U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

OR

 

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 000-14319

 

STANDARD METALS PROCESSING, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)

 

Nevada		84-0991764
(State or Other Jurisdiction of		(I.R.S. Employer Identification Number)
Incorporation or Organization)

 

611 Walnut Street, Gadsden, Alabama 35901

(Address of Principal Executive Offices)

 

888-960-7347

(Issuer’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the Registrant: (1) 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 issuer 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

 

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. (Check one):

 

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

 

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 August 12, 2014, there were 101,246,576 shares of the Registrant’s common stock, par value $.001, outstanding.

 

 

STANDARD METALS PROCESSING, INC.

FORM 10-Q

TABLE OF CONTENTS

June 30, 2014

 

		Page
PART I
Item 1.	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
PART II
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains certain statements which are forward-looking in nature and are based on the current beliefs of our management as well as assumptions made by and information currently available to management, including statements related to the uncertainty of the quantity or quality of minerals in our tailings, the fluctuations in the market price of such reserves, general trends in our operations or financial results, plans, expectations, estimates and beliefs. In addition, when used in this Form 10-Q, the words “may,” “could,” “should,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict” and similar expressions and their variants, as they relate to us or our management, may identify forward-looking statements. These statements reflect our judgment as of the date of this Form 10-Q with respect to future events, the outcome of which is subject to risks. We have attempted to identify, in context, certain of the factors that we believe may cause actual future experience and results to differ materially from our current expectations, which may have a significant impact on our business, operating results, financial condition or your investment in our common stock, as described in Part I, Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Readers are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein.

 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.

  

 

Part I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STANDARD METALS PROCESSING, INC.

(AN EXPLORATION STAGE COMPANY)

 

Condensed Consolidated Balance Sheets

(unaudited)

 

		June 30,				December 31,
		2014				2013
Assets
Current assets:
Cash		$	105,223			$	143,099
Prepaid expenses			60,015				5,000
Total current assets			165,238				148,099
Shea Mining and Milling Assets			35,159,427				35,159,427
Property, plant and equipment:
Machinery and equipment			21,000				21,000
Construction in progress			1,224,760				68,349
			1,245,760				89,349
Accumulated depreciation			(8,813	)			-
Net property, plant and equipment			1,236,947				89,349
Total Assets		$	36,561,612			$	35,396,875
Liabilities and Shareholders’ Equity
Current liabilities:
Senior secured convertible promissory note payable, related party		$	2,092,097			$	-
Short-term notes payable			-				25,000
Convertible notes payable, current portion			175,000				275,000
Due to Wits Basin Precious Minerals Inc.			16,616				16,616
Accounts payable			961,330				1,138,951
Accrued interest			155,167				86,143
Accrued expenses			751,842				1,385,251
Total current liabilities			4,152,052				2,926,961
Commitments and Contingencies (Note 8)
Senior secured convertible promissory note payable, related party			-				2,092,097
Preferred stock, 50,000,000 shares authorized:
Series A, $.001 par value, 10,000,000 and 10,000,000 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively			10,000,000				10,000,000
Shareholders’ equity:
Series B preferred stock, no shares issued and outstanding,			-				-
Common stock, $.001 par value, 500,000,000 shares authorized:
100,351,576 and 91,266,411 shares issued and outstanding
June 30, 2014 and December 31, 2013, respectively			100,352				91,266
Additional paid-in capital			71,215,142				56,114,271
Accumulated deficit during exploration stage			(48,905,934	)			(35,827,720	)
Total shareholders’ equity			22,409,560				20,377,817
Total Liabilities and Shareholders’ Equity		$	36,561,612			$	35,396,875

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

STANDARD METALS PROCESSING, INC.

(AN EXPLORATION STAGE COMPANY)

 

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended								Six Months Ended								September 28, 2004 (inception) to
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013				June 30, 2014
Revenues		$	-			$	-			$	-			$	-			$	-
Operating expenses:
General and administrative			9,491,114				248,544				12,021,604				676,769				32,780,597
Exploration expenses			-				-				-								5,876,922
Depreciation and amortization			4,406				-				8,813								340,174
Loss on disposal of assets			-				-				-								53,287
Total operating expenses			9,495,520				248,544				12,030,417				676,769				39,050,980
Loss from operations			(9,495,520	)			(248,544	)			(12,030,417	)			(676,769	)			(39,050,980	)
Other income (expense):
Other income			1,587				1,587				3,174				2,645				14,916
Loss on settlement of debt			(32,924	)			-				(959,020	)			(21,033	)			(2,331,997	)
Interest expense			(47,006	)			(115,717	)			(91,951	)			(225,481	)			(7,184,178	)
Foreign currency loss			-				-				-				-				(353,695	)
Total other income (expense)			(78,343	)			(114,130	)			(1,047,797	)			(243,869	)			(9,854,954	)
Loss from operations before income taxes			(9,573,863	)			(362,674	)			(13,078,214	)			(920,638	)			(48,905,934	)
Income tax provision			-				-				-				-				-
Net loss		$	(9,573,863	)		$	(362,674	)		$	(13,078,214	)		$	(920,638	)		$	(48,905,934	)
Basic and diluted net loss per common share		$	(0.10	)		$	(0.01	)		$	(0.14	)		$	(0.02	)
Basic and diluted weighted average common shares outstanding			94,901,898				56,406,318				95,629,266				55,728,744

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

STANDARD METALS PROCESSING, INC.

(formerly Standard Gold Holdings, Inc.)

(AN EXPLORATION STAGE COMPANY)

 

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

 

										Additional
		Common stock								paid-in				Accumulated
		Shares				Amount				capital				deficit				Total
BALANCE, December 31, 2012			54,318,756			$	54,318			$	45,831,321			$	(28,077,815	)		$	17,807,824
Stock issued for conversion of convertible debt			4,115,868				4,116				1,862,814				-				1,866,930
Stock issued for the conversion of notes payable, related party			27,000,000				27,000				1,473,000				-				1,500,000
Stock issued for the exercise of common stock warrants			2,275,138				2,275				495,510				-				497,785
Stock issued for the settlement of accrued liabilities			3,556,649				3,557				1,075,766				-				1,079,323
Warrants issued upon conversion of convertible debt			-				-				1,268,054				-				1,268,054
Options and warrants issued for employee compensation			-				-				3,226,501				-				3,226,501
Options issued for consultant compensation			-				-				881,305				-				881,305
Net loss			-				-				-				(7,749,905	)			(7,749,905	)
BALANCE, at December 31, 2013			91,266,411			$	91,266			$	56,114,271			$	(35,827,720	)		$	20,377,817
Stock issued for conversion of convertible debt			237,118				237				118,322				-				118,559
Stock issued for the exercise of common stock warrants			3,997,867				3,999				1,828,918				-				1,832,917
Stock issued for the settlement of accounts payable and accrued expense			2,100,180				2,100				2,296,157				-				2,298,257
Options issued for compensation											6,267,724				-				6,267,724
Stock issued for compensation			2,750,000				2,750				4,589,750				-				4,592,500
Net loss			-				-				-				(13,078,214	)			(13,078,214	)
BALANCE, at June 30, 2014			100,351,576			$	100,352			$	71,215,142			$	(48,905,934	)		$	(22,409,560	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

STANDARD METALS PROCESSING, INC.

(formerly Standard Gold Holdings, Inc.)

(AN EXPLORATION STAGE COMPANY)

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

										September 28,
										2004
		Six Months Ended								(inception) to
		June 30, 2014				June 30, 2013				June 30, 2014
OPERATING ACTIVITIES:
Net loss		$	(13,078,214	)		$	(920,638	)		$	(48,905,934	)
Adjustments to reconcile net loss to cash flows used in operating activities:
Expense incurred due to modification of warrants			-				-				54,226
Depreciation and amortization			8,813				-				340,174
Amortization of imputed interest and original issue discounts on debt			-				-				3,208,994
Amortization of prepaid consulting fees related to issuance of common stock and warrants			-				-				491,000
Amortization of debt issuance costs			-				-				29,239
Compensation expense related to issuance of common stock, warrants and stock option grants			10,860,224				-				23,170,030
Issuance of common stock for extension of maturity date			-				-				500,000
Loss on extinguishment of debt and accrued expenses			959,020				21,033				2,331,997
Increase in convertible note payable, related party through the payment of expenses			-				-				544,164
Loss on foreign currency			-				-				353,695
Issuance of common stock for expenses			-				-				2,118,400
Loss on disposal of miscellaneous assets			-				-				53,287
Issuance of equity securities by Wits Basin for exploration expenses			-				-				334,950
Debt incurred for exploration expenses			-				-				75,000
Changes in operating assets and liabilities:
Prepaid expenses			(55,015	)			-				(60,015	)
Accounts payable			646,289				181,526				1,484,050
Accrued expenses			(30,499	)			390,482				4,810,364
Net cash used in operating activities			(689,382	)			(327,597	)			(9,066,379	)
INVESTING ACTIVITIES:
Purchases of Shea Mining and Milling assets			-				-				(1,020,427	)
Purchases of equipment			-				-				(206,215	)
Payment for construction in progress			(1,156,411	)			-				(1,224,760	)
Net cash used in investing activities			(1,156,411	)			-				(2,451,402	)
FINANCING ACTIVITIES:
Payments on long-term debt			-				-				(491,106	)
Payments from (advances to) Wits Basin			-				-				5,314,251
Repayment of short term note principal			(25,000	)			-				(25,000	)
Cash proceeds from issuance of common stock, warrants and exercise of stock options and warrants, net			1,832,917				-				3,504,396
Cash proceeds from debt			-				333,834				3,359,727
Debt issuance costs			-				-				(39,264	)
Net cash provided by financing activities			1,807,917				333,834				11,623,004
Increase (Decrease) in CASH AND CASH EQUIVALENTS			(37,876	)			6,237				105,223
CASH AND CASH EQUIVALENTS, beginning of period			143,099				94				-
CASH AND CASH EQUIVALENTS, end of period		$	105,223			$	6,331			$	105,223
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Issuance of common stock in lieu of payment on long-term note			-				-				750,000
Accrued expenses converted into notes payable			-				-				537,257
Debt and accrued interest of Pure Path short-term loan facility converted into common stock			-				-				1,950,000
Short-term notes payable and accrued interest converted into convertible promissory notes			-				-				138,939
Convertible promissory notes and accrued interest converted into common stock			118,559				43,781				2,495,489
Expenses paid on behalf of Company by Pure Path through increase in short-term loan facility			-				-				184,202
Conversions into common stock of amounts originally due to Shea			225,000				-				365,000
Common stock issued in lieu of accounts payable and accrued expenses			114,237				410,968				1,988,983
Long-term debt incurred for the purchase of Bates-Hunter Mine			-				-				6,156,251
Advances from Wits Basin incurred for the purchase of Bates Hunter Mine			-				-				815,298
Accrued expenses incurred in connection with the purchase of Bates Hunter Mine			-				-				307,500
Offset to advances from Wits Basin for common stock purchase			-				-				(10
Amounts due to Wits Basin reclassified as additional paid-in capital			-				-				3,867,872
Amounts due to Wits Basin converted into a long-term note payable			-				-				2,500,000

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

STANDARD METALS PROCESSING, INC.

(AN EXPLORATION STAGE COMPANY)

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(unaudited)

 

NOTE 1 - OVERVIEW

 

Standard Metals Processing, Inc. (formerly Standard Gold Holdings, Inc., Standard Gold, Inc. and Princeton Acquisitions, Inc.) (the “Company”) was incorporated in the State of Colorado on July 10, 1985 as a blind pool or blank check company. On September 29, 2009, we completed a share exchange agreement with Hunter Bates Mining Corporation, a Minnesota corporation (“Hunter Bates”) and certain of its shareholders, in which Hunter Bates’ shareholders exchanged all of their capital securities into similar capital securities of ours (the “Hunter Bates Share Exchange”) and we adopted the business model of Hunter Bates of mineral exploration and mining. Accordingly, the Hunter Bates Share Exchange represented a change in control and Hunter Bates became a wholly owned subsidiary of the Company.

 

Prior to September 29, 2009, Wits Basin Precious Minerals Inc., a Minnesota corporation and public reporting company quoted on the Pink Sheets under the symbol “WITM” (“Wits Basin”) was the majority shareholder of Hunter Bates. Hunter Bates was formed in April 2008 to acquire the prior producing gold mine properties (consisting of land, buildings, equipment, mining claims and permits) located in Central City, Colorado, known as the “Bates-Hunter Mine.” We had not engaged in any exploration or mining activities at the Bates-Hunter Mine properties and on April 29, 2011, we transferred all of our interests of Hunter Bates back to Wits Basin in order to develop the toll milling business as described below.

 

On March 15, 2011, we closed a series of transactions, whereby we acquired certain assets of Shea Mining & Milling, LLC (“Shea Mining”). The exchange agreement was by and between us, Shea Mining, Afignis, LLC, Leslie Lucas Partners, LLC, Wits Basin and Alfred A. Rapetti (the “Shea Exchange Agreement”) whereby we acquired certain assets from Shea Mining, which assets include those located in Tonopah, Nevada, of land, buildings, a dormant milling facility, abandoned milling equipment, water permits and mine tailings (financed through a note payable assigned to us), mine dumps, a property lease and a contract agreement in exchange for 35,000,000 shares of our unregistered shares. The Shea Exchange Agreement did not include any operable toll milling equipment, employees or operational processes and therefore has been accounted for as a purchase of a group of assets. We completed the Shea Exchange Agreement to acquire the Shea Mining assets and develop a toll milling services business of precious minerals. Toll milling is a process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious minerals contained therein, such as gold, silver, lead, zinc and copper, and rare earth metals. See Note 4 – Acquisition of Shea Milling and Mining Assets for a detailed discussion.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The financial statements includes the accounts of Standard Metals Processing, Inc. and our wholly owned subsidiaries Tonopah Milling and Metals Group, Inc. (and its wholly owned subsidiaries Tonopah Custom Processing, Inc. and Tonopah Resources, Inc.) and Esmeralda Renewable Energy, Inc. All significant intercompany transactions, accounts and balances have been eliminated in consolidation.

  

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K filed April 11, 2014. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year as a whole.

 

 

Shea Mining and Milling Assets

 

We have recorded the estimated fair value of the Shea Mining and Milling assets as an aggregate amount on our condensed balance sheets. The assets include the mine tailings and dumps, the land, water rights and the milling facility (the buildings and equipment). None of the assets have been put into production, nor have we performed any repair or updates to any of the equipment or buildings. As such, we will continue to classify them under a single listing.

 

Mineral Properties

 

Mineral property acquisition costs are recorded at cost and are deferred until the viability of the property is determined. No properties have reached the development stage at this time. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties acquired under an option agreement, general overhead, administrative and holding costs to maintain a property on a care and maintenance basis are expensed in the period they are incurred. When reserves are determined for a property and a bankable feasibility study is completed, subsequent exploration and development costs on the property would be capitalized. If a project were to be put into production, capitalized costs would be depleted on the unit of production basis.

 

Management reviews the net carrying value of each mineral property as changes may materialize with a property or at a minimum, on an annual basis. Where information and conditions suggest impairment, estimated future net cash flows from each property are calculated using estimated future prices, proven and probable reserves and value beyond proven and probable reserves, and operating, capital and reclamation costs on an undiscounted basis. If it is determined that the future cash flows are less than the carrying value, a write-down to the estimated fair value is made with a charge to loss for the period. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses if the carrying value can be recovered.

 

Management’s estimates of gold prices, recoverable reserves, probable outcomes, operating capital and reclamation costs are subject to risks and uncertainties that may affect the recoverability of mineral property costs.

 

Recent Accounting Pronouncements

 

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inceptionto- date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage that in prior years it had been in the development stage. The Company plans to early adopt ASU No. 2014-10 during the third quarter of the year ended December 31, 2014.

  

NOTE 3 – COMPANY’S GOING CONCERN

 

The accompanying condensed financial statements have been prepared in conformity with US GAAP, assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2014, we incurred losses from operations of $13,078,214. At June 30, 2014, we had an accumulated deficit of $48,905,934 and a working capital deficit of $3,986,814. Our ability to continue as a going concern is dependent on our ability to raise the required additional capital or debt financing to meet short and long-term operating requirements. We believe that future private placements of equity capital and debt financing are needed to fund our long-term operating requirements. We may also encounter business endeavors that require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital position. If we are unable to obtain the necessary capital, we may have to cease operations.

 

 

NOTE 4 – ACQUISITION OF SHEA MINING AND MILLING ASSETS

 

On March 15, 2011, we entered into an exchange agreement by and between us, Shea Mining, Afignis, LLC, Leslie Lucas Partners, LLC, Wits Basin and Alfred A. Rapetti (the “Shea Exchange Agreement”) whereby we acquired certain assets from Shea Mining, which assets include those located in Tonopah (financed through a note payable assigned to us), mine dumps, a property lease and a contract agreement in exchange for 35,000,000 shares of our unregistered shares. The Shea Exchange Agreement did not include any operable toll milling equipment, employees or operational processes and therefore has been accounted for as a purchase of a group of assets. We completed the Shea Exchange Agreement to acquire the Shea assets and develop a toll milling services business of precious minerals.

 

Pursuant to the assignment of a note payable, we executed an Assignment and Assumption of Loan Documents and Loan Modification Agreement, by and between us, Shea Mining and NJB Mining, Inc. (the “Loan Modification Agreement”), dated March 15, 2011, for those assets located in Tonopah, Nevada (“Tonopah”), consisting of land, buildings, mining tailings, a dormant milling facility, abandoned milling equipment and water permits. The land encompasses 1,174 deeded acres, one of the largest private land holdings in Esmeralda County, Nevada. An estimated 2.2 million tons of tailings known as the “Millers Tailings” from the historic gold rush of Goldfield and Tonopah, Nevada is sitting on approximately 334 acres of this land.

 

The Tonopah property was subject to an existing $2,500,000 first deed of trust which was in default at the time of the Shea Exchange Agreement and included accrued interest of $375,645 which was also assumed in the transaction. As part of the assignment, NJB Mining, Inc. (“NJB”) modified the related note to allow us until May 14, 2011 to refinance this mortgage, which was subsequently extended numerous times. As of August 31, 2011, we were still in default under the terms of the Loan Modification Agreement, and therefore entered into a forbearance agreement with NJB, (the “NJB Forbearance Agreement”), in which NJB agreed to forbear from initiating legal proceedings, including forbearance of the deed of trust and enforcement of its collection remedies. The NJB Forbearance Agreement further provided for additional extensions up through December 9, 2011. On December 9, 2011, Pure Path Capital Management Company, LLC (“Pure Path”) purchased the Loan Modification Agreement and the NJB Forbearance Agreement directly from NJB. On December 21, 2011, we entered into an amended and restated forbearance agreement with Pure Path (the “A&R Forbearance”), whereby Pure Path extended the provisions of the NJB Forbearance Agreement. Pure Path provided an additional extension to stay any action of the A&R Forbearance until June 8, 2012, on which date, if not paid or another agreement was not executed, the Company would be required to issue 5,000,000 shares of its common stock to Pure Path; such extension was provided without additional consideration. The Company did not pay the balance of the mortgage on June 8, 2012 and pursuant to the terms of the A&R Forbearance Agreement, the Company was required to issue 5,000,000 shares to Pure Path. The 5,000,000 shares were approved for issuance by the Board of Directors on October 9, 2012 and were issued to Pure Path on December 6, 2012. Pure Path provided additional extensions to stay any action of the Forbearance Agreement until August 31, 2013; such extensions were provided without additional consideration. On October 10, 2013, the Company entered into a Settlement and Release Agreement (the “Agreement”) with Pure Path. Pursuant to the Agreement, Pure Path relinquished the rights and obligations owed to it and agreed to forbear collection remedies and legal proceedings against the Company including foreclosure on the Deed of Trust. In connection with the settlement and release of various debts of approximately $1,500,000, consulting fees owed by the Company, and relinquishment of rights by Pure Path, the Company issued 27,000,000 restricted shares and a convertible Promissory Note in the amount of $1,933,345 bearing interest of 8% per year for the current balance of the amounts owed under the Pure Path Agreements.

 

In connection with the Shea Exchange Agreement, we also were assigned the ownership of approximately a six square mile section of mine dump material in Manhattan, Nevada (“Manhattan”).

  

The other assets we acquired consisted of a property lease, which allowed us the use of an assay lab property and the associated water permits, (with a right to purchase for $6,000,000) and a contract agreement, which allowed us the use of processing permits, located in Amargosa Valley, Nevada (“Amargosa”). We paid a monthly base rent of $17,500 on this lease and $5,000 monthly on the contract agreement. In January 2012, the landlord of the Amargosa lease caused to have served a five Day Notice To Pay Rent Or Quit due to default in the monthly $17,500 lease payments. The Company began immediate communications with the landlord, which resulted in a delay of further actions by the landlord to pursue any remedies. Then on February 9, 2012, the landlord caused to have served an Order For Summary Eviction (“Eviction”) due to continued default in lease payments. Effective with the Eviction, a total of $112,500 in lease and contract payments remain unpaid as well as $10,500 in late fees required pursuant to the terms of the lease. On February 10, 2012, the Beatty County Sheriff completed the Eviction at Amargosa and we as such, no longer have access to the assay lab or permits at Amargosa. As a result, all remaining equipment at Amargosa with an aggregate value of $40,925 was written off as impaired.

 

 

Pursuant to the Shea Exchange Agreement, we issued a total of 35,000,000 shares of our common stock to the equity holders of Shea Mining in exchange for certain of their assets, resulting in those holders owning an ownership interest of approximately 87% of our then currently outstanding common stock (approximately 56% ownership interest on a fully diluted basis). Alfred A. Rapetti, a member of our Board of Directors and our former Chief Executive Officer, was granted an irrevocable voting proxy for half of the shares issued to the Shea Mining equity holders, which continues until the affected shares are publicly sold after a period of at least six months, and thereafter in accordance with all applicable securities laws. In August 2011, these rights were transferred to Blair Mielke, a former director of the Company. All but 110,000 shares of such voting rights have since been canceled by the respective holders. We also agreed to indemnify Shea Mining from any liabilities arising after March 15, 2011 out of the Loan Modification Agreement or the loan agreements.

 

The purchase consideration of the assets acquired was calculated as follows:

 

Issuance of 35,000,000 shares of common stock with an estimated fair value of $0.89 per share (closing sales price on March 15, 2011)		$	31,150,000
Cash consideration			700,000
Assumption of NJB Mining mortgage			2,500,000
Assumption of accrued interest and other liabilities			463,184
Legal costs (includes issuance of 100,000 shares of common stock valued at  $89,000)			205,258
Other direct expenses incurred in connection with the Shea Exchange Agreement			140,985
		$	35,159,427

 

In conformity with accounting principles generally accepted in the United States of America, cost of acquiring a group of assets is allocated to the individual assets within the group based on the relative fair values of the individual assets.

 

The table below sets forth the final purchase price allocation. The estimated fair value of the mineral properties and property and equipment was determined based on level 3 inputs using cost and market value approaches.

 

Tonopah mine tailings		$	24,888,252
Tonopah dormant milling facility			8,062,875
Tonopah land			1,760,000
Tonopah water rights			348,300
Manhattan mine dumps			100,000
Total		$	35,159,427

  

Simultaneous with these transactions, pursuant to the Shea Exchange Agreement, Wits Basin exchanged 19,713,544 shares of our common stock it held for 10,000,000 shares of our Series A Preferred Stock. The Series A Preferred Stock has a liquidation preference of $10,000,000, payable only upon certain liquidity events or upon achievement of a market value of our equity equaling $200,000,000 or more. Additional details regarding the Series A Preferred Stock can be found in our Articles of Amendment, which were filed with the Colorado Secretary of State on January 4, 2013. Additionally, we obtained the right to transfer our entire interest and related debt of the Bates-Hunter Mine, at any time prior to June 13, 2011, to Wits Basin in exchange for the cancellation of a promissory note issued by Hunter Bates payable in favor of Wits Basin in the approximate amount of $2,500,000. On April 29, 2011, our Board of Directors approved this transfer effective April 29, 2011.

 

Furthermore, Wits Basin had entered into certain commitments which involved shares of our common stock and as a result of their exchange of substantially all of the Company’s common stock they held for Series A Preferred Stock, they could no longer honor those commitments. In consideration of Wits Basin agreeing to the exchange, the Company agreed to enter into two stock option agreements as follows: (1) the Company granted to one of Wits Basin’s major lenders a replacement stock option, on substantially the same terms as the stock option issued by Wits Basin, to purchase up to 1,299,000 shares of the Company’s common stock at an exercise price of $1.00 per share expiring on December 14, 2014 (of which the holder exercised 10,000 shares of the option with a payment of $10,000 during 2011) and (2) the Company granted to Wits Basin a replacement stock option, expiring on December 19, 2014, to purchase up to 630,000 shares of the Company’s common stock, at an exercise price of $0.50 per share.

 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

We are preparing our Tonopah property site for the construction of our permitted custom processing toll milling facility including grading the land, installing fencing and working with contractors for our 21,875 square foot building and servicing and drilling various wells for our future operations.

 

Components of our property, plant and equipment are as follows:

 

		June 30,				December 31,
		2014				2013
Equipment		$	21,000			$	21,000
Construction in progress			1,224,760				68,349
Less accumulated depreciation			(8,813	)			—
		$	1,236,947			$	89,349

 

NOTE 6 – SHORT-TERM NOTES PAYABLE

 

The following table summarizes the Company’s short-term notes payable:

		June 30,				December 31,
		2014				2013
Promissory note issued on September 7, 2010, in the principal amount of $25,000 to Stephen Flechner, our President at the time, utilized for a potential mining project; stated interest rate of 5%; accrued interest of $4,147 at December 31, 2013; with a maturity date of November 30, 2010, original terms apply in the default period. (1)		$	—			$	25,000
Totals		$	—			$	25,000

 

(1) Secured by a personal guarantee of Stephen D. King, our CEO at the time. The principal and interest of this note were paid in full on February 13, 2014.

 

Summary

 

The following table summarizes the short-term notes payable activity for the quarter ended June 30, 2014:

 

Balance at December 31, 2013		$	25,000
Add: advances from Pure Path			—
Less: principal repaid			25,000
Balance at June 30, 2014		$	—

 

There were no short-term notes outstanding as of June 30, 2014.

 

 

NOTE 7 - SHAREHOLDERS’ EQUITY

 

Preferred Stock

 

Series A

 

Simultaneous with the Shea Exchange Agreement, Wits Basin exchanged 19,713,544 shares of our common stock it held for 10,000,000 shares ($.001 par value each) of “Series A Preferred Stock” with an original issue price of $1.00 per share.

 

Attributes of Series A Preferred Stock can be found in the Form 10-K for the year ended December 31, 2013 filed with the Commission on April 11, 2014 and in the Company’s filings with the Secretary of State of Colorado.

 

Series B

 

There are no shares of Series B Preferred Stock issued and outstanding.

 

Attributes of Series B Preferred Stock can be found in the Form 10-K for the year ended December 31, 2013 filed with the Commission on April 11, 2014 and in the Company’s filings with the Secretary of State of Nevada.

 

Common Stock Issuances

 

For services

 

On June 18, 2014, the Company issued 1,000,000 restricted common shares to a service provider. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

 

On June 18, 2014, the Company issued 250,000 restricted common shares to the President of our subsidiary Tonopah Custom Processing, Inc. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

 

On June 18, 2014, the Company issued 1,500,000 restricted common shares to an officer of the Company. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

 

Conversion of Unsecured Note

 

A holder of a convertible promissory note dated January 26, 2011 converted the entirety of the note consisting of $100,000 of principal and $18,559 of interest on February 28, 2014 into 237,118 shares of the Company’s common stock.

 

Debt Settlements

 

On January 17, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $193,910 debt was settled for 387,820 shares of restricted common stock. An additional $80,000 of debt was extinguished.

 

On January 17, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $125,000 debt was settled for 250,000 shares of restricted common stock.

 

On January 17, 2014, the Company settled a $225,000 debt by converting the entire debt into 800,000 shares of restricted common stock of the Company. Pursuant to a Debt Settlement Agreement previously executed on April 3, 2013 the debt was converted at a per share price of $0.28125.

 

On February 13, 2014, the Company entered into a Agreement with a debt holder wherein a $458,250 of Accrued Expenses was settled for 300,000 shares of restricted common stock and $21,750 was charged as loss on settlement of debt to general and administrative expense.

 

 

On March 4, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $100,000 debt was settled for 200,000 shares of restricted common stock.

 

On April 22, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $100,000 debt was settled for 112,360 shares of restricted common stock.

 

On June 10, 2014, the Company issued 50,000 unregistered shares of common stock to a former consultant for the settlement of consulting fees.

 

The Company recorded $959,020 and $21,033 related to non-cash loss on settlement of debt for the six months ended June 30, 2014 and 2013, respectively.

 

Stock Warrants

 

The following table summarizes information about the Company’s stock warrants outstanding:

 

		Number				Weighted  Average  Exercise  Price				Range  of  Exercise  Price				Weighted  Remaining  Contractual  Life
Outstanding at December 31, 2013			13,989,206			$	0.67			$	0.20 -  1.00
Granted			—			$	—			$	—
Cancelled or expired			—				—				—
Exercised			(3,997,867	)		$	0.46			$	0.25 – 1.00
Warrants outstanding at June 30, 2014			9,991,339			$	0.76			$	0.20 – 1.00			3.5 years
Warrants exercisable at June 30, 2014			9,991,339			$	0.76			$	0.20 – 1.00

 

During the six months ended June 30, 2014, a total of 3,997,867 warrants to purchase common stock were exercised: 1,730,867 warrants were exercised at a price of $0.25 per share; 400,000 warrants exercised at $0.50 per share; 1,667,000 warrants exercised at $0.60 per share and 200,000 at $1.00 per share for an aggregate total of $1,832,917.

 

Stock Option Grants

 

2010 Plan

 

We had one stock option plan: the 2010 Stock Incentive Plan, as amended (the “2010 Plan”). Stock options, stock appreciation rights, restricted stock and other stock and cash awards may be granted under the 2010 Plan. In general, options vest over a period ranging from immediate vesting to five years and expire 10 years from the date of grant. Effective January 21, 2011, the Company’s Board of Directors (the “Board”) authorized an amendment to the 2010 Stock Incentive Plan, to increase the number of options available for granting under the 2010 Plan from 3,000,000 to 13,500,000 and authorized the Company to file an S-8 Registration Statement with the U.S. Securities and Exchange Commission (subsequently filed on January 27, 2011, File No. 333-171906) for the registration of the shares available in the 2010 Plan. On March 15, 2011, with the closing of the Shea Exchange Agreement a “change of control” event was deemed to have occurred and 13,500,000 previously granted stock options vested in full. Effective July 25, 2011, the 2010 Plan was amended to increase the total shares of stock which may be issued under the Plan from 13,500,000 to 14,500,000. As of December 31, 2012, an aggregate of 6,200,000 shares of our common stock are available to be granted under our 2010 Plan.

 

 

During 2012, we granted the following stock options:

 

(1)

In February 2012, the Company received from Manfred E. Birnbaum a notice of resignation from the Company’s Board of Directors (the “Board”). Effective with Mr. Birnbaum’s resignation, the Board approved a five-year option to purchase 100,000 shares of the Company’s common stock (valued at $43,000) at an exercise price of $0.47 per share, which was the closing price of the Company’s common stock on February 10, 2012, for his continued service as a consultant. The option is subject to the terms of the 2010 Plan and vested immediately. Furthermore, the Board authorized an additional five years to exercise his currently issued 900,000 stock options. The Company charged $222,000 to expense in 2012, as a result of these modifications.  Of these options, 400,000 are available for exercise as of December 31, 2013 and 0 as of the date of this filing.

 

The Company has been receiving files from former officers and attorneys. Upon review of the files, the original 2010 Plan and Board Resolution were located. The 2010 Plan approved by the Board of Directors on March 22, 2010 authorized 3,000,000 shares of common stock for issuance under the 2010 Plan. The Board of Directors voted to increase the number of shares available under the 2010 Plan on January 21, 2011. Section 9.11 of the 2010 Plan as approved by the Board states:

 

9.11 Amendment of the Plan. The Board of Directors may amend or discontinue the Plan at any time. However, no such amendment or discontinuance shall adversely change or impair, without the consent of the recipient, an Incentive previously granted. Further, no such amendment shall, without approval of the stockholders of the Company, (a) increase the maximum number of shares of Common Stock which may be issued to all participants under the Plan, (b) change or expand the types of Incentives that may be granted under the Plan, (c) change the class of persons eligible to receive Incentives under the Plan, or (d) materially increase the benefits accruing to participants under the Plan.

 

Pursuant to the terms of the 2010 Plan, the stockholders of the Company must approve this increase. As the stockholders of the Company did not approve the increase of shares available under the 2010 Plan, the increase on January 21, 2011 was not effective.

 

As of January 21, 2011 the Company had issued a total of 2,800,000 options to purchase shares under the 2010 Plan and had 200,000 shares remaining authorized and unissued. However, also on January 21, 2011, the Board of Directors authorized the issuance of 10,500,000 options. This issuance far exceeded the number of shares available and the excess issuances were not valid. As a correction measure, the Company has divided the 200,000 shares that were available pro-rata between the persons named in the resolution.

 

As a result of this correction there are a total of 1,631,842 options granted and available for exercise under the 2010 Plan outstanding as of the date of this filing.

 

The Board of Directors terminated the 2010 option plan on August 23, 2013.

 

Options issued in 2013

 

The following options were issued in 2013 outside of any option plan:

 

The Company executed an Employment Agreement with Sharon Ullman dated effective November 13, 2013. As compensation for her employment as the Chief Executive Officer of the Company, Ms. Ullman was granted a total of 4,500,000 options to purchase common stock of the Company at an exercise price of $0.38 per share, with a grant term of 7 years. A total of 1,500,000 options vest upon each of the following: (i) November 13, 2013; (ii) June 1, 2014; and (iii) June 1, 2015.

 

The Company executed an Employment Agreement with Jim Stieben dated effective October 15, 2013. Pursuant to the agreement, Mr. Stieben was appointed the President and Director of Operations of Tonopah Custom Processing, Inc. As compensation for his services, Mr. Stieben was granted a total of 1,500,000 options to purchase common stock of the Company at an exercise price of $0.60 per share, with a grant term of 7 years. A total of 750,000 options vested on October 15, 2013, and 375,000 options will vest upon each of the following: (i) the completed construction of a permitted processing building on the Miller’s Mill site; and (ii) the Company achieving profitability.

 

 

2014 Option Plan

 

By Board Resolution effective January 27, 2014, the Company adopted a 2014 Stock Incentive Plan (the “Plan”) to compensate employees and consulting groups in their efforts to enhance the long-term shareholder value of the Company. Pursuant to the Plan, selected persons are offered opportunities to participate in the Company’s growth and success and are encouraged to acquire and maintain stock ownership in the Company. The Plan grants options to purchase shares of our common stock vesting at dates beginning on the date of grant and issuable at chronological or performance increments. The Plan Administrator may also grandfather in existing options granted during 2013. The Company intends to submit the approval of the 2014 Plan to the shareholders for approval at the 2014 annual meeting.

 

Under administration by the Compensation Committee (the “Plan Administrator”), a maximum of 75,000,000 shares of common stock are available for issuance under the Plan, subject to adjustment from time to time. Awards may be granted under the Plan to officers, directors, employees and consultants of the Company and as the Plan Administrator selects. The Plan Administrator is authorized, in its sole discretion, to issue options as incentive stock options, which shall be appropriately designated. The term of each option to purchase common stock of the Company is established by the Plan Administrator or, if not so established, is 10 years from the grant date.

 

The Plan Administrator establishes the time at which each option shall vest and become exercisable. If not established in the instrument evidencing the option, the option shall vest and become exercisable according to the following schedule: (i) after one year of the participant’s continuous employment or service with the company or its related corporations, one quarter of the total options will be vested and exercisable; (ii) after each additional six-month period of continuous service completed thereafter, an additional one eighth of the total options will be vested and exercisable; and (iii) after four years, 100% of the options will be vested and exercisable. Under the terms of the Plan, the exercise price for shares shall be paid in cash or check to the Company unless the Plan Administrator determines otherwise.

 

The Plan Administrator shall determine whether the options will continue to be exercisable, and the terms and conditions of such exercise, if a participant ceases to be employed or provide services to the Company. If not so established in the instrument evidencing such options, any portion of an option that is not vested and exercisable on the date of termination of the participant’s employment or service relationship (the “Employment Termination Date”) shall expire on such date. Any portion of an option that is vested and exercisable on the Employment Termination Date shall expire upon the earliest to occur of: (i) if the participant’s Employment Termination Date occurs by reason of retirement, disability or death, the one-year anniversary of such Employment Termination Date; (ii) if the participant’s Employment Termination Date occurs for reasons other than cause, retirement, disability or death, the three-month anniversary of such Employment Termination Date; or (iii) the last day of the option term. Notwithstanding the foregoing, if the participant dies after the Employment Termination Date while the Option is otherwise exercisable, the portion of the option that is vested and exercisable on such Employment Termination Date shall expire upon the earlier to occur of: (i) the last day of the option term; or (ii) the first anniversary of the date of death, unless the Plan Administrator determines otherwise.

 

If a participant is terminated for cause, the options shall automatically expire at the time the Company first notifies the participant of the termination. If a participant’s employment is suspended pending investigation of whether they will be terminated for cause, the participant’s rights under any option shall be suspended during the period of investigation. Awards granted under the Plan may not be assigned, except, to the extent permitted by Section 422 of the Internal Revenue Code (the “IRC”), and the Plan Administrator may permit such assignment, transfer and exercisability, and may permit a participant to designate a beneficiary who may exercise the award or receive compensation under the award after the participant’s death. Any award permitted to be assigned shall be subject to the terms and conditions contained in the instrument evidencing the award.

 

The Plan may only be amended by the Company’s Board of Directors, as it deems advisable. Shareholder approval shall be required for any amendment to the extent required for compliance with Section 422 of the IRC, as amended or any applicable law or regulation. The Board may suspend or terminate the Plan at any time. Incentive stock options may not be granted more than 10 years after the later of the Plan’s adoption by the Board or the adoption by the Board of any amendment to the Plan that constitutes adoption of a new plan for the purpose of Section 422 of the IRC. Participants who are residents of California shall be subject to additional terms and conditions until the Common Stock becomes a publicly traded security, under the California Securities Code.

 

 

We grandfathered the following options issued to consultants during the 4^th quarter of 2013 in to the 2014 Plan:

 

The Company entered into a Strategic Advisory Services Agreement with P5, LLC (“P5”) dated effective October 15, 2013, to provide strategic advisory services. As consideration for such services, the Company granted P5 an aggregate total of 17,500,000 options to purchase common stock of the Company, with 7,500,000 shares available for purchase at an exercise price of $0.65 per share and 10,000,000 shares available for purchase at an exercise price of $1.25 per share, with a grant term of seven years and subject to a vesting schedule. With respect to the options to purchase up to 7,500,000 shares at $0.65 per share, 2,500,000 options vest upon each of the following: (i) October 15, 2013 (the “P5 Grant Date”); (ii) 90 days after the P5 Grant Date; and (iii) 180 days after the P5 Grant Date. With respect to the options to purchase up to 10,000,000 shares at an exercise price of $1.25 per share, 2,500,000 options vest upon each of the following: April 1, 2014, July 1, 2014, October 1, 2014 and January 1, 2015.

 

The Company entered into a Strategic Advisory Services Agreement with a consultant dated effective October 15, 2013. As consideration for the consultant’s assistance in expanding the Company’s operations and securing new business arrangements, the Company granted the consultant an aggregate of 3,500,000 options to purchase common stock of the Company, with 1,500,000 shares available for purchase at an exercise price of $0.65 per share and 2,000,000 shares available for purchase at an exercise price of $1.25 per share, with a grant term of seven years and subject to a vesting schedule. With respect to the options to purchase up to 1,500,000 shares at $0.65 per share, 500,000 options vest upon each of the following: (i) October 15, 2013 (the “Consultant Grant Date”); (ii) 90 days after the Consultant Grant Date; and (iii) 180 days after the Consultant Grant Date. With respect to the options to purchase up to 2,000,000 shares at an exercise price of $1.25 per share, 500,000 options vest upon each of the following: April 1, 2014, July 1, 2014, October 1, 2014 and January 1, 2015.

 

On December 26, 2013, the Company entered into a Consulting Services Agreement with LR Advisors, LLC (“LRA”). Pursuant to the terms of the agreement, LRA agreed to provide the Company advisory services in connection with the Company’s investor relations. As compensation for such services, LRA was granted a total of 1,500,000 options to purchase common stock of the Company at an exercise price of $1.25 per share, with a grant term of seven years. The options vested in full upon execution of the agreement.

 

The Company entered into a Consulting Agreement with EAS Advisors, LLC (“EAS”) on January 1, 2014, whereby EAS agreed to provide the Company general corporate advice, guidance and strategic services relating to the Company’s milling assets and the development of mining clients and contacts. As consideration for such services, the Company granted EAS an aggregate of 2,000,000 options to purchase common stock of the Company, with 1,000,000 shares available for purchase at an exercise price of $1.25 per share and 1,000,000 shares available for purchase at an exercise price of $2.25 per share, with a grant term of seven years and subject to a vesting schedule. With respect to the options to purchase up to 1,000,000 shares at $1.25 per share, 250,000 options vest upon each of the following: (i) January 1, 2014 (the “EAS Grant Date”); (ii) 90 days after the EAS Grant Date; (iii) 180 days after the EAS Grant Date; and (iv) 270 days after the EAS Grant Date. With respect to the options to purchase up to 1,000,000 shares at an exercise price of $2.25 per share, 250,000 options vest upon each of the following: July 1, 2014, October 1, 2014, November 1, 2014 and December 1, 2014. The Company estimated the fair value of these options of $1,398,584 using the above Black-Scholes pricing model and will amortize over the vesting term.

 

On June 18, 2014, the Company granted 250,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to a legal advisor. The options vest in full on grant.

 

On June 18, 2014, the Company granted 750,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to the President of our Tonopah Custom Processing, Inc. subsidiary. The options vest in full on grant.

 

On June 18, 2014, the Company granted 1,000,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to an officer of the Company. The options vest in full on grant.

 

The Company uses the Black-Scholes pricing model as a method for determining the estimated fair value for stock awards. Compensation expense for stock awards is recognized on a straight-line basis over the vesting period of service awards and for performance based awards, the Company recognizes the expense when the performance condition is probable of being met.

 

 

In determining the compensation cost of the stock awards granted during fiscal 2014, the fair value of each grant had been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized below:

 

		June 30,
		2014				2013
Risk-free interest rate			2.21 % to 2.41	%			—
Expected volatility factor			75	%			—
Expected dividend			—				—
Expected option term			7 years				—

  

The Company reviews its current assumptions on a periodic basis and adjusts them as necessary to ensure an accurate valuation. The risk-free interest rate is based on the Federal Reserve Board’s constant maturities of the U.S. Treasury bond obligations with terms comparable to the expected life of the options at their issuance date. The Company uses historical data to estimate expected forfeitures, expected dividend yield, expected volatility of the Company’s stock and the expected life of the options.

 

The Company recorded $6,267,724 and $0 related to non-cash compensation expense for the six months ended June 30, 2014 and 2013, respectively. All compensation expense is included in general and administrative expense. There was no tax benefit from recording this non-cash expense due to our income tax valuation allowance and due to a portion of the options being incentive stock options. The compensation expense had a $0.07 and $0.00 per share impact on the loss per share for the six-month period ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there was $2,685,555 in unrecognized compensation expense.

 

The following tables summarize information about the Company’s stock options:

 

		Number of  Options				Weighted  Average  Exercise   Price
Options outstanding - December 31, 2012			10,438,335			$	0.64
Granted			28,500,000				0.89
Canceled or expired			(6,187,493	)			0.56
Exercised			—				—
Options outstanding - December 31, 2013			32,750,842			$	0.88
Granted			4,000,000				1.71
Canceled or expired			—				—
Exercised			—				—
Options outstanding – June 30, 2014			36,750,842			$	0.97
Weighted average fair value of options granted during the period ended June 30, 2014						$	1.17
Weighted average fair value of options granted during the period ended June 30, 2013						$	0.00

 

 

A summary of the Company’s non-vested options at June 30, 2014, and changes during the period ended June 30, 2014, is presented below:

 

		Options				Weighted  Average Grant Date  Fair Value
Non-vested, beginning of period			21,750,000			$	0.24
Granted			4,000,000			$	0.94
Vested			(16,142,859	)		$	0.27
Forfeited			—			$	—
Non-vested, end of period			9,607,141			$	0.27

 

The following tables summarize information about stock options outstanding and exercisable at June 30, 2014:

 

		Options Outstanding at June 30, 2014
Range of  Exercise Prices		Number  Outstanding				Weighted  Remaining  Contractual  Life		Weighted  Average  Exercise  Price				Aggregate  Intrinsic Value(1)
$0.40 to $0.60			7,361,842			5.6 years		$	0.47			$	10,917,352
$0.61 to $1.00			10,600,000			5.8 years		$	0.69			$	13,380,000
$1.01 to $1.50			15,789,000			5.9 years		$	1.23			$	11,374,550
$1.51 to $2.25			3,000,000			6.8 years		$	1.86			$	560,000
$0.40 to $2.25			36,750,842			5.9 years		$	0.97			$	36,231,902

   

		Options Exercisable at June 30, 2014
Range of Exercise Prices		Number  Exercisable				Weighted  Remaining  Contractual  Life		Weighted  Average  Exercise  Price				Aggregate  Intrinsic Value(1)
$0.40 to $0.60			5,611,843			5.3 years		$	0.47			$	7,579,852
$0.61 to $1.00			10,600,000			5.8 years		$	0.69			$	13,380,000
$1.00 to $1.50			8,431,859			5.2 years		$	1.20			$	4,899,550
$1.50 to $2.25			2,499,999			7.0 years		$	1.67			$	560,000
$0.40 to $2.25			27,143,701			5.6 years		$	0.86			$	26,419,402

 

(1) The aggregate intrinsic value in the table represents the difference between the closing stock price on June 30, 2014 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their options on June 30, 2014. No options were exercised during the quarter ended June 30, 2014.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

In May 2011, the Company entered into an agreement with a consultant to operate and manage a future toll milling facility in Clark County, Nevada as well as to perform other services, as requested by the Company. The term of the agreement was for two years and could be renewed by mutual agreement of the parties.  In return for these services, the Company had agreed to the following compensation throughout the term of this agreement:

 

(1)

Issue 300,000 shares of its unregistered common stock;

 

(2)

pay the consultant a cash payment of $10,000 per month plus certain living accommodation expenses for a residence in Clark County;

 

(3)

pay the consultant 25% of the calculated monthly net profits, as defined in the agreement, of the Clark County toll milling facility; and

 

 

(4)

pay the consultant 10% of the Company’s net profits derived from those contracts originated by the consultant.

 

The Company has abandoned any plans to construct a facility in Clark County because of zoning and permitting requirements, this location could have only been a laboratory and not a facility that housed both toll milling capabilities and a laboratory. At December 31, 2013, the Company had accrued $458,250 and $183,790 for the future issuance of the common stock and unpaid monthly cash payments, respectively. On February 13, 2014, the Company issued the 300,000 unregistered shares of common stock valued at $480,000 to the consultant.

 

NOTE 9 – SUBSEQUENT EVENTS

 

Settlement Agreement

 

On July 15, 2014, the Company entered into a Settlement Agreement with a former director wherein the parties agreed on the number of options issued to the former director under the 2010 Plan, resolved any and all claims against the Company and the Company issued 150,000 warrants with an exercise price of $2.00 per share that expire July 15, 2017 to the former officer.

 

Option Exercise

 

On July 15, 2014, a holder with an option to purchase a total of 400,000 shares under the 2010 Plan originally granted on September 14, 2010 executed a cashless exercise wherein 282,000 restricted shares were issued and 118,000 shares were surrendered as payment for the issued shares.

 

Warrant Exercise

 

On July 17, 2014, 613,000 warrants to purchase common stock were exercised at a per share price of $0.60 for a total of $367,800.

 

 

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

 

The following management discussion and analysis of financial condition and results of operations should be read in connection with the accompanying unaudited condensed financial statements and related notes thereto included elsewhere in this Report and the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2013.

 

Cautionary Notice Regarding Forward Looking Statements

 

Readers are cautioned that the following discussion contains certain forward-looking statements and should be read in conjunction with the “Special Note Regarding Forward-Looking Statements” appearing at the beginning of this Annual Report.

 

The information contained in Item 7 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements, which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in our Annual Report on form 10-K and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

 

History

 

Standard Metals Processing, Inc. (formerly known as Standard Gold Holdings, Inc., Standard Gold, Inc. and Princeton Acquisitions, Inc.) was incorporated in the State of Colorado on July 10, 1985. On September 29, 2009, we completed a share exchange agreement with Hunter Bates Mining Corporation, a Minnesota corporation (“Hunter Bates”) and certain of its shareholders, in which Hunter Bates’ shareholders exchanged all of their capital securities into similar capital securities of ours (the “Hunter Bates Share Exchange”) and we adopted the business model of Hunter Bates of minerals exploration and mining. Accordingly, the Hunter Bates Share Exchange represented a change in control and Hunter Bates became our wholly owned subsidiary.

 

Prior to September 29, 2009, Wits Basin Precious Minerals Inc., a Minnesota corporation and public reporting company quoted on the Pink Sheets under the symbol “WITM” (“Wits Basin”) was the majority shareholder of Hunter Bates. Hunter Bates was formed in April 2008 to acquire the prior producing gold mine properties (consisting of land, buildings, equipment, mining claims and permits) located in Central City, Colorado, known as the “Bates-Hunter Mine.”

 

On March 15, 2011, we closed a series of transactions, whereby we acquired certain assets of Shea Mining & Milling, LLC (“Shea Mining”), which assets include land, buildings, a dormant milling facility, abandoned milling equipment, water permits, mine tailings, mine dumps and the assignment of a note payable, a lease and a contract agreement with permits. We completed the Shea Exchange Agreement in order to offer toll milling services of precious minerals. Toll milling is a process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious minerals contained therein, such as gold, silver, and platinum group metals. Custom milling and refining can include many different processes to extract precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill chemicals and bulk materials on a contractual basis and provide a chemical production outsourcing option for industrial companies which lack the expertise, capacity, or regulatory permits for in-house production.

 

The Company re-domiciled from Colorado to Nevada in March 2013. We determined that, due to a lack of connection to Colorado, it was in the best interest of the Company to move its domicile to Nevada.

 

Overview of the Company

 

Standard Metals Processing, Inc. (“we,” “us,” “our,” “Standard Metals” or the “Company”) is an exploration stage company having offices in Gadsden, Alabama, New York, New York and through its subsidiary, a property in Tonopah, Nevada. Our business plan is to purchase equipment and build a facility on our Tonopah property to serve as a permitted custom processing toll milling facility (which includes an analytical lab, pyrometallurgical plant, and hydrometallurgical recovery plant).

 

The Company will perform permitted custom processing toll milling, a process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious minerals contained therein, such as minerals in the gold, silver and platinum metal groups. Custom milling and refining can include many different processes that are designed specifically for each ore load and to maximize the extraction of precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill chemicals and bulk materials on a contractual basis and provide a chemical production outsourcing option for industrial companies, which lack the expertise, capacity, or regulatory permits for in-house production.

 

We are required to obtain several permits before we can begin construction of a small scale mineral processing facility to conduct permitted processing toll milling activities and construction of the required additional buildings and well relocation necessary for us to commence operations.

 

Water Pollution Control Permit

 

Through the Company’s wholly owned subsidiary, Tonopah Custom Processing, Inc. (“TCP”), it filed a Water Pollution Control Permit (“WPCP”) Application with the Nevada Department of Environmental Protection (“NDEP”) Bureau of Mines and Mining Reclamation (“BMMR”) on August 28, 2013 for the approval of the permits necessary for a small-scale mineral processing facility planned for the Tonopah Property. The plant will perform laboratory testing, pilot testing, and custom processing of precious metal ores and concentrates from mining industry clients. Processing of ore materials will employ standard mineral processing techniques including gravity concentration, froth flotation and chemical leaching and carbon stripping.

 

 

The WPCP must be approved prior to commencing the planned construction of our processing plant in Tonopah, Nevada. We are still in the technical review stage of our WPCP. While the Company awaits approval, NDEP has allowed us to do limited site preparation.

 

We are preparing for construction of our processing facility, which includes working with contractors that will be building the new 21,875 square foot processing plant, cleaning and preparing the property, and refurbishing a trailer that will act as our construction office.

 

In connection with our WPCP application, NDEP suggested that we take the following actions: (i) retain a Nevada Certified Environmental Manager (“CEM”), (ii) perform Meteoric Profile II water testing on ground water directly below the mill as well as surrounding wells located off site, and (iii) determine baseline values of water using the Meteoric Profile II results. NDEP requested that the Company delay any new construction planned for “metal extraction” until after the permits are in place. We hired Allstate-Nevada Environmental Management, Inc., as our CEM to assist us with obtaining an NDEP WPCP and to help us fulfill all the requirements of NDEP including the Meteoric Profile II analysis, as well as advise on the overall site cleanup and assisting with any other NDEP requirements.

  

In March 2013, Advanced Surveying & Professional Services, as our Professional Land Surveyor (“PLS”), completed surveys and testing of the Tonopah property required for the application of our required permits. After completion of the survey, it was determined the property is 1,183 acres. The scope of work our PLS completed includes: (i) setting a total of 19 permanent monuments at angle points along lines, (ii) setting eight permanent monuments locating US Hwy 95, (iii) recording a professional map indicating longitude and latitude for all corners, and (iv) providing a digital map accessible in AutoCad software.

 

NDEP’s review of the WPCP application typically takes 225 days. However, a backlog of permit applications may cause delays. We engaged HDR Engineering, Inc. to assist in the final portion of permitting with NDEP.

 

Water, Wells and Drilling Permit

 

The existing water rights on the property utilize two wells (points of diversion). We are in the process of obtaining a drilling permit from the Nevada Department of Water Resources (“NDWR”) to move the point of diversion of one of our existing wells. The historic production well has not been used in recent years and is too far away from our new production plant. We are moving the point of diversion closer to our proposed production plant site to provide a localized source of fresh water. We hired Bruce Mackay Pump and Well Service to drill the new process/fresh water well that will change the point of diversion and drill a new well. Drilling commenced in June 2014.

 

We placed a new 14,600 gallon water tank on the Tonopah property and completely rebuilt our existing domestic well to provide a supply of water for construction on the property, the construction office, and the newly built Recreational Vehicle (“RV”) park. The service of the domestic well included replacing the existing well pump with a higher volume submersible pump, installing a two inch supply line from the well to a 1,500 gallon fresh water supply tank, and a secondary water system including two 80 gallon pressure bladders and individual supply lines.

 

On March 10, 2014, we retained Interflow Hydrology, Inc. (“Interflow”) to engineer, design and oversee the installation of our four monitoring wells. The monitoring wells will be utilized by taking water samples up-gradient and down-gradient of our processing plant. A gradient is a direction of flow or convergence of the underground aquifer on the property. NDEP is permitting the Company to begin the installation of up to one up-gradient and three down-gradient monitoring wells.  We will take samples from the monitoring wells each quarter once they are operational to compare the laboratory water test results from up-gradient and down-gradient to act as a control. The baseline values of water quality are compared between up-gradient and down-gradient monitoring wells to show our site is not releasing any pollutants into the water table. Interflow will also provide us with an interpretation of groundwater gradient under our processing plant.

 

During the second quarter of 2014 we completed the installation of three monitoring wells and completed the background water testing (NDEP mandated Profile 1 water quality testing). We were notified that our three wells are sufficient and we do not need to drill a fourth. Eagle Drilling, Inc. drilled the monitoring wells and Interflow oversaw the installation.

 

 

Site and Facility Preparation

 

The Company received leased heavy equipment on August 1, 2013, which was used to begin cleanup of the site to prepare it for the new construction. We ordered a pre-fabricated building on November 4, 2013 and took delivery of the building on March 21, 2014. Upon receipt of our WPCP, we will begin erecting the building, which could take up to 120 days to complete.

 

The Company accepted delivery of additional large heavy equipment and broke ground on April 1, 2014. We completed the initial grading of specific designated areas on the 40 undisturbed acres of land including clearing all vegetation, removing of all scrap metal, and the excavation of the building pad for the preparation of the new 21,875 square foot processing plant. With the additional large heavy equipment onsite, we have completed the removal of all the extra and unnecessary materials and old equipment that have accumulated on the land.

 

We installed approximately one mile of perimeter security fencing around the new building site and contracted NV Energy to provide a new service line agreement upgrading our 100 amp service to 400 amp service to provide the construction offices and the RV park with electricity. During the second quarter of 2014, the Company hired an electrical contractor to design and engineer our new on-site electrical sub-station required to provide power to our new processing plant.

 

We engaged Dwyer Engineering, Inc., to provide engineered concrete footing designs and load calculations for our new processing plant. Although not required, the processing plant is being erected in strict conformity with the 2006 IRC building codes.

 

In April 2014 we purchased a complete Concrete Batch Plant, including four cement trucks, to reduce the overall cost of construction activities on site. This purchase is estimated to reduce the overall cost of construction by at least $500,000.00.

 

There is a severe housing shortage in the Tonopah area. Any available lodging has become increasingly expensive. In order to efficiently continue the rapid growth and improvements upon the Tonopah property, the Company completed a newly constructed, landscaped 5-space RV park complete with laundry facilities. The RV park allows us to house our construction contractors and provide onsite housing for future employees at a significant cost savings. The RV park was designed to easily allow future upgrades and up to 10 additional spaces. The new water supply system will supply individual water lines to each RV space and the new electricity service line agreement will provide electricity to the RV park. The RV park was finished in Q2 2014.

 

We have engaged CivilWise Engineering to perform all civil engineering including the creation of a master site plan, a topographical study of the property, site drainage plans, sewer plans, vehicle access roadway and path plans and a soils and geology study.

 

 

RESULTS OF OPERATIONS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2013.

 

Revenues

 

We had no revenues from any operations for the six months ended June 30, 2014 and 2013. Furthermore, we do not anticipate any significant future revenue until we have sufficiently funded operations.

 

 

General and administrative expenses were $12,021,604 for the six months ended June 30, 2014 as compared to $676,769 for the same period in 2013. Of the $12,021,604 in the six months ended June 30, 2014, we recorded $10,860,224 of compensation expense related to options and warrants as compared to $0 of compensation expenses related to options in the same period in 2013. In the six months ended June 30, 2014, compensation expenses as well as operating expenses increased due to the employment agreements the Company entered into with its key officers and the increase in construction costs as we have begun site preparation for the toll milling facility and costs associated with permits, research and agreements. We anticipate that future compensation expenses will increase and that certain operating expenses will continue to increase for fiscal 2014 as we continue to build the infrastructure to proceed with permitted custom processing toll milling services.

 

General and administrative expenses were $9,491,114 for the three months ended June 30, 2014 as compared to $248,544 for the same period in 2013. Of the $9,491,114 in the three months ended June 30, 2014, we recorded $8,733,419 of compensation expense related to options and warrants as compared to $0 of compensation expenses related to options in the same period in 2013. In the three months ended June 30, 2014, compensation expenses as well as operating expenses increased due to the employment agreements the Company entered into with its key officers and the increase in construction costs as we have begun site preparation for the toll milling facility and costs associated with permits, research and agreements.

 

Other Income and Expenses

 

Other Income

 

We receive monthly payments of $529 from American Tower Corporation for a cellular tower located on our Tonopah land.

 

Interest Expense

 

Interest expense for the three and six months ended June 30, 2014 was $47,006 and $91,951 respectively, compared to $115,717 and $225,481 for the same periods in 2013. The 2014 and 2013 amounts relate primarily to the interest due on our notes payable: (i) the $2,500,000 secured, convertible promissory note issued to Pure Path on October 10, 2013 in accordance with the settlement agreement of same date. All prior debt was subsumed under this note, the outstanding of which was $2,092,097 plus accrued interest at 8% per annum on June 30, 2014; (ii) the short-term note payable; and (iii) the convertible notes issued in 2011 and 2012.

 

The payment of the short-term note in item (ii) and the conversion of all but $275,000 of item (iii) above contributed to the significant decreases from the 2013 amounts.

 

Loss on settlement of debt

 

Loss on settlement of debt for the three and six months ended June 30, 2014 was $32,924 and $959,020 respectively compared to $0 and $21,033 for the same period in 2013. We have been negotiating with several previous debt holders to convert their debt to our common stock to conserve capital for building and operating expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual and operating needs as they arise. We have funded our operations and satisfied our capital requirements through the issuance of short-term debt and convertible debt during 2014 and 2013. We do not anticipate generating sufficient net positive cash flows from our operations to fund the next twelve months. We had a working capital deficit of $3,986,814 at June 30, 2014. Cash and cash equivalents were $105,223 at June 30, 2014, representing an increase of $98,892 from the cash and cash equivalents of $6,331 at June 30, 2013.

 

Our cash reserves will not be sufficient to meet our operational needs and thus, we need to raise additional capital to pay for our operational expenses and provide for capital expenditures. Our basic operational expenses are estimated at approximately $500,000 per month. Above the basic operational expenses, we estimate that we need approximately $5,400,000 to begin limited toll milling operations. If we are not able to raise additional working capital, we may have to cease operations altogether.

 

 

For the six months ended June 30, 2014, we had net cash used in operating activities of $689,382, as compared to $327,597 for the six months ended June 30, 2013.

 

For the six months ended June 30, 2014 and 2013 we had net cash used in investing activities of $1,156,411 and $0 respectively. The amount in 2014 was due to the funds required to conduct site preparation on our Tonopah, Nevada property.

 

For the six months ended June 30, 2014 and 2013, we had net cash provided by financing activities of $1,807,917 and $333,834, respectively.

 

The following table summarizes our debt as of June 30, 2014: 

 

Outstanding  Amount				Interest  Rate				Unamortized  Discounts				Accrued  Interest				Maturity  Date				Type
$	2,092,097	(1)			8	%		$	—			$	121,180				April 10, 2015			Convertible
$	175,000	(2)			6	%		$	—			$	31,372					(3)		Convertible

  

	(1)	Represents the outstanding balance of the original note payable to NJB Mining Inc. that was purchased directly by Pure Path Capital Management and restructured with their other short-term debt into the 8% Senior Secured Convertible Promissory Note maturing on April 10, 2015 (for the assets located in Tonopah).
	(2)	Beginning in January 2011, we entered into various six-month convertible promissory notes convertible at a price of $0.50 per share and issued a two-year stock purchase warrant with an exercise price of $0.50 per share at a rate of 2 warrants per $1 of note.
	(3)	The outstanding convertible promissory notes began maturing on July 26, 2011 through March 2, 2012. These convertible notes are currently past due and original terms apply in the default period.

 

Summary

 

Our existing sources of liquidity will not provide cash to fund operations and make the required payments on our debt service for the next twelve months. Our ability to continue as a going concern is dependent entirely on raising funds through the sale of equity or debt. We will continue our attempt to raise additional capital. Some of the possibilities available to us are through private equity transactions, to develop a credit facility with a lender or the exercise of options and warrants. However, such additional capital may not be available to us at acceptable terms or at all. In the event that we are unable to obtain additional capital, we would be forced to cease operations altogether.

 

Off-Balance Sheet Arrangements

 

During the six months ended June 30, 2014, we did not engage in any off balance sheet arrangements as defined in item 303(a)(4) of the SEC’s Regulation S-K. 

 

Item 3. Quantitative and Qualitative

 

Not Applicable.

 

Item 4. Controls and Procedures

 

Under the supervision of, and the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

 

 

Based on this evaluation and taking into account that certain material weaknesses existed as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures were not effective. As a result of this conclusion, the financial statements for the period covered by this Quarterly Report on Form 10-Q were prepared with particular attention to the material weaknesses previously disclosed. Notwithstanding the material weaknesses in internal controls that continue to exist as of June 30, 2014, we have concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, the financial position, results of operations and cash flows of the Company as required for interim financial statements.

 

Due to the small number of employees dealing with general administrative and financial matters and the expenses associated with increases to remediate the disclosure controls and procedures that have been identified, the Company made some changes to its internal controls over financial reporting for the period covered by this Quarterly Report on Form 10-Q while continuing to seek the expertise it needs to remediate the material weaknesses at an appropriate cost benefit basis. The Company engaged a firm that will assist in day to day accounting operations including preparing and reviewing ledger accounts, assessing, designing and setting up accounting systems to facilitate the effective and efficient recording of accounting transactions, and provide assistance and support for management. The Company also hired a new Chief Financial Officer. Management believes the engagement of this firm and our new CFO will help the Company address its material weaknesses.

  

PART II. OTHER

INFORMATION

 

Item 1.  Legal Proceedings

 

Mark Dacko

 

Mark Dacko, the Company’s former Chief Financial Officer, made a Demand for Arbitration on December 21, 2012 with the American Arbitration Association for legal claims against the Company involving his previous employment. The Company and Mr. Dacko were in dispute regarding his employment with the Company as well as the details of his termination. On December 30, 2013, the Company entered into a settlement agreement with Mark Dacko.

 

Midwest Investment Partners, LLC v. Standard Gold Holdings, Inc.

 

On September 6, 2013, Midwest Investment Partners, LLC filed suit in the United States District Court for the Southern District of Indiana, Evansville Division against Standard Gold Holdings, Inc. alleging a breach of the Company’s obligations under a $50,000 6% Convertible Promissory Note, dated April 5, 2011, and a $25,000 6% Convertible Promissory Note, dated September 2, 2011, by (i) failing to repay the April 5, 2011 Note when due on October 6, 2011, and (ii) failing to repay the September 2, 2011 Note when due on February 29, 2012. On January 10, 2014, Standard Gold filed its Answer with Affirmative and Other Defenses to Midwest’s Complaint and Demand for Jury Trial. On February 19, 2014, the Court approved the parties’ Joint Case Management Plan setting the timing and sequence of discovery in the action, and scheduling a settlement conference to be held on October 15, 2014. On April 3, 2014, Midwest filed a Motion for Summary Judgment. On May 1, 2014, Standard Gold filed its Response in Opposition to the Motion for Summary Judgment. On May 7, 2014, Midwest filed its Reply in Support of its Motion for Summary Judgment. To date, the Court has not issued a decision on the Motion. Standard Gold intends to vigorously defend against Midwest Investment Partners, LLC’s claims.

 

Midwest Investment Partners, LLC v. Standard Metals Processing, Inc.

 

On March 17, 2014, Midwest Investment Partners, LLC filed suit against Standard Metals Processing, Inc. in Vanderburgh County Superior Court, Vanderburgh, Indiana, alleging that Standard Metals had wrongfully refused to remove a transfer restriction on Midwest’s shares of Standard Metals stock pursuant to Rule 144 of the Securities Act. On March 27, 2014, Standard Metals filed a Notice of Removal of a Civil Action requesting that the case proceed in the United States District Court for the Southern District of Indiana, Evansville Division as an action properly removed pursuant to 28 U.S.C. §§ 1441 (a) and (b). On April 2, 2014, Standard Metals filed a Motion to Consolidate. On April 15, 2014, Standard Metals served and filed its Answer and Affirmative Defenses to Plaintiff’s Complaint and Demand for Jury Trial. On April 16, 2014, Midwest filed its Response in Opposition to Standard Metals’ Motion to Consolidate. On April 21, 2014, Standard Metals filed its Reply to Midwest’s Response in Opposition to Standard Metals’ Motion to Consolidate. On June 25, 2014, Midwest filed the parties’ Case Management Plan setting the timing and sequence of discovery in the action, which the Court approved on July 1, 2014. Trial is set for April 17, 2015. Standard Metals intends to vigorously defend against Midwest Investment Partners, LLC’s claims.

 

 

Standard Metals Processing, Inc. v. Steven E. Flechner, and fictitious parties A-Z who are individuals, entities, corporations, trusts, organizations or others who may have been issued stock options by Plaintiff pursuant to the January 21, 2011 Plan Amendment

 

On April 21, 2014, Standard Metals Processing, Inc. filed a Complaint for Declaratory Judgment in the Circuit Court of Etowah County, Alabama requesting that the Court issue a declaratory judgment finding that the January 21, 2011 amendment to the Stock Option Agreement approved by the Board of Directors on March 22, 2010 was invalid because it lacked required shareholder approval and rescinding any stock option awards issued thereafter; declaring that Stephen E. Flechner’s option rights allowed only for a pro-rata portion of available options, which must include appropriate and customary restrictive legends and declaring that the fictitious parties’ option rights allowed only for a corresponding pro-rata portion; or in the alternative, declaring that Flechner and the fictitious parties’ option rights were void.

 

On May 28, 2014, Stephen E. Flechner filed a Notice of Removal to the United States District Court for the Northern District of Alabama, Middle Division. On May 28, 2014, Flechner also filed a Motion to Dismiss the Complaint for Declaratory Judgment or, in the Alternative, a Motion to Change Venue to the United States District Court for the District of Colorado. On June 10, 2014, Standard Metals Processing, Inc. filed a Motion to strike Mr. Flechner’s declaration filed as an exhibit to his Notice of Removal, and a Motion to Remand the action back to the Circuit Court of Etowah, Alabama. On June 30, 2014, Flechner filed a Response to Standard Metals’ Motion to Strike Declaration and Motion to Remand. On July 9, 2014, Standard Metals filed a Reply to Flechner’s Response to its Motion to Remand. On July 26, 2014, Flechner filed a Sur Reply. To date, the Court has not issued a decision on the Motion. Standard Metals intends to vigorously defend against Stephen E. Flechner’s claims.

 

Stephen E. Flechner v. Standard Metals Processing, Inc.

 

On April 29, 2014, Stephen E. Flechner filed suit in the United States District Court for the District of Colorado against Standard Metals Processing, Inc. alleging that Standard Metals had refused to allow him to exercise stock options granted to him pursuant to a Stock Option Agreement, dated April 1, 2010, and a second Stock Option Agreement, dated January 21, 2011. On June 12, 2014, Standard Metals filed its Answer and a Motion to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for the Northern District of Alabama, Middle Division. On July 3, 2014, Flechner filed his Response. On July 10, 2014, the Court set a Scheduling Conference for August 27, 2014 to determine the timing and sequence of discovery in the action. On July 21, 2014, Standard Metals filed its Reply in Support of its Motion to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for the Northern District of Alabama, Middle Division. Standard Metals intends to vigorously defend against Stephen E. Flechner’s claims.

 

Deborah A. King v. Standard Metals Processing, Inc. f/k/a Standard Gold, Inc., Nevada Corporation

 

On May 14, 2014, Deborah A. King filed suit against Standard Metals Processing, Inc. in the United States District Court for the District of Nevada. On June 25, 2014, Ms. King filed an Amended Complaint alleging that Standard Metals had refused to allow her to exercise the stock options assigned to her by her husband, Stephen King, on January 21, 2011, pursuant to a Stock Option Agreement entered into on that date by Mr. King and Standard Metals. On July 16, 2014, Standard Metals filed a Motion to Dismiss the Action or Stay the Proceeding, or, in the Alternative, for a More Definite Statement. Standard Metals intends to vigorously defend against Deborah A. King’s claims.

 

Item 1A. Risk Factors

 

The most significant risk factors applicable to the Company are described in Part I Item 1A entitled “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”). There have been no material changes to the risk factors previously disclosed in the 2012 Form 10-K. The risks described in the 2013 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management may materially adversely affect the Company’s business, financial condition, and/or operating results.

 

 

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

 

Conversion of Unsecured Note

 

A holder of a convertible promissory note dated January 26, 2011 converted the entirety of the note consisting of $100,000 of principal and $18,559 of interest on February 28, 2014 into 237,118 shares of the Company’s common stock.

 

Debt Settlements

 

On January 17, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $193,910 debt was settled for 387,820 shares of restricted common stock.

 

On January 17, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $125,000 debt was settled for 250,000 shares of restricted common stock.

 

On January 17, 2014, the Company settled a $225,000 debt by converting the entire debt into 800,000 shares of restricted common stock of the Company. Pursuant to a Debt Settlement Agreement previously executed on April 3, 2013 the debt was converted at a per share price of $0.28125.

 

On February 13, 2014, the Company entered into a Agreement with a debt holder wherein a $458,250 of Accrued Expenses was settled for 300,000 shares of restricted common stock and $21,750 was charged as stock compensation to general and administrative expense.

 

On March 4, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $100,000 debt was settled for 200,000 shares of restricted common stock.

 

On April 22, 2014, the Company entered into a Debt Settlement Agreement with a debt holder wherein a $100,000 debt was settled for 112,360 shares of restricted common stock. 

 

Warrant Exercises

 

During the second quarter of 2014, a total of 1,867,000 warrants to purchase common stock were exercised: 1,667,000 warrants were exercised at a price of $0.60 per share and 200,000 warrants exercised at $0.50 per share for an aggregate total of $1,100,200.

 

Option Grants

 

On June 18, 2014, the Company granted 250,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to a legal advisor. The options vest in full on grant.

 

On June 18, 2014, the Company granted 750,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to the President of our Tonopah Custom Processing, Inc. subsidiary. The options vest in full on grant.

 

On June 18, 2014, the Company granted 1,000,000 options to purchase common stock of the Company at an exercise price of $1.67 per share with a grant term of seven years to an officer of the Company. The options vest in full on grant.

 

Issuance of Shares For Services

 

On June 10, 2014, the Company issued 50,000 unregistered shares of common stock to a former consultant for the settlement of consulting fees.

 

 

On June 18, 2014, the Company issued 1,000,000 restricted common shares to a service provider. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

 

On June 18, 2014, the Company issued 250,000 restricted common shares to the President of our subsidiary Tonopah Custom Processing, Inc. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

 

On June 18, 2014, the Company issued 1,500,000 restricted common shares to an officer of the Company. These shares were valued at fair value of $1.67 per share and have been charged as stock compensation to general and administrative expense.

  

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

None.

 

Item 5.  Other Information

 

None.

  

Item 6.  Exhibits

 

Exhibit		Description
31.1**		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2**		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

** Filed herewith electronically

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Standard Metals Processing, Inc.
Date: August 12, 2014
	By:	/s/ Sharon L. Ullman
		Sharon L. Ullman
		Chief Executive Officer
	By:	/s/ Robert Geiges
		Robert Geiges
		Chief Financial Officer