Applied Minerals, Inc. - Quarter Report: 2016 June (Form 10-Q)

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		June 30, 2016				December 31, 2015
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	2,174,748			$	1,803,131
Accounts receivable			487,893				176,205
Deposits and prepaid expenses			170,914				322,922
Other current receivables			- 0 -				94,647
Total Current Assets			2,833,555				2,396,905
Property and Equipment, net			4,653,188				5,206,825
Other Assets
Deposits			269,342				269,202
Assets Held for Sale			1,000				445,180
Total Other Assets			270,342				714,382
TOTAL ASSETS		$	7,757,085			$	8,318,112
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued liabilities (excluding accrued PIK Note interest)		$	526,525			$	742,745
Accrued PIK Note interest			919,913				880,407
Current portion of notes payable			49,040				210,429
Total Current Liabilities			1,495,478				1,833,581
Long-Term Liabilities
Long-term portion of notes payable			22,535				33,688
PIK Notes payable, net of $16,632,757 and $17,572,885 debt discount, respectively			19,727,804				17,051,636
PIK Note derivative			3,856,834				5,138,857
Total Long-Term Liabilities			23,607,173				22,224,181
Total Liabilities			25,102,651				24,057,762
Commitments and Contingencies (Note 10)
Stockholders’ Deficit
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding
Common stock, $0.001 par value, 200,000,000 shares authorized, 108,376,049 and 97,144,736 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			108,376				97,145
Additional paid-in capital			68,221,368				66,106,631
Accumulated deficit prior to the exploration stage			(20,009,496	)			(20,009,496	)
Accumulated deficit during the exploration stage			(65,665,814	)			(61,933,930	)
Total Stockholders’ Deficit			(17,345,566	)			(15,739,650	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	7,757,085			$	8,318,112

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		For the three months ended June 30,								For the six months ended June 30,
		2016				2015				2016				2015
REVENUES		$	1,112,467			$	65,848			$	2,114,095			$	228,595
OPERATING EXPENSES:
Production costs			220,970				3,934				476,670				6,170
Exploration costs			584,150				1,291,197				1,111,878				2,618,478
General and administrative			1,066,927				1,247,466				2,250,136				2,429,775
Depreciation expense			338,333				326,684				674,420				652,905
Total Operating Expenses			2,210,380				2,869,281				4,513,104				5,707,328
Operating Loss			(1,097,913	)			(2,803,433	)			(2,399,009	)			(5,478,733	)
OTHER INCOME (EXPENSE):
Interest expense, net, including amortization of deferred financing cost and debt discount			(1,356,841	)			(1,092,595	)			(2,729,261	)			(2,121,222	)
Gain (loss) on revaluation of PIK Note derivative			(742,509	)			1,313,110				1,291,406				1,220,369
Other income (expense)			11,904				(145,958	)			104,980				(543,755	)
Total Other Income (Expense)			(2,087,446	)			74,557				(1,332,875	)			(1,444,608	)
Net Loss		$	(3,185,359	)		$	(2,728,876	)		$	(3,731,884	)		$	(6,923,341	)
Net Loss Per Share (Basic and Diluted)		$	(0.03	)		$	(0.03	)		$	(0.04	)		$	(0.07	)
Weighted Average Shares Outstanding (Basic and Diluted)			97,889,350				95,653,519				97,566,480				95,381,825

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		Common Stock												Accumulated Deficit				Accumulated Deficit				Total
		Shares				Amount				Additional Paid-In Capital				Prior to Exploration Stage				During Exploration Stage				Stock- holder's Deficit
Balance, December 31, 2015			97,144,736			$	97,145			$	66,106,631			$	(20,009,496	)		$	(61,933,930	)		$	(15,739,650	)
Shares issued for directors fees and other services			178,980				179				94,164				- 0 -				- 0 -				94,343
Shares issued to employees for compensation			118,994				119				26,461				- 0 -				- 0 -				26,580
Shares issued in private placement			10,933,339				10,933				1,629,067				- 0 -				- 0 -				1,640,000
Stock-based compensation expense for consultants and directors			- 0 -				- 0 -				365,045				- 0 -				- 0 -				365,045
Net loss			- 0 -				- 0 -				- 0 -				- 0 -				(3,731,884	)			(3,731,884	)
Balance, June 30, 2016			108,376,049			$	108,376			$	68,221,368			$	(20,009,496	)		$	(65,665,814	)		$	(17,345,566	)

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		For the Six Months Ended June 30,
		2016				2015
Cash Flows from Operating Activities:
Net loss		$	(3,731,884	)		$	(6,923,341	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation			674,420				652,905
Amortization of discount - PIK Notes			949,513				507,116
Amortization of deferred financing costs			3,750				3,750
Issuance of PIK Notes in payment of interest			1,732,289				578,813
Stock issued for director fees and other services			94,343				215,961
Stock-based compensation expense for consultants and directors			365,045				207,598
Stock issued for employee compensation			26,580				- 0 -
Shares issued for liquidated damages			- 0 -				541,011
Gain on revaluation of PIK Note derivative			(1,291,406	)			(1,220,369	)
Gain on sale of property			(108,764	)			- 0 -
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable			(311,688	)			88,620
Other current receivables			94,647				- 0 -
Deposits and prepaid expenses			151,868				133,949
Increase (decrease) in:
Accounts payable and accrued liabilities			(176,715	)			482,812
Net cash used in operating activities			(1,528,002	)			(4,731,175	)
Cash Flows From Investing Activities:
Sale of property			552,944				- 0 -
Purchases of property and equipment			(120,783	)			(17,995	)
Net cash provided by (used in) investing activities			432,161				(17,995	)
Cash Flows From Financing Activities:
Payments on notes payable			(172,542	)			(203,440	)
Proceeds from sale of common stock			1,640,000				- 0 -
Net cash provided by (used in) in financing activities			1,467,458				(203,440	)
Net change in cash and cash equivalents			371,617				(4,952,610	)
Cash and cash equivalents at beginning of period			1,803,131				10,701,666
Cash and cash equivalents at end of period		$	2,174,748			$	5,749,056

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		For the Six Months Ended June 30,
		2016				2015
Cash Paid For:
Interest		$	4,204			$	5,974
Income Taxes		$	- 0 -			$	- 0 -

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Table Of Contents

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, 2015, included in the Company's Annual Report filed on Form 10-K for such year. The results of operations for the three and six months ended June 30, 2016 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 owner of the Dragon Mine located in the Tintic Mining District of the State of Utah from where it produces halloysite clay and iron oxide. The Company is currently mining and selling its DRAGONITE^TM and AMIRON^TM products and is also in various phases of commercial scale trials with several organizations in various markets with respect to uses of its products.

 

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 six months ended June 30, 2016, the Company's net loss was $3,731,884 and cash used in operating activities was $1,528,002. At June 30, 2016, the Company had working capital of $1,338,077, which includes $919,913 of accrued PIK Note interest, which the Company expects to pay in-kind and $167,841 of payables for which the Company believes it has a statute of limitations defense. In addition, during the six months ended June 30, 2016, the Company commenced generating revenue under a take-or-pay supply agreement for AMIRON iron oxide and reduced exploration costs related to activities at the Dragon mine. Based on the Company's cash balance at June 30, 2016 and its cash usage expectations, it believes it will have sufficient liquidity to fund its operations for at least the next 12 months.

 

On June 24, 2016, the Company raised $1.64 million through the private placement of 10,933,333 units at $0.15 per unit. Attached to each unit sold was one share of common stock and a five-year warrant to purchase 0.3 shares of the Company’s common stock. As a result of the sale, the Company issued 10,933,333 shares of common stock and warrants to purchase 3,280,000 shares of common stock at $0.25 per share. The warrants have a term of five years and do not contain a provision that allows for a cashless exercise.  

 

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Exploration-Stage Company

From 1997 through 2008, the Company’s sole source of revenue and income was derived from its contract mining business through which it provided shaft sinking, underground mine development and mine labor services. At December 31, 2008, the Company discontinued its contract mining efforts due to economic conditions and the desire to concentrate its efforts on the commercialization of the halloysite clay deposit at the Dragon Mine. Effective January 1, 2009, the Company was, and still is, classified as an exploration company as the existence of proven or probable reserves have 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 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. No allowance was required at June 30, 2016 and 2015.

 

Property and Equipment

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

 

 

Depreciation expense for the three months ended June 30, 2016 and 2015 totaled $338,333 and $326,684, respectively. Depreciation expense for the six months ended June 30, 2016 and 2015 totaled $674,420 and $652,905, respectively. The Company currently does not capitalize any amounts to its mineral resources 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:

 

 

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

 

 

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 approximates the fair value at June 30, 2016 and December 31, 2015 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 values of the PIK Notes Payable approximate $23,463,323 and $21,789,259, respectively, at June 30, 2016 and December 31, 2015 (based on Level 2 inputs).

 

 

For the Company's PIK Note derivative liabilities, Level 3 fair value hierarchy was estimated using a Monte Carlo Model using the following assumptions:

 

 

 

 

 

Impairment of Long-lived Assets

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

 

If this comparison indicates 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 is 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. 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 June 30, 2016, 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

Loss per share for the three months ended June 30, 2016 and 2015, respectively, is calculated based on 97,889,350 and 95,653,519 weighted average outstanding shares of common stock. Loss per share for the six months ended June 30, 2016 and 2015, respectively, is calculated based on 97,556,480 and 95,381,825 weighted average outstanding shares of common stock.

 

At June 30, 2016 and 2015, respectively, the Company had outstanding options and warrants to purchase 24,276,950 and 18,929,402 shares of Company common stock, and had notes payable which were convertible into 38,676,225 and 31,590,709 shares, respectively, of the 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, it does not believe that any reclamation or remediation liability exists at June 30, 2016.

 

Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition in the income statement of the income tax effects of vested or settled awards. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statement and related disclosures.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under Accounting Standards Update 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee's obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee's right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

In November 2015, FASB issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Accounting Standards Update 2015-17 simplifies current guidance and requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. Accounting Standards Update 2015-17 can be applied either prospectively or retrospectively and is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate the new guidance will have a material effect on its financial statements and related disclosures.

 

In April 2015, the FASB issued an ASU 2015-03, 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 2017 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 financial statements and related disclosures.

 

In May 2014, the FASB issued new accounting guidance, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. Accounting Standards Update No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for fiscal years and interim periods within those years beginning after December 15, 2016, the original effective date of the standard. The Company does not anticipate the new guidance will have a material effect on its financial statements and related disclosures.

  

Comparative Information

We have reclassified certain prior year information to conform with the current year's presentation.

 

NOTE 5 - 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 June 30, 2016 and December 31, 2015.

 

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NOTE 6 - NOTES PAYABLE

 

Notes payable at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

(a)

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.

 

(b)

On October 31, 2014, the Company purchased mining equipment for $65,120 by paying a deposit and issuing a note in the amount of $57,900 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.

 

(c)

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.

(d)

The Company signed a note payable with an insurance company dated October 21, 2015 for liability insurance, due in monthly installments, including interest at 11.845%.

 

(e)

The Company signed a note payable with an insurance company dated October 17, 2015 for liability insurance, due in monthly installments, including interest at 3.000%.

 

The following is a schedule of the principal maturities on these notes as of June 30, 2016:

 

 

During the three and six months ended June 30, 2016, the Company's interest payment related to these notes totaled $2,909 and $4,204, respectively. During the three and six months ended June 30, 2015, the Company's interest payments related to these notes totaled $1,776 and $5,974, respectively.

 

NOTE 7 – 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 June 30, 2016, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

 

 

 

As of December 31, 2015, 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.

 

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 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 noteholders 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 Company has accrued $200,000 as Other Expense as of December 31, 2014 due to a delay in such filing.

●

The number of shares issuable under the Notes may be affected by the anti-dilution provisions of the Notes. The antidilition 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.

 

 

In May 2015, November 2015 and May 2016, the Company issued $992,424, $1,042,045, and $1,094,148, respectively, in additional PIK Notes to the holders to pay the semi-annual interest.

 

At June 30, 2016, the fair value of the Series A PIK Note Derivative was estimated to be $3,626,505, which includes the value of the additional PIK Notes issued in May 2015, November 2015, and May 2016 for the semi-annual interest payments due. The change in the fair value of the derivative represents a decrease in valuation of $5,585,780 from the November 3, 2014 inception date.

 

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 2016, August 2015 and February 2015, the Company issued $638,141, $607,753 and $578,812, respectively, in additional PIK Notes to the holders to pay the semi-annual interest. In February 2014 and August 2014, the Company issued $525,000 and $551,250, respectively, in additional PIK Notes to the holders to pay the semi-annual interest.

 

The Series 2023 Notes convert into the Company’s common stock at a conversion price of $1.40 per share, which is subject to customary anti-dilution adjustments; these anti-dilution adjustments reduced the conversion price to $1.36 after the issuance of the Series A Notes and then to $1.28 after the issuance of 10,933,333 units for proceeds of $1.64 million on June 24, 2016. As of issuance, principal amount of the Series 2023 Notes were convertible into 7,500,000 shares of the common stock, into 7,720,588 shares after the issuance of the Series A Notes and 8,203,125 shares of common stock after the issuance of the 10,933,333 units.. 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 December 31, 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 June 30, 2016, the fair value of the PIK Note Derivative was estimated to be $230,329, which includes the value of the additional PIK Notes issued in February 2016, August 2015, February 2015, August 2014 and February 2014 for the semi-annual interest payments due. The change in the fair value of the derivative represents a decrease in valuation of $1,824,671 from the August 2, 2013 inception date.

NOTE 8 - STOCKHOLDERS' EQUITY

 

Preferred Stock

The Company is authorized to issue 10,000,000 shares of nonconvertible preferred stock, $0.001 par value per share. At June 30, 2016 and December 31, 2015, no shares of preferred stock were outstanding.

 

Common Stock

The Company is authorized to issue up to 200,000,000 shares, $0.001 par value per share. At June 30, 2016 and December 31, 2015, 108,376,049 and 97,144,736 shares were issued and outstanding, respectively.

 

During the six months ended June 30, 2016, the Company issued a total of 185,959 shares of common stock valued at $45,094 to directors and consultants as payments of fees. An additional 118,994 shares, valued at $26,580, were issued to employees in lieu of cash compensation.

 

During the six months ended June 30, 2016, the Company issued 10,933,339 units valued at $1,640,000 as part of a private placement. Each unit consisted of one share of common stock and one warrant to purchase 0.3 shares of common stock at $0.25 per share. The Company received $1,640,000 in proceeds and no commissions were paid.

 

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NOTE 9 - OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

 

Outstanding Stock Warrants

A summary of the status of the warrants outstanding and exercisable at June 30, 2016 is presented below:

 

 

 

No warrants were issued during 2015 or the first quarter of 2016. On June 24, 2016 the Company sold 10,933,333 units at $0.15 per unit. The sale of the units included the issuance of warrants to purchase 3,283,283 shares of common stock. Each warrant has an exercise price of $0.25 per share and a term of five years. The intrinsic value of the outstanding warrants was $0 at June 30, 2016.

 

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.

 

On May 11, 2016, the Board of Directors has adopted the 2016 Long Term Incentive Plan (the “Plan”). The Plan, administered by the Compensation Committee of the Board allows for the following types of incentive awards: stock options, stock appreciation rights, restricted stock, performance shares, performance units or other stock-based award. Such awards may be issued to employees, consultants and non-employee directors. The aggregate number of shares of common stock that may be issued or used for reference purposes with respect to which awards may be granted under the Plan shall not exceed two million.

 

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 six months ended June 30, 2016 and 2015 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 six months ended June 30, 2016 is as follows:

 

 

* Measured in years

 

 

During the six months ended June 30, 2016, the Company granted 2,671,488 options to purchase the Company’s common stock with a weighted average exercise price of $0.26 and the following vesting schedule. The weighted-average grant-date fair value of options granted during the first half of 2016 was $0.10.

 

Compensation expense of $238,064 and $107,660 has been recognized for the vested options for the three months ended June 30, 2016 and 2015, respectively, and $365,045 and $207,598 for the six months ended June 30, 2016 and 2015, respectively. The aggregate intrinsic value of the outstanding options at June 30, 2016 was $0. At June 30, 2016, $328,745 of unamortized compensation expense for unvested options is expected to be recognized over the next 1.27 years on a weighted average basis.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

Commitments

The following table summarizes our contractual obligations as of June 30, 2016 that require us to make future cash payments:

 

 

Contingencies

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. 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.

 

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