UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 1

to

Form 10-Q

on

Form 10-Q/A

 

x

Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

 

¨

Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

 

Commission file number 000-30995

 

SEARCHLIGHT MINERALS CORP.

 

(Exact name of registrant as specified in its charter)

 

Nevada (State or other jurisdiction of incorporation or organization)		98-0232244 (I.R.S. Employer Identification No.)
#120 - 2441 West Horizon Ridge Pkwy. Henderson, Nevada (Address of principal executive offices)		89052 (Zip code)

 

(702) 939-5247

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    x     No     ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes     ¨ No     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes     ¨     No     x

 

As of May 13, 2011, the registrant had 127,018,318 outstanding shares of common stock.

 

 

Explanatory Note

 

This Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2011 (the “2011 Form 10-Q/A”) amends the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, originally filed by Searchlight Minerals Corp. with the Securities and Exchange Commission (“SEC”) on May 13, 2011. The following items have been amended:

 

PART I - Item 1.	Financial Statements
PART I - Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART I - Item 4	Controls and Procedures
PART II - Item 6.	Exhibits

 

In addition to the filing of this Form 10-Q/A for the quarter ended March 31, 2011, we are also concurrently filing amendments to our Annual Report on Form 10-K for the year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarterly periods ended June 30 and September 30, 2011. The amendments to our Quarterly Reports on Form 10-Q will be filed to restate our unaudited financial statements and related financial information for the periods contained in those reports. The 2010 Form 10-K/A is being filed to restate our financial statements for the years ended December 31, 2008, 2009 and 2010.

 

As disclosed in a Current Report on Form 8-K we filed with the SEC on January 6, 2012, on January 4, 2012, our board of directors and audit committee determined, based on the recommendation of management, after consulting with our independent accountants, Brown Armstrong Accountancy Corporation, that our audited consolidated financial statements for each of the years ended December 31, 2008, 2009 and 2010, and the cumulative periods from January 14, 2000 (date of inception) through December 31, 2008, 2009 and 2010, and our unaudited interim consolidated financial statements for each of the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011, should not be relied upon and that restatements should be made to our consolidated financial statements.

 

As such, our board of directors unanimously approved, authorized and directed the restatement of the financial statements for the periods and directed that the reports stated above be amended to contain such restated financial statements in order to correct certain accounting errors in our previously filed financial statements.

 

The following is a brief summary of the accounting errors:

 

·

2007 and 2008 Warrants. We issued warrants to purchase up to an aggregate of 7,042,387 shares of common stock (collectively, the “2007 and 2008 Warrants”) to investors in connection with our private placements on February 23, 2007 ($4.50 per share exercise price), March 22, 2007 ($4.50 per share exercise price), December 26, 2007 ($2.40 per share exercise price) and February 7, 2008 ($2.40 per share exercise price). We unilaterally made two subsequent amendments to the exercise price of the 2007 and 2008 Warrants on December 29, 2008 (those 2007 and 2008 Warrants with a $4.50 per share exercise price were reduced to a $2.40 per share exercise price, and those 2007 and 2008 Warrants with a $2.40 per share exercise price did not have a price adjustment) and November 12, 2009 (all of the 2007 and 2008 Warrants were reduced to a $1.85 per share exercise price).

 

Further, in connection with the December 29, 2008 amendment, we unilaterally amended certain of the 2007 and 2008 Warrants to reduce the price at which we would be able to call those 2007 and 2008 Warrants. However, on April 30, 2009, we amended those 2007 and 2008 Warrants to restore their original call provisions.

 

 

We did not give any accounting recognition to these modifications in our previously filed financial statements. The pricing modifications conveyed value to these investors that was not contemplated in the original agreements. Therefore, the pricing modifications to the 2007 and 2008 Warrants in all of these periodic reports should have been accounted for as warrant modification expense.

 

We utilized a binomial lattice option pricing model to estimate the incremental fair values of the modifications to the 2007 and 2008 Warrants. Based on this model, we recorded warrant modification expense of approximately $1.8 million and $3.2 million, as of December 29, 2008 and November 12, 2009, respectively.

 

·

2009 Warrants. On November 12, 2009, we issued an aggregate of 12,078,596 shares of common stock and warrants to purchase an additional 6,039,298 shares of common stock in a private placement. We paid commissions to agents which included warrants to purchase up to 301,965 shares of common stock. These warrants (collectively, the “2009 Warrants”) have an anti-dilution provision, including a provision for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price. The 2009 Warrants were recorded as equity in our previously filed financial statements and we did not consider the impact of the anti-dilution provision in the 2009 Warrants.

 

As a result, we performed a re-assessment of our accounting for the 2009 Warrants and determined that the 2009 Warrants were within the scope of Accounting Standards Codification 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”), formerly Emerging Issues Task Force Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. The 2009 Warrants have an anti-dilution provision, including a provision for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price of $1.85 per share. Resetting the exercise price based on a price per share received from other sales of common stock and common stock equivalents is not an input to an option pricing model and thus the fair value of the 2009 Warrants were not linked to our common stock under ASC 815-40. Accordingly, the 2009 Warrants should have been accounted for as derivative financial liabilities, measured at its fair value at the date of issuance, with changes in fair value recognized as a gain or loss for each reporting period thereafter.

 

On our balance sheets, we have recorded a derivative warrant liability beginning in the fourth quarter of the year ended December 31, 2009. The derivative warrant liability has been adjusted to its fair value at each of the periods ended from December 31, 2009 through June 30, 2011.

 

Our statements of operations for the years ended December 31, 2008 and 2009 have been restated to recognize warrant modification expense as a general and administrative expense. In addition, our statements of operations for the years ended December 31, 2009 and 2010 and the quarterly periods ended March 31, 2010, June 30, 2010, September 30, 2010, March 31, 2011 and June 30, 2011 have been restated to record the change in fair value of the derivative warrant liability as an other income (expense) item.

 

The accounting treatments of the 2007, 2008 and 2009 Warrants are non-cash items and had no impact on our business operations or cash flows.

 

A more detailed description of the restatements made to the financial statements for the three month periods ended March 31, 2010 and 2011 is provided at Note 21 to the consolidated financial statements included with this report.

 

 

In connection with the above-referenced accounting errors, management determined that there was a material weakness in our internal control over financial reporting and disclosure controls and procedures, as discussed in Part I - Item 4 of this Form 10-Q/A. Based on the discovery of the errors relating to the restatements described above, our management concluded that our system of internal control over financial reporting was not effective during the period from December 31, 2008 through September 30, 2011, which resulted in the restatements described above. For a discussion of management’s consideration of our internal control over financial reporting and disclosure controls and procedures and the material deficiency in our internal control over financial reporting and disclosure controls and procedures, see Part I - Item 4 included in this Form 10-Q/A.

 

Item 6 of Part II of this 2010 Form 10-Q/A has been amended to contain the currently-dated certifications from our principal executive officer and principal financial officer, as required by Section 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

Except as described above, no other amendments are being made to the disclosures presented in the original Form 10-Q. This Form 10-Q/A Amendment No. 1 does not reflect events occurring after the filing of the original Form 10-Q, or modify or update the disclosures contained therein in any other way other than as required to reflect the amendments discussed above. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q with the SEC on May 13, 2011. Accordingly, this Form 10-Q/A Amendment No. 1 should be read in its historical context and in conjunction with our filings made with the SEC subsequent to the filing of the original Form 10-Q, as information in such filings may update or supersede certain information contained in this Form 10-Q/A Amendment No. 1.

 

  

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION	6
Item 1. Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3. Quantitative and Qualitative Disclosures About Market Risk	55
Item 4. Controls and Procedures	55
PART II - OTHER INFORMATION	56
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3. Defaults Upon Senior Securities	57
Item 4. Submission of Matters to a Vote of Security Holders	57
Item 5. Other Information	57
Item 6. Exhibits	58
SIGNATURES	59

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

 

		(Unaudited)
		March 31, 2011				December 31, 2010
		(restated)
ASSETS
Current assets
Cash		$	6,954,346			$	6,996,027
Prepaid expenses			156,242				75,043
Assets held for sale			375,000				-
Total current assets			7,485,588				7,071,070
Property and equipment, net			12,690,732				13,900,308
Mineral properties			16,947,419				16,947,419
Slag project			120,766,877				120,766,877
Land - smelter site and slag pile			5,916,150				5,916,150
Land			3,300,000				3,300,000
Reclamation bond and deposits, net			14,772				14,772
Total non-current assets			159,635,950				160,845,526
Total assets		$	167,121,538			$	167,916,596
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	51,213			$	254,094
Accounts payable - related party			58,356				51,317
VRIC payable, current portion - related party			233,026				228,427
Capital lease payable, current portion			8,720				15,175
Total current liabilities			351,315				549,013
Long-term liabilities
VRIC payable, net of current portion - related party			1,459,417				1,519,426
Derivative warrant liability			-				993,386
Deferred tax liability			43,891,705				44,712,636
Total long-term liabilities			45,351,122				47,225,448
Total liabilities			45,702,437				47,774,461
Commitments and contingencies - Note 15			-				-
Stockholders' equity
Common stock, $0.001 par value; 400,000,000 shares authorized, 126,018,318 and 123,018,318 shares, respectively, issued and outstanding			126,018				123,018
Additional paid-in capital			145,936,659				144,219,513
Accumulated deficit during exploration stage			(24,643,576	)			(24,200,396	)
Total stockholders' equity			121,419,101				120,142,135
Total liabilities and stockholders' equity		$	167,121,538			$	167,916,596

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

										For the period from
										January 14, 2000
										(date of inception)
		For the three months ended								through
		March 31, 2011				March 31, 2010				March 31, 2011
		(restated)				(restated)				(restated)
Revenue		$	-			$	-			$	-
Operating expenses
Mineral exploration and evaluation expenses			597,910				716,876				11,026,844
Mineral exploration and evaluation expenses - related party			50,058				117,857				2,080,173
Administrative - Clarkdale site			110,177				99,515				3,271,171
General and administrative			589,755				645,114				17,358,859
General and administrative - related party			43,356				37,119				450,190
Depreciation			348,382				221,500				2,103,740
Total operating expenses			1,739,638				1,837,981				36,290,977
Loss from operations			(1,739,638	)			(1,837,981	)			(36,290,977	)
Other income (expense)
Rental revenue			6,135				6,480				130,605
Gain (loss) on equipment disposition			71				-				(49,070	)
Change in derivative warrant liability			993,386				1,042,031				4,281,989
Impairment loss on assets held for sale			(526,824	)			-				(526,824	)
Interest expense			(1,140	)			(1,048	)			(13,995	)
Interest and dividend income			3,899				308				633,128
Total other income (expense)			475,527				1,047,771				4,455,833
Loss before income taxes and discontinued operations			(1,264,111	)			(790,210	)			(31,835,144	)
Income tax benefit			820,931				684,876				10,943,591
Loss from continuing operations			(443,180	)			(105,334	)			(20,891,553	)
Discontinued operations:
Gain (loss) from discontinued operations			-				120,688				(3,752,023	)
Net income (loss)		$	(443,180	)		$	15,354			$	(24,643,576	)
Loss per common share - basic and diluted
Loss from continuing operations		$	(0.00	)		$	(0.00	)
Gain (loss) from discontinued operations			-				-
Net gain (loss)		$	(0.00	)		$	0.00
Weighted average common shares outstanding - basic and diluted			124,484,985				118,768,373

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED) (RESTATED)

 

														Accumulated
														Deficit During				Total
		Common Stock								Additional				Exploration				Stockholders'
		Shares				Amount				Paid-in Capital				Stage				Equity
Balance, December 31, 2009			118,768,373			$	118,768			$	141,744,841			$	(22,460,281	)		$	119,403,328
Amortization of stock options issued to directors over vesting period			-				-				19,560				-				19,560
Issuance of common stock for directors' compensation			15,000				15				17,985				-				18,000
Issuance of stock options for directors' compensation			-				-				8,558				-				8,558
Net income, March 31, 2010 (restated)			-				-				-				15,354				15,354
Balance, March 31, 2010 (restated)			118,783,373			$	118,783			$	141,790,944			$	(22,444,927	)		$	119,464,800
Balance, December 31, 2010			123,018,318			$	123,018			$	144,219,513			$	(24,200,396	)			120,142,135
Issuance of common stock for cash under Common Stock Purchase Agreement net of $7,500 issuance costs			3,000,000				3,000				1,620,310				-				1,623,310
Amortization of stock options issued to directors over the vesting periods			-				-				57,161				-				57,161
Amortization of purchase warrants issued to a consultant over the vesting period			-				-				17,637				-				17,637
Issuance of stock options for directors' compensation			-				-				22,038				-				22,038
Net loss, March 31, 2011 (restated)			-				-				-				(443,180	)			(443,180	)
Balance, March 31, 2011  (restated)			126,018,318			$	126,018			$	145,936,659			$	(24,643,576	)		$	121,419,101

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

										Period from
										January 14, 2000
										(date of inception)
		For the three months ended								through
		March 31, 2011				March 31, 2010				March 31, 2011
		(restated)				(restated)				(restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income  (loss)		$	(443,180	)		$	15,354			$	(24,643,576	)
Gain (loss) from discontinued operations			-				120,688				(3,752,023	)
Loss from continuing operations			(443,180	)			(105,334	)			(20,891,553	)
Adjustments to reconcile income (loss) from operating to net cash used in operating activities:
Depreciation			348,382				221,500				2,103,740
Stock based expenses			96,836				46,118				6,862,014
(Gain) loss on disposition of fixed assets			(71	)			-				50,419
Change in derivative warrant liability			(993,386	)			(1,042,031	)			(4,281,989	)
Amortization of prepaid expense			83,319				74,944				1,014,883
Write down of assets held for sale			526,824				-				526,824
Changes in operating assets and liabilities:
Prepaid expenses			(164,518	)			(157,583	)			(1,171,124	)
Reclamation bond and deposits			-				(2,640	)			(14,772	)
Accounts payable and accrued liabilities			(195,842	)			(191,817	)			(224,844	)
Deferred income taxes			(820,931	)			(684,876	)			(10,943,591	)
Net cash used in operating activities			(1,562,567	)			(1,841,719	)			(26,969,993	)
Net cash used in operating activities from discontinued operations			-				-				(2,931,324	)
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid on mineral property claims			-				-				(87,134	)
Cash paid for joint venture and merger option			-				-				(890,000	)
Cash paid to VRIC on closing date - related party			-				-				(9,900,000	)
Cash paid for additional acquisition costs			-				-				(130,105	)
Capitalized interest - related party			(34,589	)			(38,836	)			(691,255	)
Proceeds from property and equipment disposition			338				-				738
Purchase of property and equipment			(6,308	)			(268,185	)			(14,300,409	)
Net cash used in investing activities			(40,559	)			(307,021	)			(25,998,165	)
Net cash used in investing activities from discontinued operations			-				-				(452,618	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from stock issuance			1,630,810				-				62,950,305
Stock issuance costs			(7,500	)			-				(2,111,833	)
Principal payments on capital lease payable			(6,455	)			(6,175	)			(107,518	)
Principal payments on VRIC payable - related party			(55,410	)			(51,164	)			(808,745	)
Net cash provided (used) by financing activities			1,561,445				(57,339	)			59,922,209
Net cash provided by financing activities from discontinued operations			-				-				3,384,237
NET CHANGE IN CASH			(41,681	)			(2,206,079	)			6,954,346
CASH AT BEGINNING OF PERIOD			6,996,027				13,099,562				-
CASH AT END OF PERIOD		$	6,954,346			$	10,893,483			$	6,954,346

 

See Accompanying Notes to these Consolidated Financial Statements 

 

  

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

										Period from
										January 14, 2000
										(date of inception)
		For the three months ended								through
		March 31, 2011				March 31, 2010				March 31, 2011
		(restated)				(restated)				(restated)
SUPPLEMENTAL INFORMATION
Interest paid, net of capitalized amounts		$	1,140			$	1,048			$	64,746
Income taxes paid		$	-			$	-			$	-
Non-cash investing and financing activities:
Capital equipment purchased through accounts payable and financing		$	-			$	-			$	444,690
Assets acquired for common stock issued for the acquisition		$	-			$	-			$	66,879,375
Assets acquired for common stock issued for mineral properties		$	-			$	-			$	10,220,000
Assets acquired for liabilities incurred in the acquisition		$	-			$	-			$	2,628,188
Net deferred tax liability assumed		$	-			$	-			$	55,197,465
Merger option payment applied to the acquisition		$	-			$	-			$	200,000
Reclassify joint venture option agreement to slag project		$	-			$	-			$	690,000
Warrants issued in connection with joint venture option agreement related to slag project		$	-			$	-			$	1,310,204
Stock options for common stock issued in satisfaction of debt		$	-			$	-			$	1,500,000
Capitalization of related party liability to equity		$	-			$	-			$	742,848
Stock issued for conversion of accounts payable, 200,000 shares at $0.625		$	-			$	-			$	125,000
Investor warrants issued with non-customary anti-dilution provisions		$	-			$	-			$	4,281,989

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES

 

Description of business - Searchlight Minerals Corp. (the “Company”) is considered an exploration stage company since its formation, and the Company has not yet realized any revenues from its planned operations. The Company is primarily focused on the exploration, acquisition and development of mining and mineral properties. 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 (the “UK”). 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.”

 

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. In connection with its reorganization the Company entered into mineral option agreements to acquire an interest in the Searchlight Claims. The Company has consequently been considered as an exploration stage enterprise. Also in connection with its corporate restructuring, its Board of Directors approved a change in its name from “Phage Genomics, Inc.” (“Phage”) to "Searchlight Minerals Corp.” effective June 23, 2005.

 

Basis of presentation - The interim financial statements present the consolidated balance sheets, statements of operations, stockholders’ equity, and cash flows of the Company. These consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”).

 

These 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 and disclosures necessary for the fair presentation of these interim statements have been included. All such adjustments are, in the opinion of management, of a normal recurring nature with the exception of the reclassification of certain pieces of equipment to “assets held for sale” and the related write down to fair value discussed in Note 3 and with exception of the adjustments discussed in Note 21. The results reported in these interim consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim consolidated financial statements should be read in conjunction with the restated consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the SEC on March 5, 2012.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)

 

Going concern - The Company incurred cumulative net losses of $24,643,576 from operations as of March 31, 2011 and has not commenced its commercial mining and mineral processing operations; rather, it is still in the exploration stage, raising substantial doubt about the Company’s ability to continue as a going concern. The Company will seek additional sources of capital through issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.

 

The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company’s plan. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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 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, impairment analysis of long-lived assets, and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

 

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. 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 are amortized using the units-of-production basis over the proven and probable reserves. Mineral properties are assessed for impairment when circumstances indicate that the carrying amount may not be recoverable. Impairment losses are charged to operations at the time of impairment. When a property is sold or abandoned, a gain or loss is recognized and included in the consolidated statement of operations.

 

Mineral exploration and development costs – Exploration expenditures incurred prior to entering the development stage are expensed and included in “Mineral exploration and evaluation expenses”.

 

Capitalized interest cost - The Company capitalizes interest costs related to the 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. Interest cost capitalized from imputed interest on acquisition indebtedness was $34,589 and $38,836 for the three months ended March 31, 2011 and 2010, respectively.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)

 

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 39 years. The grinding circuit is depreciated on the units-of-production method over the total estimated units. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Gains or losses on disposition are recognized in operations.

 

For property, plant and equipment that our Board of Directors approves for sale, the asset is reclassified on our consolidated financial statements as “assets held for sale”.  Accordingly, we cease recording depreciation expense for assets classified as held for sale until the asset is sold or reclassified as held for use.  If the asset is ultimately reclassified as held for use, the previously unrecorded depreciation expense is expensed in the period of reclassification. Assets held for sale are recorded at the lower of their carrying value or fair values less cost to sell.  Subsequent gains and losses in fair value are recognized in operations. Subsequent gains are limited to the cumulative losses previously recognized.

 

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 producing 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 undiscounted 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. To date, no such impairments have been identified.

 

Asset retirement obligation – The Company records the fair value of a liability for an asset retirement obligation (“ARO”) in the period that it is incurred if a reasonable estimate of fair value can be made. The fair value of the ARO is measured using expected future cash flows, discounted at the Company’s credit-adjusted risk-free interest rate. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. When the cost of the long-lived asset is depleted, the cost of the ARO is expensed over the useful life of the asset. To date, no significant asset retirement obligation exists and accordingly, no liability has been recorded.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)

 

Fair value of financial instruments - Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2		Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The Company’s financial instruments consist of mineral property purchase obligations and the derivative liability on stock purchase warrants. The mineral property purchase obligations are classified within Level 2 of the fair value hierarchy as their fair value is determined using interest rates which approximate market rates.

 

The derivative liability on stock purchase warrants was valued using the Binomial Lattice model, a Level 3 input. The change in fair value of the derivative liability is classified in other income (expense) in the statement of operations. The Company generally does not use derivative financial instruments to hedge exposures to cash flow, market or foreign currency risks. However, certain of the Company’s warrants contain anti-dilution provisions that are not afforded equity classification because they embody risks not clearly and closely related to the host contract. These features are required to be bifurcated and carried as a derivative liability.

 

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, such as stock options and warrants. In these consolidated financial statements, stock options and warrants are not considered in the computation of diluted earnings per share as their inclusion would be anti-dilutive for the periods presented. Excluded stock options and warrants amounted to 28,037,977 as of March 31, 2011.

 

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.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)

 

Income taxes - 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.

 

For acquired properties that do not constitute a business, a deferred income tax liability is recorded on GAAP basis over income tax basis using statutory federal and state rates. The resulting estimated future income tax liability associated with the temporary difference between the acquisition consideration and the tax basis is computed in accordance with Accounting Standards Codification (“ASC”) 740-10-25-51, Acquired Temporary Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, and is reflected as an increase to the total purchase price which is then applied to the underlying acquired assets in the absence of there being a goodwill component associated with the acquisition transactions.

 

Recent accounting standards - From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. The Company has evaluated all the recent accounting pronouncements and believes that none of them will have a material effect on the consolidated financial statements.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

2.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		March 31, 2011												December 31, 2010
		Cost				Accumulated Depreciation				Net book value				Cost				Accumulated Depreciation				Net Book Value
Furniture and fixtures		$	38,255			$	(22,922	)		$	15,333			$	38,255			$	(21,555	)		$	16,700
Lab equipment			249,061				(103,273	)			145,788				249,061				(90,822	)			158,239
Computers and equipment			79,147				(41,221	)			37,926				78,568				(42,617	)			35,951
Income property			309,750				(11,031	)			298,719				309,750				(10,369	)			299,381
Vehicles			44,175				(33,207	)			10,968				44,175				(30,798	)			13,377
Slag conveyance equipment			300,916				(29,346	)			271,570				44,375				(11,094	)			33,281
Demo module building			6,630,063				(1,377,587	)			5,252,476				6,630,063				(1,211,835	)			5,418,228
Demo module equipment			35,996				(1,800	)			34,196				-				-				-
Grinding circuit			863,678				-				863,678				-				-				-
Leaching and filtration			1,300,618				(65,031	)			1,235,587				-				-				-
Fero-silicate storage			4,326				(108	)			4,218				-				-				-
Electrowinning building			1,492,853				(37,321	)			1,455,532				-				-				-
Site improvements			1,299,630				(182,280	)			1,117,350				1,299,630				(160,557	)			1,139,073
Site equipment			337,140				(183,018	)			154,122				337,140				(165,578	)			171,562
Construction in progress			1,102,013				-				1,102,013				5,957,850				-				5,957,850
Capitalized interest			691,256				-				691,256				656,666				-				656,666
		$	14,778,877			$	(2,088,145	)		$	12,690,732			$	15,645,533			$	(1,745,225	)		$	13,900,308

 

At March 31, 2011, construction in progress included the gold, copper and zinc extraction circuits and electrowinning equipment at the Clarkdale Slag Project. During the first quarter of 2011, certain demo module equipment, grinding circuit, leaching and filtration system, fero-silicate storage, electrowinning building and the remaining slag conveyance equipment were reclassified from construction in progress to assets that are available for use in the demonstration testing facility.

 

Depreciation expense was $348,382 and $221,500 for the three months ended March 31, 2011 and 2010, respectively. The depreciation method for the leaching and filtration circuits is based on units of production. During the testing phase, units of production have thus far been limited and no depreciation expense has been recognized for the quarter ended March 31, 2011.

 

3.

ASSETS HELD FOR SALE

 

As of March 31, 2011, assets held for sale consisted of two pieces of equipment that the Company is in the process of selling. In the first quarter of 2011, the Company was approached by another entity who was interested in purchasing the equipment. Management determined that the sale was in the best interest of the Company due to the generation of additional cash flow. Prior to its reclassification to “assets held for sale” the equipment was classified as “construction in progress” and had a book value of $901,824. The anticipated selling price of the equipment is $375,000 which is reflective of the fact that the equipment is being sold “as is” with no implied warranty. Costs to complete the sale are incidental as the buyer will be responsible for the relocation and retrofitting of the equipment. An impairment loss of $526,824 was recorded to operations during the three month period ended March 31, 2011.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

4.

CLARKDALE SLAG PROJECT

 

On February 15, 2007, the Company completed a merger with Transylvania International, Inc. (“TI”) which provided the Company with 100% ownership of the Clarkdale Slag Project in Clarkdale, Arizona, through its wholly owned subsidiary CML. This acquisition superseded the joint venture option agreement to acquire a 50% ownership interest as a joint venture partner pursuant to Nanominerals Corp. (“NMC”) interest in a joint venture agreement (“JV Agreement”) dated May 20, 2005 between NMC and Verde River Iron Company, LLC (“VRIC”). One of the Company’s former directors was an affiliate of VRIC. The former director joined the Company’s board subsequent to the acquisition.

 

The Company believes the acquisition of the Clarkdale Slag Project was beneficial because it provides for 100% ownership of the properties, thereby eliminating the need to finance and further develop the projects in a joint venture environment.

 

This merger was treated as a statutory merger for tax purposes whereby CML was the surviving merger entity.

 

The Company applied EITF 98-03 (which has been superseded by ASC 805-10-25-1) with regard to the acquisition of the Clarkdale Slag Project. The Company determined that the acquisition of the Clarkdale Slag Project did not constitute an acquisition of a business as that term is defined in ASC 805-10-55-4, and the Company recorded the acquisition as a purchase of assets.

 

The Company also formed a second wholly owned subsidiary, CMC, for the purpose of developing a processing plant at the Clarkdale Slag Project.

 

The $130.3 million purchase price was comprised of a combination of the cash paid, the deferred tax liability assumed in connection with the acquisition, and the fair value of our common shares issued, based on the closing market price of our common stock, using the average of the high and low prices of our common stock on the closing date of the acquisition. The Clarkdale Slag Project is without known reserves and the project is exploratory in nature in accordance with Industry Guides promulgated by the Commission, Guide 7 paragraph (a)(4)(i). As required by ASC 930-805-30, Mining – Business Combinations – Initial Recognition, and ASC 740-10-25-49-55, Income Taxes – Overall – Recognition – Acquired Temporary Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, the Company then allocated the purchase price among the assets as follows (and also further described in this Note 4 to the financial statements): $5,916,150 of the purchase price was allocated to the slag pile site, $3,300,000 to the remaining land acquired, and $309,750 to income property and improvements. The purchase price allocation to the real properties was based on fair market values determined using an independent real estate appraisal firm (Scott W. Lindsay, Arizona Certified General Real Estate Appraiser No. 30292). The remaining $120,766,877 of the purchase price was allocated to the Clarkdale Slag Project, which has been capitalized as a tangible asset in accordance with ASC 805-20-55-37, Use Rights. Upon commencement of commercial production, the material will be amortized using the unit-of-production method over the life of the Clarkdale Slag Project.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

4.

CLARKDALE SLAG PROJECT (continued)

 

Closing of the TI acquisition occurred on February 15, 2007, (the “Closing Date”) and was subject to, among other things, the following terms and conditions:

 

a)

The Company paid $200,000 in cash to VRIC on the execution of the Letter Agreement;

 

b)

The Company paid $9,900,000 in cash to VRIC on the Closing Date;

 

c)

The Company issued 16,825,000 shares of its common stock, valued at $3.975 per share using the average of the high and low on the Closing Date, to the designates of VRIC on the closing pursuant to Section 4(2) and Regulation D of the Securities Act of 1933;

 

In addition to the cash and equity consideration paid and issued upon closing, the acquisition agreement contains the following payment terms and conditions:

 

d)

The Company agreed to continue to pay VRIC $30,000 per month until the earlier of: (i) the date that is 90 days after receipt of a bankable feasibility study by the Company (the “Project Funding Date”), or (ii) the tenth anniversary of the date of the execution of the letter agreement;

 

The acquisition agreement also contains the following additional contingent payment terms which are based on the Project Funding Date as defined in the agreement:

 

e)

The Company has agreed to pay VRIC $6,400,000 on the Project Funding Date;

 

f)

The Company has agreed to pay VRIC a minimum annual royalty of $500,000, commencing on the Project Funding Date (the “Advance Royalty”), and an additional royalty consisting of 2.5% of the net smelter returns (“NSR”) on any and all proceeds of production from the Clarkdale Slag Project (the “Project Royalty”). The Advance Royalty remains payable until the first to occur of: (i) the end of the first calendar year in which the Project Royalty equals or exceeds $500,000 or (ii) February 15, 2017. In any calendar year in which the Advance Royalty remains payable, the combined Advance Royalty and Project Royalty will not exceed $500,000 in any calendar year; and

 

g)

The Company has agreed to pay VRIC an additional amount of $3,500,000 from the net cash flow of the Clarkdale Slag Project. The Company has accounted for this as a contingent payment and upon meeting the contingency requirements, the purchase price of the Clarkdale Slag Project will be adjusted to reflect the additional consideration.

 

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.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

4.

CLARKDALE SLAG PROJECT (continued)

 

The following table reflects the recorded purchase consideration for the Clarkdale Slag Project:

 

Purchase price:
Cash payments		$	10,100,000
Joint venture option acquired in 2005 for cash			690,000
Warrants issued for joint venture option			1,918,481
Common stock issued			66,879,375
Monthly payments, current portion			167,827
Monthly payments, net of current portion			2,333,360
Acquisition costs			127,000
Total purchase price			82,216,043
Net deferred income tax liability assumed – Clarkdale Slag Project			48,076,734
Total		$	130,292,777

 

The following table reflects the components of the Clarkdale Slag Project:

 

Allocation of acquisition cost:
Clarkdale Slag Project (including net deferred income tax liability assumed of $48,076,734)		$	120,766,877
Land – smelter site and slag pile			5,916,150
Land			3,300,000
Income property and improvements			309,750
Total		$	130,292,777

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

5.

MINERAL PROPERTIES - MINING CLAIMS

 

As of March 31, 2011, mining claims consisted of 3,200 acres located near Searchlight, Nevada. The 3,200 acre property is staked as twenty 160 acre claims, most of which are also double-staked as 142 twenty acre claims. At March 31, 2011, the mineral properties balance was $16,947,419.

 

The mining claims were acquired with issuance of 5,600,000 shares of the Company’s common stock over a three year period ending in June 2008. On June 25, 2008, the Company issued the final tranche of shares and received the title to the mining claims in consideration of the satisfaction of the option agreement.

 

The mining claims were capitalized as tangible assets in accordance with ASC 805-20-55-37, Use Rights. Upon commencement of commercial production, the claims will be amortized using the unit-of-production method. If the Company does not continue with exploration after the completion of the feasibility study, the claims will be expensed at that time.

 

In connection with the Company’s Plan of Operations (“POO”) for the Searchlight Gold Project, a bond of $7,802 was posted with the Bureau of Land Management (“BLM”) in December 2009.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

6.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities at March 31, 2011 and December 31, 2010 consisted of the following:

 

		March 31, 2011				December 31, 2010
Trade accounts payable		$	22,538			$	236,019
Accrued compensation and related taxes			28,675				18,075
		$	51,213			$	254,094

 

Prior to the Company’s corporate restructuring in 2005, the Company had several accounts payable (the “Phage Payables”) included in trade accounts payable, dating back to 2003 and prior. These expenses were related to business operations which were discontinued in February 2005. During the first quarter of 2010, the Company updated its internal review of the status of the Phage Payables and recorded a gain of $120,688 from relief of liabilities that were cleared based on expiration of UK statutes of limitations. The Phage Payables are further discussed in Note 19.

 

Accounts payable – related party are discussed in Note 18.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

7.

DERIVATIVE WARRANT LIABILITY

 

On November 12, 2009, the Company issued an aggregate of 12,078,596 units of securities to certain investors, consisting of 12,078,596 shares of common stock and warrants to purchase an additional 6,039,298 shares of common stock, in a private placement to various accredited investors pursuant to a Securities Purchase Agreement. The Company paid commissions to agents in connection with the private placement in the amount of approximately $1,056,877 and warrants to purchase up to 301,965 shares of common stock.

 

The warrants issued to the purchasers in the private placement became exercisable on November 12, 2009. The warrants have an expiration date of November 12, 2012 and an initial exercise price of $1.85 per share. Under certain specified circumstances, the warrants may be exercised by means of a “cashless exercise.” 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 freestanding and 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.

 

As of March 31, 2011, the Company adjusted the fair value of the warrants as a result of four closings completed under the Seaside financing agreement. Financings completed during the three month period ended March 31, 2011 are discussed in Note 10. In accordance with the terms and conditions of the warrants the following adjustment was made through March 31, 2011: (i) the exercise price was reduced from $1.85 per share to $1.79 per share, and (ii) the number of warrants was increased by 212,577 warrants.

 

The following table sets forth the changes in the fair value of the derivative liability for the three month period ended March 31, 2011:

 

Beginning balance		$	993,386
Warrants granted			-
Warrants exercised			-
Adjustment to warrants			3,006
Change in fair value			(996,392	)
Ending balance		$	-

 

The Company estimates the fair value of the derivative liability by using the Binomial Lattice pricing-model, a Level 3 input. The reduction of the derivative liability to zero at March 31, 2011 was primarily the result of a reduction in the Company’s stock price combined with a decrease in the volatility of the Company’s stock price. The following assumptions were used during the three month period ended March 31, 2011:

 

Dividend yield			-
Expected volatility			68.29% to 71.50%
Risk-free interest rate			0.60% to 0.84%
Expected life (years)			2.00

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

8.

CAPITAL LEASE PAYABLE

 

The Company leases a CAT loader under a capital lease. The lease provides for monthly payments of $2,200 at interest of 4.45%. The lease matures in July 2011. The remaining balance at March 31, 2011 and December 31, 2010 was $8,720 and $15,175, respectively. The cost of the CAT loader less accumulated amortization is included in property, plant and equipment as site equipment. The net book value as of March 31, 2011 and December 31, 2010 was $6,054 and $12,108, respectively.

 

9.

VRIC PAYABLE - RELATED PARTY

 

Pursuant to the Clarkdale acquisition agreement, the Company agreed to pay VRIC $30,000 per month until the Project Funding Date. Mr. Harry Crockett, one of the Company’s former directors, was an affiliate of VRIC.  Mr. Crocket joined the Board of Directors subsequent to the acquisition. Mr. Crocket passed away in September 2010.

 

The Company has recorded a liability for this commitment using imputed interest based on its best estimate of future cash flows. The effective interest rate used was 8.00%, resulting in an initial present value of $2,501,187 and imputed interest of $1,128,813. The expected term used was 10 years which represents the maximum term the VRIC liability is payable if the Company does not obtain project funding.

 

The following table represents future principal payments on VRIC payable for each of the twelve month periods ending March 31,

 

2012		$	233,026
2013			252,367
2014			273,313
2015			295,998
2016			320,566
Thereafter			317,173
			1,692,443
VRIC payable, current portion			233,026
VRIC payable, net of current portion		$	1,459,417

 

The acquisition agreement also contains payment terms which are based on the Project Funding Date as defined in the agreement. The terms and conditions of these payments are discussed in more detail in Notes 4 and 16.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

10.

STOCKHOLDERS’ EQUITY

 

Common stock Purchase Agreement - On December 22, 2010, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Seaside 88, LP (“Seaside”) for the sale of 3,000,000 shares of common stock, followed by the sale of up to 1,000,000 shares of common stock on approximately the 15th day of the month for ten consecutive months.

 

The per share purchase price of the shares sold in each transaction will be at a price equal to the volume weighted average trading price of the Company’s common stock during the ten-day trading period immediately preceding the applicable closing date (the “VWAP”), multiplied by 0.85.  For any closing to take place, the VWAP must be at least $0.50 per share. If the VWAP is below $0.50 per share, the applicable closing will not occur. In such event, the closing will be rescheduled to occur following the end of the originally scheduled closings under the Purchase Agreement, provided that only two closings may be rescheduled.

 

The Company has the right, upon written notice to Seaside, to immediately terminate the Purchase Agreement at any time. In no event may the purchase of shares of common stock at a subsequent closing cause Seaside’s beneficial ownership of the Company’s common stock to exceed 9.99% of the number of common shares outstanding after such subsequent closing. 

 

During the three months ended March 31, 2011, the Company’s stockholders’ equity activity consisted of the following:

 

a)

On March 15, 2011, the Company issued 1,000,000 shares of common stock to Seaside at a price of $0.47694 per share under the Purchase Agreement for gross proceeds of $476,935. Total fees related to this issuance were $2,500.

 

b)

On February 15, 2011, the Company issued 1,000,000 shares of common stock to Seaside at a price of $0.49198 per share under the Purchase Agreement for gross proceeds of $491,980. Total fees related to this issuance were $2,500.

 

c)

On January 18, 2011, the Company issued 1,000,000 shares of common stock to Seaside at a price of $0.661895 per share under the Purchase Agreement for gross proceeds of $661,895. Total fees related to this issuance were $2,500.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

10.

STOCK HOLDERS EQUITY (continued)

 

Private placement stock warrants - As a result of the Seaside equity funding transactions completed in the first quarter of 2011, the Company adjusted the warrants from the November 12, 2009 private placement offering. The following adjustments were made: (i) the exercise price was reduced to $1.79 per share, (ii) the number of warrants was increased by 108,051, and (iii) at March 31, 2011, the cumulative warrant adjustment has provided for the issuance of an additional 212,577 warrants.

 

The following table summarizes the Company’s private placement warrant activity for the three months ended March 31, 2011:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Balance, December 31, 2010			13,488,176			$	1.84				3.09
Warrants granted			108,051				1.79				3.05
Warrants expired			-				-				-
Warrants exercised			-				-				-
Balance, March 31, 2011			13,596,227			$	1.82				2.85

 

 

 SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

11.

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 March 31, 2011, the Company had 6,691,444 of its common shares available for issuance for stock option awards under the Company’s stock option plans.

 

At March 31, 2011, the Company had the following stock option plans available:

 

·

2009 Plan - Under the terms of the 2009 Plan, options to purchase up to 3,250,000 shares of common stock may be granted to eligible participants. Under the plan, the exercise price is generally equal to the fair market value of the Company’s common stock on the grant date and the maximum term of the options is generally ten years. For grantees who own more than 10% of the Company’s common stock on the grant date, the exercise price may not be less than 110% of the fair market value on the grant date and the term is limited to five years. The 2009 Plan was approved by the Company’s stockholders on December 15, 2009. As of March 31, 2011, no options have been granted under the 2009 Plan.

 

·

2009 Directors Plan – Under the terms of the 2009 Directors Plan, options to purchase up to 750,000 shares of common stock may be granted to Directors. Under the plan, the exercise price may not be less than 100% of the fair market value of the Company’s common stock on the grant date and the term may not exceed ten years. No participants shall receive more than 300,000 options under this plan in any one calendar year. The 2009 Directors Plan was approved by the Company’s stockholders on December 15, 2009. As of March 31, 2011, the Company had granted 656,745 options under the 2009 Directors Plan with a weighted average exercise price of $1.14 per share. As of March 31, 2011, all of the options granted were outstanding.

 

·

2007 Plan – Under the terms of the 2007 Plan, options to purchase up to 4,000,000 shares of common stock may be granted to eligible participants. Under the plan, the option price for incentive stock options is the fair market value of the stock on the grant date and the option price for non-qualified stock options shall be no less than 85% of the fair market value of the stock on the grant date. The maximum term of the options under the plan is ten years from the grant date. The 2007 Plan was approved by the Company’s stockholders on June 15, 2007. As of March 31, 2011, the Company had granted 651,811 options under the 2007 Plan with a weighted average exercise price of $1.18 per share. As of March 31, 2011, 637,065 of the options granted were outstanding.

 

Stock warrants – From time to time the Company grants stock warrants to consultants related to services performed. These grants are on an individual transaction basis and issued upon approval of the Board of Directors. 

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

11.

STOCK -BASED COMPENSATION (continued)

 

Valuation of awards - 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 grants:

 

		2011
Risk-free interest rate		1.00% - 2.24%
Dividend yield		-
Expected volatility		76.54% - 83.28%
Expected life (years)		2.00 - 4.25

 

For stock options and warrants awarded during 2011, the expected volatility is based on the historical volatility levels on our 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. The Binomial Lattice model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations on all past option grants made by the Company.

 

Stock-based compensation activity - During the three month period ended March 31, 2011, the Company granted stock-based awards as follows:

 

a)

On March 31, 2011, the Company granted nonqualified stock options under the 2007 Plan for the purchase of 105,882 shares of common stock at $0.51 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on March 31, 2016. The exercise price of the stock options equaled the closing price of the Company’s common stock on the grant date.

 

b)

On January 13, 2011, the Company granted stock purchase warrants for the purchase of 200,000 shares of common stock at $1.00 per share to a consultant. The warrants vest 25% each on April 13, 2011, July 13, 2011, October 13, 2011 and January 13, 2012. The warrants expire on January 13, 2014. The exercise price of the warrants exceeded the closing price of the Company’s common stock which was $0.76 on the grant date.

 

Expenses for the three months ended March 31, 2011 and 2010 related to the vesting and granting of stock-based compensation awards were $96,836 and $28,118, respectively, and are included in general and administrative expense.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

11.

STOCK-BASED COMPENSATION (continued)

 

The following table summarizes the Company’s stock-based compensation activity for the three months ended March 31, 2011:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Balance, December 31, 2010			2,326,128			$	1.58				3.34
Options/warrants granted			305,882				0.83				3.56
Options/warrants expired			-				-				-
Options/warrants forfeited			-				-				-
Options/warrants exercised			-				-				-
Balance, March 31, 2011			2,632,010			$	1.50				3.15

 

Unvested awards - The following table summarizes the changes of the Company’s stock-based compensation awards subject to vesting for the three months ended March 31, 2011:

 

		Number of Shares Subject to Vesting				Weighted Average Grant Date Fair Value
Unvested, December 31, 2010			600,000			$	0.99
Options/warrants granted			200,000				0.17
Options/warrants vested			(50,000	)			(0.56	)
Options/warrants cancelled			-				-
Unvested, March 31, 2011			750,000			$	0.80

 

As of March 31, 2011, there was $351,813 total unrecognized compensation cost related to unvested stock-based compensation awards. This cost is expected to be recognized as follows:

 

2011		$	157,407
2012			134,085
2013			52,495
2014			7,826
2015			-
Total		$	351,813

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

11.

WARRANTS AND OPTIONS

 

The following table summarizes all of the Company’s stock option and warrant activity for the three month period ended March 31, 2011, including warrants issued pursuant to private placement agreements, warrants issued in 2005 in connection with the Clarkdale Slag Project (as discussed in Note 4) and stock options and warrants issued as compensation to directors, employees and consultants:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Term (Years)
Balance, December 31, 2010			27,814,304			$	1.18				3.09
Options/warrants granted			413,933				1.08				3.05
Options/warrants expired			-				-				-
Options/warrants forfeited			-				-				-
Options/warranted exercised			-				-				-
Balance, March 31, 2011			28,228,237			$	1.18				2.85

 

12.

STOCKHOLDER RIGHTS PLAN

 

The Company adopted a Stockholder Rights Plan (the “Rights Plan”) 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 plan, 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 Rights Plan 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. 

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

13.

PROPERTY RENTAL AGREEMENTS AND LEASES

 

The Company, through its subsidiary CML, has the following lease and rental agreements as lessor:

 

Clarkdale Arizona Central Railroad - rental

 

CML has a month-to-month rental agreement with Clarkdale Arizona Central Railroad. The rental payment is $1,700 per month.

 

		Commercial building - rental

CML rents commercial building space to various tenants. Rental arrangements are minor in amount and are typically month-to-month.

 

Land lease - wastewater effluent

 

Pursuant to our acquisition of TI, the Company became party to a lease dated August 25, 2004 with the Town of Clarkdale, AZ (“Clarkdale”). The Company provides approximately 60 acres of land to Clarkdale for disposal of Class B effluent. In return, the Company has first right to purchase up to 46,000 gallons per day of the effluent for its use at fifty percent (50%) of the potable water rate. In addition, if Class A effluent becomes available, the Company may purchase that at seventy-five percent (75%) of the potable water rate.

 

The original term of the lease was five years and expired on August 25, 2009; however, the lease also provided for additional one year extensions without any changes to the original lease agreement. At such time as Clarkdale no longer uses the property for effluent disposal, and for a period of 25 years measured from the date of the lease, the Company has a continuing right to purchase Class B effluent, and if available, Class A effluent at then market rates.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

14.

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.

 

Significant components of the Company’s net deferred income tax assets and liabilities at March 31, 2011 and December 31, 2010 were as follows:

 

		March 31, 2011				December 31, 2010
Deferred income tax assets:
Net operating loss carryforward		$	10,738,786			$	10,185,401
Option compensation			445,848				409,050
Assets held for sale			200,193				-
Property, plant & equipment			366,781				299,428
Gross deferred income tax assets			11,751,608				10,893,879
Less: valuation allowance			(445,848	)			(409,050	)
Net deferred income tax assets			11,305,760				10,484,829
Deferred income tax liabilities:
Acquisition related liabilities			(55,197,465	)			(55,197,465	)
Net deferred income tax liability		$	(43,891,705	)		$	(44,712,636	)

 

A valuation allowance for deferred tax related to option compensation was established for net deferred tax assets not allocated to offset acquisition related deferred tax liabilities due to the uncertainty of realizing these deferred tax assets based on conditions existing at March 31, 2011 and December 31, 2010.

 

Deferred income tax liabilities were recorded on GAAP basis over income tax basis using statutory federal and state rates with the corresponding increase in the purchase price allocation to the assets acquired.

 

The resulting estimated future federal and state income tax liabilities associated with the temporary difference between the acquisition consideration and the tax basis are reflected as an increase to the total purchase price which has been applied to the underlying mineral and slag project assets in the absence of there being a goodwill component associated with the acquisition transactions.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

14.

INCOME TAXES (continued)

 

A reconciliation of the tax benefit for the three month periods ended March 31, 2011 and 2010 at US federal and state income tax rates to the actual tax provision recorded in the financial statements consisted of the following components:

 

		March 31, 2011				March 31, 2010
Income tax benefit at statutory rates		$	(480,362	)		$	(254,418	)
Reconciling items:
Non-deductible items			(377,367	)			(441,143	)
Change in valuation allowance			36,798				10,685
Income tax benefit		$	(820,931	)		$	(684,876	)

 

The Company had cumulative net operating losses of approximately $28,259,965 and $26,803,688 as of March 31, 2011 and December 31, 2010, respectively for federal income tax purposes. The federal net operating loss carryforwards will expire between 2025 and 2031.

 

State income tax allocation

 

The Company has elected to file consolidated tax returns with Arizona tax authorities. Tax attributes are computed using an allocation and apportionment formula as outlined in Arizona tax law. The Company computes its tax provision using its statutory federal rate plus a state factor that includes the Arizona statutory rate and the current apportionment percentage, which is then reduced by the federal tax benefit that would be obtained upon payment of the computed state taxes.

 

For the three month periods ended March 31, 2011 and 2010, the state income tax benefit which is included in the total tax benefit was $118,841 and $90,101, respectively.

 

The Company had cumulative net operating losses of approximately $17,245,179 and $16,144,965 as of March 31, 2011 and December 31, 2010, respectively for Arizona state income tax purposes. The Arizona state net operating loss carryforwards will expire between 2012 and 2016.

 

Tax returns subject to examination

 

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 carryforwards. The Company is no longer subject to income tax examinations by US federal and state tax authorities for years prior to 2007. 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 currently has no tax years under examination.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

15.

COMMITMENTS AND CONTINGENCIES

 

Lease obligations - The Company rents office space in Henderson, Nevada. The lease agreement expired in November 2006, and the Company continues to rent the existing space under month-to-month terms. As of March 31, 2011, the monthly rent was $2,980.

 

Rental expense resulting from this operating lease agreement was $8,940 and $12,510 for the three month periods ended March 31, 2011 and 2010, respectively.

 

Employment contracts - Martin B. Oring.  On October 1, 2010, the Company entered into an employment agreement and non-qualified stock option agreement with Mr. Oring as its Chief Executive Officer and President.  The agreement is on an at-will basis and the Company may terminate his employment, upon written notice, at any time, with or without cause or advance notice.  The Company has agreed to pay Mr. Oring compensation of $150,000, which includes compensation as a director.  Mr. Oring will be provided with reimbursement for reasonable business expenses in connection with his duties as Chief Executive Officer.  Mr. Oring has voluntarily agreed not to participate in health or other benefit plans or programs otherwise in effect from time to time for executives or employees.

 

In addition, on October 1, 2010, Mr. Oring was granted options to purchase up to 300,000 shares of common stock with an exercise price of $0.91 per share, based on the closing price of the Company’s common stock on the grant date.  Of the 300,000 options, 100,000 options vested upon execution of the agreement, 100,000 vested in December 2010 upon entering into the Seaside Purchase Agreement, and 100,000 options will vest in connection with the hiring of a new Chief Executive Officer to replace Mr. Oring or Mr. Oring’s remaining as Chief Executive Officer for at least 30 months. The options expire on the fifth anniversary of the date that they vest, but in no event later than the tenth anniversary of the agreement.

 

Carl S. Ager.  The Company entered into an employment agreement with Carl S. Ager, its Vice President, Secretary and Treasurer, effective January 1, 2006 and as amended February 16, 2007.  Pursuant to the terms of the employment agreement, the Company agreed to pay Mr. Ager an annual salary of $160,000.  In addition to his annual salary, Mr. Ager may be granted a discretionary bonus and stock options, to the extent authorized by the Board of Directors. The term of the agreement is for an indefinite period, unless otherwise terminated by either party pursuant to the terms of the agreement.  In the event that the agreement is terminated by the Company, other than for cause, the Company will provide Mr. Ager with six months written notice or payment equal to six months of his monthly salary. In September 2010, Mr. Ager voluntarily agreed to reduce his cash compensation by 25% beginning on October 1, 2010 and continuing for an undetermined amount of time. Mr. Ager’s employment agreement was not affected and has not been amended.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

15.

COMMITMENTS AND CONTINGENCIES (continued)

 

Melvin L. Williams.  The Company entered into an employment agreement with Melvin L. Williams, its Chief Financial Officer, effective on June 14, 2006 and as amended February 16, 2007.  Pursuant to the terms of the employment agreement, the Company agreed to pay Mr. Williams an annualized salary of $130,000 based on an increase in time commitment from 300-600 hours worked to 600-800 hours worked.  On June 14, 2006, the Company issued 50,000 restricted shares of its common stock, as a one-time bonus, and granted options to purchase 100,000 shares of its common stock at an exercise price of $2.06 per share, exercisable for a period of five years until June 14, 2011.  The options vested 50% on each of the first and second anniversaries of the execution of the agreement.  The price of the shares issued and the exercise price of the options granted were valued based on the closing price of the common stock on the OTCBB on June 14, 2006.  In the event the employment agreement is terminated by the Company without cause, the Company will pay Mr. Williams an amount equal to three months’ salary in a lump sum as full and final payment of all amounts payable under the agreement. In September 2010, Mr. Williams voluntarily agreed to reduce his cash compensation by 25% beginning on October 1, 2010 and continuing for an undetermined amount of time. Mr. Williams’ employment agreement was not affected and has not been amended.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

15.

COMMITMENTS AND CONTINGENCIES (continued)

 

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:

 

a)

The Company has agreed to pay VRIC $6,400,000 on the Project Funding Date;

 

b)

The Company has agreed to pay VRIC a minimum annual royalty of $500,000, commencing on the Project Funding Date (the “Advance Royalty”), and an additional royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project (the “Project Royalty”). The Advance Royalty remains payable until the first to occur of: (i) the end of the first calendar year in which the Project Royalty equals or exceeds $500,000 or (ii) February 15, 2017. In any calendar year in which the Advance Royalty remains payable, the combined Advance Royalty and Project Royalty will not exceed $500,000; and,

 

c)

The Company has agreed to pay VRIC an additional amount of $3,500,000 from the net cash flow of the Clarkdale Slag Project.

 

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.

 

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 Transylvania International, Inc., 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.

 

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 Council, (ii) the date on which the Town 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 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. At March 31, 2011 and through the date the consolidated financial statements were issued, these contingencies had not changed.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

16.

CONCENTRATION OF CREDIT RISK

 

The Company maintains its cash accounts in three financial institutions. Cash accounts at these financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per institution. Additionally, under the FDIC’s expanded coverage, all non-interest bearing transactional accounts are insured in full from December 31, 2010 through December 31, 2012. This expanded coverage is separate from and in addition to the normal insurance coverage.

 

The Company has never experienced a material loss or lack of access to its cash accounts; however, no assurance can be provided that access to the Company’s cash accounts will not be impacted by adverse conditions in the financial markets. At March 31, 2011, the Company had deposits in excess of FDIC insured limits in the amount of$5,020,389.

 

17.

CONCENTRATION OF ACTIVITY

 

For the three months ended March 31, 2011, the Company purchased services from one major vendor, Baker Hostetler, which exceeded more than 10% of total purchases and amounted to $239,863.

 

For the three months ended March 31, 2010, the Company purchased services from two major vendors, Baker Hostetler and NMC, which exceeded more than 10% of total purchases and amounted to $225,000 and $117,857, respectively.

 

18.

RELATED PARTY TRANSACTIONS

 

During the three month period ended March 31, 2011, the Company utilized the services of NMC to provide technical assistance and financing related activities. These services related primarily to the Clarkdale Slag Project and the Searchlight Claims Project. Mr. Ager is affiliated with NMC.

 

In addition to the above services, NMC provided dedicated use of its laboratory, instrumentation, milling equipment and research facilities. NMC provided invoices for these fees plus expenses.

 

For the period ended March 31, 2011, the Company incurred total fees and reimbursement of expenses to NMC of $45,000 and $5,058, respectively. At March 31, 2011, the Company had an outstanding balance due to NMC of $15,000.

 

For the period ended March 31, 2010, the Company incurred total fees and reimbursement of expenses to NMC of $90,000 and $27,857, respectively. At March 31, 2010, the Company had an outstanding balance due to NMC of $39,821.

 

During the three month period ended March 31, 2011, the Company utilized Cupit, Milligan, Ogden & Williams, CPAs (“CMOW”) to provide accounting support services. Mr. Williams is affiliated with CMOW.

 

The Company incurred total fees to CMOW of $43,356 and $37,119 for the three month periods ended March 31, 2011 and 2010, respectively. Fees for services provided by CMOW do not include any charges for Mr. Williams’ time. Mr. Williams is compensated for his time under his employment agreement. The direct benefit to Mr. Williams was $14,741 and $15,590 of the above CMOW fees and expenses for the three month periods ended March 31, 2011 and 2010, respectively. The Company had an outstanding balance due to CMOW of $43,356 and $37,119 as of March 31, 2011 and 2010, respectively.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

19.

GAIN FROM DISCONTINUED OPERATIONS

 

Prior to the Company’s corporate restructuring in 2005, the Company had several accounts payable (the “Phage Payables”) dating back to 2003 and prior. All of these Phage Payables were incurred in the UK. These expenses were related to business operations which were discontinued in February 2005. In the first quarter of 2010, the Company updated its internal review of the status of the Phage Payables and recorded a $120,688 gain resulting from relief of liabilities that were cleared based on expiration of UK statutes of limitations. The gain is reflected as a gain from discontinued operations. There was no tax impact as the prior expenses occurred while the Company operated outside the United States and the losses are not included in the Company’s net operating losses.

 

20. SUBSEQUENT EVENT

 

On April 15, 2011, the Company issued 1,000,000 shares of common stock to Seaside at a price of $0.44846 per share under the Purchase Agreement for gross proceeds of $448,460. Total fees related to this issuance were $2,500. As a result of this private placement, the Company adjusted the warrants from the November 12, 2009 private placement offering. The following adjustments were made: (i) the exercise price was reduced to $1.78 per share, and (ii) the number of warrants was increased by 36,831.

 

The Purchase Agreement with Seaside is discussed in Note 10.

 

21.

RESTATEMENT

 

During the third quarter of 2011, the Company identified errors related to the accounting treatment of private placement warrants containing non-customary anti-dilutive provisions and for modifications of the term and exercise price of certain private placement warrants.

 

Modification of Private Placement Warrants - The Company issued warrants to purchase up to an aggregate of 7,042,387 shares of common stock (collectively, the “Subject Warrants”) to investors in connection with the Company’s February 23, 2007, March 22, 2007, December 26, 2007 and February 7, 2008 private placements. The Company unilaterally made several material amendments to the Subject Warrants. The Company originally did not give any accounting recognition to these modifications. Upon further review, the Company determined that these modifications conveyed value to these investors that was not contemplated in the original agreements, and therefore, the Company should record warrant modification expense.

 

Private Placement Warrants with Non-Customary Anti-Dilutive Provisions - On November 12, 2009, the Company issued an aggregate of 12,078,596 units of securities to certain investors, consisting of 12,078,596 shares of common stock and warrants (the “Offering Warrants”) to purchase an additional 6,039,298 shares of common stock, in a private placement to various accredited investors pursuant to a Securities Purchase Agreement. The Company paid commissions to agents which included warrants to purchase up to 301,965 shares of common stock.

 

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.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

21.

RESTATEMENT (continued)

 

At the issuance date of the Offering Warrants, the Company did not give any accounting recognition to the Offering Warrants in its previously filed financial statements. The Company revisited the accounting treatment for the Offering Warrants and concluded that the warrants should be accounted for a derivative liability and revalued at each reporting period.

 

The effects of correcting these errors to each of the consolidated balance sheets as of March 31, 2011 and 2010 and each of the consolidated statements of operations for the three month periods ended March 31, 2011 and 2010 and for the cumulative periods from inception through March 31, 2011 and 2010 are presented in the tables below. None of the adjustments had an impact on cash flows for any of the periods presented below.

 

Summarized Consolidated Balance Sheet - March 31, 2010		As Previously Reported				Adjustment				Notes				As Restated
Derivative warrant liability		$	-			$	3,211,378				(b)(c)			$	3,211,378
Total liabilities			49,446,648				3,211,378								52,658,026
Additional paid-in capital			141,075,978				714,966				(a)(b)				141,790,944
Accumulated deficit during exploration stage			(18,518,583	)			(3,926,344	)			(a)(c)				(22,444,927	)
Total stockholders’ equity			122,676,178				(3,211,378	)							119,464,800

 

Summarized Statement of Operations - For the three months ended March 31, 2010		As Previously Reported				Adjustment				Notes				As Restated
Change in fair value of derivative warrant liability		$	-			$	1,042,031				(d)			$	1,042,031
Total other income (expense)			5,740				1,042,031				(d)				1,047,771
Net income (loss)			(1,026,677	)			1,042,031				(d)				15,354
Net income (loss) per common share – basic and diluted		$	(0.01	)		$	0.01							$	-

 

Summarized Statement of Operations -  For the period from January 14, 2000 (Date of Inception) through  March 31, 2010		As Previously Reported				Adjustment				Notes				As Restated
General and administrative		$	9,593,037			$	4,996,955				(a)			$	14,589,992
Total operating expenses			23,089,715				4,996,955				(a)				28,086,670
Change in fair value of derivative warrant liability			-				1,070,611				(c)				1,070,611
Total other income (expense)			666,853				1,070,611				(c)				1,737,464
Net income (loss)		$	(18,518,583	)		$	(3,926,344	)			(a)(c)			$	(22,444,927	)

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

21.

RESTATEMENT (continued)

 

Summarized Consolidated Balance Sheet - March 31, 2011		As Previously Reported				Adjustment				Notes				As Restated
Derivative warrant liability		$	-			$	-							$	-
Total liabilities			45,702,437				-								45,702,437
Additional paid-in capital			145,221,693				714,966				(a)(b)				145,936,659
Accumulated deficit during exploration stage			(23,928,610	)			(714,966	)			(a)(e)				(24,643,576	)
Total stockholders’ equity			121,419,101				-								121,419,101

 

Summarized Statement of Operations -  For the three months ended  March 31, 2011		As Previously Reported				Adjustment				Notes				As Restated
Change in fair value of derivative warrant liability		$	-			$	993,386				(f)(g)			$	993,386
Total other income (expense)			(517,859	)			993,386				(f)(g)				475,527
Net income (loss)			(1,436,566	)			993,386				(f)(g)				(443,180	)
Net income (loss) per common share – basic and diluted		$	(0.01	)		$	0.01							$	(0.00	)

 

Summarized Statement of Operations -  For the period from January 14, 2000 (Date of Inception) through  March 31, 2011		As Previously Reported				Adjustment				Notes				As Restated
General and administrative		$	12,361,904			$	4,996,955				(a)			$	17,358,859
Total operating expenses			31,294,022				4,996,955				(a)				36,290,977
Change in fair value of derivative warrant liability			-				4,281,989				(e)				4,281,989
Total other income (expense)			173,844				4,281,989				(e)				4,455,833
Net loss		$	(23,928,610	)		$	(714,966	)			(a)(e)			$	(24,643,576	)

 

The following is a summary of the differences between the consolidated financial statements as previously reported and the consolidated financial statements as revised for the errors detected:

 

(a)

Additional paid-in capital and accumulated deficit were increased by $4,996,955 as a result of two amendments to certain private placement warrants. Related warrant modification expense, categorized within general and administrative expense, was recognized in the amounts of $1,826,670 and $3,170,285 in the quarters ended December 31, 2009 and 2008, respectively.

 

(b)

Additional paid-in capital was decreased and the derivative warrant liability was increased by $4,281,989 as a result of recognizing the fair value of the warrants issued with the November 12, 2009 private placement as a derivative warrant liability due to the warrants containing non-customary anti-dilution provisions.

 

(c)

The derivative warrant liability and accumulated deficit were reduced by $1,070,611 as a result of the cumulative fair value adjustments from December 31, 2009 through March 31, 2010. A cumulative gain on the change in fair value of the derivative liability of $1,070,611 was recognized over the corresponding period.

 

 

SEARCHLIGHT MINERALS CORP.

(AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (RESTATED)

 

21.

RESTATEMENT (continued)

 

(d)

The derivative warrant liability was reduced by $1,042,031 and a gain on the change in fair value of derivative warrant liability was recognized in the same amount as a result of the fair value adjustment as of March 31, 2010.

 

(e)

The derivative warrant liability and accumulated deficit were reduced by $4,281,989 as a result of the cumulative fair value adjustments from December 31, 2009 through March 31, 2011. A cumulative gain on the change in fair value of the derivative liability of $4,281,989 was recognized over the corresponding period.

 

(f)

The derivative warrant liability was increased by $3,006 and a loss on the change in fair value of derivative warrant liability was recognized in the same amount as a result of the second adjustment to the November 12, 2009 private placement warrants for the second closing of the Seaside equity funding transaction completed on January 18, 2011.

 

(g)

The derivative warrant liability was reduced by $996,392 and a gain on the change in fair value of the derivative warrant liability was recognized in the same amount as a result of the fair value adjustment as of March 31, 2011.

 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements in this Quarterly Report on Form 10-Q, or the Report, are “forward-looking statements.” These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of Searchlight Minerals Corp., a Nevada corporation (referred to in this Report as “we,” “us,” “our” or “registrant”) and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management’s best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors that are discussed under the section entitled “Risk Factors,” in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

The following discussion and analysis summarizes our plan of operation for the next twelve months, our results of operations for the three month period ended March 31, 2011 and changes in our financial condition from our year ended December 31, 2010. The following discussion should be read in conjunction with the Management’s Discussion and Analysis or Plan of Operation included in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Executive Overview

 

We are an exploration stage company engaged in a slag reprocessing project and the acquisition and exploration of mineral properties. Our business is presently focused on our two mineral projects: (i) 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; and (ii) the Searchlight Gold Project, which involves exploration for precious metals on mining claims near Searchlight, Nevada.

 

Clarkdale Slag Project. During 2010, our technical team tested four potential flow sheets in an effort to identify new grinding, leaching extraction and equipment alternatives that would be suitable and commercially viable for the extraction of precious and base metals from the slag material. Based on this testing program, we believe that autoclaving shows the most promise, and have determined to pursue this method since the second half of 2010.

 

Autoclave Process

 

Autoclaving is a proven technology that is widely used within the mining industry. The effectiveness of the downstream ambient leach system may benefit from results gleaned from earlier and extensive leach processing conducted at the Clarkdale Slag Project. This leach process is known as Pressure Oxidation, or POX, which utilizes elevated temperature and pressure in an autoclave system to dissolve and remove impurities (iron and silica) from ore. In bench testing of the slag material in a 6 liter autoclave, this process has allowed an ambient leach to dissolve the gold in a “clean solution,” making it available for recovery by a number of commercially proven process techniques. The most recent of these tests has been conducted on slag material that was previously ground at the test facility of a manufacturer of grinding equipment, using its high pressure grinding rolls (HPGR). The tests thus far indicate the following:

 

 

·

Pressure Oxidation, followed by ambient leach (either halide or cyanide), has resulted in potential commercial-grade gold recovery into solution from the slag material. The ability to leach gold using cyanide demonstrates that the gold has been totally liberated and is in a “free” state. The use of cyanide at a batch test level also provides a cross-check on analytical results using a halide leach.

 

·

The HPGR-ground slag, ground to a minus-20 mesh size, in autoclave bench tests seems to be able to provide liberation of gold comparable to the results that were achieved in pilot-level halide leach formulation tests at a much finer minus-200 mesh size. This appears to be due to the micro-fractures imparted to the slag during the HPGR grinding process. The technical team believes that the high pressures that exist in the autoclave environment are able to drive the leach solution into the micro-fracture cracks created in the slag material by the HPGR crusher, thereby dissolving the gold without having to employ a more expensive process to grind the slag material to a much finer particle size.

 

·

Recent autoclave tests indicate that an intermediate grind at approximately minus-100 mesh may provide sufficient additional gold extraction into solution to warrant the inclusion of a secondary grinding circuit, such as a tower mill. A tower mill may provide the proper grind with only modest wear on the internal components of the mill. Grinding tests in a pilot-scale tower mill have been performed. A pilot tower mill has been effective in providing results that indicate the ability of a larger tower mill to support a commercial scale operation. Several manufacturers provide tower mills of sufficient size and capacity to support the 2,000 ton-per-day (tpd) capacity envisioned for the commercial system at the Clarkdale site that we intend to build if we can establish feasibility for the Clarkdale project.

 

·

The temperatures and pressures required within the 6 liter autoclave we have been using for bench testing are relatively moderate when compared with many commercial autoclave systems. Similarly, the required retention times for the material in the autoclave are relatively short. This may allow us to utilize a smaller, more cost-efficient autoclave for our anticipated 2,000 tpd commercial production facility, when compared with larger autoclaves installed at other mining facilities around the world.

 

Based on all tests of various leach processes that have been completed to date, autoclave POX appears to provide the most consistent and cost-effective method for extracting gold from the slag material. It is anticipated that the capital and operating costs of an autoclave system will be significantly higher than the costs for the other ambient leach techniques tested thus far.

 

To test the commercial viability of the autoclave approach, we have performed over 75 bench-scale (6-liter autoclave) tests which have shown to be successful in leaching gold into solution from the slag material. Bench testing by our consultants indicate that autoclaving can provide gold recoveries of up to 0.5 ounces per ton (opt) from the samples which we have tested. Prior sampling tests on the slag pile have reflected that there may be variances in the amount of gold per ton within the composition of the slag in different parts of the slag pile.

 

In the first quarter of 2011, an internationally recognized independent laboratory began testing our slag material in an effort to independently evaluate our internal processing methods and autoclave results. This independent facility is currently performing tests on our slag material with a bench-scale autoclave. If the results from these tests prove successful, we intend to perform larger, continuous pilot bulk tests in a larger multi-compartment autoclave (30-50 liters) as part of the feasibility study process. This type of scale-up in testing is common in the mining industry. The majority of recent major autoclave installations have proven their feasibility utilizing continuous tests conducted with 30-50 liter autoclaves. Reputable engineering firms with the expertise to assist and advise us during these larger tests may be brought on in the near term.

 

 

We anticipate that the net results from the bench-scale autoclave testing and continuous bulk autoclave testing will be incorporated into a feasibility study that identifies the engineering parameters and recoverable gold grade for a commercial-scale production facility. This information will then be used to identify capital requirements and operating costs to form the basis for a bankable feasibility study to support the financing of the commercial system.

 

Our autoclave technical team is currently led by Richard Kunter, an independent engineer and registered Qualified Person with extensive experience in autoclave development. In anticipation of continuous bulk tests, we have engaged another autoclave specialist with significant experience in the design, start-up and commercial operation of autoclave systems. As we approach the preparation of a bankable feasibility study, we may retain the services of an autoclave engineering procurement construction management (EPCM) firm that specializes in commercial autoclave design and construction.

 

We expect to develop a more thorough economic analysis of the full-scale production facility, including specific capital and operating costs, funding schedules and funding sources during the feasibility evaluation. The scope, size, timing and cost of a full-scale production facility will addressed in the bankable feasibility study. If we determine that we should use autoclaving, the capital costs will likely be higher than those of other methods, including open-vessel leaching, and such costs will need to be considered when comparing the various extraction methods.

 

Clarkdale Slag Project – History

 

Prior to 2007, while conducting testing on the slag material and to assist in the process of designing a large scale production module, we initially conducted our testing in a smaller scale pilot plant. During this initial testing process, we determined that we could effectively liberate gold, silver, copper and zinc from smaller quantities of ground slag material by employing:

 

·

a mechanical process to break up the slag material using a small vibratory mill in our crushing and grinding circuit, and

 

·

a relatively benign (halide) chemical leaching process to liberate the precious and base metals from the crushed and ground slag.

 

Our primary goal consistently has been to demonstrate the economic viability of the Clarkdale Slag Project, including the generation of a bankable feasibility study. This work has required developing a technically viable flow sheet for extracting gold, silver, copper and zinc from the slag material at the Clarkdale Slag Project site. We began work on the Clarkdale Slag Project under a joint venture arrangement with VRIC, the then-existing owners of the Clarkdale Slag Project site. We engaged qualified independent engineers, and drilled and sampled the slag pile, under chain-of-custody standards, in order to understand potential grades and tonnages. After obtaining results from these efforts, we proceeded to work on the metallurgy capable of unlocking the value of the metals contained in the slag material. To achieve this objective, we operated a small pilot plant in Phoenix, Arizona, and completed an internal pre-feasibility study. The results of this work demonstrated that, with proper grinding, a simple halide leach could extract the precious and base metals in sufficient quantities which could potentially be economically viable. The next step involved the construction of a larger pilot plant (production module) at the Clarkdale Slag Project site, which was designed to test the commercial viability of the process and to complete a feasibility study. We proceeded to build one production module rather than complete a theoretical feasibility study. Concurrently, we completed the acquisition of the Clarkdale Slag Project site from the previous owners.

 

Thereafter, we designed and built a production module which was anticipated to process between 100 and 250 tons of slag material per day. The process of building and equipping the module was completed in late 2008. We ran into delays in construction and numerous technical difficulties in connection with the scaling up of the processes previously tested for the commercialization of the Clarkdale Slag Project. Although we were able to assay the milled slag product from the crushing and grinding circuit that demonstrated the presence of 0.4 ounces per ton of gold in the slag material, the benign leach chemistry used in the production module was unable to duplicate the results of the liberation of gold from the slag material achieved in the pilot plant.

 

 

Most of 2009 was devoted to attempts to commission and optimize the production module, during which time we encountered numerous challenges involving its crushing and grinding circuit. In early 2010, we brought in experienced outside engineering resources to better define and execute on a multi-pronged approach to achieve commercial feasibility of the Clarkdale Slag Project. This refocusing effort has resulted in significant progress, both operationally and from a research and development perspective.

 

The key to the potential success of the flow sheet involves the mechanical liberation of the metals by proper grinding. This process proved to be a significant challenge for the larger grinding equipment installed on site. After an entire year of innovative attempts and modifications, the grinding circuit did not liberate the precious metals sufficiently to allow the simple and benign halide leach circuit to operate effectively. We concluded that investigation of alternative grinding and leaching methods was necessary in order to solve the problem. We conducted preliminary studies of these alternative approaches to the process flow sheet, which have shown promising results and are the current focus of our efforts.

 

Initially during the start-up of the production module, emphasis was placed on the crushing and grinding circuit since it was believed, and shown in the pilot plant, that in order to leach the highest amount of gold from the slag material with our benign halide leach, mechanical liberation of gold particles was necessary via a very fine grind. As we began to crush and grind larger amounts of slag material through the production module, we encountered a number of equipment wear issues. Highly abrasive carbon-rich ferro-silicates (containing carbon, iron and silica) comprise about 90% of the slag material. The hardness of these materials caused significant wear and tear on the metal crushers and grinders. Further, as we increased the amount of slag material in the crushing and grinding circuit, we experienced difficulties in grinding the slag material into a fine enough material to be effectively leached by our benign halide leaching process. Our experience with the slag material in the larger scale production module required us to seek out more advanced hard facing technology and wear-resistant surfacing media for our crushing and grinding equipment. Initially, we believed that the wear issues relating to the throughput rate of the crushing and grinding circuit had been resolved. However, work during the first half of 2010 revealed that these issues were still present.

 

As a result of the challenges that arose with the equipment wear issues and our not being able to grind the slag material in the production module continuously, we adjusted the chemical characteristics of the leach to a more acidic leach in an effort to put less emphasis on the mechanical liberation and put more emphasis on the chemical liberation in an effort to maximize gold extraction from the slag material. Our goal was to achieve similar results in gold extraction from the slag material to those obtained in the smaller scale pilot plant, without significantly changing the grinding circuit or seeking alternatives to the design of the larger scale production module that might have a significantly greater capital cost than we had originally planned. In doing this testing, we encountered difficulties with the liberation of excess amounts of iron and silica in the leaching process, which resulted in difficulties with our filtration process and made the recovery of gold from the pregnant leach solution more difficult.

 

Because of these challenges, which have affected our ability to operate the production module on a continuous basis, the data from our operations reflects that our production module will not be able to process 100 to 250 tons per day, as originally planned. However, we anticipate the continued use of the facility for analytical purposes. The information received from the operation of the production module has been invaluable in providing information on how to process the slag and extract the base and precious metals on a commercial scale. In particular, we have a significant amount of data on various grinds and leach chemistries and their affect on leaching the desired (gold, silver, copper and zinc) and undesired (iron and silica) metals into solution. We also have a better understanding of the equipment wear issues that need to be considered when dealing with such hard and abrasive material. All of this data has provided us with a strong knowledge base that can be drawn upon as we continue to make adjustments to our process going forward.

 

 

Although the plant site in Clarkdale remains a valuable resource for the technical team, it no longer requires the previous levels of staffing during our autoclave testing and feasibility testing activities. Thus, as of early September 2010, we reduced the number of employees working at the Clarkdale Slag Project by approximately 50% to levels appropriate only for essential and necessary tasks, while assuring that important permits remain in good standing.

 

Searchlight Gold Project

 

Since 2005, we have maintained an ongoing exploration program on our Searchlight Gold Project and have contracted with Arrakis, Inc. (“Arrakis”), an unaffiliated mining and environmental firm, to perform a number of metallurgical tests on surface and bulk samples taken from the project site under strict chain-of-custody protocols. In 2007, results from these tests validated the presence of gold on the project site, and identified reliable and consistent metallurgical protocols for the analysis and extraction of gold, such as microwave digestion and autoclave leaching. Autoclave methods typically carry high capital and operating costs on large scale projects, however, we were encouraged by these results and intend to continue to explore their applicability to the Searchlight Gold Project.

 

On February 11, 2010, we received final approval of our Plan of Operations from the BLM, which allows us to conduct an 18-hole drill program on our project area. However, in an effort to conserve our cash and resources, we have decided to postpone further exploration on our Searchlight Gold Project until we are better able to determine the feasibility of our Clarkdale Slag Project. Once we have decided to resume our exploration program, work on the project site will be limited to the scope within the Plan of Operations. To perform any additional drilling or mining on the project, we would be required to submit a new application to the BLM for approval prior to the commencement of any such additional activities.

 

Anticipated Cash Requirements

 

Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project and the Searchlight Gold Project. During the next 12 months, our management anticipates that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will be approximately $7,410,000. As of May 13, 2011, we had cash reserves in the amount of approximately $6,800,000. Our current financial resources may not be sufficient to allow us to meet the anticipated costs of our testing and feasibility programs during the next 12 months and we may require additional financing in order to fund these activities.

 

A decision on allocating additional funds for Phase II of the Clarkdale Slag Project will be forthcoming if and once the feasibility study is completed and analyzed. The Phase II work program is expected to include the preparation of a bankable feasibility study, engineering and design of the full-scale production facility and planning for the construction of an Industrial Collector Road pursuant to an agreement with the Town of Clarkdale, Arizona, We estimate that our monthly expenses will increase substantially once we enter Phase II of the project. Therefore, our current financial resources may not be sufficient to allow us to meet the anticipated costs of our testing, feasibility and Phase II programs and we may require additional financing in order to fund these activities. We currently have a financing agreement with Seaside 88, however, there are no assurances that this agreement will be sufficient to cover any increased cost we may incur. We do not currently have any other financing arrangements in place for such additional financing, and there are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

If the actual costs are significantly greater than anticipated, if we proceed with our testing and feasibility activities beyond what we currently have planned, or if we experience unforeseen delays during our activities during the next 12 months, we will need to obtain additional financing. There are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

 

Obtaining additional financing is subject to a number of factors, including market prices for base and precious metals. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition.

 

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of current stockholders will be reduced and these securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends.

 

For these reasons, our financial statements filed herewith include a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.

 

Critical Accounting Policies

 

Use of estimates - The preparation of financial statements in conformity with GAAP requires us 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 our estimate and assumption include the valuation of stock-based compensation, impairment analysis of long-lived assets, and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

 

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. 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 are amortized using the units-of-production basis over the proven and probable reserves. Mineral properties are assessed for impairment when circumstances indicate that the carrying amount may not be recoverable. Impairment losses are charged to operations at the time of impairment. When a property is sold or abandoned, a gain or loss is recognized and included in the consolidated statement of operations.

 

Mineral exploration and development - Exploration expenditures incurred prior to entering the development stage are expensed and included in “Mineral exploration and evaluation expenses”.

 

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 39 years. The grinding circuit is depreciated on the units-of-production method over the total estimated units. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Gains or losses on disposition are recognized in operations.

 

For property, plant and equipment that our Board of Directors approves for sale, the asset is reclassified on our consolidated financial statements as “assets held for sale”.  Accordingly, we cease recording depreciation expense for assets classified as held for sale until the asset is sold or reclassified as held for use.  If the asset is ultimately reclassified as held for use, the previously unrecorded depreciation expense is expensed in the period of reclassification. Assets held for sale are recorded at the lower of their carrying value or fair values less cost to sell.  Subsequent gains and losses in fair value are recognized in operations. Subsequent gains are limited to the cumulative losses previously recognized.

 

 

Impairment of long-lived assets - We review and evaluate our long-lived assets for impairment at each balance sheet date due to our planned exploration stage losses and document 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 producing 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 undiscounted cash flows expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts.

 

Our 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. To date, no such impairments have been identified.

 

Restatement of Consolidated Financial Statements

 

The following is a brief summary of the restatement of our previously filed consolidated financial statements for the three month periods ended March 31, 2010 and 2011, and the cumulative periods from January 14, 2000 (date of inception) through March 31, 2011:

 

·

2007 and 2008 Warrants. We issued warrants to purchase up to an aggregate of 7,042,387 shares of common stock (collectively, the “2007 and 2008 Warrants”) to investors in connection with our private placements on February 23, 2007 ($4.50 per share exercise price), March 22, 2007 ($4.50 per share exercise price), December 26, 2007 ($2.40 per share exercise price) and February 7, 2008 ($2.40 per share exercise price). We unilaterally made two subsequent amendments to the exercise price of the 2007 and 2008 Warrants on December 29, 2008 (those 2007 and 2008 Warrants with a $4.50 per share exercise price were reduced to a $2.40 per share exercise price, and those 2007 and 2008 Warrants with a $2.40 per share exercise price did not have a price adjustment) and November 12, 2009 (all of the 2007 and 2008 Warrants were reduced to a $1.85 per share exercise price). We did not give any accounting recognition to these modifications in our previously filed financial statements.

 

Further, in connection with the December 29, 2008 amendment, we unilaterally amended certain of the 2007 and 2008 Warrants to reduce the price at which we would be able to call those 2007 and 2008 Warrants. However, on April 30, 2009, we amended those 2007 and 2008 Warrants to restore their original call provisions.

 

We did not give any accounting recognition to these modifications in our previously filed financial statements. The pricing modifications conveyed value to these investors that was not contemplated in the original agreements. Therefore, the pricing modifications to the 2007 and 2008 Warrants in all of these periodic reports should have been accounted for as warrant modification expense.

 

We utilized a binomial lattice option pricing model to estimate the incremental fair values of the modifications to the 2007 and 2008 Warrants. Based on this model we recorded warrant modification expense of approximately $1.8 million and $3.2 million, as of December 29, 2008 and November 12, 2009, respectively.

 

 

·

2009 Warrants. On November 12, 2009, we issued an aggregate of 12,078,596 shares of common stock and warrants to purchase an additional 6,039,298 shares of common stock in a private placement. We paid commissions to agents which included warrants to purchase up to 301,965 shares of common stock. These warrants (collectively, the “2009 Warrants”) have an anti-dilution provision, including a provision for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price. The 2009 Warrants were recorded as equity in our previously filed financial statements and we did not consider the impact of the anti-dilution provision in the 2009 Warrants.

 

As a result, we performed a re-assessment of our accounting for the 2009 Warrants and determined that the 2009 Warrants were within the scope of Accounting Standards Codification 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”), formerly Emerging Issues Task Force Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.. The 2009 Warrants have an anti-dilution provision, including a provision for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price of $1.85 per share. Resetting the exercise price based on a price per share received from other sales of common stock and common stock equivalents is not an input to an option pricing model and thus the fair value of the 2009 Warrants were not linked to our common stock under ASC 815-40. Accordingly, the 2009 Warrants should have been accounted for as derivative financial liabilities, measured at its fair value at the date of issuance, with changes in fair value recognized as a gain or loss for each reporting period thereafter.

 

On our balance sheets, we have recorded a derivative warrant liability beginning in the fourth quarter of the year ended December 31, 2009. The derivative warrant liability has been adjusted to its fair value at each of the periods ended from December 31, 2009 through June 30, 2011.

 

Our statements of operations for the years ended December 31, 2008 and 2009 have been restated to recognize warrant modification expense as a general and administrative expense. In addition, our statements of operations for the years ended December 31, 2009 and 2010 and the quarterly periods ended March 31, 2010, June 30, 2010, September 30, 2010, March 31, 2011 and June 30, 2011 have been restated to record the change in fair value of the derivative warrant liability as an other income (expense) item.

 

The accounting treatments of the 2007, 2008 and 2009 Warrants are non-cash items and had no impact on our business operations or cash flows.

 

A more detailed description of the restatements made to the financial statements for the three month periods ended March 31, 2010 and 2011 is provided at Note 21 to the consolidated financial statements included with this report.

 

  

Results of Operations

 

The following table illustrates a summary of our results of operations for the periods listed below:

 

		Three Months Ended March 31,
										Percent
		2011				2010				Increase/
		(restated)				(restated)				(Decrease)
Revenue		$	-			$	-				n/a
Operating expenses			(1,739,638	)			(1,837,981	)			(5.4	)%
Other income (expense)			475,527				1,047,771				(54.6	)%
Income tax benefit			820,931				684,876				19.9	%
Gain from discontinued operations			-				120,688				(100.0	)%
Net income (loss)		$	(443,180	)		$	15,354				(2986.4	)%

 

Revenue

 

We are currently in the exploration stage of our business, and have not earned any revenues from our planned mineral operations to date. We did not generate any revenues from inception in 2000 through the three month period ended March 31, 2011. We do not anticipate earning revenues from our planned mineral operations until such time as we enter into commercial production of the Clarkdale Slag Project, the Searchlight Gold Project or other mineral properties we may acquire from time to time, and of which there are no assurances.

 

Operating Expenses

 

The major components of our operating expenses are outlined in the table below:

 

		Three Months Ended March 31,
										Percent
		2011				2010				Increase/
		(restated)				(restated)				(Decrease)
Mineral exploration and evaluation expenses		$	597,910			$	716,876				(16.6	)%
Mineral exploration and evaluation expenses – related party			50,058				117,857				(57.5	)%
Administrative – Clarkdale site			110,177				99,515				10.7	%
General and administrative			589,755				645,114				(8.6	)%
General and administrative – related party			43,356				37,119				16.8	%
Depreciation			348,382				221,500				57.3	%
Total operating expenses		$	1,739,638			$	1,837,891				(5.4	)%

 

 

Operating expenses decreased by 5.4% to $1,739,638 during the three month period ended March 31, 2011 from $1,837,891 during the three month period ended March 31, 2010. Operating expense decreased primarily as a result of decreases in mineral exploration and evaluation expenses and general and administrative expenses.

 

Mineral exploration and evaluation expenses decreased to $597,910 during the three month period ended March 31, 2011 from $716,876 during the three month period ended March 31, 2010. Mineral exploration and evaluation expenses decreased primarily as a result of our current work program related to the Clarkdale Slag Project being focused on autoclave testing which is being conducted by outside independent labs. This allowed for a reduction in the levels of on-site staffing and site operating costs.

 

Included in mineral exploration and evaluation expenses – related party were the amounts of $45,000 in fees and $5,058 in expense reimbursements and $90,000 in fees and $27,857 in expense reimbursements for the three month periods ended March 31, 2011 and 2010, respectively, to Nanominerals Corp. (one of our principal stockholders and an affiliate of Ian R. McNeil, our former Chief Executive Officer and President and a director, and Carl S. Ager, our Vice President, Secretary and Treasurer and a director). Work performed by Nanominerals includes technical assistance, including providing the use of its laboratory, instrumentation, milling equipment and research facilities with respect to our Searchlight Gold Project and Clarkdale Slag Project. Additional fees relate to financing related activities, including providing assistance to us when potential financiers perform technical due diligence on our projects and technical presentations to potential investors in connection with the exploration, testing and construction of our mineral projects, and reimbursement of expenses provided by Nanominerals in connection with the exploration, testing and construction of our mineral projects.

 

Administrative – Clarkdale site expenses increased to $110,177 during the three month period ended March 31, 2011 from $99,515 for the three month period ended March 31, 2010. Administrative costs at the Clarkdale site increased due to an increase in personal property taxes and a donation made to the Town of Clarkdale.

 

General and administrative expenses decreased to $589,755 during the three month period ended March 31, 2011 from $645,114 during the three month period ended March 31, 2010. General and administrative expenses decreased primarily as a result of our officers and directors agreeing to a 25% reduction in pay beginning in the fourth quarter of 2010. In addition, during the first quarter of 2010, we held a board of directors meeting in Florida and incurred additional travel expense. We did not have any in-person board meetings during the first quarter of 2011.

 

Included in general and administrative – related party were the amounts of $43,356 and $37,119 for the three month periods ended March 31, 2011 and 2010, respectively, for accounting support services to Cupit, Milligan, Ogden & Williams, CPAs, an affiliate of Melvin L. Williams, our Chief Financial Officer. These accounting support services included bookkeeping input for the Clarkdale facility, assistance in preparing working papers for quarterly and annual reporting, and preparation of federal and state tax filings. These expenses do not include any fees for Mr. Williams’ time in directly supervising the support staff. Mr. Williams’ compensation has been provided in the form of salary. The direct benefit to Mr. Williams was $14,741 and $15,590 of the above Cupit, Milligan, Ogden & Williams fees for the three month periods ended March 31, 2011 and 2010, respectively.

 

Depreciation expense increased to $348,382 during the three month period ended March 31, 2011 from $221,500 during the three month period ended March 31, 2010. Depreciation expense increased as a result of bringing additional construction in progress items into service.

 

Other Income and Expenses

 

Total other income (expense) decreased to $475,527 during the three month period ended March 31, 2011 from $1,047,771 during the three month period ended March 31, 2010. The decrease in total other income (expense) was primarily a result of an impairment loss of $526,824 taken on assets that are currently being held for sale. The impairment loss was a result of writing the equipment down from its book value of $901,824 to its anticipated selling price of $375,000. The reduced selling price is reflective of the expectation that the equipment will be sold “as is” with no implied warranty.

 

 

We received incidental rental revenue of $6,135 and $6,480 for the three month periods ended March 31, 2011 and 2010, respectively, from rentals of our commercial buildings and certain facilities acquired in connection with our acquisition of Transylvania.

 

Income Tax Benefit

 

Our income tax benefit increased to $820,931 for the three month period ended March 31, 2011 from $684,876 during the three month period ended March 31, 2010. The increase in income tax benefit primarily resulted from the impairment loss taken on assets held for sale during the three month period ended March 31, 2011.

 

Gain from Discontinued Operations

 

Prior to our corporate restructuring in 2005, we had several accounts payable (the “Phage Payables”) dating back to 2003 and prior. All of these Phage Payables were incurred in the United Kingdom (“UK”). These expenses were related to business operations which were discontinued in February 2005. In the first quarter of 2010, we updated our internal review of the status of the Phage Payables and recorded a $120,688 gain resulting from relief of liabilities that were cleared based on expiration of UK statutes of limitations. The gain is reflected as a gain from discontinued operations. There was no tax impact as the prior expenses occurred while we operated outside the United States and the losses are not included in our net operating losses.

 

Net Income (Loss)

 

The aforementioned factors resulted in a net loss of $443,180, or $0.00 per common share, for the three month period ended March 31, 2011, as compared to net income of $15,354, or $0.00 per common share, for the three month period ended March 31, 2010.

 

As of March 31, 2011 and December 31, 2010, we had cumulative net operating loss carryforwards of approximately $28,259,965 and $26,803,688, respectively for federal income taxes. The federal net operating loss carryforwards expire between 2025 and 2031.

 

We had cumulative state net operating losses of approximately $17,245,179 and $16,144,965 as of March 31, 2011 and December 31, 2010, respectively for state income tax purposes. The state net operating loss carryforwards expire between 2012 and 2016.

 

Liquidity and Capital Resources

 

Historically, we have financed our operations primarily through the sale of common stock and other convertible equity securities.

 

On December 22, 2010, we entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with an investor. We agreed with the investor, subject to certain conditions and exceptions, to sell an aggregate of up to 13,000,000 shares of our common stock in up to 11 closings occurring over the course of a ten-month period. The initial closing of the Purchase Agreement occurred on December 23, 2010 at which we issued 3,000,000 shares of common stock to the investor at a per share purchase price of $0.53125,resulting in gross proceeds to us of $1,593,750.

 

 

The Purchase Agreement requires us to issue and sell, and the investor to buy, up to 1,000,000 shares of our common stock on or about the 15th day of each month after the initial closing date (December 23, 2010), subject to the satisfaction of certain conditions at each closing, ending approximately ten months after the initial closing. The price of the shares that we sell to the investor will be at a 15% discount to the volume weighted average trading price of our common stock for the ten consecutive trading days immediately preceding each closing date. The offering and sale of shares of our common stock to the investor was made pursuant to our shelf registration statement on Form S-3 (File No. 333-169993), which was declared effective by the Securities and Exchange Commission on November 23, 2010.

 

Since December 31, 2010, we have completed four additional monthly closings of 1,000,000 shares each between January 18, 2011 and April 15, 2011 at a weighted per share purchase price of approximately $0.51982 resulting in gross proceeds to us of $2,079,270. Total fees related to these four closings were $10,000.

 

In connection with a private placement which was completed on November 12, 2009, we issued common stock purchase warrants to purchase up to 6,341,263 shares of common stock, including warrants issued to investors as commissions to agents, at an exercise price of $1.85 per share. These warrants currently expire on November 12, 2012. Further, based on the transactions related to the Purchase Agreement and an anti-dilution provision in the warrants issued in the private placement, the aggregate number of warrants issued in connection with the private placement and their exercise price have been adjusted. From the initial closing of the Purchase Agreement on December 23, 2010 through the most recent closing on April 15, 2011, we have issued an additional 249,408 warrants to the holders of the warrants issued in connection with the private placement and the exercise price of the warrants has been adjusted down to $1.78 per share. In all other respects, the terms and conditions of these warrants remain the same.

 

Working Capital

 

The following is a summary of our working capital at March 31, 2011 and December 31, 2010:

 

		At March 31,				At December 31,				Percent
		2011				2010				Increase/(Decrease)
Current Assets		$	7,485,588			$	7,071,070				5.9	%
Current Liabilities			(351,315	)			(549,013	)			(36.0	)%
Working Capital		$	7,134,273			$	6,522,057				9.4	%

 

As of March 31, 2011, we had an accumulated deficit of $24,643,576. As of March 31, 2011, we had working capital of $7,134,273, compared to working capital of $6,522,057 as of December 31, 2010. The increase in our working capital was primarily attributable to reclassification of certain equipment to assets held for sale and a reduction in accounts payable due to less testing activity at the Clarkdale site. Cash was $6,954,346 as of March 31, 2011, as compared to $6,996,027 as of December 31, 2010. Our cash balance was consistent from quarter to quarter due to completion of three issuances of securities during the first quarter of 2011 for net proceeds of $1,623,310 offset by our net loss and principal payments on debt. Net property and equipment decreased to $12,690,732 as of March 31, 2011 from $13,900,308 as of December 31, 2010. The decrease primarily resulted from equipment reclassified to assets held for sale and depreciation expense.

 

Included in long term liabilities in the accompanying consolidated financial statements is a balance of $43,891,705 for deferred tax liability relating to the Clarkdale Slag Project and Searchlight Gold Project. A deferred income tax liability was recorded on the excess of fair market value for the asset acquired over income tax basis at a combined statutory federal and state rate of 38% with the corresponding increase in the purchase price allocation of the assets acquired.

 

 

Cash Flows

 

The following is a summary of our sources and uses of cash for the periods set forth below:

 

		Three Months Ended March 31,
										Percent
		2011				2010				Increase/(Decrease)
Cash Flows Used in Operating Activities		$	(1,562,567	)		$	(1,841,719	)			(15.2	)%
Cash Flows Used in Investing Activities			(40,559	)			(307,021	)			(86.8	)%
Cash Flows Provided (Used) by Financing Activities			1,561,445				(57,339	)			(2823.2	)%
Net Change in Cash During Period		$	(41,681	)		$	(2,206,079	)			(98.1	)%

 

Net Cash Used in Operating Activities. Net cash used in operating activities decreased to $1,562,567 during the three month period ended March 31, 2011 from $1,841,719 during the three month period ended March 31, 2010. The decrease in cash used in operating activities was primarily due to increased non-cash charges to our loss from operations, including depreciation and the write down of assets held for sale.

 

Net Cash Used in Investing Activities. We used $40,559 in investing activities during the three month period ended March 31, 2011, as compared to $307,021 during the three month period ended March 31, 2010. The decrease was primarily a result of a decrease in purchases of property and equipment relating to the Clarkdale Slag Project after receiving the Certificate of Occupancy for the demonstration module building and our substantial completion of equipment acquisitions for the demonstration module.

 

Net Cash Provided (Used) by Financing Activities. Net cash provided by financing activities was $1,561,445 for the three month period ended March 31, 2011 compared to net cash used by financing activities of $57,339 for the three month period ended March 31, 2010. Net cash provided by financing activities during the three month period ended March 31, 2011 primarily resulted from net proceeds from issuances of securities of $1,623,310 partially offset by principal payments on the capital lease and the VRIC payable. Net cash used by financing activities during the three month period ended March 31, 2010 primarily resulted from principal payments on the capital lease and the VRIC payable.

 

We have not attained profitable operations and are dependent upon obtaining financing to pursue our plan of operation. Our ability to achieve and maintain profitability and positive cash flow will be dependent upon, among other things:

 

·

our ability to locate a profitable mineral property;

 

·

positive results from our feasibility studies on the Searchlight Gold Project and the Clarkdale Slag Project;

 

·

positive results from the operation of our initial test module on the Clarkdale Slag Project; and

 

·

our ability to generate revenues.

 

 

We may not generate sufficient revenues from our proposed business plan in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion plans. In addition, our losses may increase in the future as we expand our business plan. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock will decline and there would be a material adverse effect on our financial condition.

 

Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project and the Searchlight Gold Project. Over the next twelve months, our management anticipates that the minimum cash requirements for funding our proposed exploration, testing and construction program and our continued operations will be approximately $7,410,000. As of May 13, 2011, we had cash reserves in the amount of approximately $6,800,000. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our exploration, testing and construction programs for the next 12 months and we will require additional financing in order to fund these activities. We do not currently have any financing arrangements in place for such additional financing, and there are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

A decision on allocating additional funds for Phase II of the Clarkdale Slag Project will be forthcoming once the feasibility study is completed and analyzed. The Phase II work program is expected to include the preparation of a bankable feasibility study, engineering and design of the full-scale production facility and planning for the construction of an Industrial Collector Road pursuant to an agreement with the Town of Clarkdale, Arizona. We estimate that our monthly expenses will increase substantially once we enter Phase II of the project and therefore, we will require the necessary funding to fulfill this anticipated work program.

 

If the actual costs are significantly greater than anticipated, if we proceed with our exploration, testing and construction activities beyond what we currently have planned, or if we experience unforeseen delays during our activities over the next twelve months, we will need to obtain additional financing. There are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

Obtaining additional financing is subject to a number of factors, including the market prices for the mineral property and base and precious metals. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition.

 

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of current stockholders will be reduced and these securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends.

 

For these reasons, our financial statements filed herewith include a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.

 

Off-Balance Sheet Arrangements

 

None.

 

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) that are adopted by us, 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 our consolidated financial statements upon adoption.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We had unrestricted cash totaling $6,954,346 at March 31, 2011 and $6,996,027 at December 31, 2010. Our cash is held primarily in an interest bearing money market account, a savings account and non-interest bearing checking accounts and is not materially affected by fluctuations in interest rates. The unrestricted cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these cash holdings, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

This Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2011 (the “2011 Form 10-Q/A”) represents an amended filing for the covered period. In connection with this amendment to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, our management, with the participation of principal executive officer and principal financial officer reevaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.

 

In our original filing of the Quarterly Report on Form 10-Q, management concluded that our disclosure controls and procedures were effective as of March 31, 2011. However, in connection with the restatement to our previously filed consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, and the cumulative periods from January 14, 2000 (date of inception) through December 31, 2008, 2009 and 2010, and our unaudited interim financial statements for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011, management has subsequently determined that material weakness described below existed as of March 31, 2011. As a result of this material weakness, management, with the participation of our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were not effective as of March 31, 2011.

 

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as required by Sarbanes-Oxley (SOX) Section 404A. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:

 

·

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

 

·

provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

 

 

·

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Based on the discovery of the errors relating to the restatements described herein, our management concluded that our internal control over financial reporting was not effective as of March 31, 2011, and further was not effective during the period from December 31, 2008 through September 30, 2011.

 

We identified a material weakness in our internal control based on our assessment under the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.

 

A material weakness regarding management’s lack of expertise in accounting for complex financial instruments has been identified by management. Specifically, we did not properly account for the issuance of certain warrants in accordance with Accounting Standards Codification 815-40-15 "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock" and we did not account for the impact of warrant modifications. Accordingly, we have restated the previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, and the cumulative periods from January 14, 2000 (date of inception) through December 31, 2008, 2009 and 2010, and our unaudited interim financial statements for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011.

 

An explanation of the errors and their impact on our financial statements is contained in Note 21 to the financial statements contained in Item 6 of this 2011 Form 10-Q/A.

 

Management has been actively engaged in developing a remediation plan to address the material deficiency in our internal control over financial reporting and disclosure controls and procedures. Implementation of the remediation plan is in process and consists of redesigning quarterly procedures to enhance management's identification, capture, review, approval and recording of contractual terms included in complex financial arrangements. Management believes the foregoing efforts will effectively remediate the material weakness. As we continue to evaluate and work to improve our internal control over financial reporting and disclosure controls and procedures, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above. Management will continue to review and make necessary changes to the overall design of our internal control and disclosure control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting and disclosure controls and procedures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and the loss is probable.

 

 

We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2010, which to our knowledge have not materially changed. Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On March 31, 2011, we issued options to purchase up to 105,882 shares of our common stock to three non-management directors, pursuant to the director compensation policy for these four non-management directors. The 105,882 options were issued at an exercise price of $0.51 per share, the closing price of our common stock on March 31, 2011, the last trading day of the first quarter of 2011. These securities were issued pursuant to Section 4(2) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to our stockholders, through the solicitation of proxies or otherwise, during the quarter ended March 31, 2011.

 

Item 5. Other Information

 

None

 

 

Item 6. Exhibits

 

EXHIBIT TABLE

 

The following is a complete list of exhibits filed as part of the Quarterly Report on Form 10-Q, some of which are incorporated herein by reference from the reports, registration statements and other filings of the issuer with the Securities and Exchange Commission, as referenced below:

 

Reference Number		Item
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	SEARCHLIGHT MINERALS CORP. a Nevada corporation
Date: March 6, 2012	By:	/s/ Martin B. Oring
		Martin B. Oring
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: March 6, 2012	By:	/s/ Melvin L. Williams
		Melvin L. Williams
		Chief Financial Officer
		(Principal Accounting Officer)