Applied Minerals, Inc. - Quarter Report: 2015 September (Form 10-Q)

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Table Of Contents

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		September 30,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	3,710,045			$	10,701,666
Accounts receivable			37,017				112,831
Deposits and prepaid expenses			85,096				289,644
Total Current Assets			3,832,158				11,104,141
Property and Equipment, net			5,648,853				7,055,874
Other Assets
Deferred Financing Costs			23,125				28,750
Deposits			269,133				268,937
Asset Held for Sale			445,180				0
Total Other Assets			737,438				297,687
TOTAL ASSETS		$	10,218,449			$	18,457,702
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued liabilities		$	1,979,208			$	2,608,364
Current portion of notes payable			28,598				246,894
Total Current Liabilities			2,007,806				2,855,258
Long-Term Liabilities
Long-term portion of notes payable			39,193				59,145
PIK notes payable, net of $17,745,140 and $18,400,297 debt discount, respectively			15,849,586				13,024,439
PIK Note derivative			3,636,469				10,035,625
Total Long-Term Liabilities			19,525,248				23,119,209
Total Liabilities			21,533,054				25,974,467
Commitments and Contingencies (Note 11)
Stockholders’ Deficit
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued or outstanding			- 0 -				- 0 -
Common stock, $0.001 par value, 200,000,000 shares authorized, 96,766,329 and 95,054,552 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			96,766				95,055
Additional paid-in capital			65,857,303				64,526,469
Accumulated deficit prior to the exploration stage			(20,009,496	)			(20,009,496	)
Accumulated deficit during the exploration stage			(57,259,178	)			(52,128,793	)
Total Stockholders’ Deficit			(11,314,605	)			(7,516,765	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	10,218,449			$	18,457,702

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		For the Three Months ended								For the Nine Months ended
		September 30,								September 30,
		2015				2014				2015				2014
REVENUES		$	43,293			$	55,681			$	271,888			$	114,688
OPERATING EXPENSES:
Production costs			665				17,455				6,835				42,771
Exploration costs			976,499				1,174,208				3,594,977				3,628,943
General and administrative			1,155,016				1,082,550				3,584,791				3,680,285
Depreciation expense			326,931				170,759				979,836				416,338
Total Operating Expenses			2,459,111				2,444,972				8,166,439				7,768,337
Operating Loss			(2,415,818	)			(2,389,291	)			(7,894,551	)			(7,653,649	)
OTHER INCOME (EXPENSE):
Interest expense, net, including amortization of deferred financing cost and debt discount			(1,169,425	)			(314,268	)			(3,290,647	)			(918,631	)
Gain on revaluation of warrant derivative			-0-				114,000				-0-				814,000
Gain on revaluation of stock awards			-0-				- 0 -				-0-				110,000
Gain on revaluation of PIK Note derivative			5,378,339				11,813				6,598,708				1,764,938
Other income (expense)			(140	)			996				(543,895	)			(86,337	)
Total Other Income (Expense)			4,208,774				(187,459	)			2,764,166				1,683,970
Net income (loss)		$	1,792,956			$	(2,576,750	)		$	(5,130,385	)		$	(5,969,679	)
Net Income (Loss) Per Share (Basic and Diluted)		$	0.02			$	(0.03	)		$	(0.05	)		$	(0.06	)
Weighted Average Shares Outstanding (Basic and Diluted)			96,482,321				94,985,716				95,795,668				94,847,462

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														Accumulated				Accumulated
		Common Stock												Deficit				Deficit
										Additional				Prior to				During				Total
										Paid-In				Exploration				Exploration				Stockholders’
		Shares				Amount				Capital				Stage				Stage				Deficit
Balance, December 31, 2014			95,054,552			$	95,055			$	64,526,469			$	(20,009,496	)		$	(52,128,793	)		$	(7,516,765	)
Shares issued for directors' fees and other services			696,691				696				289,490				-0-				-0-				290,186
Stock-based compensation expense			-0-				-0-				301,348				-0-				-0-				301,348
Shares issued for liquidated damages			1,015,086				1,015				739,996				-0-				-0-				741,011
Net Loss			-0-				-0-				-0-				-0-				(5,130,385	)			(5,130,385	)
Balance, September 30, 2015			96,766,329			$	96,766			$	65,857,303			$	(20,009,496	)		$	(57,259,178	)		$	(11,314,605	)

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		For the Nine Months ended
		September 30,
		2015				2014
Cash Flows From Operating Activities:
Net loss		$	(5,130,385	)		$	(5,969,679	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation			979,836				416,338
Amortization of discount – PIK Notes			845,709				82,209
Amortization of deferred financing costs			5,625				- 0 -
Issuance of PIK Notes in payment of interest			2,178,990				1,076,250
Stock issued for director fees and other services			290,186				286,380
Stock-based compensation expense for consultants and directors			301,348				754,383
Shares issued for liquidated damages			541,011				- 0 -
Gain on revaluation of stock warrant derivative			-0-				(814,000	)
Gain on revaluation of PIK Note derivative			(6,598,708	)			(1,764,938	)
Gain on revaluation of stock awards			-0-				(110,000	)
Change in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable			75,814				(49,407	)
Deposits and prepaid expense			204,352				168,877
(Decrease) in:
Accounts payable and accrued liabilities			(429,156	)			(233,231	)
Net cash used in operating activities			(6,735,378	)			(6,156,818	)
Cash Flows From Investing Activities:
Purchases of property and equipment			(17,995	)			(784,716	)
Construction-in-progress			-0-				(513,278	)
Net cash used in investing activities			(17,995	)			(1,297,994	)
Cash Flows From Financing Activities:
Payments on notes payable			(238,248	)			(324,260	)
Net cash used in financing activities			(238,248	)			(324,260	)
Net change in cash and cash equivalents			(6,991,621	)			(7,779,072	)
Cash and cash equivalents at beginning of period			10,701,666				8,685,552
Cash and cash equivalents at end of period		$	3,710,045			$	906,480
Cash Paid For:
Interest		$	6,914			$	7,815
Income Taxes		$	-0-			$	1,403
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Reclassification of Land from Property and Equipment Net to Asset Held for Sale		$	445,180			$	-0-
Reclassification of construction in progress to buildings		$	-0-			$	2,405,648
Reclassification of construction in progress to milling equipment		$	-0-			$	1,857,727
Reclassification of construction in progress to lab equipment		$	-0-			$	96,077
Reclassification from buildings to milling equipment		$	-0-			$	319,328
Note payable for lab equipment		$	-0-			$	91,229
Additional large mine deposit in accounts payable		$	-0-			$	9,833
Reclassification of large mine deposit from short term to long term asset		$	-0-			$	199,936

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NOTE 1 – BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited, condensed, consolidated financial statements contain all adjustments necessary to present fairly the financial position of Applied Minerals, Inc. ("Applied Minerals" or "the Company" or "we") and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the applicable regulations of the Securities and Exchange Commission and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2014, included in the Company's Annual Report filed on Form 10-K for such year. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the entire year.

NOTE 2 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Applied Minerals is the leading producer of halloysite clay and advanced natural iron oxide solutions from its wholly owned Dragon Mine property in Utah. Halloysite is aluminosilicate clay that forms naturally occurring nanotubes. In addition to serving the traditional halloysite markets for use in technical ceramics and catalytic applications, the Company is developing high-value, niche applications that benefit from the tubular morphology of its halloysite. These applications include carriers of active ingredients in paints, coatings and building materials, environmental remediation, agricultural applications and high-performance additives & fillers for plastic composites. Applied Minerals markets its halloysite products under the DRAGONITE™ trade name.

 

From its Dragon Mine property, the Company also produces a range of ultra-pure natural iron oxides consisting of hematite and goethite. Combining ultra-high purity and consistent quality, the inherent properties of the iron oxide from the Dragon Mine allow for a wide range of end uses in pigment and technical applications. Applied Minerals markets its comprehensive line of advanced natural iron oxide pigments under the AMIRON™ trade name. Additional information on the Company can be found at www.appliedminerals.com and www.AMIRONoxides.com.

 

Applied Minerals is a publicly traded company incorporated in the state of Delaware. The common stock trades on the OTC Bulletin Board under the symbol AMNL.

NOTE 3 – LIQUIDITY

 

The Company has a history of recurring losses from operations and use of cash in operating activities. For the nine months ended September 30, 2015, the Company's net loss was $5,130,385 and cash used in operating activities was $6,735,378. As of September 30, 2015, the Company has working capital of $1,824,352. Collectively, these factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot provide any assurance that it will be able to raise additional capital in the future if needed. On November 2, 2015 the Company announced that it entered into a 5-year take-or-pay supply agreement. An initial purchase order of $5 million worth of AMIRON products has been received and is to be delivered over the course of 18 months with deliveries commencing on December 1, 2015 (see Note 12 – SUBSEQUENT EVENT). Also on November 2, 2015, the Company announced that it (i) has implemented, and will continue to implement, cost reduction initiatives and (ii) will auction 1,000 acres of noncore real estate it owns in Shoshone County, ID. Based on the Company’s current cash usage expectations, the Company believes it may have sufficient liquidity to support its operations for at least the next 12 months. However, the Company can provide no assurances with respect thereto.  

 

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Exploration-Stage Company

We are classified as an exploration company as the existence of proven or probable reserves has not been demonstrated and no significant revenue has been earned from the mine. Under the SEC’s Industry Guide 7, a mining company is considered an exploration stage company until it has declared mineral reserves determined in accordance with the guide and staff interpretations thereof.

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Applied Minerals, Inc. and its inactive subsidiary in northern Idaho.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. In these condensed consolidated financial statements, the warrant and PIK note derivative liability, stock compensation and impairment of long-lived assets involve extensive reliance on management’s estimates. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with a term of three months or less. The Company minimizes its credit risk by investing its cash and cash equivalents, which sometimes exceeds FDIC limits, with major financial institutions located in the United States with a high credit rating.

 

Receivables

Trade receivables are reported at outstanding principal amounts, net of an allowance for doubtful accounts. Management evaluates the collectability of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and financial condition, as well as current and projected economic and market conditions, in determining the amount of the allowance. Receivable balances are written off when management determines that the balance is uncollectable.

 

 

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or the life of the lease, whichever is shorter, as follows:

 

 

During the fourth quarter of 2014, the Company started using a five-year depreciation schedule with respect to its new processing plant that was commissioned in 2014. The five-year depreciation schedule is a change from the 40 years utilized for the building and 7 years utilized for the equipment relating to the new processing plant in the quarterly financial statements for the quarters ended March 31, June 30, and September 30, 2014. This change in useful life resulted in $587,427 of additional depreciation expense, which was recorded during the fourth quarter of 2014. The impact of the change in the depreciation schedule did not have a material impact on the consolidated financial statements for the three quarters previously reported on Form 10-Q.

 

Depreciation expense for the three months ended September 30, 2015 and 2014 totaled $326,931 and $170,759, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 totaled $979,836 and $416,338, respectively. The Company currently does not capitalize any amounts related to proven or probable reserves and therefore does not have any depletion expense.

 

Fair Value

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

●	Level 1 - Quoted prices in active markets for identical assets and liabilities;

 

●	Level 2 - Inputs other than level one inputs that are either directly or indirectly observable; and

 

●	Level 3 - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

Liabilities measured at fair value on a recurring basis are summarized as follows:

 

 

(a)	In the course of preparing its financial statements for the year ended December 31, 2014, the Company reclassified the Series 2023 PIK Note Derivative to Level 3 fair value hierarchy to match with the Series A PIK Note Derivative since it is based off of a similar model.

 

The following table summarizes the activity for financial instruments at fair value using Level 3 inputs:

 

 

(1) The net unrealized gain was attributed to a significant decline in the value of the Series 2023 and Series A PIK Note Derivative Liabilities. This decline in value was, in turn, attributed to a significant decline in the Company’s stock price during the nine month ended September 30, 2015.

 

The recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, receivables, other current assets, and accounts payable and accrued expenses approximate the fair value at September 30, 2015 and December 31, 2014 based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company for loans with similar terms, and the remaining short-term period outstanding, the carrying value of notes payable other than PIK notes approximates fair value. Estimated fair value of the PIK Notes Payable approximate $20,867,782 and $19,006,908, respectively at September 30, 2015 and December 31, 2014.

 

 

For the Company's PIK note derivative liabilities, fair value was estimated using a Monte Carlo Model and the following assumptions:

 

 

 

(1) See NOTE 8 – CONVERTIBLE DEBT (PIK NOTES)

 

Impairment of Long-lived Assets 

The Company periodically reviews the carrying amounts of long-lived assets to determine whether current events or circumstances warrant adjustment to such carrying amounts. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying amount. A test for recoverability of the Company’s long-lived assets will occur in the fourth calendar quarter of 2015.

 

If this comparison indicates impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell.

 

Revenue Recognition

Revenue includes sales of halloysite clay and, iron oxide, and is recognized when title passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Product pricing is determined based on related contractual arrangements with the Company’s customers.

 

Mining Exploration and Development Costs

Land and mining property are carried at cost. The Company expenses prospecting and mining exploration costs. At the point when a property is determined to have proven and probable reserves, subsequent development costs will be capitalized and will be charged to operations using the units-of-production method over proven and probable reserves. Upon abandonment or sale of a mineral property, all capitalized costs relating to the specific property are written off in the period abandoned or sold and a gain or loss is recognized.

 

Income taxes

The Company uses an asset and liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences or benefits of temporary differences between the financial reporting basis and the tax basis of assets and liabilities, as well as operating loss and tax credit carry forwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance has been provided for the portion of the Company’s net deferred tax assets for which it is more likely than not that they will not be realized.

 

The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. Federal income tax returns subsequent to 2009 are subject to examination by major tax jurisdictions. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

 

The Company follows the provision of ASC Topic 740-10, “Income Taxes”, relating to recognition thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and requires increased disclosures. This guidance provides that the tax effects from an uncertain tax position can be recognized in our financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. As of September 30, 2015, no amounts are included in the financial statements for unrecognized tax benefits.

 

 

Stock Options and Warrants

The Company follows ASC 718 (Stock Compensation) and 505-50 (Equity-Based Payments to Non-employees), which provide guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period.

 

Per share data

Net income (loss) per share for the three and nine months ended September 30, 2015 and 2014 is calculated based on the weighted average outstanding shares of common stock during such periods.

 

At September 30, 2015 and 2014, respectively, the Company has outstanding options and warrants to purchase 18,900,062 and 23,258,046 shares, respectively, of Company common stock, and had notes payable which were convertible into 32,037,587 and 8,268,750 shares of Company common stock, none of which were included in the diluted computation as their effect would be anti-dilutive.

   

Environmental Matters

Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate.  Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are expensed.  Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated.

 

Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs.  These amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by The Environmental Protection Agency or other organizations.  Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation.  Recoveries are evaluated separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated liability.

 

Based upon management’s current assessment of its environmental responsibilities, is does not believe that any reclamation or remediation liability exists at September 30, 2015.

 

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers. The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers.

 

ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the new standard is effective for the Company beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company is currently evaluating these new requirements to determine the method of implementation and any resulting estimated effects on the consolidated financial statements.

 

In April 2015, the FASB issued an ASU, which requires that debt issuance costs be presented in the balance sheet as a direct reduction to the carrying amount of the associated debt liability, consistent with debt discounts. Currently debt issuance costs are recognized as an asset. The ASU is effective for the Company in the first quarter of 2016 and is required to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its balance sheets.

 

In September 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for periods beginning after December 15, 2015, including interim periods within those fiscal years. The new guidance must be applied prospectively to adjustments to provisional amounts that occur after the effective date of the ASU, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its results of operations, financial position, and cash flows.

NOTE 5 – ASSET HELD FOR SALE

 

During the third quarter of 2015, the Company reclassified its non-core Atlas Mine properties, located in and around Mullan, ID, from land and mining property to asset held for sale as the Company is exploring various strategic options to further monetize the value of the land and any associated mineral resources. Upon transfer, the carrying value of the mine was tested for impairment, noting fair value exceeded the carrying value and therefore no impairment was necessary. As of September 30, 2015, the Company recorded $445,180 as asset held for sale.

 

NOTE 6 - INCOME TAX

 

Income tax provisions or benefits for interim periods are computed based on the Company's estimated annual effective tax rate. Based on the Company's historical losses and its expectation of the continuation of losses for the foreseeable future, the Company has determined that it is more likely than not that deferred tax assets will not be realized and, accordingly, has provided a full valuation allowance as of September 30, 2015 and December 31, 2014. 

 

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NOTE 7 - NOTES PAYABLE

 

Notes payable at September 30, 2015 and December 31, 2014 consist of the following:

 

 

(a)

On October 31, 2014, the Company purchased mining equipment for $57,900 by issuing a note with an interest rate of 5.2%. The note is collateralized by the mining equipment with payments of $1,339 for 48 months, which started on November 30, 2014.

(b)

On April 17, 2012, the Company purchased mining equipment for $40,565 by issuing a note with an effective interest rate of 11.279%. The note is collateralized by the mining equipment with payments of $950 for 48 months, which started on May 1, 2012.

	(c)	On July 23, 2012, the Company purchased mining equipment for $169,500 by issuing a note with an interest rate of 5.5%. The note is collateralized by the mining equipment with payments of $6,060 for 30 months, which started on August 25, 2012.
	(d)	On April 16, 2014, the Company purchased laboratory equipment for $109,493 by depositing and issuing a non-interest bearing note in the amount of $91,229. The note is collateralized by the lab equipment with payments of $9,122 for ten months, which started in May 2014.
	(e)	On September 20, 2012, the Company purchased a vehicle for the mine site for $37,701 by issuing a non-interest bearing note. The note is collateralized by the vehicle with payments of $628 for 60 months, which started on October 20, 2012.
	(f)	The Company signed a note payable with an insurance company dated October 31, 2014 for directors' and officers' insurance, due in monthly installments, including interest at 3.15%. The notes matured in July 2015.
	(g)	The Company signed a note payable with an insurance company dated October 31, 2014 for liability insurance, due in monthly installments, including interest at 3.15%. The note matured in July 2015.

 

 

The following is a schedule of the principal maturities for the next four years:

 

 

During the three and nine months ending September 30, 2015, the Company's interest payments totaled $940 and $6,894, respectively.

NOTE 8 – CONVERTIBLE DEBT (PIK NOTES)

 

The Company raised $23 million of financing through the issuance of two series of Paid-In-Kind ("PIK")-Election Convertible Notes in 2013 and 2014, with key terms highlighted in the table below:

 

 

As of September 30, 2015, the liability components of the PIK Notes on the Company's balance sheet are listed in the following table:

 

 

As of December 31, 2014, the liability components of the PIK Notes on the Company's balance sheet are listed in the following table:

 

 

  

Series A Notes

On November 3, 2014 (“Issue Date”), the Company issued, in a private placement pursuant to investment agreements, $19,848,486 principal amount of 10% PIK-Election Convertible Notes due 2018 ("Series A Notes") in exchange for $12,500,000 in cash and the cancellation of previously-issued warrants held by one investor. The Company can elect to pay semi-annual interest on the Series A Notes with additional PIK Notes containing the same terms as the Series A Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash. In July 2015, the Company issued $992,424, in additional PIK Notes to the holders to pay the semi-annual interest.

 

Below are key terms of the Series A Notes:

 

●

Maturity- November 3, 2018, provided that the Stated Maturity Date may be extended to November 3, 2019 at the option of the Company (the “Extension Option”) if (i) the Company has delivered written notice of its exercise of the Extension Option to the Holder not more than ninety (90) nor less than thirty (30) days prior to November 3, 2018 and (ii) the Company has delivered a certificate, dated as of November 3, 2018, certifying that no Default or Event of Default has occurred and is continuing; provided, further that the Stated Maturity Date shall be extended to the maturity date of the Series 2023 Notes or any Replacement Financing, as applicable, upon the occurrence of a Specified Event (“Specified Extension”)

 

●

Exercise Price- initially $0.92 per share and will be (i) adjusted from time to time pursuant to anti-dilution provisions and (ii) reduced by $0.10 per share if the Company elects to exercise its Extension Option.

 

●

Stated Interest: 10% payable semiannually in arrears, provided that the interest rate shall be reduced to 1% per annum on the principal amount of the Note upon the occurrence of the Specified Event, as defined below.

 

●

Specified Event- means the event that may occur after the second anniversary of the Issuer Date if: (i) any amounts under the Series 2023 Notes or any Replacement Financing are outstanding, (ii) the VWAP for the preceding 30 consecutive Trading Days as determined by the Board of Directors of the Issuer in good faith is in excess of the Exercise Price, (iii) the closing Market Price of the Common Stock is in excess of the Exercise Price on the date immediately preceding the date on which the Specified Event occurs, (iv) no Default or Event of Default has occurred and is continuing and (v) the Issuer has delivered a certificate to each holder of Series A Notes certifying that the conditions set forth in clauses (i) through (iv) above have been met.

 

●

Extension Option- If stock price is lower than current exercise price ($0.92) prior to the stated maturity (November 3, 2018), then the Company can elect an Extension Option, whereby the maturity is extended by one year (see Maturity definition), but with a reduction in exercise price by $0.10.

 

●

Liquidated Damages- The company is required to pay the note holders 1% of the principal amount of the Series A Notes if a Registration statement is not filed and effective within 90 days of the inception date (and further damages for every 30 days thereafter). The registration statement became effective on July 8, 2015. Liquidated damages of $541,011 has been charged to other expenses during the nine months ended September 30, 2015 due to the delay in its effective date, such amount is in addition to $200,000 accrued at December 31, 2014. During the second quarter of 2015, the Company issued 1,015,086 shares valued at $741,011 to Series A note holders as payment of liquidated damages.

 

●

The number of shares issuable under the Notes may be affected by the anti-dilution provisions of the Notes. The anti-dilution provisions adjust the Exercise Price of the Notes in the event of stock dividends and splits, issuance below the market price of the Common Stock, issuances below the conversion price of the Notes, pro rata distribution of assets, rights plans, tender offers, and exchange offers.

 

These Series A Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of $9,212,285 (based on observable inputs using a Monte Carlo model) was bifurcated from the Series A Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series A Notes. In addition, an additional debt discount of $7,348,486 was recorded as a result of the difference between the $12,500,000 of cash received and the $19,848,486 of principal on the Series A Notes. This combined debt discount of $16,560,771 is being amortized using the effective interest method over the 4-year term of the Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings.

 

At September 30, 2015, the fair value of the Series A PIK Note Derivative was estimated to be $3,420,627, which includes the value of the additional PIK Notes issued in July 2015, for the semi-annual interest payments due. In addition, the Company recorded $162,887 of additional debt discount from the July 2015 issuances above, and also amortized $749,051 of debt discount relating to the Series A PIK Notes Payable, increasing the Series A PIK Notes Payable carrying value to $4,976,331 as of September 30, 2015.

 

Series 2023 Notes

In August 2013, the Company received $10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash. In February 2014, August 2014, February 2015 and August 2015, the Company issued $525,000, $551,250, $578,813 and 607,753 respectively, in additional PIK Notes to the holders to pay the semi-annual interest.

 

The Series 2023 Notes originally converted into the Company’s common stock at a conversion price of $1.40 per share, which is subject to anti-dilution adjustments; these anti-dilution adjustments reduced the conversion price to $1.36 after the issuance of the Series A Notes. As of issuance, principal amount of the Series 2023 Notes were convertible into 7,500,000 shares of the common stock and into 7,720,588 shares after the issuance of the Series A Notes. The holders may convert the Series 2023 Notes at any time. The Series 2023 Notes are mandatorily convertible after one year when the weighted average trading price of a share of the common stock for the preceding ten trading days is in excess of the conversion price. The Series 2023 Notes contain customary representations and warranties and several covenants. The proceeds are being used for general corporate purposes. No broker was used and no commission was paid in connection with the sale of the Series 2023 Notes. As of September 30, 2015, the Company was in compliance with the covenants.

 

 

These Series 2023 Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of $2,055,000 (based on observable inputs using a Monte Carlo model) was bifurcated from the Series 2023 Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series 2023 Notes. The debt discount is being amortized using the effective interest method over the 10-year term of the Series 2023 Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Series 2023 Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings.

 

At September 30, 2015, the fair value of the Series 2023 PIK Note Derivative was estimated to be $215,842, which includes the value of the additional PIK Notes issued in February 2014, August 2014, February 2015 and August 2015 for the semi-annual interest payments due. In addition, the Company recorded $26,387 of additional debt discount from the February 2015 issuance and $10,278 of debt discount from the August 2015 issuance, resulting in a total debt discount of $1,889,561 as of September 30, 2015 and increasing the Series 2023 PIK Notes Payable carrying value to $10,873,255 as of September 30, 2015.

NOTE 9 - STOCKHOLDERS' EQUITY

 

Preferred Stock

The Company is authorized to issue 10,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share. At September 30, 2015 and December 31, 2014, no shares of preferred stock were outstanding.

 

Common Stock

On November 20, 2012, stockholders of the Company approved to increase the authorized shares of common stock from 120,000,000 to 200,000,000 shares, $0.001 par value per share. At September 30, 2015 and December 31, 2014, 96,766,329 and 95,054,552 shares were issued and outstanding, respectively.

NOTE 10 - OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

 

Derivative Instruments - Warrants

The Company issued 5,000,000 warrants (“Samlyn warrants”) in connection with the December 22, 2011 private placement of 10,000,000 shares of common stock. The strike price of these warrants was $2.00 per share at the date of grant. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary antidilution provisions the notes contained a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of the Company's common stock or securities exercisable, convertible or exchangeable for the Company's common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants (based on observable inputs using a Monte Carlo model) was recorded as a liability in the balance sheet until they are exercised or expire or are otherwise extinguished. During the first quarter of 2013, the Company issued 3,756,757 shares of its common stock for gross proceeds of $5,560,000, which triggered a down-round adjustment of $0.03 from $2.00 to $1.97 in the strike price of the Samlyn warrants at that time. As discussed in Note 7, during August 2013, the Company issued $10,500,000 of 10% mandatorily convertible Series 2023 PIK Notes in a private placement, which triggered a down-round adjustment of $0.04 from $1.97 to $1.93 in the strike price of the Samlyn warrants. On November 3, 2014, the Company cancelled the warrant arrangement, resulting in the fair value of the warrant at such date of $120,000 being credited to equity.

 

Outstanding Stock Warrants

A summary of the status of the warrants outstanding and exercisable at September 30, 2015 is presented below:

 

 

No warrants were issued during the three and nine months ended September 30, 2015 and 2014. The intrinsic value of the outstanding warrants at September 30, 2015 and 2014 was $0.

 

Outstanding Stock Options

On November 20, 2012, the shareholders of the Company approved the adoption of the Applied Minerals, Inc. 2012 Long-Term Incentive Plan (“LTIP”) and the Short-Term Incentive Plan (“STIP”) and the performance criteria used in setting performance goals for awards intended to be performance-based. Under the LTIP, 8,900,000 shares are authorized for issuance. The STIP does not refer to a particular number of shares under the LTIP, but would use the shares authorized in the LTIP for issuance under the STIP. The CEO, the CFO, and named executive officers, and directors, among others, are eligible to participate in the LTIP and STIP. Prior to the adoption of the LTIP and STIP, stock options were granted under individual arrangements between the Company and the grantees, and approved by the Board of Directors.

 

 

The fair value of each of the Company's stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury Bond on the date the award is granted with a maturity equal to the expected term of the award.

 

The significant assumptions relating to the valuation of the Company's options issued for the nine months ended September 30, 2015 and 2014 were as follows on a weighted average basis:

 

 

A summary of the status and changes of the options granted under stock option plans and other agreements for the nine months ended September 30, 2015 is as follows:

 

 

During the nine months ended September 30, 2015, the company granted 988,356 options to purchase the Company's common stock with a weighted average exercise price of $0.65 and the following vesting schedule:

 

 

A summary of the status of the options outstanding at September 30, 2015 is presented below:

 

 

 

The weighted-average grant-date fair value of options granted during the first nine months of 2015 was $0.65.

 

Compensation expense of $93,750 and $301,597 has been recognized for vesting of options for the three and nine months ended September 30, 2015, respectively. The aggregate intrinsic value of the outstanding options as September 30, 2015 was $4,000.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

Commitments

The following table summarizes our contractual obligations as of September 30, 2015 that requires us to make future cash payments:

 

 

Contingencies

The Company was named as the defendant in a lawsuit filed on April 18, 2014 in state District court in Salt Lake City, Utah.  The plaintiff is Tekko Enterprises, Inc., which was hired in 2012 as project manager for the construction of a processing plant at the Company’s Dragon Mine property and terminated in 2013 before the completion of the plant.  The complaint seeks damages of $346,000, which represents unpaid amounts that the plaintiff claims it is entitled to under the project management agreement and two purchase orders.  The Company intends to vigorously defend against the claims and to counterclaim.

 

In accordance with ASC Topic 450, when applicable, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. In addition to the above matter, we may become involved in or subject to, routine litigation, claims, disputes, proceedings and investigations in the ordinary course of business, which could have a material adverse effect on our financial condition, cash flows or results of operations.

NOTE 12 – SUBSEQUENT EVENT

 

On November 2, 2015, the Company announced that it had entered into a 5-year take-or-pay supply agreement with a leading industrial customer for its AMIRON Technical Grade Iron Oxide for use as in a specialized catalyst application. The agreement provides the customer an exclusive supply of AMIRON for a period of five years. The exclusivity provision is limited to the specialized catalyst application of the Customer and enables Applied Minerals to sell its iron oxide products for use in other technical applications that are not competitive with the Customer’s intended field of use. An initial purchase order of $5 million worth of AMIRON products has been received and is to be delivered over the course of 18 months with deliveries commencing on December 1, 2015. After fulfillment of the initial purchase order, the Company anticipates the receipt of additional purchase orders from the Customer over the remainder of the 5-year exclusivity period at terms that have been agreed to by the parties.

 

Upon expiration of the initial 5-year term, the Customer has an option to extend the exclusive supply agreement for an additional 5 years by issuing an $8.0 million additional purchase order to be delivered over the course of the subsequent 24 months. If the customer elects to exercise the extension option, the Company anticipates, after the fulfillment of the additional purchase order, the receipt of additional purchase orders over the remainder of the subsequent 5-year exclusivity period at terms that have been agreed to by the parties.

 

An initial purchase order of $5.0 million of AMIRON products has been received and is to be delivered over the course of 18 months with deliveries commencing on December 1, 2015. After fulfillment of the initial purchase order, the Company anticipates the receipt of additional purchase orders from the Customer over the remainder of the 5-year exclusivity period at terms that have been agreed to by the parties.

 

Upon expiration of the initial 5-year term, the Customer has an option to extend the exclusive supply agreement for an additional 5 years by issuing an $8.0 million purchase order to be delivered over the course of the subsequent 24 months. If the customer elects to exercise the extension option, the Company anticipates, after the fulfillment of the $8.0 million purchase order, the receipt of additional purchase orders over the remainder of the subsequent 5-year exclusivity period at terms that have been agreed to by the parties.

 

On November 2, 2015 the Company announced that it had begun the implementation of a number of cost-saving initiatives that will serve to strengthen its operational model and enhance its liquidity position as it executes the next steps of its strategy to penetrate the application markets for both its DRAGONITE halloysite clay and AMIRON iron oxide products. The savings realized from these initiatives are anticipated to be derived from efficiencies realized from all aspects of the business, both corporate and operational, putting the company in a stronger position to execute on its current business and pipeline of opportunities.

 

On November 2, 2015 the Company announced it intention to sell approximately 1,000 acres of non-core real estate it owns and leases located in Shoshone County, ID. The auction is expected to be completed by December 2016.

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