SRCH Searchlight Minerals Corp (PK)

Item 1. Financial Statements

See Accompanying Notes to these Condensed Consolidated Financial Statements

See Accompanying Notes to these Condensed Consolidated Financial Statements

See Accompanying Notes to these Condensed Consolidated Financial Statements

NOTE 1 – DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES

Description of business - Searchlight Minerals Corp. (the “Company”) is an exploration stage company engaged in a slag reprocessing project and the acquisition and exploration of mineral properties. The Company is presently focused on the Clarkdale Slag Project, located in Clarkdale, Arizona, which is a reclamation project to recover precious and base metals from the reprocessing of slag produced from the smelting of copper ore mined at the United Verde Copper Mine in Jerome, Arizona.

Since the Company’s involvement in the Clarkdale Slag Project began, the goal has been to demonstrate the economic feasibility of the project by determining a commercially viable method to extract precious and base metals from the slag material.

The Company has not yet realized any revenues from its planned operations. Upon the location of commercially minable reserves, the Company plans to prepare for mineral extraction and enter the development stage.

History - The Company was incorporated on January 12, 1999, pursuant to the laws of the State of Nevada under the name L.C.M. Equity, Inc. From 1999 to 2005, the Company operated primarily as a biotechnology research and development company with its headquarters in Canada and an office in the United Kingdom. On November 2, 2001, the Company entered into an acquisition agreement with Regma Bio Technologies, Ltd. pursuant to which Regma Bio Technologies, Ltd. entered into a reverse merger with the Company with the surviving entity named “Regma Bio Technologies Limited”. On November 26, 2003, the Company changed its name from “Regma Bio Technologies Limited” to “Phage Genomics, Inc.” (“Phage”).

In February 2005, the Company announced its reorganization from a biotechnology research and development company to a company focused on the development and acquisition of mineral properties and its Board of Directors approved a change in its name from Phage to "Searchlight Minerals Corp.” effective June 23, 2005.

Going concern - The accompanying condensed consolidated financial statements were prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The going concern basis of presentation assumes that the Company will continue in operation for the next twelve months and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s inability to continue as a going concern. The Company’s history of losses, working capital deficit, minimal liquidity and other factors raise substantial doubt about the Company’s ability to continue as a going concern. In order for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business it must raise additional equity or debt capital and continue cost cutting measures. There can be no assurance that the Company will be able to achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to management.

If the Company continues to incur operating losses and does not raise sufficient additional capital, material adverse events may occur including, but not limited to: a reduction in the nature and scope of the Company’s operations; and the Company’s inability to fully implement its current business plan. There can be no assurance that the Company will successfully improve its liquidity position. The accompanying consolidated financial statements do not reflect any adjustments that might be required resulting from the adverse outcome relating to this uncertainty.

As of September 30, 2016, the Company had cumulative net losses of $96,345,214 from operations and had not commenced commercial mining and mineral processing operations; rather it is still in the exploration stage. For the nine months ended September 30, 2016, the Company incurred a net loss of $13,852,630, had negative cash flows from operating activities of $2,201,702 and will incur additional future losses due to planned continued exploration expenses. In addition, the Company had a working capital deficit totaling $1,803,770 at September 30, 2016.

To address ongoing liquidity constraints, the Company continues to seek additional sources of capital through the issuance of equity, debt financing or a combination of both. The Company has reduced general and administrative expenses and elected to defer payment of certain obligations. Cash conservation measures include, but are not limited to, the deferred payment where available of outsourced consulting fees, current and future board fees, certain officer salaries, certain monthly professional fees, and the Verde River Iron Company, LLC (“VRIC”) monthly payable. These activities have reduced the required cash outlay of the Company’s business significantly. The Company is focused on continuing to reduce costs and obtaining additional funding. There is no assurance that such funding will be available on terms acceptable to the Company, or at all. If the Company raises additional funds by selling additional shares of capital stock, securities convertible into shares of capital stock or the issuance of convertible debt, the ownership interest of the Company’s existing common stock holders will be diluted.

Basis of presentation - The accompanying financial statements have been prepared in accordance with U.S. GAAP. The Company’s fiscal year-end is December 31.

These condensed consolidated financial statements have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments that are, in the opinion of management necessary for the fair presentation of the Company's Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015; the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015; and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, are included herein. The Company’s balance sheet at December 31, 2015 is derived from the audited financial statements at that date. The results reported in these interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on April 5, 2016.

Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Clarkdale Minerals, LLC (“CML”) and Clarkdale Metals Corp. (“CMC”). Significant intercompany accounts and transactions have been eliminated.

Use of estimates - The preparation of financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Significant areas requiring management’s estimates and assumptions include the valuation of stock-based compensation and derivative liabilities, impairment analysis of long-lived assets, and realizability of deferred tax assets. Actual results could differ from those estimates.

Capitalized interest cost - The Company capitalizes interest cost related to acquisition, development and construction of property and equipment which is designed as integral parts of the manufacturing process. The capitalized interest is recorded as part of the asset it relates to and will be amortized over the asset’s useful life once production commences.

Mineral properties - Costs of acquiring mineral properties are capitalized upon acquisition. Exploration costs and costs to maintain mineral properties are expensed as incurred while the project is in the exploration stage. Once mineral reserves are established, development costs and costs to maintain mineral properties are capitalized as incurred while the property is in the development stage. When a property reaches the production stage, the related capitalized costs will be amortized using the units-of-production method over the proven and probable reserves.

Mineral exploration and development costs - Exploration expenditures incurred prior to entering the development stage are expensed and included in mineral exploration and evaluation expense.

Property and equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 15 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operating expenses.

Impairment of long-lived assets - The Company reviews and evaluates its long-lived assets for impairment at each balance sheet date due to its planned exploration stage losses and documents such impairment testing. Mineral properties in the exploration stage are monitored for impairment based on factors such as the Company’s continued right to explore the property, exploration reports, drill results, technical reports and continued plans to fund exploration programs on the property.

The tests for long-lived assets in the exploration, development or production stage that would have a value beyond proven and probable reserves would be monitored for impairment based on factors such as current market value of the mineral property and results of exploration, future asset utilization, business climate, mineral prices and future undiscounted cash flows expected to result from the use of the related assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net cash flows expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts.

The Company's policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable either by impairment or by abandonment of the property. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds its fair value.

Deferred financing fees – Deferred financing fees represent fees paid in connection with obtaining debt financing. These fees are amortized using the effective interest method over the term of the financing. If a conversion of the underlying note occurs, a proportionate share of the unamortized amount is immediately expensed.

Convertible notes – derivative liabilities – The Company evaluates the embedded features of convertible notes to determine if they are required to be bifurcated and recorded as a derivative liability. If more than one feature is required to be bifurcated, the features are accounted for as a single compound derivative. The fair value of the compound derivative is recorded as a derivative liability and a debt discount. The carrying value of the convertible notes is recorded on the date of issuance at its original value less the fair value of the compound derivative.

The derivative liability is measured at fair value on a recurring basis with changes reported in other income (expense). Fair value is determined using a model which incorporates estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The debt discount is amortized to non-cash interest expense using the effective interest method over the life of the notes. If a conversion of the underlying note occurs, a proportionate share of the unamortized amount is immediately expensed.

Reclamation and remediation costs - For its exploration stage properties, the Company accrues the estimated costs associated with environmental remediation obligations in the period in which the liability is incurred or becomes determinable. Until such time that a project life is established, the Company records the corresponding cost as an exploration stage expense. The costs of future expenditures for environmental remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule.

Future reclamation and environmental-related expenditures are difficult to estimate in many circumstances due to the early stage nature of the exploration project, the uncertainties associated with defining the nature and extent of environmental disturbance, the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology. The Company periodically reviews accrued liabilities for such reclamation and remediation costs as evidence indicating that the liabilities have potentially changed becomes available. Changes in estimates are reflected in the consolidated statement of operations in the period an estimate is revised.

The Company is in the exploration stage and is unable to determine the estimated timing of expenditures relating to reclamation accruals. It is reasonably possible that the ultimate cost of reclamation and remediation could change in the future and that changes to these estimates could have a material effect on future operating results as new information becomes known.

Fair value of financial instruments - The Company’s financial instruments consist principally of derivative liabilities and the VRIC payable. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels defined as follows:

The Company’s financial instruments consist of the VRIC payable, derivative liabilities (described in Notes 5 and 7) and convertible notes (described in Note 6). The VRIC payable and the convertible notes are classified within Level 2 of the fair value hierarchy. The fair value of the VRIC payable approximates carrying value as the imputed interest rate is considered to approximate a market interest rate. The fair value of the convertible notes approximates carrying value as the interest rate is considered to approximate a market interest rate.

The Company calculates the fair value of its derivative liabilities using various models which are all Level 3 inputs. The fair value of the derivative warrant liability (described in Note 5) is calculated using the Binomial Lattice model, and the fair value of the derivative liability - convertible notes (described in Note 7) was calculated using a model which incorporated estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The change in fair value of the derivative liabilities is classified in other income (expense) in the condensed consolidated statement of operations. The Company generally does not use derivative financial instruments to hedge exposures to cash flow, market or foreign currency risks.

There have been no changes in the valuation techniques used for the derivative liabilities. The Company does not have any non-financial assets or liabilities that it measures at fair value. During the nine months ended September 30, 2016 and 2015, there were no transfers of assets or liabilities between levels.

Per share amounts - Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. Potentially dilutive shares, such as stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as when the exercise price of the instrument exceeds the fair market value of the Company’s common stock and when a net loss is reported. The dilutive effect of convertible debt securities is reflected in the diluted earnings (loss) per share calculation using the if-converted method. Conversion of the debt securities is not assumed for purposes of calculating diluted earnings (loss) per share if the effect is anti-dilutive. 72,034,507 and 73,162,932 stock options, warrants and common shares issuable upon the conversion of notes were outstanding as of September 30, 2016 and September 30, 2015, respectively, but were not considered in the computation of diluted earnings per share as their inclusion would be anti-dilutive.

Stock-based compensation - Stock-based compensation awards are recognized in the consolidated financial statements based on the grant date fair value of the award which is estimated using the Binomial Lattice option pricing model. The Company believes that this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for the actual exercise behavior of option holders. The compensation cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock.

The fair value of performance-based stock option grants is determined on their grant date through the use of the Binomial Lattice option pricing model. The total value of the award is recognized over the requisite service period only if management has determined that achievement of the performance condition is probable. The requisite service period is based on management’s estimate of when the performance condition will be met. Changes in the requisite service period or the estimated probability of achievement can materially affect the amount of stock-based compensation recognized in the financial statements.

Income taxes  - For interim reporting periods, the Company uses the annualized effective tax rate (“AETR”) method to calculate its income tax provision. Under this method, the AETR is applied to the interim year-to-date pre-tax losses to determine the income tax benefit or expense for the year-to-date period. The income tax benefit or expense for a quarter represents the difference between the year-to-date income tax benefit or expense for the current year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company’s annual operating results and AETR.

The Company follows the liability method of accounting for income taxes. This method recognizes certain temporary differences between the financial reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset as measured by the statutory tax rates in effect. The effect of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

Recent accounting standards - From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards did not or will not have a material impact on the Company’s consolidated financial statements upon adoption.

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, “Improvements on Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The standard will be effective for the Company beginning January 1, 2017. The Company is currently evaluating the impact to its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for annual periods beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. The standard will be effective for the Company beginning January 1, 2019. The Company is currently evaluating the impact to its condensed consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies income tax accounting. The update requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. Adoption of the new guidance is not expected to have an impact on the condensed consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs”, which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The update is effective in fiscal years, including interim periods, beginning after December 15, 2015, and early adoption was permitted. We adopted the provisions of ASU 2015-03 on a retrospective basis for our annual period ended December 31, 2015. The retrospective adoption of this standard resulted in the reclassification of approximately $0.1 million of current assets as a direct reduction against the balance of our current debt in the accompanying condensed consolidated balance sheet at December 31, 2015, but had no effect on our condensed consolidated net loss or stockholders’ equity.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about and Entity’s Ability to Continue as a Going Concern”. This update requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact to its condensed consolidated financial statements.

NOTE 2 – RESTRICTED CASH

At September 30, 2016 and December 31, 2015, restricted cash amounted to $0 and $227,345, respectively, and had consisted of funds designated for debt collateral. During the nine months ended September 30, 2016, the Company reduced the restricted cash requirement by $227,345, in connection with the conversion of the Company’s convertible notes payable (as described in Note 6).

Depreciation expense was $286,353 and $352,988 for the three months ended September 30, 2016 and 2015, respectively, and $859,576 and $1,068,325 for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016 and December 31, 2015, construction in progress included the gold, copper, and zinc extraction circuits and electrowinning equipment at the Clarkdale Slag Project.  

Amounts due to related parties are discussed in Note 13.

NOTE 5 – DERIVATIVE WARRANT LIABILITY

Related to a private placement completed on November 12, 2009, the Company issued 6,341,263 warrants to purchase shares of common stock. The warrants had an initial expiration date of November 12, 2012 and an initial exercise price of $1.85 per share. The warrants have anti-dilution provisions, including provisions for the adjustment to the exercise price and to the number of warrants granted if the Company issues common stock or common stock equivalents at a price less than the exercise price.

The Company determined that the warrants were not afforded equity classification because the warrants are not considered to be indexed to the Company’s own stock due to the anti-dilution provisions. In addition, the Company determined that the anti-dilution provisions shield the warrant holders from the dilutive effects of subsequent security issuances and therefore the economic characteristics and risks of the warrants are not clearly and closely related to the Company’s common stock. Accordingly, the warrants are treated as a derivative liability and are carried at fair value.

On various dates commencing in November 2012, the latest being March 18, 2016, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holders, to amend these private placement warrants. The expiration date of the warrants was extended for approximately one year at each extension. The current expiration date is November 30, 2017. In all other respects, the terms and conditions of the warrants remained the same.

With respect to the March 18, 2016 extension, the Company did not recognize any additional expense as the fair values of the warrants were calculated at zero using the Binomial Lattice model with the following assumptions:

As of September 30, 2016, the cumulative adjustment to the warrants was as follows: (i) the exercise price was adjusted from $1.85 per share to $0.59 per share for warrants held by Luxor Capital Partners, L.P. and its affiliates (“Luxor”) and to $0.58 per share for all other warrant holders (“all others”), and (ii) the number of warrants during the nine months ended September 30, 2016 was increased by a total of 10,859,777, being 6,392,803 warrants for Luxor and its affiliates and 4,466,974 warrants for all others. In connection with the financing completed with Luxor on June 7, 2012, Luxor waived its right to the anti-dilution adjustments on 4,252,883 warrants it holds from the 2009 private placement. Future anti-dilution adjustments were not waived. The adjusted exercise price of those warrants is $0.59 per share. The total warrants accounted for as a derivative liability were 20,006,807 and 9,147,029 as of September 30, 2016 and December 31, 2015, respectively. The total warrants accounted for as a derivative liability were not material as of September 30, 2016 and were valued at $53,141 as of December 31, 2015.

The following table sets forth the changes in the fair value of derivative liability for the nine months ended September 30, 2016 and the year ended December 31 2015:

The Company estimates the fair value of the derivative liabilities by using the Binomial Lattice pricing-model, with the following assumptions used for the nine months ended September 30, 2016 and the year ended December 31, 2015:

The expected volatility is based on the historical volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues over equivalent lives of the options. The expected life is impacted by all of the underlying assumptions and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly lower or higher fair value measurement.

NOTE 6 – CONVERTIBLE NOTES

On September 18, 2013, the Company completed a private placement of secured convertible notes (the “Notes”) resulting in gross proceeds of $4,000,000. At issuance, the Notes were convertible into shares of common stock at $0.40 per share, subject to certain adjustments. The term of the Notes was five years, but the Notes could be demanded by the holders. The Notes bore interest at 7% which was payable semi-annually. The Notes had customary provisions relating to events of default including an increase in the interest rate to 9%. The Notes were secured by a first priority lien on all of the assets of the Company including its subsidiaries. At September 30, 2016, all of the convertible notes were converted and cancelled and the first priority lien was released.

The Company was not able to incur additional secured indebtedness or other indebtedness with a maturity prior to that of the Notes without the written consent of the holders of the majority-in-interest of the Notes. In the event of a change of control of the Company, the Notes would have become due and payable at 120% of the principal balance. The holders of the Notes had the right to purchase, pro rata, up to $600,000 of additional separate notes by September 18, 2014 on the same general terms and conditions as the original Notes. In September 2014, $69,000 of additional notes were purchased and issued.

At December 31, 2015, the Notes were convertible into 10,433,333 shares of common stock at $0.39 per share, as adjusted for anti-dilutive provisions and the if-converted value equaled the principal amount of the Notes. Certain embedded features in the Notes were required to be bifurcated and accounted for as a single compound derivative and reported at fair value as discussed in Note 7.

During the nine months ended September 30, 2016, Luxor, on behalf of itself and certain of its affiliates (collectively, the “Luxor Group”), demanded repayment from the Company, of all of the outstanding principal and interest owing on the Luxor Group’s Secured Convertible Promissory Notes, each dated September 18, 2013 (the “Luxor Notes”). Lacking sufficient funds to make such repayments, on March 18, 2016 the Company agreed, pursuant to an Amendment to Secured Convertible Promissory Note, dated September 18, 2013, to allow the Luxor Group to convert all of the outstanding principal amount and accrued but unpaid interest owing on the Luxor Notes into shares of the Company’s common stock, at a rate of $0.035 per share. In the aggregate, the Luxor Group converted $2,600,000 of principal owing on the Luxor Notes and $91,000 of interest owing on the Luxor Notes in exchange for 76,885,714 shares of the Company’s common stock. As a condition of the Private Placement Offering on March 18, 2016, as discussed in Notes 8 and Note 12, the Luxor Group had agreed that all of its 12,128,708 currently owned warrants would not be exercised until at least September 18, 2016, as of September 30, 2016 this agreement was not renewed. The Company has subsequently cancelled the Luxor Notes. In connection with the conversion of the Luxor Notes the Company has recognized a loss on conversion of $6,998,571.

On March 18, 2016, Martin Oring, one of our directors and our Chief Executive Officer, and members of his family, pursuant to Amendments to Convertible Promissory Notes, dated March 18, 2016, provided us with Conversion Notices whereby they elected to convert all of the principal and accrued but unpaid interest owing on their Secured Convertible Promissory Notes (“Oring Notes”), each dated September 18, 2013, into shares of the Company’s common stock at a rate of $0.035 per share. In the aggregate, Mr. Oring and his family members converted $414,000 in principal and $14,491 in accrued interest owing on such notes in exchange for 12,242,600 shares of the Company’s common stock. The Company has subsequently cancelled the Oring Notes. In connection with the conversion of the Oring Notes the Company has recognized a loss on conversion of $1,114,391.

On March 17, 2016, the Board of Directors of the Company approved an offer to the remaining nine holders of the Secured Convertible Promissory Notes. The offer, effective March 18, 2016, included the conversion of principal and interest outstanding as of March 18, 2016 at a rate of $0.035 per share. On April 27, 2016, the remaining nine holders of the Secured Convertible Promissory Notes converted $1,055,000 in principal and $21,583 in accrued interest in exchange for 31,037,855 shares of the Company’s common stock. The Company subsequently cancelled the Notes. In connection with the conversion of the Notes the Company has recognized a loss on conversion of $324,159.

As a result of the aforementioned conversions, as of September 30, 2016, all the Secured Convertible Promissory Notes and associated accrued interest have been converted and cancelled.

At issuance, the fair value of the compound derivative was $1,261,285 and was recorded as both a derivative liability and a debt discount. The debt discount was being amortized to interest expense over the term of the Notes and the derivative liability was carried at fair value through the conversion dates. The Company incurred $126,446 of financing fees related to the Notes. Such amounts were capitalized and were amortized to interest expense over the term of the Notes. The carrying value of the convertible debt, net of discount was comprised of the following:

Interest expense related to the Notes included the following for the three and nine months ended September 30, 2016 and September 30, 2015:

Included in amortization of debt discount for the nine months ended September 30, 2016 is expense of $738,748 related to the conversion of $4,069,000 Secured Convertible Promissory Notes payable in March and April 2016. These amounts have been recorded as interest expense on our condensed consolidated statements of operations and comprehensive loss. The Company recorded total interest expense of $114 and $880,603 and $139,820 and $413,475 for the three and nine months ended September 30, 2016 and 2015, respectively.

NOTE 7 – DERIVATIVE LIABILITY – CONVERTIBLE NOTES

As further discussed in Note 6, the Company had issued $4,069,000 of secured convertible notes between September, 2013 and September, 2014. The Notes were convertible at any time into shares of common stock at $0.39 per share. As discussed further in Note 6, during the nine months ended September 30, 2016 all of the notes were converted and cancelled.

The Notes had several embedded conversion and redemption features. The Company determined that two of the features were required to be bifurcated and accounted for under derivative accounting as follows:

These two embedded features had been accounted for together as a single compound derivative. The Company estimated the fair value of the compound derivative using a model with estimated probabilities and inputs calculated by the Binomial Lattice model and present values. The assumptions included in the calculations were highly subjective and subject to interpretation. Assumptions used for the nine months ended September 30, 2016 and the year ended December 31, 2015 included redemption and conversion estimates/behaviors, estimates regarding future anti-dilutive financing agreements and the following other significant estimates:

The expected volatility was based on the historical volatility levels on the Company’s common stock. The risk-free interest rate was based on the implied yield available on US Treasury zero-coupon issues over equivalent lives of the options. The expected life was impacted by all of the underlying assumptions and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly lower or higher fair value measurement.

The following table sets forth the changes in the fair value of the derivative liability for the nine months ended September 30, 2016 and the year ended December 31, 2015:

NOTE 8 – STOCKHOLDERS’ EQUITY

During the nine months ended September 30, 2016, the Company’s stockholders’ equity activity consisted of the following:

During the nine months ended September 30, 2015, the Company’s stockholders’ equity activity consisted of the following:

The following summarizes the exercise price per share and expiration date of the Company’s outstanding warrants issued to investors and vendors to purchase common stock at September 30, 2016:

NOTE 9 – STOCK-BASED COMPENSATION

Stock-based compensation includes grants of stock options and purchase warrants to eligible directors, employees and consultants as determined by the board of directors.

Stock option plans - The Company has adopted several stock option plans, all of which have been approved by the Company’s stockholders that authorize the granting of stock option awards subject to certain conditions. At September 30, 2016, the Company had 5,263,576 of its common shares available for issuance for stock option awards under the Company’s stock option plans.

At September 30, 2016, the Company had the following stock option plans available:

As of September 30, 2016, the Company had granted 15,610,714 options and warrants outside of the aforementioned stock option plans with a weighted average exercise price of $0.48 per share. As of September 30, 2016, 15,410,714 options and warrants granted were outstanding.

Amendment to Certain Outstanding Stock Options  – On March 17, 2016, the Company’s Board of Directors unilaterally determined to amend: 570,000 options issued under the 2009 Incentive Plan; 188,469 options issued under the 2009 Directors Plan; 470,280 stock options issued under the 2007 plan; and 200,000 options issued outside all plans, by extending their expiration dates. The options were granted at various dates between October 6, 2008 and December 31, 2011 and have a weighted average exercise price of $0.98 per share. The expiration dates of all of the options were extended by twelve months. In all other respects, the terms and conditions of the extended options remain the same. With respect to the extensions, the Company did not recognize any additional expense as the fair values of the warrants were calculated at zero using the Binomial Lattice model.

Non-Employee Directors Equity Compensation Policy – Non-employee directors have a choice between receiving $9,000 value of common stock per quarter, where the number of shares is determined by the closing price of the Company’s stock on the last trading day of each quarter, or a number of options, limited to 18,000, to purchase twice the number of shares of common stock that the director would otherwise receive if the director elected to receive shares, with an exercise price based on the closing price of the Company’s common stock on the last trading day of each quarter.

Stock warrants – Upon approval of the Board of Directors, the Company may grant stock warrants to consultants for services performed.

Valuation of awards – At September 30, 2016, the Company had options outstanding that vest on two different types of vesting schedules, service-based and performance-based. For both service-based and performance-based stock option grants, the Company estimates the fair value of stock-based compensation awards by using the Binomial Lattice option pricing model with the following assumptions used for the nine month periods ended September 30, 2016 and September 30, 2015 respectively:

The expected volatility is based on the historical volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues over equivalent lives of the options.

The expected life of awards represents the weighted-average period the stock options or warrants are expected to remain outstanding and is a derived output of the Binomial Lattice model. The expected life is impacted by all of the underlying assumptions and calibration of the Company’s model.

Stock-based compensation activity – During the nine months ended September 30, 2016, the Company granted stock-based awards as follows:

Expenses related to the vesting, modifying and granting of stock-based compensation awards were $16,607 and $228,732 for the nine months ended September 30, 2016 and 2015, respectively. Such expenses have been included in general and administrative expense.

The following table summarizes the Company’s stock-based compensation activity for the nine-month period ended September 30, 2016:

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the quarter ended September 30, 2016, in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable.

Unvested awards -The following table summarizes the changes of the Company’s stock-based compensation awards subject to vesting for the nine-month period ended September 30, 2016

A total of 50,000 shares vested during the nine-month period ended September 30, 2016. As of September 30, 2016, there was $nil of total unrecognized compensation cost related to unvested stock-based compensation awards. Included in the total of unvested stock options at September 30, 2016, was 250,000 performance-based stock options. At September 30, 2016, management determined that achievement of the performance targets was probable. The weighted average period over which the related expense will be recognized is 0.25 years as of September 30, 2016.

NOTE 10 – STOCKHOLDER RIGHTS AGREEMENT

The Company adopted a Stockholder Rights Agreement (the “Rights Agreement”) in August 2009 to protect stockholders from attempts to acquire control of the Company in a manner in which the Company’s Board of Directors determines is not in the best interest of the Company or its stockholders.  Under the Rights Agreement, each currently outstanding share of the Company’s common stock includes, and each newly issued share will include, a common share purchase right.  The rights are attached to and trade with the shares of common stock and generally are not exercisable.  The rights will become exercisable if a person or group acquires, or announces an intention to acquire, 15% or more of the Company’s outstanding common stock. The Company’s Board of Directors had previously waived the 15% limitation in the Rights Agreement with respect to Luxor, to allow Luxor to become the beneficial owner of up to 26% of the shares of our Common Stock, without being deemed to be an “acquiring person” under the Rights Agreement. In connection with the Offering, completed on March 18, 2016 the Company agreed to further waive all of the existing limitations under the Rights Agreement so that Luxor would not be considered an “acquiring person” under the Rights Agreement under any circumstance. Following the Offering, Luxor is the beneficial owner (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, the “Exchange Act”) of approximately 49.83% of our Common Stock. As of September 30, 2016, Luxor was the beneficial owner of approximately 44.27% of our common stock. The Rights Agreement was not adopted in response to any specific effort to acquire control of the Company.  The issuance of rights had no dilutive effect, did not affect the Company’s reported earnings per share and was not taxable to the Company or its stockholders. 

NOTE 11 – INCOME TAXES

The Company is a Nevada corporation and is subject to federal and Arizona income taxes. Nevada does not impose a corporate income tax. The Company recognized no income tax expense for the period ended September 30, 2016 as compared to September 30, 2015. The Company has recorded a full valuation allowance for any income tax benefits recognized in the current period. The effective tax rate for the period ended September 30, 2016 was 0% as compared to 38% for the 2015 period. The overall effective income tax rate for the year could be different from the effective tax rate for the nine months ended September 30, 2016. A summary of our deferred tax assets and liabilities as well as the Company’s federal and state net operating loss carryforwards are included in Note 14 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2015.

The Company and its subsidiaries file income tax returns in the United States. These tax returns are subject to examination by taxation authorities provided the years remain open under the relevant statutes of limitations, which may result in the payment of income taxes and/or decreases in its net operating losses available for carryforward. The Company has losses from inception to date, and thus all years remain open for examination. While the Company believes that its tax filings do not include uncertain tax positions, the results of potential examinations or the effect of changes in tax law cannot be ascertained at this time. The Company does not have any tax returns currently under examination by the Internal Revenue Service. 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Severance agreements – The Company has a severance agreement with an executive officer that provides for various payments if the officer’s employment agreement is terminated by the Company, other than for cause. At September 30, 2016, the total potential liability for the severance agreement was $80,000.

Clarkdale Slag Project royalty agreement - NMC - Under the original JV Agreement, the Company agreed to pay NMC a 5% royalty on NSR payable from the Company’s 50% joint venture interest in the production from the Clarkdale Slag Project. Upon the assignment to the Company of VRIC’s 50% interest in the Joint Venture Agreement in connection with the reorganization with TI, the Company continues to have an obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project.

Purchase consideration Clarkdale Slag Project - In consideration of the acquisition of the Clarkdale Slag Project from VRIC, the Company has agreed to certain additional contingent payments. The acquisition agreement contains payment terms which are based on the Project Funding Date as defined in the agreement:

The Advance Royalty shall continue for a period of ten years from the Agreement Date or until such time that the Project Royalty shall exceed $500,000 in any calendar year, at which time the Advance Royalty requirement shall cease.

On July 25, 2011, the Company and NMC entered into an amendment (the “Third Amendment”) to the assignment agreement between the parties dated June 1, 2005. Pursuant to the Third Amendment, the Company agreed to pay Advance Royalties to NMC of $15,000 per month (the “Minimum Royalty Amount”) effective as of January 1, 2011. The Third Amendment also provides that the Minimum Royalty Amount will continue to be paid to NMC in every month where the amount of royalties otherwise payable would be less than the Minimum Royalty Amount, and such Advance Royalties will be treated as a prepayment of future royalty payments. In addition, fifty percent of the aggregate consulting fees paid to NMC from 2005 through December 31, 2010 were deemed to be prepayments of any future royalty payments. As of December 31, 2010, aggregate consulting fees previously incurred amounted to $1,320,000, representing credit for advance royalty payments of $660,000.

Total Advance Royalty fees were $45,000 for the three months ended September 30, 2016 and 2015, respectively, and $135,000 for the nine months ended September 30, 2016 and 2015 respectively. Advance Royalty fees have been included in mineral exploration and evaluation expenses – related party on the statements of operations.

Development agreement - In January 2009, the Company submitted a development agreement to the Town of Clarkdale for development of an Industrial Collector Road (the “Road”). The purpose of the Road is to provide the Company the capability to transport supplies, equipment and products to and from the Clarkdale Slag Project site efficiently and to meet stipulations of the Conditional Use Permit for the full production facility at the Clarkdale Slag Project.

The timing of the development of the Road is to be within two years of the effective date of the agreement. The effective date shall be the later of (i) 30 days from the approving resolution of the agreement by the Town Council, (ii) the date on which the Town of Clarkdale obtains a connection dedication from separate property owners who have land that will be utilized in construction of the Road, or (iii) the date on which the Town of Clarkdale receives the proper effluent permit. The contingencies outlined in (ii) and (iii) above are beyond control of the Company.

The Company estimates the initial cost of construction of the Road to be approximately $3,500,000 and the cost of additional enhancements to be approximately $1,200,000 which will be required to be funded by the Company. Based on the uncertainty of the contingencies, this cost is not included in the Company’s current operating plans. Funding for construction of the Road will require obtaining project financing or other significant financing. As of the date of this filing, these contingencies had not changed.

Registration Rights Agreement - In connection with the June 7, 2012 private placement, the Company entered into a Registration Rights Agreement (“RRA”) with the purchasers. Pursuant to the RRA, the Company agreed to certain demand registration rights. These rights include the requirement that the Company file certain registration statements within a specified time period and to have these registration statements declared effective within a specified time period. The Company also agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions. If the Company is not able to comply with these registration requirements, the Company will be required to pay cash penalties equal to 1.0% of the aggregate purchase price paid by the investors for each 30-day period in which a registration default, as defined by the RRA, exists. The maximum penalty is equal to 3.0% of the purchase price which amounts to $121,500. As of the date of this filing, the Company does not believe the penalty to be probable and accordingly, no liability has been accrued.

Litigation – From time to time the Company may become involved in litigation in the ordinary course of trade or business. As of September 30, 2016, the Company has recorded amounts in accounts payable and accrued liabilities equal to any potential litigation liabilities.

NOTE 13 – RELATED PARTY TRANSACTIONS

NMC - The Company utilizes the services of NMC to provide technical assistance and financing related activities. In addition, NMC provides the Company with use of its laboratory, instrumentation, milling equipment and research facilities. One of the Company’s executive officers, Mr. Ager, is affiliated with NMC. In 2011, the Company and NMC agreed to an advance royalty of $15,000 per month and to reimburse NMC for actual expenses incurred and consulting services provided. In 2016, the Company incurred no expense for consulting services.

The Company has an existing obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project. The royalty agreement and Advance Royalty payments are more fully discussed in Note 11.

The following table provides details of transactions between the Company and NMC for the three and nine months ended:

The Company had outstanding balances due to NMC of $323,725 and $188,725 at September 30, 2016 and December 31, 2015, respectively.

Cupit, Milligan, Ogden & Williams, CPAs – The Company utilized CMOW to provide accounting support services through April 11, 2016. CMOW is an affiliate of the Company’s former CFO, Mr. Williams. Fees for services provided by CMOW do not include any charges that had been incurred for Mr. Williams’ time. Mr. Williams was compensated for his time under his employment agreement.

The following table provides details of transactions between the Company and CMOW and the direct benefit to Mr. Williams for the three and nine months ended:

The Company had an outstanding balance due to CMOW of $208,931 and $158,457 as of September 30, 2016 and December 31, 2015, respectively. Subsequent to September 30, 2016 the Company paid $208,931 to CMOW.

Financial Consulting Services – Beginning in October of 2014, the Company utilized five individuals to provide financial consulting services. During the third quarter of 2015, the Company entered into consulting agreements with three of these individuals, all of the consultants provided similar services. One of these individuals is the son of the Company’s CEO. In consideration for his services, the Company issued to him 2,063,143 warrants to purchase common stock at an exercise price of $0.50 per share, which the Company has valued at an aggregate of $258,553. The warrants are fully vested and expire five years from the date of grant.

Ireland Inc. – The Company leases corporate office space on month-to-month terms from Ireland Inc. (“Ireland”). NMC is a shareholder in both the Company and Ireland. Additionally, one of the Company’s late directors was the former CFO, Treasurer and a director of Ireland and the Company’s CEO provides consulting services to Ireland.

Total rent expense incurred to Ireland was $5,202 and $15,606, and $5,068 and $15,070, for the three and nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, no amounts were due to Ireland. At December 31, 2015, $1,734 was due to Ireland.

Luxor – As of September 30, 2016 Luxor owned an aggregate of 142,665,754 shares of common stock and warrants to purchase up to an additional 18,525,032 shares of common stock. All 18,525,032 warrants, however, are not exercisable until September 18, 2016.

As of September 30, 2016, no amounts were payable to Luxor.

During the nine months ended September 30, 2016 the Company recognized a loss on conversion of $6,998,571 related to the conversion $2,691,000 in convertible notes payable and accrued interest owing to the Luxor Group. In connection with this conversion the Company issued to the Luxor Group 76,885,714 shares of common stock, as discussed in Note 6.

During the nine months ended September 30, 2016 The Luxor Group purchased from the Company 42,857,143 shares of common stock at $0.035 per share in exchange for $1,500,000 cash, as discussed in Note 8.