASC 805-10-25-1) with regard to the acquisition of the
Clarkdale Slag Project. The Company determined that the acquisition of the Clarkdale Slag Project did not constitute an acquisition
of a business as that term is defined in ASC 805-10-55-4, and the Company recorded the acquisition as a purchase of assets.
The
$130.3 million purchase price was comprised of a combination of the cash paid, the deferred tax liability assumed in connection
with the acquisition, and the fair value of our common shares issued, based on the closing market price of our common stock, using
the average of the high and low prices of our common stock on the closing date of the acquisition. The Clarkdale Slag Project is
without known reserves and the project is exploratory in nature in accordance with Industry Guides promulgated by the Commission,
Guide 7 paragraph (a)(4)(i). As required by ASC 930-805-30, Mining – Business Combinations – Initial Recognition,
and ASC 740-10-25-49-55, Income Taxes – Overall – Recognition – Acquired Temporary Differences in Certain
Purchase Transactions that are Not Accounted for as Business Combinations, the Company then allocated the purchase price among
the assets as follows (and also further described in this Note 4 to the financial statements): $5,916,150 of the purchase price
was allocated to the slag pile site, $3,300,000 to the remaining land acquired, and $309,750 to income property and improvements.
The remaining $120,766,877 of the purchase price was allocated to the Clarkdale Slag Project, which has been capitalized as a tangible
asset in accordance with ASC 805-20-55-37, Use Rights. Upon commencement of commercial production, the asset will be amortized
using the unit-of-production method over the life of the Clarkdale Slag Project.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
4. CLARKDALE
SLAG PROJECT (continued)
Closing of the TI acquisition
occurred on February 15, 2007, (the “Closing Date”) and was subject to, among other things, the following terms and
conditions:
| a) | The Company paid $200,000 in cash to VRIC on the execution of a letter agreement; |
| b) | The Company paid $9,900,000 in cash to VRIC on the Closing Date; |
| c) | The Company issued 16,825,000 shares of its common stock, valued at $3.975 per share using the
average of the high and low price on the Closing Date, to the designates of VRIC on the closing pursuant to Section 4(2) and Regulation
D of the Securities Act of 1933; |
In addition to the cash and
equity consideration paid and issued upon closing, the acquisition agreement contains the following payment terms and conditions:
| d) | The Company agreed to continue to pay VRIC $30,000 per month until the earlier of: (i) the date
that is 90 days after receipt of a bankable feasibility study by the Company (the “Project Funding Date”), or (ii)
the tenth anniversary of the date of the execution of the letter agreement; |
The acquisition agreement also contains the following
additional contingent payment terms which are based on the Project Funding Date as defined in the agreement:
| e) | The Company has agreed to pay VRIC $6,400,000 on the Project Funding Date; |
| f) | The Company has agreed to pay VRIC a minimum annual royalty of $500,000, commencing on the Project
Funding Date (the “Advance Royalty”), and an additional royalty consisting of 2.5% of the net smelter returns (“NSR”)
on any and all proceeds of production from the Clarkdale Slag Project (the “Project Royalty”). The Advance Royalty
remains payable until the first to occur of: (i) the end of the first calendar year in which the Project Royalty equals or exceeds
$500,000 or (ii) February 15, 2017. In any calendar year in which the Advance Royalty remains payable, the combined Advance Royalty
and Project Royalty will not exceed $500,000 in any calendar year; and |
| g) | The Company has agreed to pay VRIC an additional amount of $3,500,000 from the net cash flow of
the Clarkdale Slag Project. The Company has accounted for this as a contingent payment and upon meeting the contingency requirements,
the purchase price of the Clarkdale Slag Project will be adjusted to reflect the additional consideration. |
Under the original JV Agreement,
the Company agreed to pay NMC a 5% royalty on NSR payable from the Company’s 50% joint venture interest in the production
from the Clarkdale Slag Project. Upon the assignment to the Company of VRIC’s 50% interest in the Joint Venture Agreement
in connection with the reorganization with TI, the Company continues to have an obligation to pay NMC a royalty consisting of 2.5%
of the NSR on any and all proceeds of production from the Clarkdale Slag Project. On July 25, 2011, the Company agreed to pay NMC
an advance royalty payment of $15,000 per month effective January 1, 2011. The advance royalty payment is more fully discussed
in Note 16.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
4. CLARKDALE SLAG PROJECT (continued)
The following table reflects
the recorded purchase consideration for the Clarkdale Slag Project:
Purchase price: | |
| |
Cash payments | |
$ | 10,100,000 | |
Joint venture option acquired in 2005 for cash | |
| 690,000 | |
Warrants issued for joint venture option | |
| 1,918,481 | |
Common stock issued | |
| 66,879,375 | |
Monthly payments, current portion | |
| 167,827 | |
Monthly payments, net of current portion | |
| 2,333,360 | |
Acquisition costs | |
| 127,000 | |
| |
| | |
Total purchase price | |
| 82,216,043 | |
| |
| | |
Net deferred income tax liability assumed - Clarkdale Slag Project | |
| 48,076,734 | |
| |
| | |
Total | |
$ | 130,292,777 | |
The
following table reflects the components of the Clarkdale Slag Project:
Allocation of acquisition cost: | |
| |
Clarkdale Slag Project (including net deferred income tax liability assumed of $48,076,734) | |
$ | 120,766,877 | |
Land - smelter site and slag pile | |
| 5,916,150 | |
Land | |
| 3,300,000 | |
Income property and improvements | |
| 309,750 | |
| |
| | |
Total | |
$ | 130,292,777 | |
The Company agreed to continue
to pay VRIC $30,000 per month until the earlier of the Project Funding Date or the tenth anniversary of the date of the execution
of the letter agreement. As of September 30, 2014 and December 31, 2013, the cumulative interest cost capitalized and included
in the Slag Project was $1,047,500 and $992,934, respectively.
The following table sets forth
the change in the Slag Project for the nine month period ended September 30, 2014 and the year ended December 31, 2013:
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
| | |
| |
Slag Pile, beginning balance | |
$ | 121,759,811 | | |
$ | 121,667,730 | |
Capitalized interest costs | |
| 54,566 | | |
| 92,081 | |
| |
| | | |
| | |
Slag Pile, ending balance | |
$ | 121,814,377 | | |
$ | 121,759,811 | |
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
5. SEARCHLIGHT MINING CLAIMS
Effective September 2, 2014,
the Company allowed its Searchlight mining claims to lapse by declining to pay the related Bureau of Land Management maintenance
fees. The claims consisted of 3,200 acres located near Searchlight, Nevada. The 3,200 acre property was staked as twenty 160 acre
claims, most of which were also double-staked as 142 twenty acre claims. Upon abandonment of the claims, a $16,947,419 loss was
recorded to operations.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued
liabilities at September 30, 2014 and December 31, 2013 consisted of the following:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Trade accounts payable | |
$ | 707,398 | | |
$ | 70,272 | |
Accrued compensation and related taxes | |
| 309,542 | | |
| 45,469 | |
Accrued interest | |
| 38,324 | | |
| 79,800 | |
| |
| | | |
| | |
| |
$ | 1,055,264 | | |
$ | 195,541 | |
Accounts payable – related party are discussed
in Note 19.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
7. DERIVATIVE WARRANT LIABILITY
On November 12, 2009, the Company
issued an aggregate of 12,078,596 units of securities to certain investors, consisting of 12,078,596 shares of common stock and
warrants to purchase an additional 6,039,298 shares of common stock, in a private placement to various accredited investors pursuant
to a Securities Purchase Agreement. The Company paid commissions to agents in connection with the private placement in the amount
of approximately $1,056,877 and warrants to purchase up to 301,965 shares of common stock.
The warrants issued to the purchasers
in the private placement became exercisable on November 12, 2009. The warrants had an initial expiration date of November 12, 2012
and an initial exercise price of $1.85 per share. The warrants have anti-dilution provisions, including provisions for the adjustment
to the exercise price and to the number of warrants granted if the Company issues common stock or common stock equivalents at a
price less than the exercise price.
The Company determined that
the warrants were not afforded equity classification because the warrants are not freestanding and are not considered to be indexed
to the Company’s own stock due to the anti-dilution provisions. In addition, the Company determined that the anti-dilution
provisions shield the warrant holders from the dilutive effects of subsequent security issuances and therefore the economic characteristics
and risks of the warrants are not clearly and closely related to the Company’s common stock. Accordingly, the warrants are
treated as a derivative liability and are carried at fair value.
On November 1, 2012 and on October
25, 2013, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holders to
amend these private placement warrants. The expiration date of the warrants was extended from November 12, 2012 to November 12,
2013 and again from November 12, 2013 to November 12, 2014. In all other respects, the terms and conditions of the warrants remained
the same. With respect to the extensions, the Company did not recognize any additional expense as the fair values of the warrants
were calculated at zero using the Binomial Lattice model with the following assumptions:
| |
October 25, 2013 | |
November 1, 2012 |
| |
| |
|
Risk-free interest rate | |
0.11% | |
0.19% |
Expected volatility | |
114.79% | |
94.94% |
Expected life (years) | |
1.0 | |
1.0 |
Subsequent event - On
November 11 2014, the Company approved an amendment to the expiration date of these warrants as further described
in Note 20.
As of September 30, 2014, the
cumulative adjustment to the warrants was as follows: (i) the exercise price was adjusted from $1.85 per share to $1.62 per share,
and (ii) the number of warrants was increased by 817,285 warrants. In connection with the financing completed with Luxor Capital
Partners, L.P. and its affiliates (“Luxor”) on June 7, 2012, Luxor waived its right to the anti-dilution adjustments
on 4,252,883 warrants it holds from the 2009 private placement. Future anti-dilution adjustments were not waived. The adjusted
exercise price of the Luxor 2009 private placements warrants is $1.65 per share. 269,956 of the warrants originally held by Luxor
have been transferred to another entity. No additional warrants were issued during the nine month period ended September 30, 2014.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
7. DERIVATIVE WARRANT LIABILITY (continued)
The total warrants accounted
for as a derivative liability were 7,158,548 and 7,158,548 as of September 30, 2014 and December 31, 2013, respectively.
The following table sets forth
the changes in the fair value of the derivative liability for the nine month period ended September 30, 2014 and the year ended
December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Beginning balance | |
$ | (81,574 | ) | |
$ | (274,706 | ) |
Adjustment to warrants | |
| - | | |
| - | |
Change in fair value | |
| 81,574 | | |
| 193,132 | |
Ending balance | |
$ | - | | |
$ | (81,574 | ) |
The Company estimates the fair
value of the derivative liabilities by using the Binomial Lattice pricing-model, with the following assumptions used for the nine
month period ended September 30, 2014 and the year ended December 31, 2013:
| |
| September 30, 2014 | | |
| December 31, 2013 | |
| |
| | | |
| | |
Dividend yield | |
| - | | |
| - | |
Expected volatility | |
| 29.38% - 118.69% | | |
| 90.98% - 121.32% | |
Risk-free interest rate | |
| 0.02% - 0.10% | | |
| 0.01% - 0.13% | |
Expected life (years) | |
| 0.10 - 0.60 | | |
| 0.10 - 0.90 | |
The expected volatility is based
on the historical volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield
available on US Treasury zero-coupon issues over equivalent lives of the options. The expected life is impacted by all of the underlying
assumptions and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly
lower or higher fair value measurement.
8. CONVERTIBLE NOTES
On September 18, 2013, the Company
completed a private placement of secured convertible notes (the “Notes”) to certain investors resulting in gross proceeds
of $4,000,000. The term of the Notes is five years, but the Notes can be called on the second anniversary date of issuance and
every six month period ended thereafter. The Notes bear interest at 7% which is payable semi-annually. The Notes have customary
provisions relating to events of default including an increase in the interest rate to 9%.The Notes are secured by a first priority
lien on all of the assets of the Company including its subsidiaries.
The Company has agreed not to
incur any additional secured indebtedness or any other indebtedness with a maturity prior to that of the Notes without the written
consent of the holders of the majority-in-interest of the Notes. In the event of a change of control of the Company, the Notes
will become due and payable at 120% of the principal balance. The holders of the Notes had the right to purchase, pro rata, up
to $600,000 of additional separate notes by the first anniversary of the issuance date on the same general terms and conditions
as the original Notes. On September 10, 2014, $69,000 in additional notes were issued.
SEARCHLIGHT
MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
8. CONVERTIBLE NOTES
(continued)
The Notes are convertible at
any time into shares of common stock at $0.40 per share, subject to certain adjustments. At September 30, 2014, the Notes were
convertible into 10,172,500 shares of common stock and the if-converted value equaled the principal amount of the Notes. Certain
embedded features in the Notes were required to be bifurcated and accounted for as a single compound derivative and reported at
fair value as further discussed in Note 9.
On the issuance date, the fair
value of the compound derivative amounted to $1,261,285 and was recorded as both a derivative liability and a debt discount. The
debt discount is being amortized to interest expense over the term of the Notes and the derivative liability is carried at fair
value until conversion or maturity.
The carrying value of the convertible
debt, net of discount was comprised of the following at September 30, 2014 and December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Convertible notes at face value | |
$ | 4,000,000 | | |
$ | 4,000,000 | |
Issuance of additional notes | |
| 69,000 | | |
| - | |
Unamortized discount | |
| (1,038,251 | ) | |
| (1,201,494 | ) |
| |
| | | |
| | |
Convertible notes, net of discount | |
$ | 3,030,749 | | |
$ | 2,798,506 | |
The
Company incurred $126,446 of financing fees related to the Notes. Such amounts were capitalized and recorded as deferred financing
fees and are being amortized to interest expense over the term of the Notes. The effective interest rate on the Notes is 15.4%
which included the following components and amounts for the three and nine month periods ended September 30, 2014:
| |
Three Months Ended September 30, 2014 | | |
Nine Months Ended September 30, 2014 | |
| |
| | |
| |
Interest rate at 7% | |
$ | 70,265 | | |
$ | 209,798 | |
Amortization of debt discount | |
| 55,568 | | |
| 163,244 | |
Amortization of deferred financing fees | |
| 5,771 | | |
| 16,953 | |
| |
| | | |
| | |
Total interest expense on convertible notes | |
$ | 131,604 | | |
$ | 389,995 | |
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
9. DERIVATIVE LIABILITY – CONVERTIBLE NOTES
As further discussed in Note
8, the Company has issued $4,069,000 of convertible notes. The Notes are convertible at any time into shares of common stock at
$0.40 per share.
The Notes have several embedded
conversion and redemption features. The Company determined that two of the features were required to be bifurcated and accounted
for under derivative accounting as follows:
| 1. | The embedded conversion feature includes a provision for the adjustment to the conversion price
if the Company issues common stock or common stock equivalents at a price less than the exercise price. Derivative accounting was
required for this feature due to this anti-dilution provision. |
| 2. | One embedded redemption feature requires the Company to pay 120% of the principal balance due upon
a change of control. Derivative accounting was required for this feature as the debt involves a substantial discount, the option
is only contingently exercisable and its exercise is not indexed to either an interest rate or credit risk. |
These two embedded features
have been accounted for together as a single compound derivative. The Company estimated the fair value of the compound derivative
using a model with estimated probabilities and inputs calculated by the Binomial Lattice model and present values. The assumptions
included in the calculations are highly subjective and subject to interpretation. Assumptions used for the nine month period ended
September 30, 2014 and the year ended December 31, 2013 included redemption and conversion estimates/behaviors, estimates regarding
future anti-dilutive financing agreements and the following other significant estimates:
| |
September 30, 2014 | |
December 31, 2013 |
| |
| |
|
Expected volatility | |
96.46% - 107.84% | |
93.11% - 101.74% |
Risk-free interest rate | |
1.25 % - 1.73% | |
1.39% - 1.75% |
Expected life (years) | |
2.50 - 3.0 | |
4.25 – 4.75 |
The expected volatility is based
on the historical volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield
available on US Treasury zero-coupon issues over equivalent lives of the options. The expected life is impacted by all of the underlying
assumptions and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly
lower or higher fair value measurement.
The following table sets forth
the changes in the fair value of the derivative liability for the nine month period ended September 30, 2014 and the year ended
December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Beginning balance | |
$ | 755,709 | | |
$ | - | |
Issuance of convertible debt | |
| 9,519 | | |
| 1,261,285 | |
Change in fair value | |
| (257,375 | ) | |
| (505,576 | ) |
| |
| | | |
| | |
Ending balance | |
$ | 507,853 | | |
$ | 755,709 | |
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
10. VRIC PAYABLE - RELATED PARTY
Pursuant to
the Clarkdale acquisition agreement, the Company agreed to pay VRIC $30,000 per month until the Project Funding Date. Mr. Harry
Crockett was an affiliate of VRIC and served on the Company’s Board of Directors subsequent to the acquisition until he passed
away in 2010.
The Company has recorded a liability
for this commitment using imputed interest based on its best estimate of its incremental borrowing rate. The effective interest
rate used was 8.00%, resulting in an initial present value of $2,501,187 and a debt discount of $1,128,813. The discount is being
amortized over the expected term of the debt using the effective interest method. The expected term used was 10 years which represents
the maximum term the VRIC liability is payable if the Company does not obtain project funding.
Interest costs related to this
obligation were $16,753 and $22,366 for the three month periods ended September 30, 2014 and 2013, respectively, and $54,566 and
$71,077 for the nine month periods ended September 30, 2014 and 2013, respectively. Interest costs incurred have been capitalized
and included in the Slag Project. To address liquidity constraints, the Company has deferred payment of VRIC monthly payable effective
May 1, 2014. Accrued interest related to the deferred payments was $28,726 as of September 30, 2014.
The following table represents
future minimum payments on the VRIC payable for each of the twelve month periods ending September 30,
2015 |
| |
$ | 510,000 | |
2016 |
| |
| 360,000 | |
2017 |
| |
| 150,000 | |
Thereafter |
| |
| - | |
|
| |
| | |
Total minimum payments |
| |
| 1,020,000 | |
Less: amount representing interest |
| |
| (110,039 | ) |
|
| |
| | |
Present value of minimum payments |
| |
| 909,961 | |
VRIC payable, current portion |
| |
| 429,311 | |
|
| |
| | |
VRIC payable, net of current portion |
| |
$ | 480,650 | |
The acquisition
agreement also contains payment terms which are based on the Project Funding Date as defined in the agreement. The terms and conditions
of these payments are discussed in more detail in Notes 4 and 16.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
11. STOCKHOLDERS’ EQUITY
During the nine month period
ended September 30, 2014, the Company’s stockholders’ equity activity consisted of the following:
On September 9, 2014, the Company
approved the issuance of a private placement of the Company’s securities at a purchase price of $0.20 per Unit. Each Unit
consists of:
| · | One share of the Company’s common
stock, $0.001 par value per share; and |
| · | One half of a common stock purchase warrant,
where each full warrant will entitle the warrant holder to purchase one share of the Company’s common stock, at an exercise
price of $0.30 per share and expiring five years from the date of issuance. |
Common stock subscribed
– As of September 30, 2014, the Company had received subscriptions for the purchase of Units in the issuance discussed above.
$575,000 of proceeds were received by September 30, 2014 and were recorded as common stock subscribed. Additionally, 633,000 Units
were subscribed to by convertible note holders in consideration of $126,700 of interest payments due on September 18, 2014. The
first closing of the private placement was completed on October 24, 2014 as further described in Note 20.
During the nine month period ended September 30,
2013 the Company did not issue any common stock or enter into any financing agreements.
The following table summarizes the Company’s
private placement warrant activity for the nine month period ended September 30, 2014:
| |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (Years) | |
| |
| | |
| | |
| |
Balance, December 31, 2013
| |
| 14,200,935 | | |
$ | 1.74 | | |
| 0.87 | |
Warrants granted | |
| - | | |
| - | | |
| - | |
Warrants expired | |
| - | | |
| - | | |
| - | |
Warrants exercised | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Balance, September 30, 2014 | |
| | | |
| | | |
| | |
| |
| 14,200,935 | | |
$ | 1.74 | | |
| 0.12 | |
Subsequent event
- On November 11 2014, the Company approved an amendment to the expiration date of the 14,200,935 warrants in the above table
as further described in Note 20.
In addition to the private
placement warrants in the table above, the Company issued 12,000,000 warrants on June 1, 2005 in connection with the Clarkdale
Slag Project option, of which 8,750,000 remain outstanding as of September 30, 2014. The exercise price of these warrants is $0.375
per share with an expiration date of June 1, 2015.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
12. STOCK-BASED COMPENSATION
Stock-based compensation includes
grants of stock options and purchase warrants to eligible directors, employees and consultants as determined by the board of directors.
Stock option plans -
The Company has adopted several stock option plans, all of which have been approved by the Company’s stockholders that authorize
the granting of stock option awards subject to certain conditions. At September 30, 2014, the Company had 10,390,576 of its common
shares available for issuance for stock option awards under the Company’s stock option plans.
At September 30, 2014, the Company
had the following stock option plans available:
| · | 2009 Incentive Plan – The terms
of the 2009 Incentive Plan, as amended, allow for up to 7,250,000 options to be issued to eligible participants. Under the plan,
the exercise price is generally equal to the fair market value of the Company’s common stock on the grant date and the maximum
term of the options is generally ten years. No participants shall receive more than 500,000 options under this plan in any one
calendar year. For grantees who own more than 10% of the Company’s common stock on the grant date, the exercise price may
not be less than 110% of the fair market value on the grant date and the term is limited to five years. The plan was approved by
the Company’s stockholders on December 15, 2009 and the amendment was approved by the Company’s stockholders on May
8, 2012. As of September 30, 2014, the Company had granted 1,222,500 options under the 2009 Incentive Plan with a weighted average
exercise price of $1.16 per share. As of September 30, 2014, 1,182,500 of the options granted were outstanding. |
| · | 2009 Directors Plan - The terms of the
2009 Directors Plan, as amended, allow for up to 2,750,000 options to be issued to eligible participants. Under the plan, the exercise
price may not be less than 100% of the fair market value of the Company’s common stock on the grant date and the term may
not exceed ten years. No participants shall receive more than 250,000 options under this plan in any one calendar year. The plan
was approved by the Company’s stockholders on December 15, 2009 and the amendment was approved by the Company’s stockholders
on May 8, 2012. As of September 30, 2014, the Company had granted 1,434,887 options under the 2009 Directors Plan with a weighted
average exercise price of $0.87 per share. As of September 30, 2014, all of the options granted were outstanding. |
| · | 2007 Plan - Under the terms of the 2007
Plan, options to purchase up to 4,000,000 shares of common stock may be granted to eligible participants. Under the plan, the option
price for incentive stock options is the fair market value of the stock on the grant date and the option price for non-qualified
stock options shall be no less than 85% of the fair market value of the stock on the grant date. The maximum term of the options
under the plan is ten years from the grant date. The 2007 Plan was approved by the Company’s stockholders on June 15, 2007. As
of September 30, 2014, the Company had granted 952,047 options under the 2007 Plan with a weighted average exercise price of $1.03
per share. As of September 30, 2014, 813,618 of the options granted were outstanding. |
The Company has also granted
300,000 stock options to one of its executives on October 1, 2010 and 200,000 warrants to one of its consultants on January 13,
2011 outside of the aforementioned stock option plans, all of which remain outstanding at September 30, 2014.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
12. STOCK-BASED COMPENSATION (continued)
Non-Employee Directors Equity
Compensation Policy – Non-employee directors have a choice between receiving $9,000 value of common stock per quarter,
where the number of shares is determined by the closing price of the Company’s stock on the last trading day of each quarter,
or a number of options to purchase twice the number of shares of common stock that the director would otherwise receive if the
director elected to receive shares, with an exercise price based on the closing price of the Company’s common stock on the
last trading day of each quarter. Effective April 1, 2011, the Board of Directors implemented a policy whereby the number of options
granted for quarterly compensation to each director is limited to 18,000 options per quarter.
Stock warrants –
Upon approval of the Board of Directors, the Company may grant stock warrants to consultants for services performed.
Valuation of awards -
At September 30, 2014, the Company had options outstanding that vest on two different types of vesting schedules, service-based
and performance-based. For both service-based and performance-based stock option grants, the Company estimates the fair value of
stock-based compensation awards by using the Binomial Lattice option pricing model with the following assumptions used for the
nine month periods ended September 30, 2014 and 2013:
| |
September 30, 2014 | |
September 30, 2013 |
| |
| |
|
Risk-free interest rate | |
0.39% - 1.73% | |
0.77%-1.41% |
Dividend yield | |
- | |
- |
Expected volatility | |
98.65% - 105.87% | |
90.39%-95.66% |
Expected life (years) | |
2.00 - 4.25 | |
4.25 |
The expected volatility is based
on the historical volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield
available on US Treasury zero-coupon issues over equivalent lives of the options.
The expected life of awards
represents the weighted-average period the stock options or warrants are expected to remain outstanding and is a derived output
of the Binomial Lattice model. The expected life is impacted by all of the underlying assumptions and calibration of the Company’s
model. The Binomial Lattice model estimates the probability of exercise as a function of these two variables based on the entire
history of exercises and cancellations on all past option grants made by the Company.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
12.
STOCK-BASED COMPENSATION
(continued)
Stock-based compensation
activity - During the nine month period ended September 30, 2014, the Company granted stock-based awards as follows:
| a) | On September 30, 2014, the Company granted stock options under the 2009 Directors Plan for the
purchase of 54,000 shares of common stock at $0.22 per share. The options were granted to three of the Company’s non-management
directors for directors’ compensation, are fully vested and expire on September 30, 2019. The exercise price of the stock
options equaled the closing price of the Company’s common stock for the grant date |
| b) | On June 30, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase
of 54,000 shares of common stock at $0.24 per share. The options were granted to three of the Company’s non-management directors
for directors’ compensation, are fully vested and expire on June 30, 2019. The exercise price of the stock options equaled
the closing price of the Company’s common stock for the grant date. |
| c) | On March 31, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase
of 54,000 shares of common stock at $0.26 per share. The options were granted to three of the Company’s non-management directors
for directors’ compensation, are fully vested and expire on March 31, 2019. The exercise price of the stock options equaled
the closing price of the Company’s common stock for the grant date. |
| d) | On January 13, 2014, the Company extended the expiration date of 200,000 warrants issued to a consultant.
The expiration date was extended from January 13, 2014 to January 13, 2016. All other terms were unchanged. The modification resulted
in additional expense of $5,011. |
During the nine month period
ended September 30, 2013, the Company granted stock-based awards as follows:
| a) | On September 30, 2013, the Company granted stock options under the 2009 Directors Plan for the
purchase of 54,000 shares of common stock at $0.365 per share. The options were granted to three of the Company’s non-management
directors for directors’ compensation, are fully vested and expire on September 30, 2018. The exercise price of the stock
options equaled the closing price of the Company’s common stock for the grant date |
| b) | On June 30, 2013, the Company granted stock options under the 2009 Directors Plan for the purchase
of 54,000 shares of common stock at $0.288 per share. The options were granted to three of the Company’s non-management directors
for directors’ compensation, are fully vested and expire on June 30, 2018. The exercise price of the stock options equaled
the closing price of the Company’s common stock for the grant date. |
| c) | On March 31, 2013, the Company granted stock options under the 2009 Directors Plan for the purchase
of 54,000 shares of common stock at $0.48 per share. The options were granted to three of the Company’s non-management directors
for directors’ compensation, are fully vested and expire on March 31, 2018. The exercise price of the stock options equaled
the closing price of the Company’s common stock for the grant date. |
| d) | On March 31, 2013, the Company granted stock options under the 2007 Plan for the purchase of 18,000
shares of common stock at $0.48 per share. The options were granted to a consultant, are fully vested and expire on March 31, 2018.
The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date. |
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
12.
STOCK-BASED COMPENSATION
(continued)
Expenses related to the vesting,
modifying and granting of stock-based compensation awards were $11,300 and $61,287 for the three month periods ended September
30, 2014 and 2013, respectively, and $62,947 and $256,568 for the nine month periods ended September 30, 2014 and 2013, respectively.
Such expenses have been included in general and administrative and mineral exploration and evaluation expense.
The
following table summarizes the Company’s stock-based compensation activity for the nine month period ended September 30,
2014:
| |
Number of Shares | | |
Weighted Average Grant Date Fair Value | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (Years) | | |
Aggregate Intrinsic Value | |
| |
| | |
| | |
| | |
| | |
| |
Outstanding, December 31, 2013 | |
| 3,800,331 | | |
$ | 0.56 | | |
$ | 1.01 | | |
| 3.76 | | |
| | |
Options/warrants granted | |
| 162,000 | | |
| 0.09 | | |
| 0.24 | | |
| 4.75 | | |
| | |
Options/warrants expired | |
| (31,336 | ) | |
| 1.02 | | |
| 2.02 | | |
| - | | |
| | |
Options/warrants forfeited | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
Options/warrants exercised | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Outstanding, September 30, 2014 | |
| 3,930,995 | | |
$ | 0.54 | | |
$ | 0.97 | | |
| 3.21 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Exercisable, September 30, 2014 | |
| 3,580,995 | | |
$ | 0.50 | | |
$ | 0.95 | | |
| 2.86 | | |
$ | - | |
Aggregate intrinsic
value represents the value of the Company’s closing stock price on the last trading day of the quarter ended September 30,
2014 in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable.
Unvested awards - The
following table summarizes the changes of the Company’s stock-based compensation awards subject to vesting for the nine month
period ended September 30, 2014:
| |
Number of Shares Subject to Vesting | | |
Weighted Average Grant Date Fair Value | |
| |
| | | |
| | |
Unvested, December 31, 2013 | |
| 450,000 | | |
$ | 0.95 | |
Options/warrants granted | |
| - | | |
| - | |
Options/warrants vested | |
| (100,000 | ) | |
| 1.02 | |
| |
| | | |
| | |
Unvested, September 30, 2014 | |
| 350,000 | | |
$ | 0.93 | |
For the three month periods
ended September 30, 2014 and 2013, the total grant date fair value of shares vested was $27,708 and $139,563, respectively. For
the nine month periods ended September 30, 2014 and 2013, the total grant date fair value of shares vested was $102,439 and $418,148,
respectively. As of September 30, 2014, there was $22,000 of total unrecognized compensation cost related to unvested stock-based
compensation awards. The weighted average period over which this cost will be recognized was 0.54 years as of September 30, 2014.
Included in the total of unvested stock options at September 30, 2014, was 250,000 performance-based stock options. At September
30, 2014, management determined that achievement of the performance targets was probable. The weighted average period over which
the related expense will be recognized was 0.25 years as of September 30, 2014.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
13. STOCKHOLDER RIGHTS AGREEMENT
The Company
adopted a Stockholder Rights Agreement (the “Rights Agreement”) in August 2009 to protect stockholders from attempts
to acquire control of the Company in a manner in which the Company’s Board of Directors determines is not in the best interest
of the Company or its stockholders. Under the agreement, each currently outstanding share of the Company’s common stock
includes, and each newly issued share will include, a common share purchase right. The rights are attached to and trade
with the shares of common stock and generally are not exercisable. The rights will become exercisable if a person or
group acquires, or announces an intention to acquire, 15% or more of the Company’s outstanding common stock. The Rights Agreement
was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights had no
dilutive effect, did not affect the Company’s reported earnings per share and was not taxable to the Company or its stockholders.
On June
7, 2012 and on September 18, 2013, the Company agreed to waive the 15% limitation currently in the Rights Agreements with respect
to Luxor, and to allow Luxor to become the beneficial owners of up to 17.5% and 22% of the Company’s common stock, without
being deemed to be an “acquiring person” under the Rights Agreement.
14. PROPERTY RENTAL AGREEMENTS AND LEASES
The
Company, through its subsidiary CML, has the following lease and rental agreements as lessor:
Clarkdale
Arizona Central Railroad – rental – CML rents land to Clarkdale Arizona Central Railroad on month-to-month terms
at $1,700 per month.
Land lease - wastewater effluent
- Pursuant to the acquisition of TI, the Company became party to a lease dated August 25, 2004 with the Town of Clarkdale, AZ (“Town
of Clarkdale”). The Company provides approximately 60 acres of land to the Town of Clarkdale for disposal of Class B effluent.
In return, the Company has first right to purchase up to 46,000 gallons per day of the effluent for its use at fifty percent (50%)
of the potable water rate. The Company may also purchase Class A effluent at seventy-five percent (75%) of the potable water rate,
if available.
The lease agreement expired
August 25, 2014. At such time as the Town of Clarkdale no longer uses the property for effluent disposal, and for a period of 25
years measured from the date of the lease, the Company has a continuing right to purchase Class B effluent, and if available, Class
A effluent at then market rates.
As of September 30, 2014, the
Company was negotiating the sale of three parcels of land to the Town of Clarkdale which contain the approximately 60 acres of
land leased to the Town of Clarkdale. Further details are provided in Note 3.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Company is a Nevada corporation and
is subject to federal, Arizona and Colorado income taxes. Nevada does not impose a corporate income tax.
Significant components
of the Company’s net deferred income tax assets and liabilities at September 30, 2014 and December 31, 2013 were as follows:
| |
September 30, 2014 | | |
December 31, 2013 | |
Deferred income tax assets: | |
| | | |
| | |
| |
| | | |
| | |
Net operating loss carryforward | |
$ | 18,336,483 | | |
$ | 16,822,317 | |
Option compensation | |
| 715,723 | | |
| 763,779 | |
Asset held for sale | |
| 436,528 | | |
| - | |
Property, plant & equipment | |
| 1,207,225 | | |
| 1,021,685 | |
| |
| | | |
| | |
Gross deferred income tax assets | |
| 20,695,959 | | |
| 18,607,781 | |
Less: valuation allowance | |
| (531,226 | ) | |
| (733,287 | ) |
| |
| | | |
| | |
Net deferred income tax assets | |
| 20,164,733 | | |
| 17,874,494 | |
| |
| | | |
| | |
Deferred income tax liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Acquisition related liabilities | |
| (48,740,641 | ) | |
| (55,197,465 | ) |
| |
| | | |
| | |
Net deferred income tax liability | |
$ | (28,575,908 | ) | |
$ | (37,322,971 | ) |
The realizability of deferred
tax assets are reviewed at each balance sheet date. The majority of the Company’s deferred tax liabilities are related to
depletable assets. Such depletion will begin with the processing of mineralized material once production has commenced. Therefore,
the deferred tax liabilities will reverse in similar time periods as the deferred tax assets. The reversal of the deferred tax
liabilities is sufficient to support the deferred tax assets. The valuation allowance relates to state net operating loss carryforwards
which may expire unused due to their shorter life.
Deferred income tax liabilities
were recorded on GAAP basis over income tax basis using statutory federal and state rates with the corresponding increase in the
purchase price allocation to the assets acquired.
The resulting estimated future
federal and state income tax liabilities associated with the temporary difference between the acquisition consideration and the
tax basis are reflected as an increase to the total purchase price which has been applied to the underlying mineral and slag project
assets in the absence of there being a goodwill component associated with the acquisition transactions.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
| 15. | INCOME TAXES (continued) |
A reconciliation of the deferred income
tax benefit for the three month periods ended September 30, 2014 and 2013 at US federal and state income tax rates to the actual
tax provision recorded in the financial statements consisted of the following components:
| |
September 30,
2014 | | |
September 30,
2013 | |
| |
| | |
| |
Deferred tax benefit at statutory rates | |
$ | 6,840,332 | | |
$ | 584,567 | |
State deferred tax benefit, net of federal benefit | |
| 586,314 | | |
| 50,106 | |
Increase (decrease) in deferred tax benefit from: | |
| | | |
| | |
Change in valuation allowance | |
| 50,937 | | |
| 11,689 | |
Change in state NOL’s | |
| (47,873 | ) | |
| (34,841 | ) |
Gain (loss) on the change in fair value of | |
| | | |
| | |
derivative liabilities | |
| 47,741 | | |
| (437 | ) |
Other permanent differences | |
| (36,685 | ) | |
| (7,582 | ) |
| |
| | | |
| | |
Deferred income tax benefit | |
$ | 7,440,766 | | |
$ | 603,502 | |
A reconciliation of the deferred
income tax benefit for the nine month periods ended September 30, 2014 and 2013 at US federal and state income tax rates to the
actual tax provision recorded in the financial statements consisted of the following components:
| |
September 30,
2014 | | |
September 30,
2013 | |
| |
| | |
| |
Deferred tax benefit at statutory rates | |
$ | 8,023,681 | | |
$ | 1,702,628 | |
State deferred tax benefit, net of federal benefit | |
| 687,744 | | |
| 145,940 | |
Increase (decrease) in deferred tax benefit from: | |
| | | |
| | |
Change in valuation allowance | |
| 202,061 | | |
| (83,036 | ) |
Change in state NOL’s | |
| (143,621 | ) | |
| (104,522 | ) |
Gain on the change in fair value of | |
| | | |
| | |
derivative warrant liability | |
| 125,183 | | |
| 103,951 | |
Other permanent differences | |
| (147,985 | ) | |
| (16,853 | ) |
| |
| | | |
| | |
Deferred income tax benefit | |
$ | 8,747,063 | | |
$ | 1,748,108 | |
The Company had cumulative net
operating losses of $49,617,366 as of September 30, 2014 for federal income tax purposes. The federal net operating loss carryforwards
will expire between 2025 and 2034.
State income tax allocation
- The Company had cumulative net operating losses of $24,151,883 as of September 30, 2014 for state income tax purposes. The Company
has placed a valuation allowance against state net operating loss carryforwards expected to expire unused. The remaining net operating
loss carryforwards expire at various dates through 2034.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
15.
INCOME TAXES (continued)
Tax returns subject to examination
- The Company and its subsidiaries file income tax returns in the United States. These tax returns are subject to examination by
taxation authorities provided the years remain open under the relevant statutes of limitations, which may result in the payment
of income taxes and/or decreases in its net operating losses available for carryforward. The Company has losses from inception
to date, and thus all years remain open for examination. While the Company believes that its tax filings do not include uncertain
tax positions, the results of potential examinations or the effect of changes in tax law cannot be ascertained at this time. The
Company does not have any tax returns currently under examination by the Internal Revenue Service.
16. COMMITMENTS AND CONTINGENCIES
Lease obligations –
The Company leases corporate office space under a sublease agreement from a related party as further discussed in Note 19. The
lease agreement commenced September 1, 2013 and is for a 2 year period. The following table represents future rent payments for
each of the twelve month periods ending September 30,
2015 | |
$ | 18,337 | |
Thereafter | |
| - | |
| |
| | |
| |
$ | 18,337 | |
Total rent expense was $7,305
and $5,799 for the three month periods ended September 30, 2014 and 2013, respectively. Total rent expense was $24,219 and $23,679
for the nine month periods ended September 30, 2014 and 2013, respectively.
Severance agreements
– The Company has severance agreements with two executive officers that provide for various payments if the officer’s
employment agreement is terminated by the Company, other than for cause. At September 30, 2014, the total potential liability for
severance agreements was $112,500.
Consultant agreement
– The Company has executed an agreement with a consultant to provide services to the Company in the areas of business and
financial affairs. The agreement commenced on September 9, 2014 and is for a term of one year. In exchange for these services,
the Company will issue 1,250,000 warrants exercisable at $0.30 per share to the consultant from time to time or at any time under
the term of the agreement. As of September 30, 2014, no warrants had been issued under this agreement.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
16. COMMITMENTS AND CONTINGENCIES (continued)
Clarkdale Slag Project royalty
agreement - NMC - Under the original JV Agreement, the Company agreed to pay NMC a 5% royalty on NSR payable from the Company’s
50% joint venture interest in the production from the Clarkdale Slag Project. Upon the assignment to the Company of VRIC’s
50% interest in the Joint Venture Agreement in connection with the reorganization with Transylvania International, Inc., the Company
continues to have an obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the
Clarkdale Slag Project.
The Advance Royalty shall continue
for a period of ten years from the Agreement Date or until such time that the Project Royalty shall exceed $500,000 in any calendar
year, at which time the Advance Royalty requirement shall cease.
Purchase consideration Clarkdale
Slag Project - In consideration of the acquisition of the Clarkdale Slag Project from VRIC, the Company has agreed to certain
additional contingent payments. The acquisition agreement contains payment terms which are based on the Project Funding Date as
defined in the agreement:
| a) | The Company has agreed to pay VRIC $6,400,000 on the Project Funding Date; |
| b) | The Company has agreed to pay VRIC a minimum annual royalty of $500,000, commencing on the Project
Funding Date (the “Advance Royalty”), and an additional royalty consisting of 2.5% of the NSR on any and all proceeds
of production from the Clarkdale Slag Project (the “Project Royalty”). The Advance Royalty remains payable until the
first to occur of: (i) the end of the first calendar year in which the Project Royalty equals or exceeds $500,000 or (ii) February
15, 2017. In any calendar year in which the Advance Royalty remains payable, the combined Advance Royalty and Project Royalty will
not exceed $500,000; and, |
| c) | The Company has agreed to pay VRIC an additional amount of $3,500,000 from the net cash flow of
the Clarkdale Slag Project. |
On July 25, 2011, the Company
and NMC entered into an amendment (the “Third Amendment”) to the assignment agreement between the parties dated June
1, 2005. Pursuant to the Third Amendment, the Company agreed to pay advance royalties (the “Advance Royalties”) to
NMC of $15,000 per month (the “Minimum Royalty Amount”) effective as of January 1, 2011. The Third Amendment also provides
that the Minimum Royalty Amount will continue to be paid to NMC in every month where the amount of royalties otherwise payable
would be less than the Minimum Royalty Amount, and such Advance Royalties will be treated as a prepayment of future royalty payments.
In addition, fifty percent of the aggregate consulting fees paid to NMC from 2005 through December 31, 2010 were deemed to be prepayments
of any future royalty payments. As of December 31, 2010, aggregate consulting fees previously incurred amounted to $1,320,000,
representing credit for advance royalty payments of $660,000.
Total advance royalty payments
to NMC were $45,000 and $45,000 for the three month periods ended September 30, 2014 and 2013, respectively, and $135,000 and $135,000
for the nine month periods ended September 30, 2014 and 2013, respectively. Advanced royalty payments have been included in mineral
exploration and evaluation expenses – related party on the statements of operations.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
16. COMMITMENTS AND CONTINGENCIES (continued)
Development agreement
- In January 2009, the Company submitted a development agreement to the Town of Clarkdale for development of an Industrial Collector
Road (the “Road”). The purpose of the Road is to provide the Company the capability to transport supplies, equipment
and products to and from the Clarkdale Slag Project site efficiently and to meet stipulations of the Conditional Use Permit for
the full production facility at the Clarkdale Slag Project.
The timing of the development
of the Road is to be within two years of the effective date of the agreement. The effective date shall be the later of (i) 30 days
from the approving resolution of the agreement by the Council, (ii) the date on which the Town of Clarkdale obtains a connection
dedication from separate property owners who have land that will be utilized in construction of the Road, or (iii) the date on
which the Town of Clarkdale receives the proper effluent permit. The contingencies outlined in (ii) and (iii) above are beyond
control of the Company.
The Company estimates the initial
cost of construction of the Road to be approximately $3,500,000 and the cost of additional enhancements to be approximately $1,200,000
which will be required to be funded by the Company. Based on the uncertainty of the contingencies, this cost is not included in
the Company’s current operating plans. Funding for construction of the Road will require obtaining project financing or other
significant financing. As of the date of this filing, these contingencies had not changed.
Registration Rights Agreement
- In connection with the June 7, 2012 private placement, the Company entered into a Registration Rights Agreement (“RRA”)
with the purchasers. Pursuant to the RRA, the Company agreed to certain demand registration rights. These rights include the requirement
that the Company file certain registration statements within a specified time period and to have these registration statements
declared effective within a specified time period. The Company also agreed to file and keep continuously effective such additional
registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume
restrictions. If the Company is not able to comply with these registration requirements, the Company will be required to pay cash
penalties equal to 1.0% of the aggregate purchase price paid by the investors for each 30 day period in which a registration default,
as defined by the RRA, exists. The maximum penalty is equal to 3.0% of the purchase price which amounts to $121,500. As of the
date of this filing, the Company does not believe the penalty to be probable and accordingly, no liability has been accrued.
Registration Rights Agreement
- In connection with the September 18, 2013 convertible notes issuance, the Company entered into a RRA with the investors. Pursuant
to the RRA, the Company agreed to file a registration statement covering the resale of the shares of common stock issuable upon
conversion of the notes and the additional notes allowed for under the agreement. Pursuant to the RRA, the Company agreed to certain
demand registration rights. These rights include the requirement that the Company file certain registration statements within a
specified time period and to have these registration statements declared effective within a specified time period. The Company
also agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock
registered thereunder have been sold or may be sold without volume restrictions. The Purchasers will also be granted piggyback
registration rights with respect to such shares. If the Company is not able to comply with these registration requirements, the
Company will be required to pay cash penalties equal to 1.0% of the purchase price. The maximum penalty is equal to 3.0% of the
purchase price which amounts to $120,000 for the convertible notes and $18,000 for the additional notes. As of the date of this
filing, the Company does not believe the penalty to be probable and accordingly, no liability has been accrued.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
17. CONCENTRATION OF CREDIT RISK
The Company maintains its cash
accounts in financial institutions. Cash accounts at these financial institutions are insured by the Federal Deposit Insurance
Corporation (the “FDIC”) for up to $250,000 per institution. The Company has never experienced a material loss or lack
of access to its cash accounts; however, no assurance can be provided that access to the Company’s cash accounts will not
be impacted by adverse conditions in the financial markets. At September 30, 2014, the Company had $138,584 of deposits in excess
of FDIC insured limits.
18. CONCENTRATION OF ACTIVITY
The Company currently utilizes
a mining and environmental firm to perform significant portions of its mineral property and metallurgical exploration work programs.
A change in the lead mining and environmental firm could cause a delay in the progress of the Company’s exploration programs
and would cause the Company to incur significant transition expense and may affect operating results adversely.
19. RELATED PARTY TRANSACTIONS
NMC - The Company utilizes
the services of NMC to provide technical assistance and financing related activities. In addition, NMC provides the Company with
use of its laboratory, instrumentation, milling equipment and research facilities. One of the Company’s executive officers,
Mr. Ager, is affiliated with NMC. Prior to January 1, 2011, the Company paid a negotiated monthly fee ranging from $15,000 to $30,000
plus reimbursement of expenses incurred. Effective January 1, 2011, the Company and NMC agreed to replace the monthly fee with
an advance royalty payment of $15,000 per month and to reimburse NMC for actual expenses incurred and consulting services provided.
The Company has an existing
obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project.
The royalty agreement and advance royalty payments are more fully discussed in Note 16.
The following table provides
details of transactions between the Company and NMC for the three and nine month periods ended September 30, 2014 and 2013.
| |
Three Months
Ended September 30,
2014 | | |
Three Months
Ended September 30,
2013 | | |
Nine Months
Ended September 30,
2014 | | |
Nine Months
Ended September 30,
2013 | |
| |
| | | |
| | | |
| | | |
| | |
Reimbursement of expenses | |
$ | 983 | | |
$ | 1,854 | | |
$ | 6,143 | | |
$ | 3,946 | |
Consulting services provided | |
| 30,000 | | |
| 28,395 | | |
| 90,400 | | |
| 45,745 | |
Advance royalty payments | |
| 45,000 | | |
| 45,000 | | |
| 135,000 | | |
| 135,000 | |
| |
| | | |
| | | |
| | | |
| | |
Mineral and exploration expense – related party | |
$ | 75,983 | | |
$ | 75,249 | | |
$ | 231,543 | | |
$ | 184,691 | |
Additionally, during the nine
month period ended September 30, 2014, NMC paid $50,000 of the Company’s expenses. Such amount was recorded as a contribution
to capital.
The Company had outstanding
balances due to NMC of $179,928 and $37,896 at September 30, 2014 and December 31, 2013, respectively.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
19. RELATED PARTY TRANSACTIONS (continued)
Cupit, Milligan, Ogden &
Williams, CPAs - The Company utilizes Cupit, Milligan, Ogden & Williams, CPAs (“CMOW”) to provide accounting
support services. CMOW is an affiliate of our CFO, Mr. Williams. Fees for services provided by CMOW do not include any charges
for Mr. Williams’ time. Mr. Williams is compensated for his time under his employment agreement.
The following table provides
details of transactions between the Company and CMOW and the direct benefit to Mr. Williams for the three and nine month periods
ended September 30, 2014 and 2013.
| |
Three Months Ended September 30, 2014 | | |
Three Months Ended September 30, 2013 | | |
Nine Months Ended September 30, 2014 | | |
Nine Months Ended September 30, 2013 | |
| |
| | |
| | |
| | |
| |
Accounting support services | |
$ | 33,331 | | |
$ | 29,008 | | |
$ | 105,133 | | |
$ | 111,353 | |
Direct benefit to CFO | |
$ | 12,999 | | |
$ | 13,296 | | |
$ | 41,002 | | |
$ | 45,411 | |
The Company had an outstanding
balance due to CMOW of $82,450 and $8,639 as of September 30, 2014 and December 31, 2013, respectively.
Ireland Inc. –
The Company leases corporate office space under a sublease agreement with Ireland Inc. (“Ireland”). NMC is a shareholder
in both the Company and Ireland. Additionally, one of the Company’s directors is the CFO, Treasurer and a director of Ireland
and the Company’s CEO provides consulting services to Ireland. The lease agreement commenced September 1, 2013, is for a
two year period and requires monthly lease payments of $2,819 for the first year and $1,667 for the second year. The lease agreement
did not require payment of a security deposit.
Total rent expense incurred
under this sublease agreement was $7,305 and $24,219 for the three and nine month periods ended September 30, 2014, respectively
and $2,819 for both the three and nine month periods ended September 30, 2013. The Company had an outstanding balance due to Ireland
of $12,943 as of September 30, 2014. No amounts were due to Ireland as of December 31, 2013.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
20. SUBSEQUENT EVENT
Private placement - On
October 24, 2014, the Company closed on the sale of $1,005,700 of its securities in a private placement to certain investors, (collectively,
the “Purchasers”). The securities were issued in reliance on exemptions from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended and Rule 506 of Regulation D thereunder. Certain of such Purchasers are holders (“Note
Holders”) of the Company’s secured convertible promissory notes (“Notes”). The Company did not pay any
commissions or brokers’ fees in connection with this issuance.
The Company issued 5,028,500
“Units,” with each Unit consisting of: one share of the Company’s common stock and one half of a warrant, where
each full warrant entitles the warrant holder to purchase one share of the Company’s common stock at an exercise price of
$0.30 per share. Such warrants expire on October 24, 2019. The price of each Unit was $0.20.
Of the 5,028,500 Units, 4,395,000
were sold to investors for gross proceeds of $879,000, and 633,500 Units were issued to Note Holders in consideration of interest
payments due as of September 18, 2014 in the amount of $126,700.
Luxor purchased $91,000 of
the Units in consideration of the September 18, 2014 interest payment owed to them. In addition, Mr. Martin Oring, one of the
Company’s directors, and Chief Executive Officer and President, and certain of his affiliates, purchased $100,000 of Units
for cash, and $8,225 of Units in consideration of the September 18, 2014 interest payment owed to them.
Warrant extension - On
November 11, 2014, the Company approved an amendment to the expiration dates of certain outstanding warrants to purchase up to
an aggregate of 14,520,373 shares of the Company’s common stock. Prior to the amendment, these warrants were set to expire
on November 12, 2014. After the amendment, these warrants are set to expire on November 12, 2015. The terms and conditions of these
warrants remain the same in all other respects. These warrants were originally issued in connection with the Company’s February
23, 2007, March 22, 2007, December 26, 2007, February 7, 2008 and November 12, 2009 private placements. The Company calculated
the fair value of the warrants using the Binomial Lattice model with the following assumptions, outputs and results:
Risk-free interest rate | |
0.12% |
Expected volatility | |
142.72% |
Expected life | |
1 year |
Fair value | |
$- |
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly
Report on Form 10-Q, or the Report, are “forward-looking statements.” These forward-looking statements include, but
are not limited to, statements about the plans, objectives, expectations and intentions of Searchlight Minerals Corp., a Nevada
corporation (referred to in this Report as “we,” “us,” “our” or “registrant”) and
other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter
included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to
our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties
and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the
future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such
future results are based upon management’s best estimates based upon current conditions and the most recent results of operations.
When used in this Report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,”
“seek,” “estimate” and similar expressions are generally intended to identify forward-looking statements,
because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results
to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations
and intentions and other factors that are discussed under the section entitled “Risk Factors,” in this Report and in
our Annual Report on Form 10-K for the year ended December 31, 2013.
The following discussion
and analysis summarizes our plan of operation for the next twelve months, our results of operations for the three and nine month
periods ended September 30, 2014 and changes in our financial condition from our year ended December 31, 2013. The following discussion
should be read in conjunction with the Management’s Discussion and Analysis or Plan of Operation included in our Annual Report
on Form 10-K for the year ended December 31, 2013.
Executive Overview
We are an exploration stage company engaged
in a slag reprocessing project and the acquisition and exploration of mineral properties. Our business is presently focused on
the Clarkdale Slag Project, located in Clarkdale, Arizona, which is a reclamation project to recover precious and base metals from
the reprocessing of slag produced from the smelting of copper ore mined at the United Verde Copper Mine in Jerome, Arizona. As
of September 2, 2014, we have decided to discontinue our second mineral project, the Searchlight Gold Project, which involved exploration
for precious metals on mining claims near Searchlight, Nevada.
Clarkdale Slag Project
Since our involvement in the Clarkdale Slag
Project, our goal has been to demonstrate the economic feasibility of the project by determining a commercially viable method to
extract precious and base metals from the slag material. We believe that in order to demonstrate this, we must successfully operate
four major steps of our production process: crushing and grinding, leaching, continuous process operation, and extraction of gold
from solution.
Our Production Process
| 1. | Crushing and Grinding. The first step of our production process involves grinding the slag material from rock-size chunks
into sand-size grains (minus-20 mesh size). Because of the high iron content and the glassy/siliceous nature of the slag material,
grinding the slag material creates significant wear on grinding equipment. Batch testing with various grinders produced significant
wear on the equipment to render them unviable for a continuous production facility. |
In 2010 we tested high pressure grinding rolls (HPGR)
to grind the slag material at the facility in Germany of the leading manufacturer of HPGR’s. HPGR’s are commonly used
in the mining industry to crush ore and have shown an ability to withstand very hard and abrasive ores. The results from these
tests showed that grinding our slag material on a continuous basis did not produce wear on the equipment beyond the expected levels.
When we tested the HPGR-ground slag in our autoclave
process, results showed liberation of gold, which our technical team believes is due to the micro-fractures imparted to the slag
during the HPGR grinding process. The technical team also believes that the high pressures that exist in the autoclave
(see autoclave discussion in 2. below) environment are able to drive the leach solution into the micro-fracture cracks created
in the slag material by the HPGR crusher, thereby dissolving the gold without having to employ a more expensive process to grind
the slag material to a much finer particle size.
We believe that the HPGR is a viable grinder for
our production process because it appears to have solved our grinding equipment wear issue and the HPGR produces ground slag from
which gold can be leached into solution in an autoclave process.
| 2. | Leaching. The second step of our production process involves leaching gold from the ground slag material. Our original
open-vessel ambient leach process leached gold into solution during our initial pilot tests. However, during our scale-up to a
larger pilot size we discovered that the high levels of iron and silica that were leached into solution produced a pregnant leach
solution (“PLS”) that became gelatinous over time. We tried numerous methods to remedy this issue. However, it was
determined that, with the high levels of iron and silica in solution, the extraction of the gold from the PLS was not commercially
feasible. Hence, we concluded that this open-vessel leach process was not viable for a production facility. |
In 2010, we turned our efforts to the autoclave process.
Autoclaving, a proven technology that is widely used within the mining industry, is a chemical leach process that utilizes elevated
temperature and pressure in a closed autoclave system to extract precious and base metals from the slag material. Our independent
consultant, Arrakis Inc. (“Arrakis”) has performed over 200 batch autoclave tests under various leach protocols and
grind sizes. Arrakis’ test results have consistently leached approximately 0.5 ounces per ton (“opt”) of gold
into solution. In addition, these results indicate that autoclaving does not dissolve the levels of iron and silica into solution
as did the ambient leach. We believe that autoclaving will improve our ability to recover gold from solution and thus improve process
technical feasibility. The operating conditions identified by Arrakis thus far are mild to moderate compared with most current
autoclaves and are anticipated to result in lower capital, operating and maintenance costs.
During the third quarter of 2011, we received the
results of testing from an independent engineering firm in Chile whereby a number of batch autoclave tests, under various metallurgical
conditions using both pressure oxidation (“POX”) and pressure oxidative leach (“POL”) testing methodologies
were completed. The optimized POX tests produced slightly less than or equal to 0.5 opt gold and the optimized POL tests produced
0.5 opt gold or slightly greater. Moreover, the test results reaffirm that autoclaving does not dissolve the levels of iron and
silica into solution as did the ambient leach. Additionally, since the POL method involves fewer process steps resulting in lower
operating costs, and appeared to consistently place higher grades of gold into solution, this process was likely to be superior
to the POX method in achieving better results.
The Chilean engineering firm noted that the refractory
Clarkdale slag was difficult to consistently analyze and suggested that further work be done to validate analytical methods and
determine the most accurate method. Our consultant, Arrakis, previously had noted this analytical problem and decided to use an
analytical method developed in the 1980’s, Atomic Absorption Spectroscopy/Inductively Coupled Plasma Optical Emission Spectroscopy
(“AAS/ICP-OES”), to manually correct gold in solution values by determining the amount of interferences caused by other
metals present in the leach solutions and manually adjusting the gold in solution values.
We believe that the POL autoclave method is a viable
leach method for our production process because it leaches higher quantities of gold into solution from our slag material and results
in much lower levels of iron and silica in solution than other methods, thus improving process technical feasibility.
| 3. | Continuous Operation. The third step in our production process involves being able to perform the leaching step in a
larger continuous operation. While lab and bench-scale testing provides critical data for the overall development of a process,
economic feasibility can only be achieved if the process can be performed in a continuous operation. |
During the second quarter of 2012, we received the
results of tests conducted by an independent Australian metallurgical testing firm whereby they conducted autoclave tests under
various conditions, using the POL method in a four-compartment, 25-liter autoclave. The completion of a continuous 14 hour test
with 100% mechanical availability (i.e. no “down time”) demonstrates the ability of a pilot autoclave to process the
Clarkdale slag material on a continuous basis. The pilot multi-compartment autoclave is routinely used to simulate operating performance
in a full-scale commercial autoclave as part of a bankable feasibility study.
In addition, the PLS that was produced from the 14
hour continuous run was analyzed by the Australian testing firm. Analysis using the AAS/ICP-OES method resulted in approximately
0.2 - 0.6 opt of gold extracted into solution. The 0.2 opt was achieved during the startup of the test run. After making adjustments
to the pH, volume of the leach solution and other process parameters, the higher 0.6 opt was obtained toward the completion of
the test. Our independent technical consultants believe we can replicate these higher test results in future test runs.
The Australian testing firm also noted the existence
of analytical difficulties previously reported by our independent consultants and us. We have been advised that the results of
this test work is largely based on the analysis carried out on gold solutions emanating from the tests, by AAS/ICP-OES. Analysis
of gold in solution by this method is not in agreement with fire assays analysis and both methods are prone to analytical difficulties
due to the refractory nature of the slag. A different analytical method was used by the Australian testing firm, the Inductively
Coupled Plasma Mass Spectroscopy, or ICPMS. Fire assay (performed by the Australian testing firm), as well as Neutron Activation
(performed by an independent third party consulting agency), were also used to perform analyses of the raw slag. All of the above
methods indicated different quantities of gold in the slag, but at values substantially below the results achieved by AAS/ICP-OES
method. Consequently, Arrakis continues to refine the analytical techniques used to measure gold in solution.
We believe that the POL autoclave method in a large
multi-compartment autoclave has shown to be viable for our production process because it can operate on a continuous basis and
leaches higher levels of gold and much lower levels of iron and silica into solution than other methods. The results from POL autoclaving
testing were comparable to previous bench-scale tests performed by Arrakis and the Chilean engineering firm.
| 4. | Extraction. The fourth and final step in our production process involves being able to extract and recover metallic
gold from PLS. Economic feasibility can only be achieved if a commercially viable method of metallic gold recovery is determined.
In addition, the recovery of metallic gold will not only define the most cost-effective method of such recovery, but will also
provide a better definition to the total process system mass balance and help reduce any discrepancy in analytical tests. Recovery
of gold beads provides the ability to determine more accurately the amount of gold that was recovered from leach solution. Simple
weighing of the gold bead and having the weight of the initial slag sample used to provide the bead gives a more accurate determination
of an extractable gold grade in the slag sample. In this effort, we and our consultants are continuing to perform tests to recover
gold from solution, using carbon, ion exchange resin technologies, or other commonly used methods of extracting gold from solution. |
We have engaged Arrakis to assemble a multinational
project team to specifically determine the most efficient method of extracting gold from solution. Arrakis has performed in excess
of 63 ion exchange tests in an attempt to determine the optimal method for extracting gold from solution, using a variety of resins
and carbons. In addition, Arrakis has performed nano-filtration tests using membrane technology in conjunction with the ion exchange
tests to enhance ion exchange results. Arrakis has also conducted electro-winning tests, to determine the best way to remove gold
from solution. Results from these alternative methods of extracting gold from solution have resulted in removing up to 10% of the
gold from solution using resins and up to 40% of the gold from solution using the electro-winning method. These results were obtained
by assaying of dore beads produced by the various testing techniques noted. As larger volumes of POL leach solutions are generated
via the pilot autoclave, and testing optimized, larger dore beads will be produced and analysis will become much simpler.
We have also engaged an independent firm to examine
the viability of using membrane technology to remove small quantities of unwanted elements from the PLS prior to loading the gold
on to resin or carbon. This process may further enhance gold recovery and increase gold loading rates onto the resin or carbon.
As larger volumes of POL leach solution are generated and resin tests are fine-tuned, we expect our gold recovery values to improve.
We will continue with our test work in order to better determine the method that best optimizes our gold recovery on a consistent
basis.
To provide additional PLS which is necessary to expedite
the gold recovery tests and commercial viability of the project, we have acquired a large batch titanium autoclave (approximately
900 liter capacity). A total of nine tests have been conducted in the pilot autoclave. The initial tests were designed to examine
the structural integrity and functionality of the autoclave, its components, control and support systems. Subsequent tests were
designed in an effort to mimic the mechanical and chemical operating conditions achieved with previous tests in the 6-liter bench
autoclave, which yielded approximately 0.4 to 0.5 opt of gold in solution.
As the tests progressed, several
mechanical and chemical issues were identified which indicated that the pilot autoclave was operating under less than optimum conditions,
resulting in low gold extraction values. As these issues were identified, modifications were undertaken to the autoclave in order
to help achieve the desired operating conditions. Significant delays occurred due to specialty alloy parts having to be ordered
and in some cases custom made. During this time, additional bench-scale autoclave tests were performed in order to modify and optimize
the chlorine chemistry for the pilot autoclave.
The ninth pilot autoclave test
demonstrated that 0.42 opt gold was leached into solution from the slag sample containing 0.48 opt gold, which represents an estimated
gold recovery of 87.5%. While past test work had relied upon ‘wet chemistry’ electronic determination, these latest
results were determined by analyzing gold metal extracted by standard fire assay techniques.
Solution values were determined
by evaporating the PLS and fire assaying the residual solids to produce a gold bead in hand. Likewise, the finely ground slag going
into the large pilot autoclave and the leached residue after the test were also fire assayed and the resultant gold beads were
used to calculate gold grades and leach efficiency. This is the second autoclave test that has verified the gold grade of the slag
by fire assay. Electrowinning tests are currently underway to recover gold as metal from the PLS.
The greater quantity of PLS able to be generated
with the large batch autoclave allows the use of multiple resins and multiple stages to more closely model a full-scale commercial
system and optimize recovery of gold from solution. We also continue to examine other methods of extracting gold from solution
in an effort to determine the most cost-effective and efficient method of recovering gold.
Recently, we have been performing tests whereby the
slag material is pretreated prior to processing it in the autoclave. Recent test work indicates that pretreatment, by melting the
slag at high temperature, aids in the recovery of the gold from solution derived from the autoclave. We believe that the
high temperature process aids in breaking down the refractory coating on the gold particles that are subsequently put into solution
after the autoclaving of the slag material and also separates out the iron that makes up approximately one third of the untreated
slag material.
The heat treated slag material, after the removal
of the iron is, for ease of reference, hereinafter referred to as glass. This processed glass material contains the gold
and, because of the heat treatment process, is now easily and readily assayed by standard fire assay techniques. It is anticipated
that incorporating this additional step into our flow chart renders process optimization testing much easier and will allow
this phase of the development program to be concluded more quickly.
Technical achievements
considered to be a major breakthrough
In the past few months the
precise nature of the gold contained in the Clarkdale slag has been determined. Test work done with high resolution microscopes
– a Scanning Electron Microscope (“SEM”) and a Transmission Electron Microscope (“TEM”) – have
photographed and measured the gold contained within sulfides and further encapsulated by a highly refractory silicate very resistant
to thermal and chemical attack. This explains the difficulty in fire assaying the gold or using ambient temperature strong reagent
leaching. Further, the gold is present as colloids (very small particles) less than 100 nm in size which is 1,000 times less than
the width of a human hair. (This microscopic size is in the range of most of the gold contained within the Carlin Trend in Nevada
– one of North America’s richest gold deposits that went undetected for decades due to the small “invisible”
gold particles. The Carlin Trend material was also very difficult to assay and process until the true nature and deportment of
the gold was determined.) The temperature required to break the silicate coating of the Clarkdale slag material exceeds standard
fire assay temperature which is why the gold is not captured in the lead collector used in a standard fire assay. Specialized grinding
using High Pressure Grinding Rolls (“HPGR”) and high temperature leaching used in the current proposed process flow
diagram aid in breaking this coating, oxidizing the sulfide, and converting the gold from a colloid to a charged ionic form in
solution.
Testing using this process
thus far has verified the prior test results achieved and reported by us of gold grades between 0.4 to 0.6 ounces per ton (average).
The processed material being derived from the heat treated slag is also much easier to be analyzed using standard analytical techniques.
Small autoclave tests conducted on the glass from the heat treatment have produced up to an 85% extraction of gold into the pregnant
leach solution (“PLS”) solution.
The PLS solutions have been
treated with ion exchange resin to remove the gold from solution. Fire assays of the gold impregnated resin indicate up to a 60%
extraction of the gold from the PLS into gold fire assay beads (gold in hand). While not yet optimized, this is a significant
improvement over previous attempts to capture the gold as metal by ion exchange resin.
All of these tests thus far
have been limited to a small 6 liter test autoclave. To provide more definitive process results, we have purchased and installed
a much larger heat treating unit, to produce sufficient treated slag to allow running the larger 900 liter pilot autoclave. This
will provide a sufficient volume of PLS for a final determination of recoverable gold by ion exchange resin, as well as, allowing
the testing of other methods of gold removal from solution to determine the method allowing optimal recovery of gold from solution.
Other
positive developments
In addition to the breakthrough
discussed above, as a byproduct of this new process, the high temperatures produce a high quality iron product grading 75 to 85%
iron content in a pelletized form. The high quality of the iron and its pellet size form make it a readily marketable product for
sale to the China, Korea, or India markets. We believe that further optimization testing will result in greater than 90% iron as
achievable and will secure a premium price selling either into the scrap iron or pig iron market. Test work is continuing in an
effort to maximize iron content while maintaining gold recovery.
The existing railroad spur
on the Clarkdale Project Site connects to a major railroad for low cost transportation to a seaport or domestic market. It is believed
that this pre-treatment process may pay for itself or provide a net cash flow from the sale of the iron. To examine the efficacy
of this concept, we have engaged Samuel Engineering of Denver, Colorado to perform a preliminary assessment and marketing study.
This study has been concluded and suggests that a marketable higher grade iron product could be made and sold as a byproduct to
generate net cash flow or reduce the overall costs of producing gold. Toward this end we have commenced contacting commercial iron
producers for expressions of interest.
This pilot scale test work
should provide sufficient process definition for a project feasibility study to be completed, allowing management to seek the financing
to move forward to commercialization of the Clarkdale Project.
We believe this latest breakthrough
has moved the project much closer to commercialization as well as potentially providing extra unanticipated revenue through the
sale of iron. The gold results set forth in this report have not yet been optimized, however, since we have been able to remove
the iron as a saleable byproduct through the additional step discussed, even at the current results, if repeatable, the project
would be commercial. We are looking forward to final definition of the process flow diagram and moving ahead to the bankable study
to allow the project to move to a commercial status.
Searchlight Gold Project
Effective September 2, 2014, we allowed our Searchlight
Gold Project mining claims, comprised of non-patented placer mining claims located on federal land administered by the United States
Bureau of Land Management (“BLM”), to lapse by declining to pay the related BLM and Clark County, Nevada maintenance
fees. The claims were made up of twenty (20) one hundred and sixty (160) acre parcels on a 3,200 acre site near Searchlight, Nevada,
as well as one hundred and forty two (142) twenty (20) acre claims that were “double staked” on top of the 3,200 acre
site. Such claims have not been a significant focus of our business strategy since its acquisition of the Clarkdale Slag Project
in 2007.
Upon abandonment of the claims,
a $16,947,419 loss was recorded to operations. By allowing the mining claims to lapse, the Company expects to save approximately
$48,518 per year in annual claim maintenance fees, which the Company believes will be better spent in furtherance of the Clarkdale
Slag Project.
Critical Accounting Policies
Use of estimates - The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Significant
areas requiring estimates and assumptions include the valuation of stock-based compensation and derivative liabilities, impairment
analysis of long-lived assets, and realizability of deferred tax assets. Actual results could differ from those estimates.
Mineral properties - Costs
of acquiring mineral properties are capitalized upon acquisition. Exploration costs and costs to maintain mineral properties are
expensed as incurred while the project is in the exploration stage. Development costs and costs to maintain mineral properties
are capitalized as incurred while the property is in the development stage. When a property reaches the production stage, the related
capitalized costs are amortized using the units-of-production method over the proven and probable reserves.
Mineral exploration and development
costs - Exploration expenditures incurred prior to entering the development stage are expensed and included in “Mineral
exploration and evaluation expenses.”
Capitalized interest cost
- We capitalize interest cost related to acquisition, development and construction of property and equipment which is designed
as integral parts of the manufacturing process of the project. The capitalized interest is recorded as part of the asset it relates
to and will be amortized over the asset’s useful life once production commences.
Property and Equipment - Property
and equipment is stated at cost less accumulated depreciation. Depreciation is principally provided on the straight-line method
over the estimated useful lives of the assets, which are generally 3 to 39 years. The cost of repairs and maintenance is charged
to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a
depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operating
expenses.
Impairment of long-lived assets
- We review and evaluate our long-lived assets for impairment at each balance sheet date due to our planned exploration stage losses
and document such impairment testing. Mineral properties in the exploration stage are monitored for impairment based on factors
such as our continued right to explore the property, exploration reports, drill results, technical reports and continued plans
to fund exploration programs on the property.
The tests for long-lived assets in the exploration,
development or production stage that would have a value beyond proven and probable reserves would be monitored for impairment based
on factors such as current market value of the mineral property and results of exploration, future asset utilization, business
climate, mineral prices and future undiscounted cash flows expected to result from the use of the related assets. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net
undiscounted cash flows expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts.
Our policy is to record an impairment loss
in the period when it is determined that the carrying amount of the asset may not be recoverable either by impairment or by abandonment
of the property. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds its fair value.
Stock-based compensation -
Stock-based compensation awards are recognized in the consolidated financial statements based on the grant date fair value of the
award which is estimated using the Binomial Lattice option pricing model. We believe that this model provides the best estimate
of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow
for the actual exercise behavior of option holders. The compensation cost is recognized over the requisite service period which
is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock.
The fair value of performance-based stock
option grants is determined on their grant date through the use of the Binomial Lattice option pricing model. The total value of
the award is recognized over the requisite service period only if management has determined that achievement of the performance
condition is probable. The requisite service period is based on management’s estimate of when the performance condition will
be met. Changes in the requisite service period or the estimated probability of achievement can materially affect the amount of
stock-based compensation recognized in the financial statements.
We account for stock options issued to non-employees
based on the estimated fair value of the awards using the Binomial Lattice option pricing model. The measurement of stock-based
compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change
in value, if any, is recognized in our consolidated statements of operations during the period the related services are rendered.
Derivative warrant liability
- We have certain warrants with anti-dilution provisions, including provisions for the adjustment to the exercise price and to
the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price. We
determined that these warrants were not afforded equity classification because they embody risks not clearly and closely related
to the host contract. Accordingly, the warrants are treated as a derivative liability and are carried at fair value.
We calculate the fair value of the derivative
liability using the Binomial Lattice model, a Level 3 input. The change in fair value of the derivative liability is classified
in other income (expense) in the consolidated statement of operations. We generally do not use derivative financial instruments
to hedge exposures to cash flow, market or foreign currency risks. The Company is not exposed to significant interest or credit
risk arising from these financial instruments.
Convertible notes – derivative
liabilities - We evaluate the embedded features of convertible notes to determine if they are required to be bifurcated
and recorded as a derivative liability. If more than one feature is required to be bifurcated, the features are accounted for as
a single compound derivative. The fair value of the compound derivative is recorded as a derivative liability and a debt discount.
The carrying value of the convertible notes was recorded on the issuance date at its original value less the fair value of the
compound derivative.
The derivative liability is measured at
fair value on a recurring basis with changes reported in other income (expense). Fair value is determined using a model which incorporates
estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The debt discount is amortized
to non-cash interest expense using the effective interest method over the life of the notes. If a conversion of the underlying
note occurs, a proportionate share of the unamortized amount is immediately expensed.
Income taxes – We follow
the liability method of accounting for income taxes. This method recognizes certain temporary differences between the financial
reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates
either a net deferred income tax liability or asset as measured by the statutory tax rates in effect. The effect of a change in
tax rates is recognized in operations in the period that includes the enactment date. We record a valuation allowance against any
portion of those deferred income tax assets when we believe, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred income tax asset will not be realized.
For acquired properties that do not constitute
a business, a deferred income tax liability is recorded on GAAP basis over income tax basis using statutory federal and state rates.
The resulting estimated future income tax liability associated with the temporary difference between the acquisition consideration
and the tax basis is computed in accordance with Accounting Standards Codification (“ASC”) 740-10-25-51, Acquired Temporary
Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, and is reflected as an increase
to the total purchase price which is then applied to the underlying acquired assets in the absence of there being a goodwill component
associated with the acquisition transactions.
Results of Operations
The following table illustrates a summary of our results of
operations for the periods set forth below:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
Percent Increase/ (Decrease) | | |
2014 | | |
2013 | | |
Percent Increase/ (Decrease) | |
Revenue | |
$ | - | | |
$ | - | | |
| n/a | | |
$ | - | | |
$ | - | | |
| n/a | |
Operating expenses | |
| (19,525,152 | ) | |
| (1,657,333 | ) | |
| 1078.1 | % | |
| (22,866,435 | ) | |
| (5,138,676 | ) | |
| 345.0 | % |
Other income (expense) | |
| (18,654 | ) | |
| (12,859 | ) | |
| 45.1 | % | |
| (58,368 | ) | |
| 274,025 | | |
| (121.3 | )% |
Income tax benefit | |
| 7,440,766 | | |
| 603,502 | | |
| 1132.9 | % | |
| 8,747,063 | | |
| 1,748,108 | | |
| 400.4 | % |
Net loss | |
$ | (12,103,040 | ) | |
$ | (1,066,690 | ) | |
| 1034.6 | % | |
$ | (14,177,740 | ) | |
$ | (3,116,543 | ) | |
| 354.9 | % |
Revenue. We are currently
in the exploration stage of our business, and have not earned any revenues from our planned mineral operations to date. We did
not generate any revenues from inception in 2000 through the nine months ended September 30, 2014. We do not anticipate earning
revenues from our planned mineral operations until such time as we enter into commercial production of the Clarkdale Slag Project
or other mineral properties we may acquire from time to time, and of which there are no assurances.
Operating Expenses. The major
components of our operating expenses are outlined in the table below:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
Percent Increase/ (Decrease) | | |
2014 | | |
2013 | | |
Percent Increase/ (Decrease) | |
Mineral exploration and evaluation expenses | |
$ | 396,409 | | |
$ | 588,832 | | |
| (32.7 | )% | |
$ | 1,482,176 | | |
$ | 1,829,621 | | |
| (19.0 | )% |
Mineral exploration and evaluation expenses – related party | |
| 75,983 | | |
| 75,249 | | |
| 1.0 | % | |
| 231,543 | | |
| 184,691 | | |
| 25.4 | % |
Administrative – Clarkdale site | |
| 34,080 | | |
| 36,450 | | |
| (6.5 | )% | |
| 83,912 | | |
| 146,799 | | |
| (42.8 | )% |
General and administrative | |
| 504,629 | | |
| 537,816 | | |
| (6.2 | )% | |
| 1,662,929 | | |
| 1,791,838 | | |
| (7.2 | )% |
General and administrative – related party | |
| 40,636 | | |
| 31,827 | | |
| 27.7 | % | |
| 129,352 | | |
| 114,172 | | |
| 13.3 | % |
Loss on asset dispositions and reclassifications | |
| 18,095,234 | | |
| - | | |
| n/a | | |
| 18,140,349 | | |
| - | | |
| n/a | |
Depreciation | |
| 378,181 | | |
| 387,159 | | |
| (2.3 | )% | |
| 1,136,174 | | |
| 1,071,555 | | |
| 6.0 | % |
Total operating expenses | |
$ | 19,525,152 | | |
$ | 1,657,333 | | |
| 1078.1 | % | |
$ | 22,866,435 | | |
$ | 5,138,676 | | |
| 345.0 | % |
Nine month period ended September
30, 2014 and 2013. Operating expenses increased by 345.0% to $22,866,435 during the nine month period ended September 30,
2014 from $5,138,676 during the nine month period ended September 30, 2013. Operating expenses increased primarily as a result
of writing off the Searchlight Claims in the third quarter of 2014.
Mineral exploration and evaluation expenses
decreased to $1,482,176 during the nine month period ended September 30, 2014 from $1,829,621 during the nine month period ended
September 30, 2013. Mineral exploration and evaluation expenses decreased as a result reducing our staff at the Clarkdale site.
Additionally, in 2013 additional consulting expenses were incurred related to completion of nine autoclave tests conducted in the
pilot autoclave.
Mineral exploration and evaluation expenses
– related party increased to $231,543 during the nine month period ended September 30, 2014 from $184,691 for the nine month
period ended September 30, 2013. These expenses relate to services provided to us by Nanominerals Corp. (“NMC”). NMC
is one of our principal stockholders and an affiliate of Carl S. Ager, our Vice President, Secretary and Treasurer and a director.
We utilize the services of NMC to provide technical assistance and financing related activities. In addition, NMC provides us with
use of its laboratory, instrumentation, milling equipment and research facilities. We pay NMC an advance royalty payment of $15,000
per month and reimburse NMC for actual expenses incurred and consulting services provided. The increase is attributed to additional
metallurgical consulting work performed by NMC.
Administrative – Clarkdale site expenses
decreased to $83,912 during the nine month period ended September 30, 2014 from $146,799 for the nine month period ended September
30, 2013. Administrative costs at the Clarkdale site decreased due to a reduction of certain consulting fees and to our reduction
of staff at the Clarkdale site in March 2014 resulting in less administrative costs.
General and administrative expenses decreased
to $1,662,929 during the nine month period ended September 30, 2014 from $1,791,838 during the nine month period ended September
30, 2013. General and administrative expenses decreased primarily due to less stock based compensation expense incurred in 2014.
General and administrative – related
party amounted to $129,352 and $114,172 for the nine month periods ended September 30, 2014 and 2013, respectively. These expenses
include accounting support services and rent expense. The accounting support services are performed by Cupit, Milligan, Ogden &
Williams, CPAs, an affiliate of Melvin L. Williams, our Chief Financial Officer. Rent payments are made to Ireland Inc. for corporate
office space. NMC is a shareholder in both Searchlight and Ireland. Additionally, one of our directors is the CFO, Treasurer and
a director of Ireland and our CEO provides consulting services to Ireland.
Accounting expenses – related party
decreased to $105,133 during the nine month period ended September 30, 2014 from $111,353 for the nine month period ended September
30, 2013. These fees do not include any fees for Mr. Williams’ time in directly supervising the support staff. Mr. Williams’
compensation has been provided in the form of salary. The direct benefit to Mr. Williams was $41,002 and $45,411 of the above fees
for the nine month periods ended September 30, 2014 and 2013, respectively. The decrease in fees is attributed normal workflow
fluctuation.
Rent expense – related party increased
to $24,219 during the nine month period ended September 30, 2014 from $2,819 for the nine month period ended September 30, 2013.
The increase is due to our lease commencing in September 2013.
Loss on asset dispositions and reclassifications
amounted to $18,140,349 for the nine month period ended September 30, 2014. The amount was comprised of the write off of the Searchlight
claims, a loss on the sale of a building and lot and writing down land that is classified as held for sale. There were no dispositions
or assets held for sale during the nine month period ended September 30, 2013.
Depreciation expense increased to $1,136,174
during the nine month period ended September 30, 2014 from $1,071,555 during the nine month period ended September 30, 2013. The
increase is due to placing the autoclave into service during the third quarter of 2013.
Three month period ended September
30, 2014 and 2013. Operating expenses increased to $19,525,152 during the three month period ended September 30, 2014 from
$1,657,333 during the three month period ended September 30, 2013. Operating expense increased primarily as a result of writing
off the Searchlight Claims in the third quarter of 2014.
Mineral exploration and evaluation expenses
decreased to $396,409 during the three month period ended September 30, 2014 from $588,832 during the three month period ended
September 30, 2013. The decrease is due to a large reduction in our staff at the Clarkdale site resulting in less salary and related
costs. Additionally, we incurred more consulting expenses in 2013 as a result of further autoclave tests performed.
Mineral exploration and evaluation expenses
– related party increased to $75,983 during the three month period ended September 30, 2014 from $75,249 during the three
month period ended September 30, 2013.
Administrative – Clarkdale site expenses
decreased to $34,080 during the three month period ended September 30, 2014 from $36,450 for the three month period ended September
30, 2013. Administrative costs at the Clarkdale site decreased due to a reduction of certain consulting fees and to our reduction
of staff at the Clarkdale site in March 2014 resulting in less administrative costs.
General and administrative expenses decreased
to $504,629 during the three month period ended September 30, 2014 from $537,816 during the three month period ended September
30, 2013. General and administrative expenses decreased due to less stock based compensation recognized in 2014.
General and administrative – related
party increased to $40,636 during the three month period ended September 30, 2014 from $31,827 during the three month period ended
September 30, 2013. These expenses include accounting support services and rent expense as further discussed below.
Accounting expenses – related party
increased to $33,331 during the three month period ended September 30, 2014 from $29,008 for the three month period ended September
30, 2013. These fees do not include any fees for Mr. Williams’ time in directly supervising the support staff. Mr. Williams’
compensation has been provided in the form of salary. The direct benefit to Mr. Williams was $12,999 and $13,296 of the above fees
for the three month periods ended September 30, 2014 and 2013, respectively. The increase in fees is attributed to normal workflow
fluctuations.
Rent expense – related party increased
to $7,305 during the three month period ended September 30, 2014 from $2,819 for the three month period ended September 30, 2013.
The increase is due to our lease commencing in September 2013.
Loss on assets held for sale amounted to
$18,095,234 for the three month period ended September 30, 2014. The amount was comprised of the write off of the Searchlight claims,
adjustment to the loss on the sale of a building and lot and writing down land that is classified as held for sale. There were
no dispositions or assets held for sale during the three month period ended September 30, 2013.
Depreciation expense amounted to $378,181
during the three month period ended September 30, 2014 and $387,159 during the three month period ended September 30, 2013.
Other Income and Expenses
Nine month period ended September
30, 2014 and 2013. Total other income (expense) amounted to $(58,368) during the nine month period ended September 30,
2014 and $274,025 during the nine month period ended September 30, 2013. The change was primarily due to additional interest expense
incurred related to our convertible debt issued in September 2013 and to the change in the fair values of our derivative liabilities
which are impacted by changes in our stock price, the volatility of our stock price and changes in the risk free interest rate.
Three month period ended September
30, 2014 and 2013. Total other income (expense) amounted to $(18,654) during the three month period ended September 30,
2014 from $(12,859) during the three month period ended September 30, 2013. The change was primarily due to additional interest
expense incurred related to our convertible debt issued in September 2013 and to the change in the fair values of our derivative
liabilities which are impacted by changes in our stock price, the volatility of our stock price and changes in the risk free interest
rate. Additionally, in the third quarter of 2014, certain convertible note holders subscribed to our October private placement
in satisfaction of interest payments owed to them on September 18, 2014. We recognized a $19,005 loss on the equity based interest
payment.
Income Tax Benefit
Nine month period ended September
30, 2014 and 2013. Our income tax benefit increased to $8,747,063 for the nine month period ended September 30, 2014 from
$1,748,108 during the nine month period ended September 30, 2013. The increase in income tax benefit primarily resulted from reversal
of deferred tax liabilities related to the Searchlight mining claims which were written off in September 2014.
Three month period ended September
30, 2014 and 2013. Income tax benefit increased to $7,440,766 for the three month period ended September 30, 2014 from
$603,502 during the three month period ended September 30, 2013. The increase in income tax benefit primarily resulted from reversal
of deferred tax liabilities related to the Searchlight mining claims which were written off in September 2014.
Net Loss
Nine month period ended September
30, 2014 and 2013. The aforementioned factors resulted in a net loss of $14,177,740, or $0.10 per common share, for the
nine month period ended September 30, 2014, as compared to a net loss of $3,116,543, or $0.02 per common share, for the nine month
period ended September 30, 2013.
Three month period ended September
30, 2014 and 2013. The aforementioned factors resulted in a net loss of $12,103,040, or $0.09 per common share, for the
three month period ended September 30, 2014, as compared to a net loss of $1,066,690, or $0.01 per common share, for the three
month period ended September 30, 2013.
As of September 30, 2014, we had cumulative
net operating loss carryforwards of approximately $49,617,366 for federal income taxes. The federal net operating loss carryforwards
expire between 2025 and 2034.
We had cumulative state net operating losses
of approximately $24,151,883 as of September 30, 2014 for state income tax purposes. The state net operating loss carryforwards
expire between 2014 and 2034.
Liquidity and Capital Resources
Historically, we have financed our operations
primarily through the sale of common stock and other convertible equity securities. On September 9, 2014, we approved the commencement
of a private placement of an indefinite number of “Units” of our securities at a purchase price of $0.20 per Unit.
Each Unit consists of: one share of our common stock, $0.001 par value per share; and one half of a common stock purchase warrant,
where each full warrant will entitle the warrant holder to purchase one share of our common stock, at an exercise price of $0.30
per share and expiring five years from the date of issuance.
On October 24, 2014, we closed on the sale
of $1,005,700 of our securities comprising of 5,028,500 Units (the “First Closing”) of a private placement (the “Offering”)
to certain investors, (collectively, the “Purchasers”). The securities were issued in reliance on exemptions from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation
D thereunder. Certain of such Purchasers are holders (“Note Holders”) of our secured convertible promissory notes (“Notes”)
that were issued pursuant to a Secured Convertible Note Purchase Agreement entered into on September 18, 2013. We intend to use
the net proceeds from the Offering for general working capital purposes. We did not pay any commissions or broker’s fees
in connection with the First Closing.
Of the 5,028,500 Units issued in the First
Closing, 4,395,000 were sold to 16 investors for gross proceeds of $879,000 in cash, and 633,500 Units were issued to 13 Note Holders
in consideration of cancellation of an aggregate of $126,700 in debt owing by the Company to such Note Holders for interest payments
due on the Notes as of September 18, 2014. Such Note Holders include Luxor Capital Group, LP and certain of its associates and
affiliates (collectively, “Luxor”), who received $91,000 worth of Units in the First Closing in consideration of cancellation
of the September 18, 2014 interest payment owed to them on their Notes. Luxor and certain other funds managed by Luxor are principal
stockholders of the Company and Michael Conboy, one of our directors, currently serves as Luxor’s Director of Research. Following
the First Closing, Luxor is the beneficial owner of approximately 19.93% of our common stock (including giving effect to derivative
securities or other rights to purchase or acquire shares of our common stock).
Altogether, out of the 16 total Note Holders,
13 Note Holders (including Luxor), participated in the First Closing. In addition to Luxor, affiliates of Martin Oring, one of
our directors, and our Chief Executive Officer and President, purchased $100,000 of Units for cash and received an additional $8,225
worth of Units in consideration of the cancellation of the September 18, 2014 interest payment owed on Notes held by such affiliates.
The three remaining Note Holders elected to receive their September 18, 2014 interest payment in cash, for an aggregate amount
of $13,300.
In addition to the Offering, between September
10, 2014 and September 18, 2014, five Note Holders exercised their option as set forth in the September 18, 2013 Secured Convertible
Note Purchase Agreement to purchase $69,000 of additional Notes. Mr. Oring and certain affiliates of Mr. Oring purchased $35,250
of such Notes.
During the year ended December 31, 2013,
we completed the following issuance of convertible notes:
On September 18, 2013, we completed a private
placement (the “Note Offering”) of secured convertible notes (the “Notes”) to certain investors (collectively,
the “Purchasers”), resulting in aggregate gross proceeds to us of $4,000,000. We used the proceeds from the Note Offering
for general working capital purposes. We did not pay any commissions or brokers fees in connection with the Note Offering.
In connection with the Note Offering, we
entered into certain agreements, including a Secured Convertible Note Purchase Agreement (the “Purchase Agreement”),
a Registration Rights Agreement (the “Registration Rights Agreement”) and a Pledge and Security Agreement (the “Security
Agreement”), each dated September 18, 2013, with the Purchasers (the Purchase Agreement, Registration Rights Agreement and
Security Agreement, together with all exhibits, schedules and other documents attached thereto, are collectively referred to herein
as the “Transaction Documents”). Our two wholly-owned subsidiaries, Clarkdale Metals Corp. and Clarkdale Minerals,
LLC, agreed to guarantee the obligations underlying the Notes. We and our subsidiaries granted a first priority lien in all of
our assets pursuant to the terms of the Security Agreement. The Bank of Utah agreed to act as the collateral agent under the Security
Agreement.
Luxor Capital Group, LP and certain of its
associates and affiliates (collectively, “Luxor”) purchased $2,600,000 of the Notes in the Note Offering. Luxor and
certain other funds managed by Luxor are principal stockholders of the Company. Michael Conboy, one of our directors, currently
serves as Luxor’s Director of Research. In addition, Martin Oring, one of our directors, and our Chief Executive Officer
and President, and certain affiliates and relatives of Mr. Oring, purchased $310,000 of Notes. The Notes were issued in reliance
on exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”)
and Rule 506 of Regulation D thereunder.
The Notes contain the following terms and
conditions: The Notes are due five (5) years from the date of issuance. However, the Note holders have a put option with respect
to the Notes, on the second anniversary of the issuance date and every six (6) months thereafter, at par plus accrued and unpaid
interest. The Notes may not be prepaid without the consent of the holders of the majority-in-interest of the Notes. The Notes have
customary provisions relating to events of default.
Interest on the Notes accrues at a rate
of 7% per annum, which will be payable in cash semi-annually. On March 18, 2014, we paid our semi-annual interest installment of
$140,000.
Following and during the continuance of
an event of default, the Notes will bear interest at a rate per annum equal to the rate otherwise applicable thereto, plus an additional
2% per annum.
Each Note is convertible at any time while
the Note is outstanding, at the option of the holder, into shares of our common stock, at $0.40 per share. The Notes have customary
anti-dilution provisions, including, without limitation, provisions for the adjustment to the exercise price based on certain stock
dividends and stock splits. In addition, the conversion price of the Notes may require adjustment upon the issuance of equity securities
(including the issuance of debt convertible into equity) by us at prices below the then existing conversion price, subject to certain
exempt issuances which will not result in an adjustment to the exercise price.
The Notes are secured by a first priority
lien on all of our assets and our two subsidiaries in favor of the Purchasers. However, we have the right to cause defeasance of
the liens and to reduce the interest rate on the Notes to 4% per annum, if, at any time, we deposit additional collateral and other
agreements, satisfactory to the holders of the majority-in-interest of the Notes, with the collateral agent.
We have agreed to not incur any (a) additional
secured indebtedness, or (b) indebtedness of any kind (unsecured or secured) with a maturity of less than 5 years from the issuance
date of the Notes, in each case, without the written consent of the holders of the majority-in-interest of the Notes, except for
purposes of defeasance or trade payables in the ordinary course of business.
Working Capital
The following is a summary of our working
capital at September 30, 2014 and December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | | |
Percent Increase/(Decrease) | |
Current Assets | |
$ | 657,261 | | |
$ | 2,203,427 | | |
| (70.2 | )% |
Current Liabilities | |
| (1,759,896 | ) | |
| (613,806 | ) | |
| 186.7 | % |
(Working Capital Deficit) Working Capital | |
$ | (1,102,635 | ) | |
$ | 1,589,621 | | |
| (169.4 | )% |
The change in our working capital was attributable
to continued net losses, equipment purchases, interest payments on our convertible notes and recurring scheduled payments on our
long term liabilities which were made through April 2014 as partially offset by proceeds received from an asset sale, issuance
of additional convertible notes and subscriptions received for the October 2014 private placement. Cash was $351,075 as of September
30, 2014, as compared to $2,065,824 as of December 31, 2013.
To address liquidity constraints, we will
seek additional sources of capital through the issuance of equity or debt financing. Additionally, we have reduced expenses and
elected to defer payment of certain obligations. Cash conservation measures include, but are not limited to, the deferred payment
of outsourced consulting fees where available, deferred payment of current and future board fees and reduction of staffing levels.
We have deferred payment of officer salaries, monthly legal retainer fees, and the Verde River Iron Company, LLC (“VRIC”)
monthly payable. These activities have reduced the required cash outlay of the business significantly. We are focused on continuing
to reduce costs and obtaining additional funding, of which there is no assurance.
Cash Flows
The following is a summary of our sources
and uses of cash for the periods set forth below:
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
Percent Increase/(Decrease) | |
Cash Flows Used in Operating Activities | |
$ | (2,420,486 | ) | |
$ | (3,847,709 | ) | |
| (37.1 | )% |
Cash Flows Provided by (Used in) Investing Activities | |
| 181,737 | | |
| (133,283 | ) | |
| (236.4 | )% |
Cash Flows Provided by Financing Activities | |
| 524,000 | | |
| 3,603,554 | | |
| (85.5 | )% |
Net Change in Cash During Period | |
$ | (1,714,749 | ) | |
$ | (377,438 | ) | |
| 354.3 | % |
Net Cash Used in Operating Activities.
Net cash used in operating activities decreased to $2,420,486 during the nine month period ended September 30, 2014 from $3,847,709
during the nine month period ended September, 30 2013. The decrease was due primarily to a reduction in mineral exploration and
evaluation and general and administrative expenses and to the increase in accounts payable and accrued liabilities.
Net Cash Provided by (Used in) Investing
Activities. Net cash provided by investing activities was $181,737 during the nine month period ended September 30, 2014,
as compared to net cash used in investing activities of $(133,283) during the nine month period ended September 30, 2013. The change
was due to proceeds received from the sale of a building and lot in 2014 and to less equipment purchases during 2014.
Net Cash Provided by Financing Activities.
Net cash provided by financing activities decreased to $524,000 during the nine month period ended September 30, 2014, as compared
to $3,603,554 during the nine month period ended September 30, 2013. The decrease was due to more proceeds received from the issuance
of debt or equity securities in 2013.
We have not attained profitable operations
and are dependent upon obtaining financing to pursue our plan of operation. Our ability to achieve and maintain profitability and
positive cash flow will be dependent upon, among other things:
| · | our ability to locate a profitable mineral property; |
| · | positive results from our feasibility studies on the Clarkdale Slag
Project; |
| · | positive results from the operation of our initial test module on
the Clarkdale Slag Project; and |
| · | our ability to generate revenues. |
We may not generate sufficient revenues
from our proposed business plan in the future to achieve profitable operations. As of September 30, 2014, we had a working capital
deficit of $1,102,635, compared to working capital of $1,589,621 as of December 31, 2013. If we are not able to achieve profitable
operations at some point in the future, we eventually will have insufficient working capital to maintain our operations as we presently
intend to conduct them or to fund our expansion plans. In addition, our losses may increase in the future as we expand our business
plan. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets
and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock will decline and
there would be a material adverse effect on our financial condition.
Our exploration and evaluation plan calls
for significant expenses in connection with the Clarkdale Slag Project. For the next twelve months, our management anticipates
that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will
be approximately $7,300,000. As of October 31, 2014, we had cash reserves in the amount of approximately $470,000. Our current
financial resources are not sufficient to allow us to meet the anticipated costs of our testing and feasibility programs and operating
overhead during the next twelve months and we will require additional financing in order to fund these activities. As
of September 30, 2014, our financial statements and this report do not include any adjustments relating to the recoverability of
assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.
A decision on allocating additional funds
for Phase II of the Clarkdale Slag Project will be forthcoming if and once the feasibility study is completed and analyzed. The
Phase II work program is expected to include the preparation of a bankable feasibility study, engineering and design of the full-scale
production facility and planning for the construction of an Industrial Collector Road pursuant to an agreement with the Town of
Clarkdale, Arizona. We estimate that our monthly expenses will increase substantially once we enter Phase II of the project and
therefore, we may require the necessary funding to fulfill this anticipated work program.
If the actual costs are significantly greater
than anticipated, if we proceed with our exploration, testing and construction activities beyond what we currently have planned,
or if we experience unforeseen delays during our activities during 2014, we will need to obtain additional financing. There are
no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are
acceptable to us.
Obtaining additional financing is subject
to a number of factors, including the market prices for base and precious metals. These factors may make the timing, amount, terms
or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable
terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations.
We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such
a financing would have a material, adverse effect on our business, results of operations and financial condition.
If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of current stockholders will be reduced and these securities
may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be
forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or
pay dividends.
For these reasons, our financial statements
filed herewith include a statement that these factors raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business
plan.
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by us, as of the specified effective
date. Unless otherwise discussed, management believes that the impact of recently issued standards did not or will not have a material
impact on our consolidated financial statements upon adoption.
In August 2014, the FASB issued Accounting
Standard Update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern. The new standard requires
management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue
as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans
alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim periods
within annual periods beginning after December 15, 2016. Adoption of the new guidance is not expected to have an impact on
our consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued ASU No. 2014-10,
Development Stage Entities (Topic 915) Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation. This ASU does the following among other things: a) eliminates the requirement
to present inception-to-date information on the statements of income, cash flows, and shareholders’ equity, b) eliminates
the need to label the financial statements as those of a development stage entity, c) eliminates the need to disclose a description
of the development stage activities in which the entity is engaged, and d) amends FASB ASC 275, Risks and Uncertainties, to clarify
that information on risks and uncertainties for entities that have not commenced planned principal operations is required. The
amendments in ASU No. 2014-10 are effective for public companies for annual and interim reporting periods beginning after
December 15, 2014. Early adoption is permitted. We have elected early adoption of the new standard applied retrospectively.
Adoption of the new guidance had no impact on our consolidated financial position, results of operations or cash flows.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
We had unrestricted cash totaling $351,075
at September 30, 2014 and $2,065,824 at December 31, 2013. Our cash is held primarily in an interest bearing bank account, a savings
account and non-interest bearing checking accounts and is not materially affected by fluctuations in interest rates. The unrestricted
cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term
nature of these cash holdings, we believe that we do not have any material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
Item 4. Controls
and Procedures
Controls and Procedures
As of September 30, 2014, we carried out
an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as
such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e).
Based on this evaluation, our chief executive
officer and chief financial officer concluded that, as of September 30, 2014, such disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated
to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls
over financial reporting during the quarter ended September 30, 2014 that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to claims
and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings
individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable
and the loss is probable.
We believe that there are no material litigation
matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we
believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position,
liquidity, or results of operations.
Item 1A. Risk Factors
In addition to the other information set
forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2013, which to our knowledge have not materially changed. Those
risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
On September 10, 2014, five holders (“Note
Holders”) of our secured convertible promissory notes (“Notes”) that were issued pursuant to a Secured Convertible
Note Purchase Agreement entered into on September 18, 2013, exercised their option as set forth in the September 18, 2013 Secured
Convertible Note Purchase Agreement to purchase $69,000 of additional Notes.
On September 18, 2014, 633,500 “Units”
were issued to 13 Note Holders in consideration of cancellation of an aggregate of $126,700 in debt owing by the Company to such
Note Holders for interest payments due on the Notes as of September 18, 2014. In addition 2,875,000 Units were issued for cash
proceeds of $575,000 before September 30, 2014 as part of our private placement offering. Each Unit consists of: one share of the
Company’s common stock, $0.001 par value per share; and one half of a common stock purchase warrant, where each full warrant
(each, a “Warrant”) will entitle the warrant holder to purchase one share of the Company’s common stock at an
exercise price of $0.30 per share. Such Warrants will expire five years from the date of issuance. The price of each Unit (including
the value used to determine the cancellation of debt) was $0.20.
Item 3. Defaults
Upon Senior Securities
None.
Item 4. Mine Safety
Disclosures
The
information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street
Reform and Consumer Protection Act and Item 104 of Regulation S-K for the quarter ended September 30, 2014 is included in Exhibit
95 to this Quarterly Report on Form 10-Q.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT TABLE
The following is a complete list of exhibits
filed as part of the Quarterly Report on Form 10-Q, some of which are incorporated herein by reference from the reports, registration
statements and other filings of the issuer with the Securities and Exchange Commission, as referenced below: |
|
Reference Number |
Item |
|
|
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
95.1 |
Mine Safety Disclosures |
101 |
101.INS XBRL Instance 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation 101.LAB XBRL Taxonomy Extension Labels 101.PRE XBRL Taxonomy Extension Presentation 101.DEF XBRL Taxonomy Extension Definition |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
SEARCHLIGHT MINERALS CORP.
a Nevada corporation |
|
|
Date: November 14, 2014 |
By: |
/s/
Martin B. Oring |
|
|
Martin B. Oring |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
Date: November 14, 2014 |
By: |
/s/ Melvin L. Williams |
|
|
Melvin L. Williams |
|
|
Chief Financial Officer
(Principal Accounting Officer) |
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Martin B. Oring, hereby
certify that:
1. I have reviewed this
quarterly report on Form 10-Q of Searchlight Minerals Corp.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my
knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
|
|
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
|
|
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting. |
|
SEARCHLIGHT MINERALS CORP. |
|
|
Date: November 14, 2014 |
By: /s/ Martin
B. Oring |
|
Martin B. Oring |
|
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Melvin L. Williams, hereby
certify that:
1. I have reviewed this
quarterly report on Form 10-Q of Searchlight Minerals Corp.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my
knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
|
|
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
|
|
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting. |
|
|
SEARCHLIGHT MINERALS CORP. |
|
|
|
Date: November 14, 2014 |
|
By: /s/ MELVIN L. WILLIAMS |
|
|
Melvin L. Williams |
|
|
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CEO AND CFO
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the
Quarterly Report on Form 10-Q of Searchlight Minerals Corp. (the “Company”) for the quarter ended September 30, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Martin B. Oring, as Chief Executive
Officer of the Company, and Melvin L. Williams, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18
U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
SEARCHLIGHT MINERALS CORP. |
|
|
|
Date: November 14, 2014 |
|
By: /s/ Martin
B. Oring |
|
|
Martin B. Oring |
|
|
Chief Executive Officer |
|
|
|
Date: November 14, 2014 |
|
By: /s/ MELVIN L. WILLIAMS |
|
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Melvin L. Williams |
|
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Chief Financial Officer |
EXHIBIT 95.1
MINE SAFETY DISCLOSURE
Section 1503(a) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Act”) and Item 104 of Regulation S-K require certain disclosures by companies
required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate coal or other mines regulated
under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). The following disclosures are provided pursuant
to the Act and Item 104 of Regulation S-K; provided, however, that such disclosure is not intended as an admission by us that we
are subject to the provisions of the Mine Act and, provided, further, that we reserve the right to challenge the applicability
of the Mine Act and the jurisdiction of the U.S. Department of Labor’s Mine Safety and Health Administration (“MSHA”)
with respect to our activities. The following disclosures are reported for the quarter ended September 30, 2014 for us and our
subsidiaries.
Project |
Section 104 S&S Citations (#)
(1)
|
Section 104(b) Orders
(#)
(2)
|
Section 104(d) Citations and Orders
(#)
(3)
|
Section 110(b)(2) Violations
(#)
(4)
|
Section 107(a) Orders
(#)
(5)
|
Total Dollar Value of MSHA Assessments
Proposed
($)
|
Total Number of Mining Related Fatalities
(#)
|
Received Notice of Pattern of Violations
Under Section 104(e)
(yes/no)
(6)
|
Received Notice of Potential to Have
Pattern Under Section 104(e)
(yes/no)
|
Legal Actions Pending as of Last Day
of Period
(#)
(7)
|
Legal Actions Initiated During Period
(#)
(7)
|
Legal Actions Resolved During Period
(#)
(7)
|
Clarkdale Slag Project |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
No |
No |
0 |
0 |
0 |
Searchlight Gold Project |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
No |
No |
0 |
0 |
0 |
| (1) | Mine Act section 104(a) citations are for alleged violations of mandatory health or safety standards, rules, orders or regulations. |
| (2) | Mine Act section 104(b) orders are for alleged failures to totally abate a citation within the period of time specified in
the citation. |
| (3) | Mine Act section 104(d) citations and orders are for alleged violations of mandatory health or safety standards where such
violation is caused by an unwarrantable failure on the part of the operator to comply with such standards. |
| (4) | Mine Act section 110(b)(2) violations are for “flagrant” violations of mandatory health or safety standards, i.e.
a reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory safety or health standard
that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury. |
| (5) | Mine Act section 107(a) orders are for alleged conditions or practices which could reasonably be expected to cause death or
serious physical harm before such condition or practice can be abated and result in orders of immediate withdrawal from the area
of the mine affected by the condition. |
| (6) | Mine Act section 104(e) violations and notices are for when an operator is alleged to have a pattern or potential to have a
pattern of violations of mandatory health or safety standards. |
| (7) | Legal actions before the Federal Mine Safety and Health Review Commission involving a coal or other mine owned and operated
by us or our subsidiaries. |
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