The accompanying footnotes are in integral part
of these unaudited condensed consolidated financial statements.
Notes
to Condensed Consolidated Financial Statements
For the Three and Six Months Ended June
30, 2017
(unaudited)
NOTE 1 - OVERVIEW
Standard Metals Processing,
Inc. (“we,” “us,” “our,” “Standard Metals” or the “Company”) 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 six months ended June 30, 2017, the Company incurred losses from operations of approximately
$153,000. At June 30, 2017, the Company had an accumulated deficit of approximately $102,912,000 and a working capital deficit
of approximately $9,467,000. 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 six months ended June 30, 2017, the Company
received net cash proceeds of $130,000 from the convertible promissory notes payable. Subsequent to June 30, 2017, the Company
received approximately an additional $93,000. 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, 2016 filed
April 14, 2017. 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 six months ended June 30,
2017 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 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
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue
from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities
beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of
either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09
will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined
the effect of the standard on its ongoing financial reporting, however as there have been no revenues to date, the Company does
not expect the adoption to have a material impact.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases
(Topic 842) The standard requires all leases that have a term of over 12 months to be
recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured
at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement
will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue
to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be
disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense
(for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1,
2019 and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the
timing of adoption and the potential impact of this standard, but as the Company does not have any significant leases, it does
not expect it to have a material impact on its financial position or results of operations.
During the period ended
June 30, 2017 and through March 15, 2018, 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.
Management’s Evaluation of Subsequent
Events
The Company evaluates
events that have occurred after the balance sheet date of June 30, 2017, through the date which the condensed consolidated financial
statements were issued. Based upon the review, other than described in Note 10 – Subsequent Events, the Company did
not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed
consolidated financial statements.
NOTE 3 – 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. The Company does not conduct any mining activity.
Components of our property,
plant and equipment are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
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 4 – CONVERTIBLE NOTES PAYABLE
On
June 22, 2017, the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding. The note is convertible into shares of common stock at $0.065 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in Accounting Standards Codification (“ASC”) 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The Company analyzed the conversion feature under ASC 470-20, “
Debt with conversion and other
options
”, and based on the market price of the common stock of the Company on the date of funding as compared to the
conversion price, determined there was a $4,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. No amortization was recognized in the three and six months ended June 30, 2017
as the amount was insignificant.
On
March 14, 2017, the Company received cash proceeds of $60,000, and on April 18, 2017, the Company issued a convertible promissory
note in exchange for the cash proceeds. The promissory note accrues interest at 6% per annum and is due one year from the date
of issuance. The note is convertible into shares of common stock at $0.075 per share, with no adjustments to the conversion price.
The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception in
ASC 815-10-15-74(a) and would not be bifurcated and accounted for separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20 and based on the market price of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was no beneficial conversion feature to recognize.
On
February 15, 2017 and March 1, 2017, the Company issued convertible promissory notes in the aggregate principal amount of $60,000.
The notes are due one year after issuance, accrue interest at 6% per annum and are convertible into shares of common stock at a
price of $0.02 per share. The Company then analyzed the conversion under ASC 470-20
Debt with conversion and other options
for consideration of a beneficial conversion feature. The Company recorded a discount for the intrinsic value of the conversion
feature of $60,000, which was to be amortized over the term of the note. On March 7, 2017, the convertible promissory notes payable,
totaling $60,174 including accrued interest, were converted into 3,008,712 shares of restricted common stock and the remaining
debt discount of $58,164 was recorded as amortization of debt discount.
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 (volume weighted average price) 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 matures on August 1,
2018, 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. Amortization expense of $7,500 and $15,000 was recognized during the three and six months ended June
30, 2017, respectively, with a remaining unamortized debt discount balance of $33,610 at June 30, 2017.
The
Company issued a convertible promissory note in the principal amount of $65,000 effective on November 28, 2016. The note is due
one year after issuance, accrues interest at 6% 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 $65,000 and will
amortize this debt discount over the term of the note. On December 28, 2016 the convertible promissory note payable totaling $65,000
and accrued interest of $353 were converted into 3,262,838 shares of restricted common stock.
The Company issued three
convertible promissory notes for a total of $175,000 in 2011 and 2012, which bear interest at 6%, which are convertible into common
shares of the Company at a conversion price of $0.50. The convertible promissory notes are past due, and the original terms apply
in the default period. During the six months ended June 30, 2017 interest expense was $5,200, and accrued interest on these notes
was $62,872.
NOTE 5 – PROMISSORY NOTES PAYABLE
- RELATED PARTY
On February 11, 2015,
the Company issued an unsecured promissory note to Tina Gregerson Family Properties, LLC, an entity controlled by a former director
of the Company. The Note for up to $750,000 was 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.
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. The Note is in
default.
NOTE 6 – SHAREHOLDERS’ EQUITY
Common Stock - Convertible promissory
notes conversion
On March 7, 2017, convertible
promissory notes payable and accrued interest totaling $60,174 were converted into 3,008,712 shares of restricted common stock.
(Note 4)
Option Grants
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.
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
no compensation expense for the three and six months ended June 30, 2017 and 2016. As of June 30, 2017, 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, 2015
|
|
|
35,076,223
|
|
|
$
|
0.99
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Canceled or expired
|
|
|
(2,500,000
|
)
|
|
|
0.88
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding - December 31, 2016
|
|
|
32,576,223
|
|
|
$
|
0.99
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Canceled or expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding – June 30, 2017
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period ended June 30, 2017
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2016
|
|
|
|
|
|
$
|
—
|
|
The following table
summarizes information about stock options outstanding and exercisable at June 30, 2017:
|
|
|
Options Outstanding and exercisable at June 30, 2017
|
|
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
|
|
|
3.4 years
|
|
$
|
0.46
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
|
9,800,000
|
|
|
3.3 years
|
|
$
|
0.67
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
|
14,500,000
|
|
|
3.3 years
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
|
3,000,000
|
|
|
3.8 years
|
|
$
|
1.63
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
|
32,576,223
|
|
|
3.4 years
|
|
$
|
0.98
|
|
|
$
|
—
|
|
|
(1)
|
The aggregate intrinsic value in the table represents the difference between the closing stock price on June 30, 2017 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 June 30, 2017.
|
Common Stock Purchase Warrants
For warrants granted
to non-employees in exchange for services, the Company records the fair value of the equity instrument using the Black-Scholes
pricing model unless the value of the services is more reliably measurable.
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 June 30, 2017 and December 31, 2016:
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Range of
Exercise
Price
|
|
|
Weighted
Remaining
Contractual
Life
|
|
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 December 31, 2016
|
|
|
6,275,640
|
|
|
$
|
0.86
|
|
|
$
|
0.20
– 2.00
|
|
|
3.2 years
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
6,275,640
|
|
|
$
|
0.80
|
|
|
$
|
0.20
- 2.00
|
|
|
2.6 years
|
|
Warrants exercisable at June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
6,425,640
|
|
|
|
|
The aggregate intrinsic
value of the 6,275,640 outstanding and exercisable warrants at June 30, 2017 was $0. The intrinsic value is the difference between
the closing stock price on June 30, 2017 and the exercise price, multiplied by the number of in-the-money warrants, had all warrant
holders exercised their warrants on June 30, 2017.
NOTE 7 – 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. Standard Metals Processing, Inc. intends to continue to vigorously defend against
claims by Steven E. Flechner. 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. The Company and Flechner are in negotiations to
modify the settlement.
Midwest Investment Partners, LLC v. Standard
Metals Processing, Inc.
On
March 17, 2014, Midwest Investment Partners, LLC filed suit against Standard Metals Processing, Inc. in
Vanderburgh County Superior
Court, Vanderburgh, Indiana,
alleging that Standard Metals had wrongfully refused to remove a transfer restriction on Midwest’s
shares of Standard Metals stock pursuant to Rule 144 of the Securities Act. On March 27, 2014, Standard Metals filed a Notice of
Removal of a Civil Action requesting that the case proceed in the
United States District Court for the Southern District of
Indiana, Evansville Division
as an action properly removed pursuant to 28 U.S.C. §§ 1441 (a) and (b). On April 15,
2014, Standard Metals served and filed its Answer and Affirmative Defenses to Plaintiff’s Complaint and Demand for Jury Trial.
On November 26, 2014, Standard Metals filed a Motion for Summary Judgment. On February 11, 2015, the Court issued an Order granting
Standard Metals’ Motion for Summary Judgment and entered a Final Judgment in favor of Standard Metals and terminating the
action. During the six months ended June 30, 2017 the Company paid $55,000 towards the judgment.
NOTE 8 – RELATED PARTY TRANSACTIONS
Pure Path Management Company, LLC
Pure Path Management
Company, LLC (“Pure Path”) is currently the beneficial owner of 21% 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 owed 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, such class is no longer available
for issuance. Subsequently, the Company retired and cancelled the entire class of Series B Preferred Stock, such class is no longer
available for issuance.
NOTE 9 – 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 June 30, 2017, the
weighted average shares from stock options of 32,576,223, warrants of 6,275,640 and Convertible Promissory note shares of approximately
2,304,000 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.
NOTE 10 – SUBSEQUENT EVENTS
Convertible Promissory Notes
On
October 17, 2017, the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding, with no adjustments to the conversion price. The conversion feature meets the definition of conventional convertible
debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The note is convertible into shares of common stock at $0.05 per share. The Company analyzed the conversion
feature under ASC 470-20, and based on the market price of the common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $6,000 beneficial conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method.
On
December 26, 2017, the Company received cash proceeds of $5,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding. The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in ASC 815-10-15-74(a) and would not be bifurcated and accounted for separately as a derivative liability. The note is convertible
into shares of common stock at $0.05 per share. The Company analyzed the conversion feature under ASC 470-20, and based on the
market price of the common stock of the Company on the date of funding as compared to the conversion price, determined there was
a $3,000 beneficial conversion feature to recognize, which will be amortized over the term of the note using the effective interest
method.
On
December 29, 2017, the Company received cash proceeds of $4,796, and on January 24, 2018, the Company issued a promissory note
in exchange for the cash proceeds. The promissory note accrues interest at 6% per annum and is due one year from the date of funding.
The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion price. The conversion
feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a)
and would not be bifurcated and accounted for separately as a derivative liability. The note is convertible into shares of common
stock at $0.05 per share. The Company analyzed the conversion feature under ASC 470-20, and based on the market price of the common
stock of the Company on the date of funding as compared to the conversion price, determined there was a $3,000 beneficial conversion
feature to recognize, which will be amortized over the term of the note using the effective interest method.
On
January 22, 2018, the Company received cash proceeds of $15,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price. The conversion feature meets the definition
of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a) and would not be bifurcated
and accounted for separately as a derivative liability. The note is convertible into shares of common stock at $0.05 per share.
The Company analyzed the conversion feature under ASC 470-20, and based on the market price of the common stock of the Company
on the date of funding as compared to the conversion price, determined there was a $9,000 beneficial conversion feature to recognize,
which will be amortized over the term of the note using the effective interest method.
On
January 22, 2018, the Company received cash proceeds of $8,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price. The conversion feature meets the definition
of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a) and would not be bifurcated
and accounted for separately as a derivative liability. The note is convertible into shares of common stock at $0.05 per share.
The Company analyzed the conversion feature under ASC 470-20, and based on the market price of the common stock of the Company
on the date of funding as compared to the conversion price, determined there was a $5,000 beneficial conversion feature to recognize,
which will be amortized over the term of the note using the effective interest method.
On
January 26, 2018, the Company received cash proceeds of $40,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price. The conversion feature meets the definition
of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a) and would not be bifurcated
and accounted for separately as a derivative liability. The note is convertible into shares of common stock at $0.05 per share.
The Company analyzed the conversion feature under ASC 470-20, and based on the market price of the common stock of the Company
on the date of funding as compared to the conversion price, determined there was a $24,000 beneficial conversion feature to recognize,
which will be amortized over the term of the note using the effective interest method.
Conversion of Convertible Promissory
Notes
On February 1, 2018,
the holder of the convertible promissory notes funded on April 18, 2017, June 22, 2017, October 17, 2017, December 26, 2017, December
29, 2017, January 22, 2018 and January 26, 2018 totaling $148,181.02 principal and interest converted the entire balance into 2,693,978
shares of restricted common stock at various conversion prices of $0.075, $0.065, $0.05 and $0.025, pursuant to the terms of each
outstanding convertible promissory note.