The accompanying footnotes are an integral
part of these consolidated financial statements.
The accompanying footnotes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 and 2016
NOTE 1 – NATURE OF BUSINESS
Standard Metals Processing, Inc. (“we,”
“us,” “our,” “Standard Metals” or the “Company”) is an exploration stage company,
incorporated in Nevada having offices in Gadsden, Alabama and through its subsidiary, a property in Tonopah, Nevada. Their business
plan is to purchase equipment and build a facility on the 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.
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 year ended December 31, 2017, the Company incurred losses from
operations of approximately $597,000. At December 31, 2017, the Company had an accumulated deficit of approximately
$103,175,000 and a working capital deficit of approximately $9,738,000. These circumstances raise substantial doubt about the
Company’s 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 year ended December 31, 2017, the Company received net cash proceeds of approximately $160,000 from the convertible
promissory notes payable, and an additional $63,000 subsequent to year end. 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 consolidated financial statements include
the accounts of Standard Metals Processing, Inc., and its wholly-owned subsidiaries Tonopah Milling and Metals Group, Inc. and
its wholly-owned subsidiaries Tonopah Custom Processing, Inc., and Tonopah Resources, Inc. All significant intercompany transactions,
accounts and balances have been eliminated in consolidation.
Cash and Cash Equivalents
We maintain our cash in high-quality financial
institutions. The balances, at times, may exceed federally insured limits.
Property, Plant and Equipment
Property and equipment are recorded at
cost and depreciated, once placed in service, using the straight-line method over estimated useful lives as follows:
|
|
Years
|
|
Machinery and equipment
|
|
|
2-7
|
|
Vehicle
|
|
|
2
|
|
Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized. As items of property or equipment are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income.
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. There were no impairment charges during the years ended December 31, 2017 and
December 31, 2016.
Use of Estimates
Preparing 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.
Revenue Recognition and Deferred Revenue
As of December 31, 2017, we have recorded
no revenues from custom permitted processing toll milling.
Financial Instruments
The carrying amounts for all financial
instruments approximates fair value. The carrying amounts for cash, accounts payable and accrued liabilities approximated fair
value because of the short maturity of these instruments. The fair value of short-term debt approximated the carrying amounts based
upon the expected borrowing rate for debt with similar remaining maturities and comparable risk.
Loss per Common Share
Basic earnings (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 earnings 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 December 31, 2017 and 2016, the weighted
average shares from stock options of 32,576,223 and 32,576,223, respectively and warrants of 6,125,640 and 6,275,640, and number
of equivalent shares of convertible notes payable 3,020,704 and 1,000,000 respectively 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.
Income Taxes
Income taxes are accounted for based upon
an asset and liability approach. Accordingly, deferred tax assets and liabilities arise from the difference between
the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under
currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the
period plus or minus the change in deferred tax assets and liabilities during the period.
Accounting guidance requires the recognition
of a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. The Company believes its income tax filing positions and deductions
will be sustained upon examination and accordingly, no reserves, or related accruals for interest and penalties have been recorded
at December 31, 2017 and 2016. The Company recognizes interest and penalties on unrecognized tax benefits as well as interest received
from favorable tax settlements within income tax expense.
On December 22, 2017, the President of
the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax
years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United
States tax law, including various provisions that are expected to impact the Company. The Tax Reform Law reduces the federal corporate
tax rate from 34% to 21% effective January 1, 2018. The Company will continue to analyze the provisions of the Tax Reform Law to
assess the impact on the Company’s consolidated financial statements.
Recent Accounting Standards
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. As there have been no revenues to date, the Company does not
expect the adoption to have a material impact and no transition method will be necessary upon adoption.
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 year ended December 31, 2017
and through June 8, 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 December 31, 2017, through the date which the consolidated financial
statements were issued. Based upon the review, other than described in Note 11 – Subsequent Events, the Company did not identify
any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the 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 Precious
Minerals, Inc., (“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 , mine dumps, a property lease and a contract
agreement in exchange for 35,000,000 shares of our unregistered shares.
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.
During the year ended December 31, 2015
Management analyzed the Shea Mining and Milling assets and determined that all the acquired assets except for the Tonopah land
and water rights were fully impaired and recorded an impairment reducing the net carrying value of the Miller’s Landing assets
to $2,108,300.
The Company has
made some preparations including grading the land, installing fences and drilling various wells for future operations. The Company
plans to resume preparing the Tonopah property site for the construction of a permitted custom processing toll milling facility
and will work with contractors for the 21,875 square foot building and servicing the various wells.
The Company does not conduct any mining
activity.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Components of our property, plant and equipment
are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and 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 5 –
Senior
Secured Promissory Note, related party
On October 10, 2013, a Senior Secured Convertible
Promissory Note for up to $2,500,000 was issued to Pure Path Capital Management Company, LLC (“Pure Path”) pursuant
to a Settlement and Release Agreement. The note had an original principal balance of $1,933,345, with a maturity date of April
10, 2015, and bears interest at 8% per annum. The settlement agreement included the issuance to Pure Path of 27,000,000 of the
Company’s common shares, resulting in Pure Path becoming a related party. Upon an event of default additional interest will
accrue at the rate equal to the lesser of (i) 15% per annum in addition to the Interest Rate or (ii) the highest
rate permitted by applicable law, per annum (the “Default Rate”). The Company has obtained a waiver on the default
rate interest, allowing the 8% interest rate to remain in effect during the default on the note. The Note is securitized by any
and all of Borrower’s tangible or intangible assets, already acquired or hereinafter acquired, including but not limited
to: machinery, inventory, accounts receivable, cash, computers, hardware, mineral rights, etc.
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 (Note
8).
The outstanding principal balance on the note was $2,229,187
as of both December 31, 2017 and 2016, with related accrued interest of $768,982 and $582,264, respectively.
NOTE 6 – PROMISSORY NOTES PAYABLE
- RELATED PARTY
On February 11, 2015, the Company issued
an unsecured promissory note (the “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. 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. Interest accrues at 8% per annum on each tranche. Accrued interest was $871,317 and $678,466 as of December 31, 2017
and 2016, respectively.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
On December 29,
2017, the Company received cash proceeds of $4,756, and on January 22, 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
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 $3,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. No amortization expense was recognized in the year ended December 31, 2017 as
the amount was insignificant.
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
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 $3,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. No amortization expense was recognized in the year ended December 31, 2017 as
the amount was insignificant.
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. 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 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 $6,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. Amortization expense of $750 was recognized in the year ended December 31, 2017.
On August 22,
2017, the Company received cash proceeds of $10,000, and on February 7, 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 $0.08 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. Amortization expense of $1,000 was recognized in the year ended December 31, 2017.
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 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 a $4,000 beneficial conversion feature to recognize, which will be amortized over the term of the note
using the effective interest method. Amortization expense of $2,000 was recognized in the year ended December 31, 2017.
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.
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
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 $65,000 and will amortize this debt
discount over the term of the note.
On December 28, 2016 the convertible promissory
notes payable totaling $65,000 and accrued interest of $353 were converted into 3,262,838 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 analyzed the conversion under ASC
470-20
Debt with conversion and other options
for consideration of a beneficial conversion feature. The Company recognized
a discount for the intrinsic value of the conversion feature of $60,000 which will be amortized over the term of the note.
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 was convertible at $0.021 per share based on the ninety
day VWAP ending on the date of funding, the $30,000 convertible promissory note was 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 was 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
analyzed the conversion under ASC 470-20
Debt with conversion and other options
for consideration of a conversion feature.
The Company recognized a discount for the intrinsic value of the conversion feature of $160,000 to be amortized 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,
with the remaining debt discount immediately amortized.
In the year ended December 31, 2011, the
Company issued 3 separate Convertible promissory notes totaling $175,000, with an interest rate of 6%, and are convertible at $0.50
per share. As of December 31, 2017, all of these Notes are past due, and the original terms apply in the default period. Accrued
interest on these notes totaled $68,165 and $57,665 at December 31, 2017 and 2016, respectively.
NOTE 8 – SHAREHOLDERS’ DEFICIT
Preferred Stock
Series A Preferred Stock
Attributes of Series A Preferred Stock
include but are not limited to the following:
Distribution in
Liquidation
The Series A Preferred Stock has a liquidation
preference of $10,000,000, payable only upon certain liquidity events or upon achievement of a market value of our equity equaling
$200,000,000 or more. Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing
for the payment of all its obligations, the remainder of the assets of the Company 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 Liquidation 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. Upon the occurrence of any Liquidation Event (as defined below), each holder of Series A Preferred Stock will receive a
payment equal to the Original Issue Price for each share of Series A Preferred Stock held by such holder (the “Liquidation
Value”). A “Liquidation Event” will have occurred when:
|
●
|
The Company has an average market capitalization (calculated by adding the value of all outstanding
shares of Common Stock valued at the Company’s closing sale price on the OTCQB or other applicable bulletin board or exchange,
plus the value of the outstanding Series A Preferred Stock at the Original Issues Price per share) of $200,000,000 or more over
any 90 day period. The holders of the Series A Preferred Stock would have the right, for 30 days after the end of such qualifying
90 day measurement period, to require the Company to purchase the Series A Preferred Stock for an amount equal to the Liquidation
Value.
|
|
●
|
Any Liquidity Event in which the Company receives proceeds of $50,000,000 or more. For purposes
hereof, a “Liquidity Event” means any (a) liquidation, dissolution or winding up of the Company; (b) acquisition of
the Company by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger,
share exchange, share purchase or consolidation) provided that the applicable transaction shall not be deemed a liquidation unless
the Company’s stockholders constituted immediately prior to such transaction hold less than 50% of the voting power of the
surviving or acquiring entity; or (c) the sale, lease, transfer or other disposition, in a single transaction or series of related
transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries
taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially
all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries.
|
Written notice of any Liquidation Event
(the “Liquidation Notice”) shall be given by mail, postage prepaid, or by facsimile to non-U.S. residents, not less
than five days prior to the anticipated payment date state therein, to the holders of record of Series A Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the records of the Company. The Liquidation Notice shall
state (i) the anticipated payment date, and (ii) the total Liquidation Value available for distribution to Series A Preferred Stock
shareholders upon the occurrence of the Liquidation Event.
Redemption
The Series A Preferred Stock may be redeemed
in whole or in part as determined by a resolution of the Board of Directors at any time, at a price equal to the Liquidation Value.
Voting Rights
Shares of Series A Preferred Stock shall
have no rights to vote on any matter submitted to a vote of shareholders, except as required by law, in which case each share of
Series A Preferred Stock shall be entitled to one vote.
Conversion Rights
Holders of Series A Preferred Stock will
have no right to convert such shares into any other equity securities of the Company.
Agreement with
Holder of Series A Preferred Stock
Simultaneous with the Shea Exchange Agreement
(Note 3), Wits Basin exchanged 19,713,544 shares of the Company’s 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 executed an Agreement
with Wits to exchange these preferred shares for shares of common stock.
The Company entered
into an Agreement on July 29, 2016 with the holder of the Series A Preferred Stock, Wits Basin and Wits Basins’ 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 $10,000,000 (referred to herein as “Stated Value”),
payable only upon certain events.
(a) Upon
any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment of all its
obligations, the remainder of the assets of the Company 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
Company receives proceeds of $10,000,000 or more in a cash offering; or
(ii) the
Company’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 Company has an average market capitalization (calculated by adding the value of all outstanding
shares of Common Stock valued at the Company’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 Company has the right to:
|
(i) 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 Company 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
(ii) 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 above section is triggered, the Company has three years to choose option (i) or (ii) and pay the Stated Value. The Company
has 60 days from the date of notice of its election to pay under either (i) or (ii). Upon payment of the Stated Value, the Series
A Shares will be retired.
If
the above section is triggered and the Company fails to pay the Stated Value within the three year time frame, the Company 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 Company 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 on April 1, 2016 that are being held in escrow pending a Series A Preferred Stock
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, a related party, executed an addendum to their Senior Secured Convertible Promissory Note (Note 6) 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..
Common Stock
Common Stock
issued on conversion of notes payable
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.
On December 28, 2016 a convertible promissory
note payable totaling $65,000 and accrued interest of $353 were converted into 3,262,838 shares of restricted common stock.
Sale of Common Stock
On August 17, 2016 the company received
a subscription agreement and $20,000 for 275,028 shares of the Company common stock.
Option Grants
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.
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.
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
|
|
|
$
|
0.98
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Canceled or expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding –December 31, 2017
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
There are no unvested options as of December 31, 2017.
The following tables summarize information
about stock options outstanding and exercisable:
|
|
|
Options Outstanding and Exercisable at December 31, 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
|
|
|
2.9 years
|
|
$
|
0.46
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
|
9,800,000
|
|
|
2.7 years
|
|
$
|
0.67
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
|
14,500,000
|
|
|
2.8 years
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
|
3,000,000
|
|
|
3.3 years
|
|
$
|
1.63
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
|
32,576,223
|
|
|
2.9 years
|
|
$
|
0.98
|
|
|
$
|
—
|
|
|
|
|
Options Outstanding and Exercisable at December 31, 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
|
|
|
3.9 years
|
|
$
|
0.46
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
|
9,800,000
|
|
|
3.7 years
|
|
$
|
0.67
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
|
14,500,000
|
|
|
3.8 years
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
|
3,000,000
|
|
|
4.3 years
|
|
$
|
1.63
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
|
32,576,223
|
|
|
3.9 years
|
|
$
|
0.98
|
|
|
$
|
—
|
|
|
(1)
|
The aggregate intrinsic value in the table represents the difference between the closing stock price on December 31, 2017 and 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 December 31, 2017 and 2016.
|
Common Stock Purchase
Warrants
For warrants granted to non-employees in
exchange for services, the Company recorded 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 (Note 3) executed
a Settlement Agreement on January 22, 2016 (Note 9). 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 December 31, 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
|
|
|
(150,000
|
)
|
|
$
|
2.00
|
|
|
$
|
2.00
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
6,125,640
|
|
|
$
|
0.77
|
|
|
$
|
0.20 – 1.23
|
|
|
|
Warrants exercisable at December 31, 2017
|
|
|
6,125,640
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the 6,125,640
and 6,275,640 outstanding and exercisable warrants at December 31, 2017 and 2016 was $0. The intrinsic value is the difference
between the closing stock price on December 31, 2017 and 2016 and the exercise price, multiplied by the number of in-the-money
warrants had all warrant holders exercised their warrants on December 31, 2017 and 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. 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.
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 year ended December
31, 2017 the Company has paid $80,000 towards the judgment.
Wits Basin Precious Minerals, Inc.,
Lee Levine, Michael Lepore, Mark McLain, Morton Waldman, Allan Staller, Thomas McAdam, Arthur Brown, DJ Sikka, and Bryan Reichel
v. Standard Metals Processing, Inc. f/k/a Standard Gold, Inc., Nevada Corporation
On September 10, 2014, Wits Basin Precious
Minerals, Inc. filed suit against Standard Metals Processing, Inc. in the United States District Court for the District of Nevada
asserting breach of contract, anticipatory breach of contract and equitable relief. On October 16, 2014, Wits Basin filed an Amended
Complaint, adding new parties and alleging that Standard Metals had refused to allow it to exercise its option to purchase shares
granted to it pursuant to an Exchange Agreement, dated March 15, 2011, so that Wits Basin could obtain shares to meet its requirements
under private option agreements it had entered into with option holders, allowing those option holders certain rights, options
and warrants to purchase stock in Standard Metals. On November 5, 2014, Standard Metals filed a Second Motion to Dismiss Wits Basin
et al.’s Amended Complaint. On March 13, 2015, the Court issued an Order granting in part and denying in part Standard Metals’
Motion to Dismiss the action. The Court dismissed with prejudice Wits Basin et al.’s claims of breach of contract and anticipatory
repudiation of the contract. However, the Court allowed Wits Basin et al’s claim against Standard Metals of interference
with contract to go forward. 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 Company
will also pay $14,665 in plaintiffs’ legal fees. As of December 31, 2017, $8,350 of the attorneys’ fees have been paid
and all warrants have been issued.
NOTE 10 - INCOME TAXES
The components of income tax expense for
the years ended December 31, 2017 and 2016 consist of the following:
|
|
2017
|
|
|
2016
|
|
Current tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax benefit
|
|
|
(203,000
|
)
|
|
|
(321,000
|
)
|
Valuation allowance
|
|
|
203,000
|
|
|
|
321,000
|
|
Total income tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliations between the statutory rate
and the effective tax rate for the years ended December 31, 2017 and 2016 consist as follows:
|
|
2017
|
|
|
2016
|
|
Federal statutory tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
|
|
0
|
%
|
|
|
0
|
%
|
Permanent differences
|
|
|
—
|
|
|
|
—
|
%
|
Valuation allowance
|
|
|
34
|
%
|
|
|
34
|
%
|
Effective tax rate
|
|
|
—
|
|
|
|
—
|
|
Significant components of the Company’s
deferred tax assets as of December 31, 2017 and 2016 are summarized below. The calculations presented below at December 31, 2017
reflect the new U.S. federal statutory corporate tax rate of 21% effective January 1, 2018 (see Note 2).
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,133,000
|
|
|
$
|
11,299,000
|
|
Impairment of assets
|
|
|
6,941,000
|
|
|
|
11,310,000
|
|
Stock based compensation
|
|
|
2,228,000
|
|
|
|
3,607,000
|
|
Loss on settlement of debt
|
|
|
32,000
|
|
|
|
51,000
|
|
Total deferred tax asset
|
|
|
16,334,000
|
|
|
|
26,267,000
|
|
Valuation allowance
|
|
|
(16,334,000
|
)
|
|
|
(26,267,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2017, the Company had
approximately $33,969,000 of federal net operating loss carry forwards. These carry forwards, if not used, will begin to expire
in 2028. Future utilization of their net operating loss carry forwards is subject to certain limitations under Section 382 of the
Internal Revenue Code. The Company believes that the issuance of their common stock in exchange for the Shea Mining and Milling
properties in March of 2011 resulted in an “ownership change” under the rules and regulations of Section 382. Accordingly,
the Company’s ability to utilize their net operating losses generated prior to this date is limited to approximately $1,000,000
annually.
As of December 31, 2017, we do not believe
any of our net operating loss carry forward consists of deductions generated by the exercise of warrants or options to purchase
our stock. In the future, the stock options referenced in the above table of deferred tax items may be exercised and we may receive
a tax deduction. To the extent that the tax deduction is included in a net operating loss carry forward and is in excess of amounts
recognized for book purposes, no benefit will be recognized until the loss carry forward is recognized. Upon utilization and realization
of the carry forward, the corresponding change in the deferred asset and valuation allowance will be recorded as additional paid-in
capital.
We provide for a valuation allowance when
it is more likely than not that we will not realize a portion of the deferred tax assets. We have established a valuation allowance
against our net deferred tax asset due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions
to utilize the assets. Therefore, we have not reflected any benefit of such deferred tax assets in the accompanying financial statements.
Our net deferred tax asset and valuation allowance decreased by $9,933,000 in the year ended December 31, 2017, $10,089,000 of
which related to the decrease in the expected future tax rate as a result of the Tax Reform Law.
We reviewed all income tax positions taken
or that we expect to be taken for all open years and determined that our income tax positions are appropriately stated and supported
for all open years. The Company is subject to U.S. federal income tax examinations by tax authorities for years after 2011 due
to unexpired net operating loss carryforwards originating in and subsequent to that year. The Company may be subject to income
tax examinations for the various taxing authorities which vary by jurisdiction.
NOTE 11 – SUBSEQUENT EVENTS
In January 2018 the Company issued three
convertible promissory notes in the principal amounts of $8,000, $40,000 and $15,000. The notes are due one year after issuance,
accrues interest at 6% per annum and is convertible into shares of common stock at a price of $0.05 per share.
On January 29, 2018 six of the convertible
promissory notes payable totaling principal of $144,796 and accrued interest of $3,385 were converted into 2,693,978 shares of
restricted common stock, at conversion prices ranging from $0.025 to $0.075.