The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016
(unaudited)
NOTE 1 - OVERVIEW
Standard Metals Processing, Inc. (“we,”
“us,” “our,” “Standard Metals,” the “Company” or the “Corporation”)
(a.k.a. Cambrian Minerals Group, Inc.) is an exploration stage company having offices in Gadsden, Alabama and through its subsidiary,
a property in Tonopah, Nevada. Our business plan is to purchase equipment and build a facility on our Tonopah property to serve
as a permitted custom processing toll milling facility (which includes an analytical lab, pyrometallugircal plant, and hydrometallurgical
recovery plant).
The Company plans to perform permitted
custom processing toll milling which is a process whereby mined material is crushed and ground into fine particles to ease the
extraction of any precious minerals contained therein, such as minerals in the gold, silver and platinum metal groups. Custom milling
and refining can include many different processes that are designed specifically for each ore load and to maximize the extraction
of precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill chemicals and bulk
materials on a contractual basis and provide a chemical production outsourcing option for industrial companies, which lack the
expertise, capacity, or regulatory permits for in-house production.
We are required to obtain several permits
before we can begin construction of a small scale mineral processing facility to conduct permitted processing toll milling activities
and construction of the required additional buildings and well relocation necessary for us to commence operations.
Any reference herein to “Standard
Metals,” “the Company,” “we,” “our,” or “us” is intended to mean Standard
Metals Processing, Inc. a Nevada corporation, and all of our subsidiaries unless otherwise indicated.
Going Concern
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assuming
we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. For the nine months ended September 30, 2016, the Company incurred losses from operations of $657,666. At September
30, 2016, the Company had an accumulated deficit of $102,294,846 and a working capital deficit of $9,123,197. These conditions
raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent
on our ability to raise the required additional capital or debt financing to meet short and long-term operating requirements. During
the nine months ended September 30, 2016, the Company received net cash proceeds of $220,000 from the convertible promissory notes
payable. Management believes that private placements of equity capital and/or additional debt financing will be needed to fund
our long-term operating requirements. The Company may also encounter business endeavors that require significant cash commitments
or unanticipated problems or expenses that could result in a requirement for additional cash. If the Company raises additional
funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could
be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may
not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms,
the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and
materially restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital
position. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts
of Standard Metals Processing, Inc., its wholly owned subsidiary Tonopah Milling and Metals Group, Inc. (“TMMG”), and
TMMG’s wholly owned subsidiaries Tonopah Custom Processing, Inc. and Tonopah Resources, Inc. All significant intercompany
transactions, accounts and balances have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”), for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete
financial statements. The unaudited condensed financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2015 filed May 2, 2016. In the
opinion of management, all adjustments (consisting of normal recurring adjustments unless otherwise indicated) considered necessary
for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily
indicative of the results that may be expected for the year as a whole.
Shea Mining and Milling Assets
The Company recorded the estimated fair
value of the Shea Mining and Milling assets as an aggregate amount on the condensed consolidated balance sheets. The assets include
the mine tailings and dumps, the land, water rights and the milling facility (the buildings and equipment). None of the assets
have been put into production, nor has the Company performed any repair or updates to any of the equipment or buildings. As such,
the Company will continue to classify them under a single listing.
Mineral Properties
Mineral property acquisition costs are
recorded at cost and are deferred until the viability of the property is determined. No properties have produced operating revenues
at this time. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties acquired
under an option agreement, general overhead, administrative and holding costs to maintain a property on a care and maintenance
basis are expensed in the period they are incurred. When reserves are determined for a property and a bankable feasibility study
is completed, subsequent exploration and development costs on the property would be capitalized. If a project were to be put into
production, capitalized costs would be depleted on the unit of production basis.
Management reviews the net carrying value
of each mineral property as changes may materialize with a property or at a minimum, on an annual basis. Where information and
conditions suggest impairment, estimated future net cash flows from each property are calculated using estimated future prices,
proven and probable reserves and value beyond proven and probable reserves, and operating, capital and reclamation costs on an
undiscounted basis. If it is determined that the future cash flows are less than the carrying value, a write-down to the estimated
fair value is made with a charge to loss for the period. Where estimates of future net cash flows are not available and where other
conditions suggest impairment, management assesses if the carrying value can be recovered.
Management’s estimates of gold prices,
recoverable reserves, probable outcomes, operating capital and reclamation costs are subject to risks and uncertainties that may
affect the recoverability of mineral property costs.
The Company does not own any mining claims.
It owns tailings located on the Tonopah property and some tailings located in Manhattan, Nevada. The Company has not disturbed
or processed any of this material and does not intend to do so in the foreseeable future.
Impairment of Long-Lived Assets and Long-Lived Assets
The Company will periodically evaluate
the carrying value of long-lived assets to be held and used, including but not limited to, mineral properties, mine tailings, mine
dumps, capital assets and intangible assets, when events and circumstances warrant such a review and at least annually. The carrying
value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds
the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that
fair values are reduced for the cost to dispose.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
During the period ended September 30, 2016
and through December 7, 2016, there were several new accounting pronouncements issued by the Financial Accounting Standards Board.
Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the
adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial
statements.
NOTE 3 –SHEA MILLING AND MINING
ASSETS
On March 15, 2011, the Company entered
into an exchange agreement by and between the Company, Shea Mining, Afignis, LLC, Leslie Lucas Partners, LLC, Wits Basin and Alfred
A. Rapetti (the “Shea Exchange Agreement”) whereby the Company acquired certain assets from Shea Mining, which assets
include those located in Tonopah financed through a note payable assigned to the Company, mine dumps, a property lease and a contract
agreement in exchange for 35,000,000 shares of our unregistered shares. The Shea Exchange Agreement did not include any operable
toll milling equipment, employees or operational processes and therefore has been accounted for as a purchase of a group of assets.
The Company completed the Shea Exchange Agreement to acquire the Shea assets and develop a toll milling services business of precious
minerals.
Pursuant to the assignment of a note payable,
the Company executed an Assignment and Assumption of Loan Documents and Loan Modification Agreement, by and between us, Shea Mining
and NJB Mining, Inc. (the “Loan Modification Agreement”), dated March 15, 2011, for those assets located in Tonopah,
Nevada (“Tonopah”), consisting of land, buildings, mining tailings, a dormant milling facility, abandoned milling equipment
and water permits. The land encompasses 1,186 deeded acres, one of the largest private land holdings in Esmeralda County, Nevada.
An estimated 2,200,000 tons of tailings known as the Millers Tailings from the historic gold rush of Goldfield and Tonopah, Nevada
sits on approximately 334 acres of this land. The Company has not processed any of these tailings and has no intention to do so
in the near future.
The Tonopah property was subject to an
existing $2,500,000 first deed of trust, which was in default at the time of the Shea Exchange Agreement and included accrued interest
of $375,645, which was also assumed in the transaction. As part of the assignment, NJB Mining, Inc. (“NJB”) modified
the related note to allow the Company until May 14, 2011 to refinance this mortgage, which was subsequently extended numerous times.
As of August 31, 2011, the Company was still in default under the terms of the Loan Modification Agreement, and therefore entered
into a forbearance agreement with NJB, (the “NJB Forbearance Agreement”), in which NJB agreed to forbear from initiating
legal proceedings, including forbearance of the deed of trust and enforcement of its collection remedies. The NJB Forbearance Agreement
further provided for additional extensions up through December 9, 2011. On December 9, 2011, Pure Path Capital Management Company,
LLC (“Pure Path”) purchased the Loan Modification Agreement and the NJB Forbearance Agreement directly from NJB. On
December 21, 2011, we entered into an amended and restated forbearance agreement with Pure Path (the “A&R Forbearance”),
whereby Pure Path extended the provisions of the NJB Forbearance Agreement. Pure Path provided an additional extension to stay
any action of the A&R Forbearance until June 8, 2012, on which date, if not paid or another agreement was not executed, the
Company would be required to issue 5,000,000 shares of its common stock to Pure Path; such extension was provided without additional
consideration. The Company did not pay the balance of the mortgage on June 8, 2012 and pursuant to the terms of the A&R Forbearance
Agreement, the Company was required to issue 5,000,000 shares to Pure Path. The 5,000,000 shares were approved for issuance by
the Board of Directors on October 9, 2012 and were issued to Pure Path on December 6, 2012. Pure Path provided additional extensions
to stay any action of the Forbearance Agreement until August 31, 2013; such extensions were provided without additional consideration.
On October 10, 2013, the Company entered into a Settlement and Release Agreement (the “Agreement”) with Pure Path.
Pursuant to the Agreement, Pure Path relinquished the rights and obligations owed to it and agreed to forbear collection remedies
and legal proceedings against the Company including foreclosure on the Deed of Trust. In connection with the settlement and release
of various debts of approximately $1,500,000, consulting fees owed by the Company, and relinquishment of rights by Pure Path, the
Company issued 27,000,000 restricted shares and a convertible promissory note for up to $2,500,000 with a principal amount on the
date of issuance of $1,933,345 bearing interest of 8% per year for the amounts owed under the Pure Path Agreements.
In connection with the Shea Exchange Agreement,
the Company was also assigned the ownership of approximately a six square mile section of mine dump material in Manhattan, Nevada
(“Manhattan”). The Company has not disturbed, moved or processed any of this material and currently has no intention
to do so.
The other assets the Company acquired consisted
of a property lease, which allowed the use of an assay lab property and the associated water permits, (with a right to purchase
for $6,000,000) and a contract agreement, which allowed the Company use of processing permits, located in Amargosa Valley, Nevada
(“Amargosa”). The Company paid a monthly base rent of $17,500 on this lease and $5,000 monthly on the contract agreement.
In January 2012, the landlord of the Amargosa lease caused to have served a five Day Notice To Pay Rent Or Quit due to default
in the monthly $17,500 lease payments. The Company began immediate communications with the landlord, which resulted in a delay
of further actions by the landlord to pursue any remedies. Then on February 9, 2012, the landlord caused to have served an Order
For Summary Eviction (“Eviction”) due to continued default in lease payments. Effective with the Eviction, a total
of $112,500 in lease and contract payments remain unpaid as well as $10,500 in late fees required pursuant to the terms of the
lease. On February 10, 2012, the Beatty County Sheriff completed the Eviction at Amargosa and the Company as such, no longer has
access to the assay lab or permits at Amargosa. As a result, all remaining equipment at Amargosa with an aggregate value of $40,925
was written off as impaired.
Pursuant to the Shea Exchange Agreement,
the Company issued a total of 35,000,000 shares of our common stock to the equity holders of Shea Mining in exchange for certain
of their assets, resulting in those holders owning an ownership interest of approximately 87% of our then currently outstanding
common stock (approximately 56% ownership interest on a fully diluted basis). Alfred A. Rapetti, then a member of our Board of
Directors and our former Chief Executive Officer, was granted an irrevocable voting proxy for half of the shares issued to the
Shea Mining equity holders, which continues until the affected shares are publicly sold after a period of at least nine months,
and thereafter in accordance with all applicable securities laws. In August 2011, these rights were transferred to Blair Mielke,
a former director of the Company. All such voting rights have since been canceled by the owners or through a transfer of ownership.
The Company also agreed to indemnify Shea Mining from any liabilities arising after March 15, 2011 out of the Loan Modification
Agreement or the loan agreements.
The purchase consideration of the assets
acquired was calculated as follows:
Issuance of 35,000,000 shares of common stock with an estimated fair value of $0.89 per share (closing sales price on March 15, 2011)
|
|
$
|
31,150,000
|
|
Cash consideration
|
|
|
700,000
|
|
Assumption of NJB Mining mortgage
|
|
|
2,500,000
|
|
Assumption of accrued interest and other liabilities
|
|
|
463,184
|
|
Legal costs (includes issuance of 100,000 shares of common stock valued at $89,000)
|
|
|
205,258
|
|
Other direct expenses incurred in connection with the Shea Exchange Agreement
|
|
|
140,985
|
|
|
|
$
|
35,159,427
|
|
In conformity with accounting principles
generally accepted in the United States of America, cost of acquiring a group of assets is allocated to the individual assets within
the group based on the relative fair values of the individual assets.
The table below sets forth the final purchase
price allocation. The fair value of the mineral properties and property and equipment was determined based on level 3 inputs using
cost and market value approaches.
Tonopah mine tailings
|
|
$
|
24,888,252
|
|
Tonopah dormant milling facility
|
|
|
8,062,875
|
|
Tonopah land
|
|
|
1,760,000
|
|
Tonopah water rights
|
|
|
348,300
|
|
Manhattan mine dumps
|
|
|
100,000
|
|
Total
|
|
$
|
35,159,427
|
|
Simultaneous with these transactions, pursuant
to the Shea Exchange Agreement, Wits Basin exchanged 19,713,544 shares of the Company’s common stock it held for 10,000,000
shares of our Series A Preferred Stock. The Series A Preferred Stock has a liquidation preference of $10,000,000, payable only
upon certain liquidity or triggering events. Additional details regarding the Series A Preferred Stock can be found below in “Shareholders
Equity”. Additionally, the Company obtained the right to transfer the entire interest and related debt of the Bates-Hunter
Mine, at any time prior to June 13, 2011, to Wits Basin in exchange for the cancellation of a promissory note issued by Hunter
Bates payable in favor of Wits Basin in the approximate amount of $2,500,000. On April 29, 2011, our Board of Directors approved
this transfer.
Management analyzed the Shea Mining and
Milling assets and determined that the Tonopah mine tailings of $24,888,252, Tonopah dormant milling facility of $8,062,875 and
Manhattan mine dumps of $100,000 were fully impaired and recorded an impairment of $33,051,127 and reduced the net carrying value
of the Miller’s Landing assets to $2,108,300.
The Company does not conduct any mining
activity.
NOTE 4 – ASSET HELD FOR SALE
During the year ended December 31, 2015
the Company determined that certain equipment with a historic cost of $2,020,415 had a fair value of $996,643 and was no longer
required. The Company evaluated this event using the guidance provided by ASC 360-10 “
Property, Plant and Equipment –
Impairment or disposal of long-life assets
” and concluded an impairment of machinery and equipment of $1,023,772 was
required. The Company negotiated with the Vendor that originally sold the equipment to the Company to accept such certain equipment
held for sale in full settlement of the Vendor’s Long-Term Trade Payable. On February 23, 2016 an auction was held in which
$222,597 of other equipment was sold for $56,500. The net proceeds from this sale of $37,821 were paid to a former employee for
past compensation. The Company is negotiating the sale of additional equipment with a fair value of $12,000.
NOTE 5 – PROPERTY, PLANT AND
EQUIPMENT
The Company is preparing the Tonopah property
site for the construction of a permitted custom processing toll milling facility including grading the land, installing fencing
and working with contractors for our 21,875 square foot building and servicing and drilling various wells for our future operations.
Components of our property, plant and equipment
are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Equipment
|
|
$
|
21,000
|
|
|
$
|
21,000
|
|
Construction in Progress
|
|
|
1,775,224
|
|
|
|
1,775,224
|
|
Less accumulated depreciation
|
|
|
(21,000
|
)
|
|
|
(21,000
|
)
|
|
|
$
|
1,775,224
|
|
|
$
|
1,775,224
|
|
NOTE 6 – CONVERTIBLE NOTES
PAYABLE
Between January 22, 2016 and March 31,
2016 the Company issued Convertible Promissory Notes totaling $160,000. The Convertible promissory notes accrue interest at 8%
and mature 2 years from the date of issue. At the option of the holder the Convertible Promissory Notes convert into shares of
the Company’s Common Stock. The $55,000 convertible promissory note is convertible at $0.021 per share based on the ninety
day VWAP ending on the date of funding, the $30,000 convertible promissory note is convertible at $0.05 per share based on the
ninety day VWAP ending on the date of funding, and the $75,000 convertible promissory note is convertible at $0.05 per share based
on a fifty percent discount to the closing sale price on the last trading day immediately preceding the issue date. The Company
then analyzed the conversion under ASC 470-20
Debt with conversion and other options
for consideration of a conversion feature.
The Company recorded a discount for the intrinsic value of the conversion feature of $160,000 and will amortize this debt discount
over the term of the notes.
On July 22, 2016 the convertible promissory
notes payable totaling $160,000 and accrued interest of $4,919 were converted into 4,879,067 shares of restricted common stock.
The Company
issued a convertible promissory note in the principal amount of $60,000 on August 1, 2016. The note is due two years after issuance,
accrues interest at 8% per annum and is convertible into shares of common stock at a price of $0.06 per share. The Company then
analyzed the conversion under ASC 470-20
Debt with conversion and other options
for consideration of a conversion feature.
The Company recorded a discount for the intrinsic value of the conversion feature of $60,000 and will amortize this debt discount
over the term of the note.
The following table summarizes the Company’s
remaining convertible promissory notes (convertible into common stock):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible notes net of unamortized discount of $35,068 at September 30, 2016; interest rate of 8%;
|
|
$
|
24,932
|
|
|
$
|
-
|
|
Convertible promissory notes net of unamortized discount of $0 at December 31, 2014; interest rate of 6%; accrued interest of $36,665 at December 31, 2013 and all of these Notes are past due and original terms apply in the default period.
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Less current portion of Convertible Notes Payable
|
|
|
(175,000
|
)
|
|
|
(175,000
|
)
|
|
|
$
|
24,932
|
|
|
$
|
-
|
|
NOTE 7 – PROMISSORY NOTES PAYABLE
- RELATED PARTY
The following table summarizes the Company’s
notes payable related party:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Promissory note issued on February 11, 2015, in the principal amount of up to $750,000 with tranches received as follows: $200,000 on February 11, 2015; $48,000 on February 13, 2015; $50,000 on April 13, 2015; $150,000 on July 31, 2015, $2,500 on October 20, 2015, $12,000 on October 29, 2015 and $15,000 on November 4, 2015; the note has a stated interest rate of 8%; with a maturity of 1 year from the date of the tranche.
|
|
$
|
477,500
|
|
|
$
|
477,500
|
|
Less discount
|
|
|
(-
|
)
|
|
|
(11,577
|
)
|
Totals
|
|
$
|
477,500
|
|
|
$
|
465,923
|
|
On February 11, 2015, the Company issued
an unsecured promissory note to Tina Gregerson Family Properties, LLC, an entity controlled by a officer and director of the Company.
The Note for up to $750,000 will be provided in tranches. Maturity of each tranche is one year from the date of receipt. Interest
will accrue at 8% per annum on each tranche. As consideration, the Company agreed to issue common stock purchase warrants for the
purchase of up to 250,000 shares of common stock exercisable for seven years at $1.23 per share. The Company then analyzed the
warrant under ASC 470-20-25
Debt with conversion and other options
for consideration of a warrants issue. The Company recorded
a discount from the relative fair value of the warrants of $116,560. The Company valued the warrants using the Black-Scholes option
pricing model with the following assumptions: stock price on the measurement date of $1.25; warrant term of 7 years; expected volatility
of 75%; and discount rate of 1.83% and accounted for them as debt discount, which will be amortized over the term of the loan.
NOTE 8 – SHAREHOLDERS’
EQUITY
Preferred Stock
Series A Preferred Stock
Simultaneous with the Shea Exchange Agreement,
Wits Basin exchanged 19,713,544 shares of our common stock it held for 10,000,000 shares ($.001 par value each) of “Series
A Preferred Stock” with an original issue price of $1.00 per share.
The Company entered
into an Agreement on July 29, 2016 with the holder of the Series A Preferred Stock, Wits Basin Precious Minerals, Inc., (“Wits”)
and Wits’ secured creditor regarding exchange options for the Series A Preferred Stock. Under the terms of the Agreement,
upon the occurrence of a Triggering Event (as defined below), the holders of the Preferred Stock will receive the corresponding
compensation, the “Triggering Events” and their corresponding compensation are set forth below:
Liquidation Rights, Stated Value and
Redemption
. The Series A Preferred Stock has a stated value of Ten Million Dollars ($10,000,000) (referred to herein as “Stated
Value”), payable only upon certain events.
(a) Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of
the assets of the Corporation shall be distributed, either in cash or in kind, first pro rata to the holders of the Series A Preferred
Stock in an amount equal to the Stated Value (as described below); then, to any other series of Preferred Stock, until an amount
to be determined by a resolution of the Board of Directors prior to issuances of such Preferred Stock, has been distributed per
share, and, then, the remainder pro rata to the holders of the Common Stock.
(b) Upon the occurrence of a Triggering
Event (as defined below), the holders of the Preferred Stock will receive the corresponding compensation, The “Triggering
Events” and their corresponding compensation are set forth below:
(1) If either
of the following occur:
(i) the Corporation
receives proceeds of $10,000,000 or more in a cash offering; OR
(ii) the Corporation’s
Common Stock trades at $3.00 or more (with proportionate adjustments for stock splits) for 90 consecutive trading days;
then all of the
10,000,000 shares of the Preferred Stock will be exchanged for 5,000,000 shares of Common Stock.
(2) If the Corporation
has an average market capitalization (calculated by adding the value of all outstanding shares of Common Stock valued at the Corporation’s
closing sale price on the Over the Counter Markets (or other applicable exchange) (the “Market”) of $200,000,000 or
more over any consecutive 95 day period following the effective date of this agreement and the effective date of any required duly
authorized amendment to the Standard’s Articles of Incorporation, the terms of the Preferred Stock and the subsequent consent
of the holder’s secured creditor to the final form and terms of such amendment, and items (1)(i) or (1)(ii) of Section (b)
have not been met, then the Corporation has the right to:
(A) issue the
number of shares of Common Stock equal to the Stated Value using the average closing sale price of the Common Stock on the Over
the Counter Markets of the prior 15 trading days from the date of the notice. The Corporation will provide 10 days’ prior
written notice to the holder and any known secured party of such holder of the Series A Stock of its intention to proceed with
this option; or
(B) issue a portion
of the Stated Value in shares of Common Stock based on the valuation formula in 3(b)(2)(A) and pay the remaining Stated Value in
cash.
If this Section
(3)(b)(2) is triggered, the Corporation has three years to choose option Section (3)(b)(2)(A) or (B) and pay the Stated Value.
The Corporation has 60 days from the date of notice of its election to pay under either Section (3)(b)(2)(A) or (B).
Upon payment of
the Stated Value, the Series A Shares will be retired.
(c) If Section
(3)(b)(2) is triggered and the Corporation fails to pay the Stated Value within the three year time frame, the Corporation will
take all necessary action to return the Series A Preferred Shares in their original form (containing all original terms and conditions)
to the holder with the exception that the Stated Value will be increased to $10,100,000 upon delivery and the Corporation will
lose the exchange options provided in Section (3)(b).
The previous terms
of the Series A Preferred Stock would have required the Company to make a payment of $10,000,000 upon the Company having an average
market capitalization of $200,000,000. This Agreement gives the Company additional payment options and allows for the payment to
be made completely or partially in common shares, depending on the Triggering Event.
The Company issued
five million shares of restricted common stock that are being held in escrow pending a Series A Preferred Stock Triggering Event.
The Company analyzed the event under ASC
470-20
Debt with conversion and other options
for consideration of a common stock. The Company believe that common stock
in escrow should not be recognized in the financial statements as Wits does not have control or rights to the common shares held
in escrow until the Triggering Event.
Series B Preferred Stock
There are no shares of Series B Preferred
Stock issued and outstanding. The class of stock has been retired.
On April 11, 2016 the Company and Pure Path Capital Management
LLC, a related party, executed an addendum removing Pure Path’s ability to convert its note into shares of Series B Preferred
Stock. Subsequently, the Company retired and cancelled the entire class of Series B Preferred Stock, which was never issued or
outstanding and such class is no longer available for issuance.
Common Stock
On July 22, 2016 three convertible promissory
notes payable totaling $160,000 and accrued interest of $4,919 were converted into 4,879,067 shares of restricted common stock.
Common Stock Subscribed
On August 17, 2016 the company received
a subscription agreement and $20,000 for 275,028 shares of the Company common stock, as of September 30, 2016 the shares were not
issued. The shares were issued on December 13, 2016.
Option Grants
2010 Plan
The Company had one stock option plan:
the 2010 Stock Incentive Plan, as amended (the “2010 Plan”). Stock options, stock appreciation rights, restricted stock
and other stock and cash awards may be granted under the Plan. In general, options vest over a period ranging from immediate vesting
to five years and expire 10 years from the date of grant. Effective January 21, 2011, the Company’s Board of Directors (the
“Board”) authorized an amendment to the 2010 Stock Incentive Plan, to increase the number of options available for
granting under the 2010 Plan from 3,000,000 to 13,500,000 and authorized the Company to file an S-8 Registration Statement with
the U.S. Securities and Exchange Commission (subsequently filed on January 27, 2011) for the registration of the shares available
in the Plan. On March 15, 2011, with the closing of the Shea Exchange Agreement a “change of control” event was deemed
to have occurred and 13,500,000 previously granted stock options vested in full. Effective July 25, 2011, the 2010 Plan was amended
to increase the total shares of stock which may be issued under the 2010 Plan from 13,500,000 to 14,500,000.
The Company has been receiving files from
former officers and attorneys. Upon review of the files, the original 2010 Plan and Board Resolution were located. The 2010 Plan
approved by the Board of Directors on March 22, 2010 authorized 3,000,000 shares of common stock for issuance under the 2010 Plan.
The Board of Directors voted to increase the number of shares available under the 2010 Plan on January 21, 2011. Section 9.11 of
the 2010 Plan as approved by the Board states:
9.11 Amendment of the Plan. The Board
of Directors may amend or discontinue the Plan at any time. However, no such amendment or discontinuance shall adversely change
or impair, without the consent of the recipient, an Incentive previously granted. Further, no such amendment shall, without approval
of the stockholders of the Company, (a) increase the maximum number of shares of Common Stock which may be issued to all participants
under the Plan, (b) change or expand the types of Incentives that may be granted under the Plan, (c) change the class of persons
eligible to receive Incentives under the Plan, or (d) materially increase the benefits accruing to participants under the Plan.
Pursuant to the terms of the 2010 Plan,
the stockholders of the Company must approve this increase. As the stockholders of the Company did not approve the increase of
shares available under the 2010 Plan, the increase on January 21, 2011 was not effective.
As of January 21, 2011 the Company had
issued a total of 2,800,000 options to purchase shares under the 2010 Plan and had 200,000 shares remaining authorized and unissued.
However, also on January 21, 2011, the Board of Directors authorized the issuance of 10,500,000 options. This issuance far exceeded
the number of shares available and the excess issuances were not valid. As a correction measure, the Company has divided the 200,000
shares that were available pro-rata between the persons named in the resolution.
The Board of Directors terminated the 2010
option plan on August 23, 2013.
2014 Option Plan
By Board Resolution effective January 27,
2014, the Company adopted a 2014 Stock Incentive Plan (the “Plan”) to compensate employees and consulting groups in
their efforts to enhance the long-term shareholder value of the Company. Pursuant to the Plan, selected persons are offered opportunities
to participate in the Company's growth and success and are encouraged to acquire and maintain stock ownership in the Company. The
Plan grants options to purchase shares of the Company’s common stock vesting at dates beginning on the date of grant and
issuable at chronological or performance increments. The Plan Administrator may also grandfather in existing options granted during
2013. The shareholders approved the 2014 Plan at the 2014 annual meeting.
Under administration by the Compensation
Committee (the “Plan Administrator”), a maximum of 75,000,000 shares of common stock are available for issuance under
the Plan, subject to adjustment from time to time. Awards may be granted under the Plan to officers, directors, employees and consultants
of the Company and as the Plan Administrator selects. The Plan Administrator is authorized, in its sole discretion, to issue options
as incentive stock options, which shall be appropriately designated. The term of each option to purchase common stock of the Company
is established by the Plan Administrator or, if not so established, is 10 years from the grant date.
The Plan Administrator establishes the
time at which each option shall vest and become exercisable. If not established in the instrument evidencing the option, the option
shall vest and become exercisable according to the following schedule: (i) after one year of the participant’s continuous
employment or service with the company or its related corporations, one quarter of the total options will be vested and exercisable;
(ii) after each additional six-month period of continuous service completed thereafter, an additional one eighth of the total options
will be vested and exercisable; and (iii) after four years, 100% of the options will be vested and exercisable. Under the terms
of the Plan, the exercise price for shares shall be paid in cash or check to the Company unless the Plan Administrator determines
otherwise.
The Plan Administrator shall determine
whether the options will continue to be exercisable, and the terms and conditions of such exercise, if a participant ceases to
be employed or provide services to the Company. If not so established in the instrument evidencing such options, any portion of
an option that is not vested and exercisable on the date of termination of the participant’s employment or service relationship
(the “Employment Termination Date”) shall expire on such date. Any portion of an option that is vested and exercisable
on the Employment Termination Date shall expire upon the earliest to occur of: (i) if the participant’s Employment Termination
Date occurs by reason of retirement, disability or death, the one-year anniversary of such Employment Termination Date; (ii) if
the participant’s Employment Termination Date occurs for reasons other than cause, retirement, disability or death, the three-month
anniversary of such Employment Termination Date; or (iii) the last day of the option term. Notwithstanding the foregoing, if the
participant dies after the Employment Termination Date while the Option is otherwise exercisable, the portion of the option that
is vested and exercisable on such Employment Termination Date shall expire upon the earlier to occur of: (a) the last day of the
option term; or (b) the first anniversary of the date of death, unless the Plan Administrator determines otherwise.
If a participant is terminated for cause,
the options shall automatically expire at the time the Company first notifies the participant of the termination. If a participant’s
employment is suspended pending investigation of whether they will be terminated for cause, the participant’s rights under
any option shall be suspended during the period of investigation. Awards granted under the Plan may not be assigned, except, to
the extent permitted by Section 422 of the Internal Revenue Code (the “IRC”), and the Plan Administrator may permit
such assignment, transfer and exercisability, and may permit a participant to designate a beneficiary who may exercise the award
or receive compensation under the award after the participant’s death. Any award permitted to be assigned shall be subject
to the terms and conditions contained in the instrument evidencing the award.
The Plan may only be amended by the Company’s
Board of Directors, as it deems advisable. Shareholder approval shall be required for any amendment to the extent required for
compliance with Section 422 of the IRC, as amended or any applicable law or regulation. The Board may suspend or terminate the
Plan at any time. Incentive stock options may not be granted more than 10 years after the later of the Plan’s adoption by
the Board or the adoption by the Board of any amendment to the Plan that constitutes adoption of a new plan for the purpose of
Section 422 of the IRC. Participants who are residents of California shall be subject to additional terms and conditions until
the Common Stock becomes a publicly traded security, under the California Securities Code.
The Company grandfathered the following
options issued to consultants during the 4
th
quarter of 2013 in to the 2014 Plan:
The Company entered into a Strategic Advisory
Services Agreement with P5, LLC (“P5”) dated effective October 15, 2013, to provide strategic advisory services. As
consideration for such services, the Company granted P5 a total of 17,500,000 options to purchase common stock of the Company,
with 7,500,000 shares available for purchase at an exercise price of $0.65 per share and 10,000,000 shares available for purchase
at an exercise price of $1.25 per share, with a grant term of seven years and subject to a vesting schedule. With respect to the
options to purchase up to 7,500,000 shares at $0.65 per share, 2,500,000 options vest upon each of the following: (i) October 15,
2013 (the “P5 Grant Date”); (ii) 90 days after the P5 Grant Date; and (iii) 180 days after the P5 Grant Date. With
respect to the options to purchase up to 10,000,000 shares at an exercise price of $1.25 per share, 2,500,000 options vest upon
each of the following: April 1, 2014, July 1, 2014, October 1, 2014 and January 1, 2015. As of November 29, 2016, Mr. Ted Ashford,
III is the owner of 13,187,500 of these options pursuant to an agreement between the parties, with such transfer authorized by
the Company.
The Company entered into a Strategic Advisory
Services Agreement with a consultant dated effective October 15, 2013. As consideration for the consultant’s assistance in
expanding the Company’s operations and securing new business arrangements, the Company granted the consultant an aggregate
of 3,500,000 options to purchase common stock of the Company, with 1,500,000 shares available for purchase at an exercise price
of $0.65 per share and 2,000,000 shares available for purchase at an exercise price of $1.25 per share, with a grant term of seven
years and subject to a vesting schedule. With respect to the options to purchase up to 1,500,000 shares at $0.65 per share, 500,000
options vest upon each of the following: (i) October 15, 2013 (the “Consultant Grant Date”); (ii) 90 days after the
Consultant Grant Date; and (iii) 180 days after the Consultant Grant Date. With respect to the options to purchase up to 2,000,000
shares at an exercise price of $1.25 per share, 500,000 options vest upon each of the following: April 1, 2014, July 1, 2014, October
1, 2014 and January 1, 2015.
On December 26, 2013, the Company entered
into a Consulting Services Agreement with LR Advisors, LLC (“LRA”). Pursuant to the terms of the agreement, LRA agreed
to provide the Company advisory services in connection with the Company’s investor relations. As compensation for such services,
LRA was granted a total of 1,500,000 options to purchase common stock of the Company at an exercise price of $1.25 per share, with
a grant term of seven years. The options vested in full upon execution of the agreement.
The Company entered into a Consulting Agreement
with EAS Advisors, LLC (“EAS”) on January 1, 2014, whereby EAS agreed to provide the Company general corporate advice,
guidance and strategic services relating to the Company’s milling assets and the development of mining clients and contacts.
As consideration for such services, the Company granted EAS an aggregate of 2,000,000 options to purchase common stock of the Company,
with 1,000,000 shares available for purchase at an exercise price of $1.25 per share and 1,000,000 shares available for purchase
at an exercise price of $2.25 per share, with a grant term of seven years and subject to a vesting schedule. With respect to the
options to purchase up to 1,000,000 shares at $1.25 per share, 250,000 options vest upon each of the following: (i) January 1,
2014 (the “EAS Grant Date”); (ii) 90 days after the EAS Grant Date; (iii) 180 days after the EAS Grant Date; and (iv)
270 days after the EAS Grant Date. With respect to the options to purchase up to 1,000,000 shares at an exercise price of $2.25
per share, 250,000 options vest upon each of the following: July 1, 2014, October 1, 2014, November 1, 2014 and December 1, 2014.
The Company estimated the fair value of these options of $1,398,584 using the above Black-Scholes pricing model and will amortize
over the vesting term.
On June 18, 2014, the Company granted
250,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a term of seven years to a
legal advisor. The options vested in full on grant.
On June 18, 2014, the Company granted 750,000
options to purchase common stock of the Company at an exercise price of $1.67 per share with a term of seven years to the President
of our Tonopah Custom Processing, Inc. subsidiary. The options vested in full on grant.
On June 18, 2014, the Company granted 1,000,000
options to purchase common stock of the Company at an exercise price of $1.67 per share with a term of seven years to an officer
of the Company. The options vested in full on grant.
On January 16, 2015 the Company’s
Chief Operating Officer was granted 2,250,000 options under the 2014 Plan with an exercise price of $1.15 per share for a term
of seven years. The options shall vest and become exercisable as follows: (i) 750,000 shall vest on the Date of Grant; (ii) 187,500
shall vest on each of the following dates: April 1, 2015, July 1, 2015, October 1, 2015, January 1, 2016, April 1, 2016, July 1,
2016, October 1, 2016 and January 1, 2017. On March 27, 2015 the Company executed an addendum to the Chief Operating Officer’s
employment agreement wherein he agreed to take on additional responsibilities. As consideration, the Company issued an additional
7,000,000 options under the 2014 Plan with an exercise price of $1.00 for a term of seven years. The 7,000,000 options vested in
full on grant.
On April 24, 2015 the Company entered into
an employment agreement with Mr. John Ryan to serve as the Company’s president. Pursuant to the employment agreement, the
Company granted Mr. Ryan 2,500,000 options under the 2014 Plan with an exercise price of $0.92 per share for a term of three years
to Mr. John Ryan its new President. The options shall vest and become exercisable as follows: (i) 100,000 vested on the Date of
Grant; (ii) 150,000 vested on July 24, 2015, (iii) 250,000 shall vest on each of the following dates: October 24, 2015, January
24, 2016 and April 24, 2016, (iv) 750,000 shall vest on achievement of certain performance objectives of tonnage and gold ore concentrate
(v) 750,000 shall vest on achievement of certain performance objectives based on earnings before interest, taxes, depreciation
and amortization. See the Form 8-K filed with the Commission on April 28, 2015. The Company and Mr. Ryan came to a mutual agreement
to terminate this agreement on October 22, 2015. All unvested options are cancelled.
On June 4, 2015 the Company entered into
an employment agreement with Mr. Thomas Loucks to serve as the Company’s Vice President of Corporate Development. Pursuant
to the employment agreement, the Company granted Mr. Loucks 2,500,000 options under the 2014 Plan with an exercise price of $0.90
per share for a term of three years. The options shall vest and become exercisable as follows: (i) 500,000 shall vest on the Date
of Grant; (ii) 500,000 shall vest on each of the following dates: December 4, 2015, June 4, 2016, December 4, 2016 and June 4,
2017. The Company and Mr. Loucks came to a mutual agreement to terminate this agreement on October 22, 2015. All unvested options
are cancelled.
On June 11, 2015 the Company entered into
an employment agreement with Mr. Bobby Cooper to serve as the Company’s Managing Director. Pursuant to the employment agreement,
the Company granted Mr. Cooper 2,500,000 options under the 2014 Plan with an exercise price of $0.80 per share for a term of three
years. The options shall vest and become exercisable as follows: (i) 500,000 shall vest on the Date of Grant; (ii) 500,000 shall
vest on each of the following dates: December 11, 2015, June 11, 2016, December 11, 2016 and June 11, 2017. The Company and Mr.
Cooper came to a mutual agreement to terminate this agreement on October 22, 2015. All unvested options are cancelled.
On July 21, 2015 the Company agreed to
reprice 750,000 options of an officer and director June 18, 2014 with an original exercise price of $1.67 to $0.75 exercise price.
The accounting effect of this resolution is to cancel the previous options and reissue new options with the new exercise price
of $0.75 with vested immediately as all other option terms remained the same and reduced option compensation by $318,270.
The Company uses the Black-Scholes pricing
model as a method for determining the estimated fair value for stock awards. Compensation expense for stock awards is recognized
on a straight-line basis over the vesting period of service awards and for performance-based awards, the Company recognizes the
expense when the performance condition is probable of being met.
In determining the compensation cost of
the stock awards granted during the nine month period ended September 30, 2016 and the year ended December 31, 2015, the fair value
of each grant had been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions
used in these calculations are summarized below:
|
|
|
2016
|
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
—
|
|
|
|
0.084% - 2.08%
|
|
Expected volatility factor
|
|
|
—
|
|
|
|
185% - 305%
|
|
Expected dividend
|
|
|
—
|
|
|
|
—
|
|
Expected option term (years)
|
|
|
—
|
|
|
|
3 - 7
|
|
The Company reviews its current assumptions
on a periodic basis and adjusts them as necessary to ensure an accurate valuation. The risk-free interest rate is based on the
Federal Reserve Board’s constant maturities of the U.S. Treasury bond obligations with terms comparable to the expected life
of the options at their issuance date. The Company uses historical data to estimate expected forfeitures, expected dividend yield,
expected volatility of the Company’s stock and the expected life of the options.
The Company recorded $0 and $11,923,865
related to compensation expense for the nine months ended September 30, 2016 and 2015, respectively. All compensation expense is
included in general and administrative expense. There was no tax benefit from recording this non-cash expense due to our income
tax valuation allowance and due to a portion of the options being incentive stock options. As of September 30, 2016, there was
$0 in unrecognized compensation expense.
The following tables summarize information
about the Company’s stock options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding - December 31, 2014
|
|
|
34,131,842
|
|
|
$
|
0.99
|
|
Granted
|
|
|
17,500,000
|
|
|
|
.90
|
|
Canceled or expired
|
|
|
(16,555,619
|
)
|
|
|
.92
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Options outstanding - December 31, 2015
|
|
|
35,076,223
|
|
|
$
|
0.99
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
(2,500,000
|
)
|
|
|
0.88
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Options outstanding –September 30, 2016
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
Weighted average fair value of options granted during the period ended September 30, 2016
|
|
|
|
|
|
$
|
-
|
|
Weighted average fair value of options granted during the year ended December 31, 2015
|
|
|
|
|
|
$
|
0.90
|
|
A summary of the Company’s non-vested
options at September 30, 2016, and changes during the nine months ended September 30, 2016, is presented below:
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested, beginning of period
|
|
|
1,149,850
|
|
|
$
|
0.90
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
1,149,850
|
|
|
$
|
0.88
|
|
Non-vested, end of period
|
|
|
-
|
|
|
$
|
-
|
|
The following tables summarize information
about stock options outstanding and exercisable at September 30, 2016:
|
|
Options Outstanding at September 30, 2016
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
$0.40 to $0.60
|
|
|
5,276,223
|
|
|
4.1 years
|
|
$
|
0.46
|
|
|
$
|
-
|
|
$0.61 to $1.00
|
|
|
9,800,000
|
|
|
4.0 years
|
|
$
|
0.67
|
|
|
$
|
-
|
|
$1.01 to $1.50
|
|
|
14,500,000
|
|
|
4.1 years
|
|
$
|
1.25
|
|
|
$
|
-
|
|
$1.51 to $2.25
|
|
|
3,000,000
|
|
|
4.6 years
|
|
$
|
1.63
|
|
|
$
|
-
|
|
$0.40 to $2.25
|
|
|
32,576,223
|
|
|
4.1 years
|
|
$
|
0.98
|
|
|
$
|
-
|
|
|
|
Options Exercisable at September 30, 2016
|
|
Range of
Exercise Prices
|
|
Number
Exercisable
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
$0.40 to $0.60
|
|
|
5,276,223
|
|
|
4.1 years
|
|
$
|
0.46
|
|
|
$
|
-
|
|
$0.61 to $1.00
|
|
|
9,800,000
|
|
|
4.0 years
|
|
$
|
0.67
|
|
|
$
|
-
|
|
$1.01 to $1.50
|
|
|
14,500,000
|
|
|
4.1 years
|
|
$
|
1.25
|
|
|
$
|
-
|
|
$1.51 to $2.25
|
|
|
3,000,000
|
|
|
4.6 years
|
|
$
|
1.63
|
|
|
$
|
-
|
|
$0.40 to $2.25
|
|
|
32,576,223
|
|
|
4.1 years
|
|
$
|
0.98
|
|
|
$
|
-
|
|
|
(1)
|
The aggregate intrinsic value in the table represents the difference between the closing stock price on September 30, 2016 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their options on September 30, 2016.
|
Common Stock Purchase Warrants
For warrants granted to non-employees in
exchange for services, we recorded the fair value of the equity instrument using the Black-Scholes pricing model unless the value
of the services is more reliably measurable.
On March 2, 2015, 100,000 warrants to purchase
common stock were exercised at a per share price of $0.89 for a total of $89,000.
On April 23, 2015, 40,000 warrants to purchase
common stock were exercised at a per share price of $0.89 for a total of $35,600.
The Company and Wits Basin executed a Settlement
Agreement on January 22, 2016. Pursuant to the terms of the Settlement Agreement, the Company issued 630,000 warrants to purchase
common stock at an exercise price of $0.70 and 630,000 warrants at an exercise price of $0.30 to investors of Wits Basin. The warrants
are exercisable until December 31, 2018.
The following table summarizes information
about the Company’s stock purchase warrants outstanding at September 30, 2016 and December 31, 2015:
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Range
of
Exercise
Price
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Outstanding at December 31, 2014
|
|
|
5,483,980
|
|
|
$
|
0.79
|
|
|
$
|
0.20
– 2.00
|
|
|
|
4.8 years
|
|
Granted
|
|
|
400,000
|
|
|
$
|
1.24
|
|
|
$
|
1.23 – 1.25
|
|
|
|
|
|
Cancelled or expired
|
|
|
(728,340
|
)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
|
|
Exercised
|
|
|
(140,000
|
)
|
|
$
|
0.89
|
|
|
$
|
0.25
– 0.89
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
5,015,640
|
|
|
$
|
0.88
|
|
|
$
|
0.20 – 2.00
|
|
|
|
4.4 years
|
|
Granted
|
|
|
1,260,000
|
|
|
$
|
2.00
|
|
|
$
|
0.30 – 1.25
|
|
|
|
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
6,275,640
|
|
|
$
|
0.86
|
|
|
$
|
0.20 – 2.00
|
|
|
|
4.9 years
|
|
Warrants exercisable at September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
6,275,640
|
|
|
|
|
|
The aggregate intrinsic value of the 6,425,640
outstanding and exercisable warrants at September 30, 2016 was $0. The intrinsic value is the difference between the closing stock
price on September 30, 2016 and the exercise price, multiplied by the number of in-the-money warrants had all warrant holders exercised
their warrants on September 30, 2016.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal Matters
Stephen E.
Flechner v. Standard Metals Processing, Inc.
On April 29, 2014,
Stephen E. Flechner filed suit in the United States District Court for the District of Colorado against Standard Metals Processing,
Inc. alleging that Standard Metals had refused to allow him to exercise stock options granted to him pursuant to a Stock Option
Agreement, dated April 1, 2010, and a second Stock Option Agreement, dated January 21, 2011. On June 12, 2014, Standard Metals
filed an Answer and a Motion to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for
the Northern District of Alabama, Middle Division . On January 16, 2015, Standard Metals filed a Motion for Summary Judgment. On
January 23, 2015, the Court issued an Order granting in part and denying in part Standard Metals’ Motion to Dismiss or, Alternatively,
to Stay or Transfer the action to the United States District Court for the Northern District of Alabama, Middle Division. The Court
in its Order stayed further proceedings in Colorado pending the issuance of orders by the Alabama court. Thereafter, on January
26, 2015, the Court issued an Order vacating the February 20, 2015 Trial Preparation Conference and the March 9, 2015 Bench Trial.
On March 23, 2015, the Court issued an Order denying Standard Metals’ Motion for Summary Judgment. On March 30, 2015, Flechner
filed a Motion to Lift the Stay. On March 31, 2015, the Court issued an Order granting Flechner’s Motion to Lift the Stay.
On April 6, 2015, the Court issued an Order scheduling a Bench Trial for July 29, 2015. On April 9, 2015, Flechner filed a Motion
for Reconsideration of the Court’s March 23, 2015 Order Denying Flechner’s Motion to Enforce the Confidential Settlement
Agreement to Settle Certain Issues. On May 1, 2015, the Court issued an Order Granting Flechner’s Motion to Enforce the Confidential
Settlement Agreement to Settle Certain Issues. On August 12, 2015 the United Stated District Court for the District of Colorado
issued a judgment in favor of Stephen E. Flechner for $2,157,000. An amended final judgment was ordered in adjudication of the
Complaint by the U.S. District Court for the District of Colorado (the “Court”) on August 28, 2015 in favor of Flechner
in the amount of $2,157,000, plus interest through the date of judgment of $235,246, plus interest of $472.76/day from August 28,
2015 until paid in full. The Company, in good faith anticipation of a settlement did not appeal the judgment and therefore, the
Company’s notice of appeal was dismissed on November 17, 2015. This judgment is now non-appealable. The Company and Flechner
entered into a Settlement Agreement on November 24, 2015, wherein Flechner will receive $450,000 in cash payment and $250,000 in
installment payments. As of the date of this filing, the Company has not yet made a payment and has recorded an accrual in the
amount of judgment.
NOTE 10 – RELATED PARTY TRANSACTIONS
Tina Gregerson/Tina Gregerson Family
Properties, LLC
On February 11, 2015, the Company issued
an unsecured promissory note (the “Note”) to Tina Gregerson Family Properties, LLC, an entity controlled by a director
of the Company. The Note for up to $750,000 will be provided in tranches. Maturity of each tranche is one year from the date of
receipt. Interest will accrue at 8% per annum on each tranche. As consideration, the Company agreed to issue common stock purchase
warrants for the purchase of up to 250,000 shares of common stock exercisable for seven years at $1.23 per share. Under the terms
of the Note, the Company received $200,000 on February 11, 2015, $48,000 on February 13, 2015, $50,000 on April 13, 2015, $150,000
on July 31, 2015, $2,500 on October 20, 2015, $12,000 on October 29, 2015 and $15,000 on November 4, 2015.
Pure Path Management Company, LLC
Pure Path Management Company, LLC (“Pure
Path”) is currently the beneficial owner of 19.8% of the outstanding common stock of the Company. On October 10, 2013, the
Company issued 27,000,000 shares of common stock to Pure Path Management Company, LLC to settle $1,500,000 of the note payable
and accrued interest by the Company.
In connection with the assignment of the
Forbearance Agreement, the Parties executed an Agreement in Principle setting forth terms of the Forbearance Agreement (collectively
the “Pure Path Agreements”). Pursuant to the Pure Path Agreements, Pure Path was to receive participation payments
to be received on a quarterly basis for seven years after the final closing at a rate of 5% of adjusted gross revenue as such terms
are defined in the Pure Path Agreements, past and future consulting fees for approximately $1,150,000, collection remedies and
legal proceedings against the Company including foreclosure on the Deed of Trust, registration rights, rights of first refusal,
tag along rights, preemptive rights, exclusive worldwide rights pertaining to financing and joint ventures, and other negative
covenants regarding approval of corporate actions.
Pursuant to the Settlement and Release
Agreement executed October 10, 2013 with the Company, Pure Path relinquished the foregoing rights and obligations owed to it and
agreed to forbear collection remedies and legal proceedings against the Company including foreclosure on the Deed of Trust, and
in connection with the settlement and release of various debts of approximately $1,500,000 and the consulting fees owed by the
Company and relinquishment of rights by Pure Path, the Company issued 27,000,000 restricted shares and a Promissory Note (the “Pure
Path Note”) for an amount of up to $2,500,000 with a beginning principal balance of $1,933,345 bearing interest of 8% per
year for the current balance of the amounts owed under the Pure Path Agreements.
Under the terms of the Pure Path Note,
the Company received $54,590 on February 4, 2015.
On April 11, 2016, the Company and Pure
Path executed an addendum removing Pure Path’s ability to convert its note into shares of Series B Preferred Stock. Subsequently,
the Company retired and cancelled the entire class of Series B Preferred Stock, and such class is no longer available for issuance.
NOTE 11 – EARNINGS (LOSS) PER
SHARE
Basic net loss per common share is computed
by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding during the periods
presented. Diluted net loss per common share is determined using the weighted average number of common shares outstanding during
the periods presented, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued
upon exercise of options, warrants and conversion of convertible debt. In periods where losses are reported, the weighted average
number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
At September 30, 2016, the weighted
average shares from stock options of 32,576,223, warrants of 6,275,640 and Convertible Promissory note shares of 1,000,000
were excluded from the diluted weighted average common share calculation due to the antidilutive effect such shares would
have on net loss per common share. The 5,000,000 shares in escrow pending the exchange for the Series A Preferred Stock are
considered issued but not outstanding.
NOTE 12 – SUBSEQUENT EVENTS
Effective November
21, 2016, Tina Gregerson resigned as CEO. Effective December 13, 2016, J. Bryan Read was appointed to the existing vacancy seat
on the Board of Directors to serve until approved at the next shareholder meeting and as Interim CEO.
J. Bryan Read, Lt. Col, US Army (R)
Mr. Read honorably served as an officer
and a commander in the United States Army. He has over twenty years professional military experience in leadership management,
military logistics, training operations, missile defense, property management, diplomacy, and supply systems. He has commanded
military organizations from platoon up through battalion level. As a military attaché assigned to the State Department and
an overseas United States Embassy in the Former Soviet Union, he regularly planned and conducted meetings with high level foreign
government officials and ministries on behalf of the United States involving important defense and commerce related matters. He
has served as the Russian language Interpreter and team leader for the U.S. Humanitarian Special Operations Mission to Semipalatinsk,
Kazakhstan. Additionally, he was a professor at the United States Military Academy at West Point.
Bryan has served as a business development
executive officer and independent business development consultant for variety of companies and industries. He has introduced businesses
to private and government sector opportunities by utilizing operations research, analytics, and networking. The goal was to present
revenue generating opportunities as well as merger and acquisition opportunities. His duties included negotiating terms of agreement
for client projects, analyzing business models, developing marketing strategies, and reviewing P&L. His clients’ products
and services have included the following industries: renewable energy, mining, precious metals processing, B2B connectivity/management
services, e-mail encryption technology software, EVM software, steel manufacturing technology, construction, antennas, smart grid
technologies, computer simulations, and sports recovery nutritional products. He has also served as a business development liaison
between Bio-Pharmaceutical companies in order to coordinate clinical research for FDA approval. He has regularly organized and
facilitated meetings for clients with fortune 500 senior management, government agencies, and congressional staffs. His efforts
have a proven track record of producing contracts, teaming arrangements, alliances, and reseller agreements.
As a member of the American Council of
Renewable Energy (ACORE), Mr. Read has served on the Power and Infrastructure Committee and the Defense Initiatives Energy Committee.
These committee positions allowed him to regularly provide input to elected officials on future energy policy. He regularly attends
national energy conferences to connect and share ideas with public and private leaders in the energy community. Bryan is also the
President and Founder of Keystone General Contracting and Technologies LLC: a Veteran Owned Small Business.
Mr. Read has a master’s degree from
Cornell University and is a graduate of the United States Army Command and General Staff College. He was a Senior Fellow at the
George C. Marshall European Center for Security Studies in Garmisch, Germany. He earned his bachelor’s degree from the University
of Alabama.
Midwest Settlement
The parties to
the Midwest lawsuit executed an addendum to the Settlement Agreement. The Addendum modified the terms of the Settlement by providing
a payment schedule with $25,000 due on December 15, 2016 and $10,000 due every 60 days thereafter with a balloon payment of $60,000
due on December 15, 2017. If a payment is more than seven days late, the Company will pay an additional $100,000 penalty. The shares
subject to the lock up agreement will be released and Midwest will file a Release of Judgment for all claims against the Company
and any affiliated parties.
Promissory
Note
On December 13,
2016, the Company issued a promissory note for $65,000 to an unrelated third party. The note was funded on November 28, 2016, is
convertible at $0.02 per share based on a discount to the lowest trading price in the previous five trading days and accrues interest
at 6%. The note matures one year from the date of issuance.