UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

(Mark One)

x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 For the fiscal year ended December 31, 2015.

OR

 

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

 

For the transition period from              to             

 

Commission File Number 000-30995

 

  

SEARCHLIGHT MINERALS CORP.

(Name of registrant as specified in its charter)

 

Nevada	98-0232244
State or other jurisdiction of incorporation or organization	I.R.S. Employer Identification Number
#100 - 2360 West Horizon Ridge Pkwy.
Henderson, Nevada	89052
Address of principal executive offices	Zip Code
(702) 939-5247
Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.001

Common Stock Purchase Rights

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No    x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No    x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2015 (106,718,331 shares) was approximately $26,679,583 (computed based on the closing sale price of the common stock at $0.25 per share as of such date). Shares of common stock held by each officer and director and each person owning more than ten percent of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares of common stock of the issuer outstanding as of March 31, 2016 was 286,291,994 shares.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement relating to its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 

TABLE OF CONTENTS

 

		PAGE
PART I		3
Item 1.	Business	3
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosure	32
PART II		32
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	60
Item 9A.	Controls and Procedures	60
Item 9B.	Other Information	61
PART III		61
Item 10.	Directors, Executive Officers and Corporate Governance	61
Item 11.	Executive Compensation	73
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
Item 13.	Certain Relationships and Related Transactions, and Director Independence	74
Item 14.	Principal Accountant Fees and Services	74
PART IV		74
Item 15.	Exhibits and Financial Statement Schedules	74

 

 

PART I

 

Item 1.

Business

 

General

 

Clarkdale Slag Project. We are an exploration stage company engaged in a slag reprocessing project, our Clarkdale Slag Project. The Clarkdale Slag Project, located in Clarkdale, Arizona, is a reclamation project to recover precious and base metals from the reprocessing of slag produced from the smelting of copper ore mined at the United Verde Copper Mine in Jerome, Arizona. Metallurgical testing and project exploration on the Clarkdale Slag Project by us have been ongoing since 2005. There is approximately 20 million tons of slag available to be processed at the Clarkdale site.

 

Since our involvement in the Clarkdale Slag Project, our goal has been to demonstrate the economic feasibility of the project by determining a commercially viable method to extract precious and base metals from the slag material. We believe that in order to demonstrate this, we must successfully operate four major steps of our production process: crushing and grinding, leaching, continuous process operation, and extraction of gold from solution.

 

Our processing flow diagram consists of grinding the slag material using high pressure grinding rolls (HPGR), then pretreatment by melting the slag at high temperature, followed by leaching the slag in an autoclave. Autoclave, a proven technology that is widely used within the mining industry, is a chemical leach process that utilizes elevated temperature and pressure in a closed autoclave system to extract precious and base metals from slag material. In an effort to establish the commercial feasibility of the autoclave method, we acquired, installed and have been operating a large batch titanium autoclave (approximately 900 liter capacity).

 

Recent tests, which incorporated the high temperature pretreatment, resulted in gold metal recovery at an average of 0.38 ounces per ton (“opt”), with a back-calculated average slag head grade of 0.46 opt gold, resulting in an average 84% recovery of the gold in the slag material. The tests were conducted on a total of 1,200 kilograms (kg) of slag material, which generated 3,800 liters of pregnant leach solution (PLS). The test results were all verified by standard fire assay analyses and confirmed previously determined slag gold grades of 0.4 to 0.6 opt.

 

These recent tests have also produced a high quality iron product grading over 95% iron content in a pelletized form. The slag material in our 20 million ton pile is approximately one third iron, and therefore, we could potentially produce a marketable high grade iron product which could be sold as a byproduct to generate net cash flow or reduce the overall costs of producing gold.

 

Currently, we are in the process of optimizing the various components of the production process, including the thermal pre-treatment testing and autoclave process. We have also hired an independent team of well qualified and experienced experts to complete a technical review of the project. It is anticipated that a favorable report from this review would be used to facilitate the financing of the bankable feasibility study and commercial production facility.

 

We have not been profitable since inception and there is no assurance that we will develop profitable operations in the future. Our net loss for the years ended December 31, 2015 and 2014 was $27,086,775 and $18,513,603, respectively. As of December 31, 2015, we had an accumulated deficit of $82,492,584. We cannot assure you that we will have profitable operations in the future.

 

 

Corporate History

 

We were incorporated on January 12, 1999 pursuant to the laws of the State of Nevada. Our principal executive offices are located at 2360 W. Horizon Ridge Pkwy., Suite 100, Henderson, Nevada, 89052. Our telephone number is (702) 939-5247. Our Internet address is www.searchlightminerals.com. Through a link on the “Recent Filings” section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available free of charge. Information contained on our website or that is accessible through our website should not be considered to be part of this report.

 

Acquisition of Clarkdale Slag Project

 

Assignment Agreement with Nanominerals. Under the terms of an Assignment Agreement, dated June 1, 2005, and as amended, Nanominerals Corp. (“Nanominerals”), a privately owned Nevada corporation (and one of our current principal stockholders, and an affiliate of Ian R. McNeil one of our former officers and directors, and Carl S. Ager, our current Vice President/Secretary/Treasurer and a director), assigned to us its 50% financial interest and the related obligations arising under a Joint Venture Agreement, dated May 20, 2005, between Nanominerals and Verde River Iron Company, LLC (“VRIC”), an affiliate of a former member of our board of directors, Harry B. Crockett. Each of the amendments to the Assignment Agreement were negotiated on our behalf by Ian Matheson, who served as an executive officer and/or a director at the time of the execution of the amendments. The joint venture related to the exploration, testing, construction and funding of the Clarkdale Slag Project.

 

Under the terms of the various agreements between the Company, Nanominerals and VRIC, we have a continuing obligation to pay an aggregate royalty consisting of 5.0% of the “net smelter returns” from the Clarkdale Slag Project. Such royalty is divided equally between Nanominerals and VRIC.

 

The term “net smelter returns” under the agreement means the actual proceeds received by us, from any mint, smelter or other purchaser for the sale of bullion, concentrates or ores produced from the Clarkdale Slag Project and sold, after deducting from such proceeds the following charges to the extent that they are not deducted by the smelter or purchaser in computing payment:

 

·

in the case of the sale of bullion, refining charges (including penalties) only;

 

·

in the case of the sale of concentrates, smelting and refining charges, penalties and the cost of transportation, including related insurance, of such concentrates from the Clarkdale Slag Project property to any smelter or other purchaser; and

 

·

in the case of any material containing a mineral or minerals of commercial economic value mined or processed from the Clarkdale Slag Project which may be shipped to a purchaser, refining charges for bullion and charges for smelting, refining and the cost of transportation, including related insurance, from the mill to any smelter or other purchaser for concentrates.

 

 

Reorganization with Transylvania International, Inc. Under the terms of a letter agreement, dated November 22, 2006 and as amended on February 15, 2007, with VRIC, Harry B. Crockett, one of our former directors, and Gerald Lembas, and an Agreement and Plan of Merger with VRIC and Transylvania, dated and completed on February 15, 2007, we acquired all of the outstanding shares of Transylvania from VRIC through the merger of Transylvania into our wholly-owned subsidiary, Clarkdale Minerals LLC, a Nevada limited liability company. As a result of the merger, we acquired title to the approximately 200 acre property underlying the slag pile located in Clarkdale, Arizona, approximately 600 acres of additional land adjacent to the project property and a commercial building in the town of Clarkdale, Arizona. In accordance with the terms of these agreements, we:

 

·

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

 

·

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

 

·

issued 16,825,000 shares of our common stock, valued at $3.975 per share, using the average of the high and low prices of our common stock on the closing date, to Harry B. Crockett and Gerald Lembas, the equity owners of VRIC, and certain designates of VRIC under the agreements, who are not our affiliates.

 

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

 

·

we agreed to continue to pay VRIC $30,000 per month until the earlier of: (i) the date that is 90 days after we receive a report of the commercial, technical and environmental feasibility of the processing and smelting of metals and other mineral materials from a deposit that is prepared in such depth and detail as would be acceptable to lending institutions in the United States, or a “bankable feasibility study,” or (ii) the tenth anniversary of the date of the execution of the letter agreement.

 

The acquisition agreement also contains additional contingent payment terms which are based on the date that a bankable feasibility study relating to the Clarkdale Slag Project establishes that the project is economically viable and bankable (the “Project Funding Date”):

 

·

we have agreed to pay VRIC $6,400,000 within 90 days after we receive a bankable feasibility study;

 

·

we have agreed to pay VRIC a minimum annual royalty of $500,000, commencing 90 days after we receive a bankable feasibility study, and an additional royalty consisting of 2.5% of the “net smelter returns” on any and all proceeds of production from the Clarkdale Slag Project. The minimum royalty remains payable until the first to occur of: (1) the end of the first calendar year in which the percentage royalty equals or exceeds $500,000; or (2) February 15, 2017. In any calendar year in which the minimum royalty remains payable, the combined minimum royalty and percentage royalty will not exceed $500,000; and

 

·

we have agreed to pay VRIC an additional amount of $3,500,000 from the net cash flow of the Clarkdale Slag Project after such time that we have constructed and are operating a processing plant or plants that are capable of processing approximately 2,000 tons of slag material per day at the Clarkdale Slag Project. The acquisition agreement does not include a specific provision with respect to the periods at the end of which “net cash flow” is measured, once the production threshold has been reached. Therefore, the timing and measurement of specific payments may be subject to dispute. The parties intend to negotiate a clarification of this provision in good faith before the production threshold has been reached.

 

 

We account for this as a contingent payment, and upon meeting the contingency requirements, the purchase price of the Clarkdale Slag Project will be adjusted to reflect the additional consideration.

 

Under the terms of these agreements, the parties terminated the Joint Venture Agreement. However, we continue to have an obligation to pay Nanominerals a royalty consisting of 2.5% of the net smelter returns on any and all proceeds of production from the Clarkdale Slag Project. Therefore, when added to VRIC’s 2.5% royalty, we have an obligation to pay an aggregate of 5% of the net smelters returns to Nanominerals and VRIC on any and all proceeds of production from the Clarkdale Slag Project.

 

Clarkdale Slag Project

 

Location and Access

 

The Clarkdale Slag Project is located in Clarkdale, Arizona, approximately 107 miles north of Phoenix, Arizona and about 50 miles southwest of Flagstaff, Arizona in Yavapai County (see Figure 1, below). The project site is located at a 3,480 feet elevation on approximately 727 deeded acres of industrial zoned land near the town of Clarkdale.

 

 

 

Figure 1 –Clarkdale Slag Pile

 

Slag is the waste product of the smelting process. The slag at the Clarkdale Slag Project originated from a large, copper ore smelting operation located on our property in Clarkdale, Arizona. The copper ore was mined in Jerome, Arizona during the period 1915-1952, when the Clarkdale smelter was one of the largest copper smelters in the world. Jerome is a historic mining district, located approximately 6 miles west of Clarkdale at an elevation of 5,435 feet, which produced copper extracted from massive sulfide deposits mined at Jerome (1889-1952) and smelted at both Jerome (1889-1915) and Clarkdale (1915-1952).

 

 

Molten slag from the Clarkdale smelter was hauled by rail to the deposit site and poured onto the property, much like a lava flow. The slag cooled and hardened into the large slag pile which now exists at the Clarkdale site. The hardened slag has a glassy, volcanic lava-like appearance, and has a high iron and silica content. It contains some thin layers of coarse material, which appear to have been undigested from the smelter. The hardening process causes fracturing at the surface and within the layers beneath the surface. As a result, the slag pile consists of both solid sheets and coarse material deposited layer upon layer.

 

The slag pile currently occupies approximately 45 acres on the property and, as determined from the drilling and analysis programs, has a graduating thickness of between 60 and 130 feet and contains approximately 20 million tons of slag material. The slag pile borders the Verde River and an active railroad track. The track divides the pile into two sections located east and west of the track. The eastern portion of the slag pile is the larger of the two, as approximately 98% of the slag pile is located in the east section of the property.

 

Other Positive Developments

 

In addition to the breakthrough discussed above, as a byproduct of this new process, the high temperature pre-treatment produces a high quality iron product grading over 95% iron content in a pelletized form. The high quality of the iron and its pellet size form make it a readily marketable product for sale to the China, Korea, or India markets. We believe that this high grade iron product will secure a premium price selling either into the scrap iron or pig iron market. Test work is continuing in an effort to maximize iron content while maintaining gold recovery.

 

The existing railroad spur on the Clarkdale Project Site connects to a major railroad for low cost transportation to a seaport or domestic market. It is believed that this pre-treatment process may pay for itself or provide a net cash flow from the sale of the iron. To examine the efficacy of this concept, we engaged Samuel Engineering of Denver, Colorado to perform a preliminary assessment and marketing study. This study suggests that a marketable high grade iron product could be made and sold as a byproduct to generate net cash flow or reduce the overall costs of producing gold. Toward this end we have commenced contacting commercial iron producers for expressions of interest.

 

Pilot Autoclave Test Results

 

In the fourth quarter of 2014, three successful pilot autoclave tests, which consisted of heat treating the Clarkdale slag material prior to autoclave processing, confirmed feed grades of 0.3 to 0.6 opt gold contained in the slag material and gold recoveries of 0.25 to 0.50 ounces per ton. The percentage recoveries ranged from 79% to 94%, with an 84% average recovery. The first two tests (the highest recovered gold values) were conducted from fresher ground slag material that was pulverized using high pressure grinding rolls (HPGR). A third test was conducted from older HPGR-pulverized material and resulted in the lowest recovered gold value referred to above. We believe the third test was negatively affected by oxide layers that commonly form on the surface of older (aged) ground slag material.

 

A fourth pilot autoclave test was unable to be completed due to a mechanical problem with the autoclave. Even though it was pronounced a failed test and not included in the above results, the fourth test nonetheless produced a gold grade of 0.2 opt.

 

 

Two of the successful tests included processing the pre-treated slag through the autoclave twice. This simulates, to a degree, what is commonly done in large commercial multi-compartment autoclaves to achieve optimum extraction. One of the tests involved a single autoclave run. Therefore, a total of five pilot-scale autoclave tests were successfully conducted with the high temperature pre-treatment. These tests resulted in the processing of over 1,200 kg of raw slag and the production of over 3,800 liters of gold-bearing solutions. The gold contained in these solutions is now being recovered as metallic gold.

 

High temperature pre-treatment allows the refractory material from the Clarkdale Slag Project to be fire assayed, resulting in the recovery of gold beads, and all results have been reported by fire assay.

 

Whereas previously reported slag material gold grade results were similar to those reported above, the most recent tests resulted in higher percentage recoveries of the gold from solution (as gold beads) using a variety of standard processes (i.e., electro-winning, direct precipitation, activated carbon, and ion exchange resins). All of these commonly used processes represent “off the shelf” technologies utilized globally in base and precious metals processing.

 

The methodology that consistently provided the highest percentage recovery of metal from solution in the most recent tests was an ion exchange resin process, which was originally used in our plant in Clarkdale, Arizona.

 

An additional benefit of utilizing the large-capacity heat treating unit prior to the large-capacity pilot autoclave is that high grade ‘pig iron’ has been produced, containing a greater than 95% iron content, whereas previously reported results at bench-scale levels resulted in 75% - 85% iron extraction. The 95%-plus iron product commands a much higher price, and we believe that it may be able to profitably sell such pig iron into the domestic scrap iron market. If such sales of pig iron can be realized, we can eliminate the cost of overseas transport while simultaneously obtaining a much higher price per ton. In addition, the original railroad line to the Clarkdale Slag Project site is intact and has been well maintained. The cost of upgrading the line for pig iron transport would be minimal relative to the cost of new railroad construction. It is currently anticipated that this additional byproduct, if buyers are found, will further enhance the commercial profitability of the Clarkdale Slag Project by improving recoverable gold grades and generating an additional revenue stream.

 

Current Work Program

 

We are currently working on the following key steps in an effort to move expeditiously towards commercial operation:

 

1.

Thermal Pre-treatment Testing: Previous testing on slag material conducted by us on material from our Clarkdale Slag Project indicated that a high quality iron product could be produced from the slag material by using a thermal pre-treatment step prior to the autoclave process, which is designed to extract the gold. We conducted such tests to determine whether high quality iron could be produced from the slag material with the goal that the resulting iron may be sold at a price, which could at a minimum, pay for the cost of producing it and perhaps produce an additional cash flow above and beyond the revenue that we may receive from the extraction of gold from the slag pile. We also believe that the iron-removing pre-treatment of the slag material in this manner results in greater gold extraction from the autoclave process.

 

In the second quarter of 2015, we awarded a contract to Midrex Technologies, Inc. (“Midrex”) to run bench scale testing in their test facility in Charlotte, N.C. to determine if their technology could produce a high quality iron product from the Company’s slag material in a more cost effective manner than previously used by us.

 

 

The report provided in connection with these tests by Midrex states: “This work successfully demonstrated the technical suitability of using Midrex’s FASTMET® technology to allow iron to be removed from copper slag. Up to 97.8% iron metallization was achieved in bench scale box furnace testing, exceeding the goal of 90.0% iron metallization. FASTMET® DRI was then melted in a crucible furnace separating the iron metal from the residual iron-lean slag. 350 grams of this resulting slag was ground and representative samples were sent to Searchlight for gold analysis. This report satisfies the deliverables contracted under proposal no. MTI-9502-99 and presents the evolution of the mix chemistries and bench scale testing.”

 

We believe that the Midrex technology uses much less costly natural gas coupled with a flux additive which also provides thermal energy, compared with our previously used method which uses electricity as its energy source. Since the leading cost source in the production of iron from the slag material is energy, we believe that the net result is a projected significant cost savings by using the Midrex technology. It is our intent to have Midrex perform additional bench tests and pilot scale tests to confirm these test results and to scale up their process.

 

We have also had discussions with Midrex on their potential interest in participating in a commercial scale project to produce iron from our slag pile.

 

An initial test performed by us on the glass (the resulting product following Midrex’s removal of the iron from the slag material) has shown the presence of gold. However, additional testing needs to be performed in order to quantify the amount of gold contained in the glass as well as to determine the optimal autoclave chemistry to use on the glass.

 

A work plan is being assembled with Midrex to include performing a pilot scale test which will allow a much larger quantity of glass to be produced for additional bench and pilot scale autoclave testing. Midrex’s pilot scale test unit is anticipated to process 50 to 100 kilograms of slag material per hour, thus producing sufficient glass for the Company to run pilot scale tests in our 900 liter autoclave which requires 100 kilograms of material per test run.

 

2.

Autoclave Optimization: We have installed certain required components to switch from using chlorine reagents to chlorine gas for the autoclave process. We believe that this will not only significantly lower supply costs on the commercial unit but will eliminate the potential problems of salt formation in the autoclave. We anticipate that this will also simplify and increase recovery of gold from the pregnant leach solution (PLS) derived from the autoclave process.

 

Initial test work conducted with the chlorine gas system has indicated that this system, used in lieu of the previous chlorine chemical system, provides a much higher oxidizing capability at a much lower total reagent cost, reduces the salt load in solution and therefore, eliminates the piping plugging problems encountered in previous autoclave test runs. Once additional bench autoclave tests have been completed to finalize the chemical and operating conditions, the 900 liter pilot autoclave will be operated to verify results to date at a larger scale.

 

3.

Third Party Review and Verification: We have hired an independent team of well qualified and experienced experts to complete a technical review of the project. It is anticipated that a favorable report from this review would be used to facilitate the financing of the bankable feasibility study and commercial production facility.

 

 

History

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

During 2010, our technical team tested four potential flow sheets in an effort to identify new grinding, leaching extraction and equipment alternatives that would be suitable and commercially viable for the extraction of precious and base metals from the slag material. Based on this testing program, we determined that autoclaving is the most appropriate method to pursue using HPGRs to grind the slag material.

 

 

In 2010 we tested high pressure grinding rolls (HPGR) to grind the slag material at the facility in Germany of the leading manufacturer of HPGRs. HPGRs are commonly used in the mining industry to crush ore and have shown an ability to withstand very hard and abrasive ores. The results from these tests showed that grinding our slag material on a continuous basis did not produce wear on the equipment beyond the expected levels.

 

When we tested the HPGR-ground slag in our autoclave process, results showed liberation of gold, which our technical team believes is due to the micro-fractures imparted to the slag during the HPGR grinding process.  The technical team also believes that the high pressures that exist in the autoclave environment are able to drive the leach solution into the micro-fracture cracks created in the slag material by the HPGR crusher, thereby dissolving the gold without having to employ a more expensive process to grind the slag material to a much finer particle size.

 

To test the commercial viability of the autoclave approach, we performed over 200 bench-scale (6-liter autoclave) tests which showed to be successful in leaching gold into solution from the slag material. In an effort to maximize gold extraction from the slag material, we tested several different leach protocols and grind sizes during our autoclave tests. Results of these bench tests by our consultants indicate that autoclaving can provide gold recoveries into solution of up to 0.5 ounces per ton (opt) from the samples which we have tested. Prior sampling tests on the slag pile have reflected that there may be variances in the amount of gold per ton within the composition of the slag in different parts of the slag pile.

 

During the third quarter of 2011, we received the results of testing from an independent engineering firm in Chile whereby a number of batch autoclave tests, under various metallurgical conditions using both pressure oxidation (“POX”) and pressure oxidative leach (“POL”) testing methodologies were completed. The optimized POX tests produced slightly less than or equal to 0.5 opt gold and the optimized POL tests produced 0.5 opt gold or slightly greater. Moreover, the test results reaffirm that autoclaving does not dissolve the levels of iron and silica into solution as did the ambient leach. Additionally, since the POL method involves fewer process steps resulting in lower operating costs, and appeared to consistently place higher grades of gold into solution, this process was likely to be superior to the POX method in achieving better results.

 

The Chilean engineering firm noted that the refractory Clarkdale slag was difficult to consistently analyze and suggested that further work be done to validate analytical methods and determine the most accurate method. Our consultant, Arrakis, previously had noted this analytical problem and decided to use an analytical method developed in the 1980’s, Atomic Absorption Spectroscopy/Inductively Coupled Plasma Optical Emission Spectroscopy (“AAS/ICP-OES”), to manually correct gold in solution values by determining the amount of interferences caused by other metals present in the leach solutions and manually adjusting the gold in solution values.

 

We believe that the POL autoclave method is a viable leach method for our production process because it leaches higher quantities of gold into solution from our slag material and results in much lower levels of iron and silica in solution than other methods, thus improving process technical feasibility.

 

During the second quarter of 2012, we received the results of tests conducted by an independent Australian metallurgical testing firm whereby they conducted autoclave tests under various conditions, using the POL method in a four-compartment, 25-liter autoclave. The completion of a continuous 14 hour test with 100% mechanical availability (i.e. no “down time”) demonstrates the ability of a pilot autoclave to process the Clarkdale slag material on a continuous basis. The pilot multi-compartment autoclave is routinely used to simulate operating performance in a full-scale commercial autoclave as part of a bankable feasibility study.

 

 

In addition, the PLS that was produced from the 14 hour continuous run was analyzed by the Australian testing firm. Analysis using the AAS/ICP-OES method resulted in approximately 0.2 - 0.6 opt of gold extracted into solution. The 0.2 opt was achieved during the startup of the test run. After making adjustments to the pH, volume of the leach solution and other process parameters, the higher 0.6 opt was obtained toward the completion of the test. Our independent technical consultants believe we can replicate these higher test results in future test runs.

 

The Australian testing firm also noted the existence of analytical difficulties previously reported by our independent consultants and us. We have been advised that the results of this test work is largely based on the analysis carried out on gold solutions emanating from the tests, by AAS/ICP-OES. Analysis of gold in solution by this method is not in agreement with fire assays analysis and both methods are prone to analytical difficulties due to the refractory nature of the slag. A different analytical method was used by the Australian testing firm, the Inductively Coupled Plasma Mass Spectroscopy, or ICPMS. Fire assay (performed by the Australian testing firm), as well as Neutron Activation (performed by an independent third party consulting agency), were also used to perform analyses of the raw slag. All of the above methods indicated different quantities of gold in the slag, but at values substantially below the results achieved by AAS/ICP-OES method. Consequently, Arrakis continues to refine the analytical techniques used to measure gold in solution.

 

We believe that the POL autoclave method in a large multi-compartment autoclave has shown to be viable for our production process because it can operate on a continuous basis and leaches higher levels of gold and much lower levels of iron and silica into solution than other methods. The results from POL autoclaving testing were comparable to previous bench-scale tests performed by Arrakis and the Chilean engineering firm.

 

We engaged Arrakis to assemble a multinational project team to specifically determine the most efficient method of extracting gold from solution. Arrakis has performed in excess of 63 ion exchange tests in an attempt to determine the optimal method for extracting gold from solution, using a variety of resins and carbons. In addition, Arrakis has performed nano-filtration tests using membrane technology in conjunction with the ion exchange tests to enhance ion exchange results. Arrakis has also conducted electro-winning tests, to determine the best way to remove gold from solution. Results from these alternative methods of extracting gold from solution have resulted in removing up to 10% of the gold from solution using resins and up to 40% of the gold from solution using the electro-winning method. These results were obtained by assaying of dore beads produced by the various testing techniques noted. As larger volumes of POL leach solutions are generated via the pilot autoclave, and testing optimized, larger dore beads will be produced and analysis will become much simpler.

 

We also engaged an independent firm to examine the viability of using membrane technology to remove small quantities of unwanted elements from the PLS prior to loading the gold on to resin or carbon. This process may further enhance gold recovery and increase gold loading rates onto the resin or carbon. As larger volumes of POL leach solution are generated and resin tests are fine-tuned, we expect our gold recovery values to improve. We will continue with our test work in order to better determine the method that best optimizes our gold recovery on a consistent basis.

 

Numerous tests have been conducted in the pilot autoclave. The initial tests were designed to examine the structural integrity and functionality of the autoclave, its components, control and support systems. Subsequent tests were designed in an effort to mimic the mechanical and chemical operating conditions achieved with previous tests in the 6-liter bench autoclave, which yielded approximately 0.4 to 0.5 opt of gold in solution.

 

 

As the tests progressed, several mechanical and chemical issues were identified which indicated that the pilot autoclave was operating under less than optimum conditions, resulting in low gold extraction values. As these issues were identified, modifications were undertaken to the autoclave in order to help achieve the desired operating conditions. Significant delays occurred due to specialty alloy parts having to be ordered and in some cases custom made. During this time, additional bench-scale autoclave tests were performed in order to modify and optimize the chlorine chemistry for the pilot autoclave.

 

The ninth pilot autoclave test demonstrated that 0.42 opt gold was leached into solution from the slag sample containing 0.48 opt gold, which represents an estimated gold recovery of 87.5%. While past test work had relied upon ‘wet chemistry’ electronic determination, these latest results were determined by analyzing gold metal extracted by standard fire assay techniques.

 

Solution values were determined by evaporating the PLS and fire assaying the residual solids to produce a gold bead in hand. Likewise, the finely ground slag going into the large pilot autoclave and the leached residue after the test were also fire assayed and the resultant gold beads were used to calculate gold grades and leach efficiency. This was the second autoclave test that verified the gold grade of the slag by fire assay.

 

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

 

Clarkdale Development Agreement

 

In January 2009, we submitted a development agreement to the Town of Clarkdale for the construction of an Industrial Collector Road. The purpose of the road is to provide us with the capability to enhance the flow of industrial traffic to and from the Clarkdale Slag Project. The construction of the road is a required infrastructure improvement under the terms of our conditional use permit with the Town of Clarkdale. The Town of Clarkdale approved the development agreement on January 9, 2009.

 

Under the development agreement, we are obligated to complete the construction of the road within two years after the effective date of the agreement. However, it is our understanding that the contingencies to effectuate the development agreement have not been met at this time, and, therefore, the effective date has not yet been determined.

 

We estimate that the initial cost of construction of the road will be approximately $3,500,000 and that the cost of the additional enhancements will be approximately $1,200,000. We will be required to fund the costs of this construction. Based on the uncertainty of the timing of these contingencies, we have not included these costs in our current operating plans or budgets. However, we will require additional project financing or other financing in order to fund the construction of the road and the additional enhancements. The failure to complete the road and the additional enhancements in a timely manner under the development agreement would have a material adverse effect on the Clarkdale Slag Project and our operations.

 

 

Competition

 

We are an exploration stage company. We compete with other mineral resource exploration companies for financing and for the acquisition of new mineral properties. Many of the mineral resource exploration companies with whom we compete have greater financial and technical resources than us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of mineral properties of merit, on exploration of their mineral properties and on development of their mineral properties. In addition, they may be able to afford greater geological expertise in the targeting and exploration of mineral properties. This competition could result in competitors having mineral properties of greater quality and interest to prospective investors who may finance additional exploration. This competition could adversely impact our ability to finance further exploration on our mineral properties.

 

Compliance With Government Regulation

 

The site for the Clarkdale Slag Project is located in the Town of Clarkdale, Arizona and as a result, most of the operational permits are subject to their authority. The environmental permits, however, are subject to the authority of the State of Arizona. For our current level of operations, we believe we have obtained all of the permits necessary to operate the Clarkdale Slag Project as currently configured at this time. Prior to beginning the development of the processing facility, we expect that we will require additional permits.

 

The mining industry in the United States is highly regulated. We intend to secure all necessary permits for the exploration and development of the Clarkdale Slag Project. The technical consultants that we hire are experienced in conducting mineral exploration and metallurgical activities and are familiar with the necessary governmental regulations and permits required to conduct such activities. As such, we expect that our consultants will inform us of any government permits that we will be required to obtain prior to conducting any planned activities on our two aforementioned projects. We are not able to estimate the full costs of complying with environmental laws at this time since the full nature and extent of our proposed processing and mining activities cannot be determined until we complete a bankable feasibility study and have a full design of a proposed production facility for the Clarkdale Slag Project.

 

If we enter into full scale production on our Clarkdale Slag Project, of which there are no assurances, the cost of complying with environment laws, regulations and permitting requirements will be substantially greater than in the exploration or preliminary development phases because the increase in the size of the project. Permits and regulations will control all aspects of any development or production program if the project continues to those stages because of the potential impact on the environment. Examples of regulatory requirements include:

 

·

water discharge will have to meet water standards;

 

·

dust generation will have to be minimal or otherwise remediated;

 

·

dumping of material on the surface will have to be re-contoured and re-vegetated;

 

·

an assessment of all material to be left on the surface will need to be environmentally benign;

 

·

ground water will have to be monitored for any potential contaminants;

 

·

the socio-economic impact of the project will have to be evaluated and if deemed negative, will have to be remediated; and

 

·

there will have to be an impact report of the work on the local fauna and flora.

 

 

Employees

 

As of December 31, 2015, we had 11 full-time employees. We also had two significant consultants who provide services to our Clarkdale Slag Project operations. None of our employees are currently represented by a union or covered by a collective bargaining agreement. Management believes its employee relations are satisfactory.

 

Item 1A.

Risk Factors

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This report contains forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

 

The risk factors referred to in this report could materially and adversely affect our business, financial conditions and results of operations and cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The risks and uncertainties described below are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, you may lose all or part of your investment.

 

The industry and market data contained in this report are based either on our management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. We have not independently verified market and industry data from third-party sources. In addition, consumption patterns and customer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be verifiable or reliable.

 

 

RISK FACTORS

 

An investment in our common stock is very risky. Our financial condition is unsound. You should not invest in our common stock unless you can afford to lose your entire investment. You should carefully consider the risk factors described below, together with all other information in this report, before making an investment decision. If an active market is ever established for our common stock, the trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. You also should refer to the other information set forth in this report, including our financial statements and the related notes.

 

Risks Relating to Our Business

 

We lack an operating history and have losses which we expect to continue into the future. As a result, we may have to suspend or cease exploration activities if we do not obtain additional financing, and our business will fail.

 

We were incorporated on January 12, 1999 and initially were engaged in the business of biotechnology research and development. In February, 2005, we changed our business to mineral exploration. We have a limited history upon which we may make an evaluation of the future success or failure of our current business plan.

 

We have a history of operating losses and have an accumulated deficit. We recorded a net loss of $27,086,775 and $18,513,603 for the years ended December 31, 2015 and 2014, respectively, and have incurred cumulative net losses from operations of $82,492,584 and $55,405,809 as of December 31, 2015 and 2014, respectively. In addition, we had cash reserves of approximately $453,744 and $584,976 at December 31, 2015 and 2014, respectively. We have not commenced our proposed mineral processing and mining operations and are still in the exploration stages of our proposed operations. Prior to completion of our exploration stage, we anticipate that we will incur increased operating expenses without realizing any revenues. We therefore expect to incur significant losses into the foreseeable future.

 

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

 

·

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

 

·

positive results from our autoclave processing tests;

 

·

obtaining a bankable feasibility study for the Clarkdale Slag Project that demonstrates that the Clarkdale Slag Project is commercially viable;

 

·

obtaining the necessary financing to implement the business plan based on the bankable feasibility study, including any equity and debt financing that may be required;

 

·

our ability to generate revenues; and

 

·

our ability to locate a profitable mineral property.

 

 

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

 

Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project and our corporate operations at this time. During the next 12 months, our management anticipates that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will be approximately $7,300,000. As of March 31, 2016, we had operating cash reserves of approximately $1,670,000. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our testing and feasibility programs and operating overhead during the next 12 months and we will require additional financing in order to fund these activities. We do not currently have any financing arrangements in place for such, and there are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us. As of December 31, 2015, our financial statements and this report do not include any adjustments relating to the recoverability of assets and the amount of classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

In addition, if we receive a bankable feasibility study, we will have to pay $6,400,000 to VRIC in connection with our Agreement and Plan of Merger with VRIC and Transylvania. To satisfy this obligation, we will be required to obtain additional financing within 90 days of receipt of such a bankable feasibility study.

 

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

 

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

 

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

 

 

Actual capital costs, operating costs and economic returns may differ significantly from our estimates and there are no assurances that any future activities will result in profitable mining operations.

 

We are an exploration stage company and are still in the process of exploring and testing our mineral projects. We do not have any historical mineral operations upon which to base our estimates of costs. Decisions about the exploration, testing and construction of our mineral properties will ultimately be based upon feasibility studies. Feasibility studies derive cost estimates based primarily upon:

 

·

anticipated tonnage, grades and metallurgical characteristics of the slag to be processed or the ore to be mined and processed;

 

·

anticipated recovery rates of gold and other metals from the slag or the ore;

 

·

cash operating costs of comparable facilities and equipment; and

 

·

anticipated weather/climate conditions.

 

To date, we have only conducted an internal pre-feasibility study of the Clarkdale Slag Project. In particular:

 

·

we have conducted limited amounts of drilling at the site;

 

·

process testing has been limited to smaller scale pilot plants and bench scale testing;

 

·

our slag processing concepts, metallurgical flow sheets and estimated recoveries are still in exploration stages; and

 

·

once a bankable feasibility study and necessary financing are obtained and we build a processing plant, actual metallurgical recoveries may fail to meet preliminary estimates.

 

In order to demonstrate the large scale viability of the project, we will need to complete a bankable feasibility study that addresses the economic viability of the project. Capital and operating costs and economic returns, and other estimates contained in our bankable feasibility study may differ significantly from our current estimates. There is no assurance that our actual capital and operating costs will not exceed our current estimates. In addition, delays to construction schedules may negatively impact the net present value and internal rates of return for our mineral properties. There are no assurances that actual recoveries of base and precious metals or other minerals processed from our mineral projects will be economically feasible or that actual costs will match our pre-feasibility estimates. We cannot be certain at this time when a bankable feasibility study will be completed, if at all, and if successfully completed, when a commercial-scale production facility will be ready for operation.

 

Feasibility estimates typically underestimate future capital needs and operating costs. Our projected operating and capital cost estimates are in preliminary stages and may be subject to significant, upward adjustment based on future events, including the results of any final feasibility study which we may develop.

 

If we are unable to achieve projected mineral recoveries from the slag material at the Clarkdale Slag Project then our financial condition will be adversely affected.

 

As we have not established any reserves on our Clarkdale Slag Project to date, there is no assurance that actual recoveries of minerals from material mined during exploration mining activities will equal or exceed our exploration costs on our mineral properties. To date, we are continuing to test metallurgical processes on our Clarkdale slag material. Since we have determined that we cannot move to production scale from our original design determined from our pilot-scale and have now turned to experimenting with autoclave technology, no assurance can be given that projected mineral recoveries will be achieved.

 

 

To test the commercial viability of the autoclave approach, we have performed over 100 bench-scale (6-liter autoclave) tests and numerous pilot-scale (900 liter) tests which have shown to be successful in leaching gold into solution from the slag material. Bench and pilot-scale testing by our consultants indicate that autoclaving can provide gold recoveries of up to 0.5 ounces per ton (opt) from the samples which we have tested. However, prior sampling tests on the slag pile have reflected that there may be variances in the amount of gold per ton within the composition of the slag in different parts of the slag pile. Therefore, there can be no assurances given that we will be able to recover the same amount of precious and base metals from all parts of the slag pile. If mineral recoveries are less than projected, then our sales of minerals will be less than anticipated and may not equal or exceed the cost of exploration and recovery, in which case our operating results and financial condition will be materially, adversely affected.

 

Obtaining a bankable feasibility study that shows that our Clarkdale Slag Project is viable and constructing a facility to implement the study will result in our need to raise significant financing.

 

At this time we do not know the actual cost of conducting a bankable feasibility study based on an autoclave process or implementing such a study into an operating autoclaving facility at the Clarkdale site. However, we believe that the amount of funds necessary both to conduct the study and, if successful, to develop a facility will be significant. We will require additional financing in order to fund both of these stages in our business plan. We anticipate that these financings, if completed, will be a combination of equity and debt. Obtaining additional financing is subject to a number of factors, including the market prices for base and precious metals. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

 

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of current stockholders will be reduced and these securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition.

 

We have no known mineral reserves and if we cannot find any, we will have to cease operations.

 

We have no known mineral reserves. Mineral exploration is highly speculative. It involves many risks and is often non-productive. Even if we are able to find mineral reserves on our property our production capability is subject to further risks including:

 

·

costs of bringing the property into production including exploration work, preparation of production feasibility studies, and construction of production facilities;

 

·

availability and costs of financing;

 

·

ongoing costs of production; and

 

 

·

environmental compliance regulations and restraints.

 

The marketability of any minerals acquired or discovered may be affected by numerous factors which are beyond our control and which cannot be accurately predicted, such as market fluctuations, the success of our metallurgical and processing activities on the Clarkdale Slag Project and such other factors as government regulations, including regulations relating to allowable production, exporting of minerals, and environmental protection. If we do not find a mineral reserve or if we cannot explore the mineral reserve, either because we cannot obtain an approved Plan of Operations, do not have the money to do so or because it will not be economically feasible to do so, we will have to cease operations.

 

If we do not complete the construction of an Industrial Collector Road pursuant to an agreement with the Town of Clarkdale, Arizona within two years after the effective date of the agreement, we may lose our conditional use permit from the Town of Clarkdale with respect to the Clarkdale Slag Project, and we may not have sufficient funds to complete construction of the road. The loss of the permit would have a material adverse effect on the Clarkdale Slag Project and our operations.

 

In January 2009, we submitted a development agreement to the Town of Clarkdale for the construction of an Industrial Collector Road. The purpose of the road is to provide us with the capability to enhance the flow of industrial traffic to and from the Clarkdale Slag Project. The construction of the road is a required infrastructure improvement under the terms of our conditional use permit with the Town of Clarkdale. The Town of Clarkdale approved the development agreement on January 9, 2009.

 

The development agreement provides that its effective date will be the later of (i) 30 days from the approving resolution of the agreement by the Clarkdale Town Council; or (ii) the date on which the Town of Clarkdale obtains a connection dedication from separate property owners who have land that will be utilized in construction of the road; or (iii) the date on which the Town of Clarkdale receives the proper effluent permit. The Town of Clarkdale has approved the development agreement, and although it is our understanding that the remaining two contingencies with respect to the effectiveness of the development agreement have not yet been met, such contingencies are beyond our control. Since the remaining two contingencies have not been met at this time, the effective date has not yet been determined.

 

Under the development agreement, we are obligated to complete the construction of the road within two years after the effective date of the agreement. If we do not complete the road within the two year period, we may lose our conditional use permit from the Town of Clarkdale. Further, as a condition of our developing any of our property that is adjacent to the Clarkdale Slag Project, we will be required to construct additional enhancements to the road. We will have ten years from the start of construction on the road in which to complete the additional enhancements. However, we do not currently have any defined plans for the development of the adjacent property.

 

We estimate that the initial cost of construction of the road will be approximately $3,500,000 and that the cost of the additional enhancements will be approximately $1,200,000. We will be required to fund the costs of this construction and we may not have the necessary funds to complete construction when required under the agreement. Based on the uncertainty of the timing of these contingencies, we have not included these costs in our current operating plans or budgets. However, we will require additional project financing or other financing in order to fund the construction of the road and the additional enhancements. There are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us. The failure to complete the road and the additional enhancements in a timely manner under the development agreement would have a material adverse effect on the Clarkdale Slag Project and our operations.

 

 

The nature of mineral exploration and production activities involves a high degree of risk; we could incur a write-down on our investment in any project.

 

Exploration for minerals is highly speculative and involves greater risk than many other businesses. Investors should be aware of the difficulties normally encountered by new mineral exploration companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the exploration of the mineral properties that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to exploration, and additional costs and expenses that may exceed current estimates. The expenditures to be made by us in the exploration of the mineral claim may not result in the discovery of mineral deposits. If funding is not available, we may be forced to abandon our operations.

 

Many exploration programs do not result in the discovery of mineralization and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Uncertainties as to the metallurgical amenability of any minerals discovered may not warrant the mining of these minerals on the basis of available technology. Our operations are subject to all of the operating hazards and risks normally incident to exploring for and developing mineral properties, such as:

 

·

encountering unusual or unexpected formations;

 

·

environmental pollution;

 

·

personal injury and flooding;

 

·

decrease in recoverable reserves due to lower precious and base metal prices; and

 

·

changing environmental laws and regulations.

 

If management determines, based on any factors including the foregoing, that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write-down on our investment in such property interests on our financial statements. Further, we may become subject to liability for such hazards, including pollution and other hazards against which we cannot insure or against which we may elect not to insure. At the present time, we have no coverage to insure against these hazards. Such a write-down or the payment of such liabilities may have a material adverse effect on our financial position.

 

Our industry is highly competitive, mineral lands are scarce and we may not be able to obtain quality properties.

 

In addition to us, many companies and individuals engage in the mining business, including large, established mining companies with substantial capabilities and long earnings records. There is a limited supply of desirable mineral lands available for claim staking, lease, or acquisition in the United States and other areas where we may conduct exploration activities. We may be at a competitive disadvantage in acquiring mining properties since we must compete with these individuals and companies, many of which have greater financial resources and larger technical staffs. Mineral properties in specific areas which may be of interest or of strategic importance to us may be unavailable for exploration or acquisition due to their high cost or they may be controlled by other companies who may not want to sell or option their interests at reasonable prices. In addition, the Clarkdale slag pile is a finite, depleting asset. Therefore, the life of the Clarkdale Slag Project will be finite, if it is ever developed to the point of economic feasibility. Our long-term viability depends upon finding and acquiring new resources from different sites or properties. There can be no assurances that the Clarkdale Slag Project will become economically viable, and if so, that we will achieve or obtain additional successful economic opportunities.

 

 

As we undertake exploration of our mineral claims, we will be subject to compliance with government regulation that may increase the anticipated cost of our exploration program.

 

There are several governmental regulations that materially restrict mineral exploration. We will be subject to applicable federal, state and local laws as we carry out our exploration program on the Clarkdale Slag Project. We are required to obtain work permits, post bonds and perform remediation work for any physical disturbance to the land in order to comply with these laws. Further, the United States Congress is actively considering amendment of the federal mining laws. Among the amendments being considered are imposition of significant royalties payable to the United States and more stringent environmental and reclamation standards, either of which would increase the cost of operations of mining projects. While our planned exploration program budgets for regulatory compliance, there is a risk that new regulations could increase our costs of doing business and prevent us from carrying out our exploration program.

 

We are required to obtain work permits, post bonds and perform remediation work for any physical disturbance to the land in order to comply with these laws. If we enter the production phase, the cost of complying with permit and regulatory environment laws will be greater because the impact on the project area is greater. Permits and regulations will control all aspects of the production program if the project continues to that stage. Examples of regulatory requirements include:

 

·

water discharge will have to meet drinking water standards;

 

·

dust generation will have to be minimal or otherwise remediated;

 

·

dumping of material on the surface will have to be re-contoured and re-vegetated with natural vegetation;

 

·

an assessment of all material to be left on the surface will need to be environmentally benign;

 

·

ground water will have to be monitored for any potential contaminants;

 

·

the socio-economic impact of the project will have to be evaluated and if deemed negative, will have to be remediated; and

 

·

there will have to be an impact report of the work on the local fauna and flora including a study of potentially endangered species.

 

There is a risk that new regulations could increase our costs of doing business and prevent us from carrying out our exploration program. We will also have to sustain the cost of reclamation and environmental remediation for all exploration work undertaken. Both reclamation and environmental remediation refer to putting disturbed ground back as close to its original state as possible. Other potential pollution or damage must be cleaned-up and renewed along standard guidelines outlined in the usual permits. Reclamation is the process of bringing the land back to its natural state after completion of exploration activities. Environmental remediation refers to the physical activity of taking steps to remediate, or remedy, any environmental damage caused. The amount of these costs is not known at this time as we do not know the extent of the exploration program that will be undertaken beyond completion of the recommended work program. If remediation costs exceed our cash reserves we may be unable to complete our exploration program and have to abandon our operations.

 

 

We must comply with complex environmental regulations which are increasing and costly.

 

Our exploration operations are regulated by federal, state and local environmental laws that relate to the protection of air and water quality, hazardous waste management and mine reclamation. These regulations will impose operating costs on us. If the regulatory environment for our operations changes in a manner that increases the costs of compliance and reclamation, then our operating expenses may increase. This would result in an adverse effect on our financial condition and operating results.

 

Compliance with environmental quality requirements and reclamation laws imposed by federal, state and local governmental authorities may:

 

·

require significant capital outlays;

 

·

materially affect the economics of a given property;

 

·

cause material changes or delays in our intended activities; and

 

·

expose us to lawsuits.

 

These authorities may require us to prepare and present data pertaining to the effect or impact that any proposed exploration for or production of minerals may have upon the environment. The requirements imposed by any such authorities may be costly, time consuming, and may delay operations. Future legislation and regulations designed to protect the environment, as well as future interpretations of existing laws and regulations, may require substantial increases in equipment and operating costs and delays, interruptions, or a termination of operations. We cannot accurately predict or estimate the impact of any such future laws or regulations, or future interpretations of existing laws and regulations, on our operations.

 

Affiliates of our management and principal stockholders have conflicts of interest which may differ from those of ours and yours and we only have four independent board members.

 

We have ongoing business relationships with affiliates of our management and principal stockholders. In particular, we have continuing obligations under the agreements under which we acquired the assets relating to our Clarkdale Slag Project. We remain obligated to pay a royalty which may be generated from the operations of the Clarkdale Slag Project to Nanominerals, one of our principal stockholders, which is an affiliate of a member of our executive management and board of directors, Carl S. Ager. We also have engaged Nanominerals as a paid consultant to provide technical services to us. Further, one of our board members, Robert D. McDougal, serves as the chief financial officer and a director of Ireland Inc., a publicly traded, mining related company, which is an affiliate of Nanominerals. In addition, another member of our executive management and one of our directors, Martin B. Oring, serves as a consultant to Ireland, Inc. These persons are subject to a fiduciary duty to exercise good faith and integrity in handling our affairs. However, the existence of these continuing obligations may create a conflict of interest between us and our board members and senior executive management, and any disputes between us and such persons over the terms and conditions of these agreements that may arise in the future may raise the risk that the negotiations over such disputes may not be subject to being resolved in an arms’ length manner. In addition, Nanominerals’ interest in Ireland Inc. and its other mining related business interests may create a conflict of interest between us and our board members and senior executive management who are affiliates of Nanominerals.

 

 

Although our management intends to avoid situations involving conflicts of interest and is subject to a Code of Ethics, there may be situations in which our interests may conflict with the interests of those of our management or their affiliates. These could include:

 

·

competing for the time and attention of management;

 

·

potential interests of management in competing investment ventures; and

 

·

the lack of independent representation of the interests of the other stockholders in connection with potential disputes or negotiations over ongoing business relationships.

 

Although we only have four independent directors, the board of directors has adopted a written Related Person Transactions Policy, that describes the procedures used to identify, review, approve and disclose, if necessary, any transaction or series of transactions in which: (i) we were, are or will be a participant; (ii) the amount involved exceeds the lesser of $120,000, or one percent of the average of our total assets at year end for the last two completed fiscal years; and (iii) a related person had, has or will have a direct or indirect material interest. There can be no assurance that the above conflicts will not result in adverse consequences to us and the interests of the other stockholders.

 

We may suffer adverse consequences as a result of our reliance on outside contractors to conduct our operations.

 

A significant portion of our operations are currently conducted by outside contractors. As a result, our operations are subject to a number of risks, some of which are outside our control, including:

 

·

negotiating agreements with contractors on acceptable terms;

 

·

the inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;

 

·

reduced control over those aspects of operations which are the responsibility of the contractor;

 

·

failure of a contractor to perform under its agreement with us;

 

·

interruption of operations in the event that a contractor ceases its business due to insolvency or other unforeseen events;

 

·

failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and

 

·

problems of a contractor with managing its workforce, labor unrest or other employment issues.

 

In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could have a material adverse effect on our business, results of operations and financial condition.

 

 

Because our management does not have formal training specific to the technicalities of mineral exploration, there may be a higher risk that our business will fail.

 

Our executive officers and directors do not have any formal training as geologists or in the technical aspects of management of a mineral exploration company. With no direct training or experience in these areas, our management may not be fully aware of the specific requirements related to working within this industry. Our management's decisions and choices may not take into account standard engineering or managerial approaches mineral exploration companies commonly use. Consequently, our operations, earnings, and ultimate financial success could suffer irreparable harm due to management's lack of experience in this industry.

 

Base and precious metal prices are volatile and declines may have an adverse effect on our share price and business plan.

 

The market price of minerals is extremely volatile and beyond our control. Basic supply/demand fundamentals generally influence gold prices. The market dynamics of supply/demand can be heavily influenced by economic policy. Fluctuating metal prices will have a significant impact on our results of operations and operating cash flow. Furthermore, if the price of a mineral should drop dramatically, the value of our properties which are being explored or developed for that mineral could also drop dramatically and we might not be able to recover our investment in those properties. The decision and investment necessary to put a mine into production must be made long before the first revenues from production will be received. Price fluctuations between the time that we make such a decision and the commencement of production can completely change the economics of the mine. Although it is possible for us to protect against some price fluctuations by entering into derivative contracts (hedging) in certain circumstances, the volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can eliminate.

 

If the price of base and precious metals declines, our financial condition and ability to obtain future financings will be impaired.

 

The price of base and precious metals is affected by numerous factors, all of which are beyond our control. Factors that tend to cause the price of base and precious metals to decrease include the following:

 

·

sales or leasing of base and precious metals by governments and central banks;

 

·

a low rate of inflation and a strong U.S. dollar;

 

·

speculative trading;

 

·

decreased demand for base and precious metals in industrial, jewelry and investment uses;

 

·

high supply of base and precious metals from production, disinvestment, scrap and hedging;

 

·

sales by base and precious metals producers, foreign transactions and other hedging transactions; and

 

·

devaluing local currencies (relative to base and precious metals prices in U.S. dollars) leading to lower production costs and higher production in certain major base and precious metals producing regions.

 

 

Our business is dependent on the price of base and precious metals. We have not undertaken hedging transactions in order to protect us from a decline in the price of base and precious metals. A decline in the price of base and precious metals may also decrease our ability to obtain future financings to fund our planned exploration programs.

 

Risks Relating to Our Securities

 

There has been a very limited public trading market for our securities, and the market for our securities may continue to be limited and be sporadic and highly volatile.

 

There is currently a limited public market for our common stock. Our common stock is quoted on the National Association of Securities Dealers, Inc. OTC Markets Group (the “OTCQB”). We cannot assure you that an active market for our shares will be established or maintained in the future. The OTCQB is not a national securities exchange, and many companies have experienced limited liquidity when traded through this quotation system. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares, which may be purchased, may be sold without incurring a loss. The market price of our shares, from time to time, may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the shares in the future.

 

In addition, the market price of our common stock may be volatile, which could cause the value of our common stock to decline. Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include:

 

·

price and volume fluctuations in the stock markets;

 

·

changes in our earnings or variations in operating results;

 

·

any shortfall in revenue or increase in losses from levels expected by securities analysts;

 

·

changes in regulatory policies or law;

 

·

operating performance of companies comparable to us; and

 

·

general economic trends and other external factors.

 

Even if an active market for our common stock is established, stockholders may have to sell their shares at prices substantially lower than the price they paid for the shares or might otherwise receive than if an active public market existed.

 

Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.

 

Our board of directors has the power to issue additional shares of common stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.

 

 

If we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the per share book value of our common stock.

 

Our anti-takeover provisions or provisions of Nevada law, in our articles of incorporation and bylaws and the common share purchase rights that accompany shares of our common stock could prevent or delay a change in control of us, even if a change of control would benefit our stockholders.

 

Provisions of our articles of incorporation and bylaws, as well as provisions of Nevada law, could discourage, delay or prevent a merger, acquisition or other change in control of us, even if a change in control would benefit our stockholders. These provisions:

 

·

classify our board of directors so that only one-third of the directors are elected each year and require the vote of 66 2/3% of the outstanding stock entitled to vote in the election of directors to amend these provisions;

 

·

prohibit stockholder action by written consent and require that all stockholder actions be taken at a meeting of our stockholders; and

 

·

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings and require the vote of 66 2/3% of the outstanding stock entitled to vote in the election of directors to amend these provisions.

 

In addition, the Nevada Revised Statutes contain provisions governing the acquisition of a controlling interest in certain publicly held Nevada corporations. These laws provide generally that any person that acquires 20% or more of the outstanding voting shares of certain publicly held Nevada corporations, such as us, in the secondary public or private market must follow certain formalities before such acquisition or they may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights in whole or in part. These laws provide that a person acquires a "controlling interest" whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the Nevada Revised Statutes, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. The Control Share Acquisition Statute generally applies only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada. Our Bylaws provide that the provisions of the Nevada Revised Statutes, known as the “Control Share Acquisition Statute” apply to the acquisition of a controlling interest in us, irrespective of whether we have 200 or more stockholders of record, or whether at least 100 of our stockholders have addresses in the State of Nevada appearing on our stock ledger. These laws may have a chilling effect on certain transactions if our articles of incorporation or bylaws are not amended to provide that these provisions do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in the control shares.

 

In connection with our March 18, 2016 Offering to Luxor, the Board of Directors has also authorized, subject to stockholder approval, certain amendments to our Articles of Incorporation and Amended and Restated Bylaws that, among other things, would eliminate a classified Board of Directors and increase the number of authorized shares of our capital stock.

 

 

Each currently outstanding share of our common stock includes, and each newly issued share of our common stock will include, a common share purchase right. The rights are attached to and trade with the shares of common stock and generally are not exercisable. The rights will become exercisable if a person or group acquires, or announces an intention to acquire, 15% or more of our outstanding common stock. However, the applicable threshold percentage will not exceed 20% or more of our outstanding common stock in the case of any person or group who owned 15% or more of our outstanding common stock as of August 24, 2009, except in the case of one of our principal stockholders, Luxor Capital Partners, L.P. (“Luxor”), for whom we agreed to waive the 15% threshold to allow Luxor to acquire an unlimited amount of equity in connection with an Offering completed on March 18, 2016. These persons may be deemed to include certain of our officers, directors and principal stockholders. The rights have some anti-takeover effects and generally will cause substantial dilution to a person or group that attempts to acquire control of us without conditioning the offer on either redemption of the rights or amendment of the rights to prevent this dilution. The rights are designed to provide additional protection against abusive or unfair takeover tactics, such as offers for all shares at less than full value or at an inappropriate time (in terms of maximizing long-term stockholder value), partial tender offers and selective open-market purchases. The rights are intended to assure that our board of directors has the ability to protect stockholders and us if efforts are made to gain control of us in a manner that is not in the best interests of us and our stockholders. The rights could have the effect of delaying, deferring or preventing a change of control that is not approved by our board of directors, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of the common stock.

 

A substantial number of our shares are available for sale in the public market and sales of those shares could adversely affect our stock price.

 

Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock, and could impair our ability to obtain capital through a subsequent sale of our securities.

 

Our common stock is subject to “penny stock” regulations that may affect the liquidity of our common stock.

 

Our common stock is subject to the rules adopted by the SEC that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, for which current price and volume information with respect to transactions in such securities is provided by the exchange or system).

 

The penny stock rules require that a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the SEC, which contains the following:

 

·

a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

 

·

a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation of such duties or other requirements of securities laws;

 

·

a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and significance of the spread between the “bid” and “ask” price;

 

·

a toll-free telephone number for inquiries on disciplinary actions, definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and

 

 

·

such other information and in such form (including language, type, size and format), as the SEC shall require by rule or regulation.

 

Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:

 

·

the bid and offer quotations for the penny stock;

 

·

the compensation of the broker-dealer and its salesperson in the transaction;

 

·

the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock;

 

·

the liquidity of the market for such stock; and

 

·

monthly account statements showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock such as our common stock if it is subject to the penny stock rules.

 

If we are, or were, a U.S. real property holding corporation, non-U.S. holders of our common stock or other security convertible into our common stock could be subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of such security.

 

If we are or ever have been a U.S. real property holding corporation (a “USRPHC”) under the Foreign Investment Real Property Tax Act of 1980, as amended (“FIRPTA”) and applicable United States Treasury regulations (collectively, the “FIRPTA Rules”), unless an exception described below applies, certain non-U.S. investors in our common stock (or options or warrants for our common stock would be subject to U.S. federal income tax on the gain from the sale, exchange or other disposition of shares of our common stock (or such options or warrants), and such non-U.S. investor would be required to file a United States federal income tax return. In addition, the purchaser of such common stock, option or warrant would be required to withhold from the purchase price an amount equal to 10% of the purchase price and remit such amount to the U.S. Internal Revenue Service.

 

In general, under the FIRPTA Rules, a company is a USRPHC if its interests in U.S. real property comprise at least 50% of the fair market value of its assets. If we are or were a USRPHC, so long as our common stock is “regularly traded on an established securities market” (as defined under the FIRPTA Rules), a non-U.S. holder who, actually or constructively, holds or held no more than 5% of our common stock is not subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of our common stock under FIRPTA. In addition, other interests in equity of a USRPHC may qualify for this exception if, on the date such interest was acquired, such interests had a fair market value no greater than the fair market value on that date of 5% of our common stock. Any of our common stockholders (or owners of options or warrants for our common stock) that are non-U.S. persons and own or anticipate owning more than 5% of our common stock (or, in the case of options or warrants, of a value greater than the fair market value of 5% of our common stock) should consult their tax advisors to determine the consequences of investing in our common stock (or options or warrants). We have not conducted a formal analysis of whether we are or have ever been a USRPHC. We do not believe that we are or have ever been a USRPHC. However, if we later determine that we were a USRPHC, then we believe that we would have ceased to be a USRPHC as of June 1, 2005 and that non-U.S. holders would not be subject to FIRPTA with respect to a sale, exchange, or other disposition of shares of our common stock (or options or warrants) after June 1, 2010.

 

 

Item 1B.

Unresolved Staff Comments

 

Not applicable.

 

Item 2.

Properties

 

We currently rent the office space for our corporate headquarters at the current rate of $1,734 per month under a month-to-month sublease agreement from Ireland Inc. The office space, located at 2360 West Horizon Ridge Parkway, Suite 100, Henderson, Nevada 89052, consists of approximately 1,000 square feet.

 

We have a month-to month rental agreement with Clarkdale Arizona Central Railroad. We receive rental income of $1,700 per month.

 

Subject to certain exceptions and encumbrances, including, among others, certain easements and rights of way, we hold title to the following real properties located in Clarkdale, Arizona which relate to the Clarkdale Slag Project:

 

Location		Assessor Parcel No.		Parcel Acreage
Clarkdale, Arizona		400-06-002C			9.53
Clarkdale, Arizona		400-02-004J			73.69
Clarkdale, Arizona		400-02-004H			121.26
Clarkdale, Arizona		400-02-001			32.97
Clarkdale, Arizona		400-01-007F			76.8
Clarkdale, Arizona		400-01-007E			413.49
Total Acreage Owned					727.74

 

Item 3.

Legal Proceedings

 

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

 

 

We believe that there are no material litigation matters against us at the current time.

 

Item 4.

Mine Safety Disclosure

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K for the year ended December 31, 2015 is included in Exhibit 95 to this Annual Report on Form 10-K.

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Trading History

 

Our common stock is quoted on the OTCQB under the symbol “SRCH.” Trading in our common stock has not been extensive and such trades cannot be characterized as constituting an active trading market. The following is a summary of the high and low closing prices of our common stock on the OTCQB during the periods presented, as reported on the website of the NASDAQ Stock Market. Such prices represent inter-dealer prices, without retail mark-up, mark down or commissions, and may not necessarily represent actual transactions:

 

		Closing Sale Price
		High				Low
Year Ended December 31, 2015
Fourth Quarter		$	0.22			$	0.08
Third Quarter			0.35				0.18
Second Quarter			0.32				0.22
First Quarter			0.49				0.21
Year Ended December 31, 2014
Fourth Quarter		$	0.50			$	0.17
Third Quarter			0.29				0.18
Second Quarter			0.31				0.17
First Quarter			0.35				0.17

 

On March 31, 2016, the closing sales price on the OTCQB for the common stock was $0.08 as reported on the website of the NASDAQ Stock Market. As of March 31, 2016, there were 286,291,994 outstanding shares of common stock and approximately 147 stockholders of record of the common stock (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms). However, the number of holders of record of our shares of common stock (including the number of persons or entities holding stock in nominee or street name through various brokerage firms) exceeds the number of holders which would permit us to terminate the registration of our common stock under Section 12(g) of the Exchange Act.

 

 

Dividend Policy

 

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

·

we would not be able to pay our debts as they become due in the usual course of business; or

 

·

our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our articles of incorporation.

 

Equity Compensation Plan Information

 

The following table provides information, as of December 31, 2015, with respect to options and warrants outstanding and available under our equity compensation plans, other than any employee benefit plan meeting the qualification requirements of Section 401(a) of the Internal Revenue Code:

 

Plan Category		Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (A)				Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (B)				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column A) (C)
Equity compensation plans approved by security holders			8,325,448			$	0.62				5,371,576
Equity compensation plans not approved by security holders			15,610,714				0.48				-
TOTAL			23,936,162			$	0.53				5,371,576

 

As of December 31, 2015, we had also granted 15,610,714 options and warrants outside of stock option plans.

 

Recent Sales of Unregistered Securities

 

The following sets forth information regarding unregistered securities sold in the first quarter of 2016:

 

 

Conversion of Existing Notes and Completion of Private Placement

 

Luxor Capital Partners, LP (“Luxor”), on behalf of itself and certain of its affiliates (collectively, the “Luxor Group”), demanded repayment from the Company of all of the outstanding principal and interest owing on their Secured Convertible Promissory Notes, each dated September 18, 2013 (the “Luxor Notes”). Lacking sufficient funds to make such repayments, we agreed, pursuant to an Amendment to Secured Convertible Promissory Note, dated September 18, 2013, to allow the Luxor Group to convert all of the outstanding principal amount and accrued but unpaid interest owing on the Luxor Notes into shares of the Company’s restricted common stock, $0.001 par value per share (the “Common Stock”), at a rate of $0.035 per share. On March 18, 2016, Luxor and its affiliates provided the Company with Conversion Notices consistent with such terms and conditions. In the aggregate, the Luxor Group converted $2,691,000 owing on the Luxor Notes in exchange for 76,885,714 shares of the Company’s Common Stock. The Company has subsequently cancelled the Luxor Notes.

 

The Company also agreed to sell to Luxor 42,857,143 shares of Common Stock, at a purchase price of $0.035 per share, for a total consideration of $1,500,000. On March 18, 2016, we completed a private placement (the “Offering”) of our securities to Luxor on such terms and conditions. The securities were issued in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D thereunder. We intend to use the net proceeds from the Offering for general working capital purposes. In connection with the Offering, we entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) and a Registration Rights Agreement, each dated March 18, 2016, with Luxor. The Common Stock Purchase Agreement contains representations and warranties of the Company and Luxor that are customary for transactions of the type contemplated in connection with the Offering.

 

The Luxor Group has also agreed, as a condition of the Offering, that all of its 12,128,708 currently owned warrants shall not be exercisable until at least September 18, 2016. In addition, in connection with the Offering, our Board of Directors agreed to waive certain provisions of our Rights Agreement, dated August 24, 2009, with respect to accounts managed by Luxor. In connection with the Rights Agreement, the Board of Directors previously declared a dividend of one common share purchase right for each outstanding share of our Common Stock. The rights become exercisable, under certain circumstances, in the event that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of our Common Stock (an “acquiring person”). Our Board of Directors has previously waived the 15% limitation in the Rights Agreement with respect to Luxor, to allow Luxor to become the beneficial owner of up to 26% of the shares of our Common Stock, without being deemed to be an “acquiring person” under the Rights Agreement. In connection with the Offering, we have agreed to further waive all of the existing limitations under the Rights Agreement so that Luxor would not an “acquiring person” under the Rights Agreement under any circumstance. Following the Offering, Luxor is the beneficial owner (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, the “Exchange Act”) of approximately 49.83% of our Common Stock.

 

The Board of Directors has also authorized, subject to stockholder approval, certain amendments to our Articles of Incorporation and Amended and Restated Bylaws that, among other things, would eliminate a classified Board of Directors and increase the number of authorized shares of our capital stock. The Board of Directors will call for an annual meeting of our stockholders and will nominate five designees, three of which shall be designees of Luxor, for election as directors at such meeting.

 

   

Private Placement of Additional Securities

 

Pursuant to a letter agreement between us and Luxor, dated March 18, 2016, entered into by Luxor and us (the “Letter Agreement”), Luxor agreed that it, or its designees, will invest up to an additional $1,250,000 in to be issued shares of our Common Stock, at a purchase price of $0.045 per share, upon the completion of certain milestones set forth in such Letter Agreement. The securities will be issued in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act, and Rule 506 of Regulation D thereunder. We intend to use the net proceeds from such sales for general working capital purposes. In connection with the additional investment described in the Letter Agreement, we entered into a common stock purchase agreement, dated March 18, 2016 (the “Second Common Stock Purchase Agreement”) with Luxor Capital Group, LP, an affiliate of Luxor (“Luxor Capital”). The Second Common Stock Purchase Agreement contains representations and warranties of the Company and Luxor Capital that are customary for transactions of the type contemplated in connection with the Offering. In addition, upon the completion of certain milestones set forth in such Letter Agreement, we will enter into a Registration Rights Agreement with Luxor Capital or its designees.

 

Additional Note Conversions

 

Also on March 18, 2016, Martin Oring, one of our directors and our Chief Executive Officer, and members of his family, pursuant to Amendments to Convertible Promissory Notes, dated March 18, 2016, provided us with Conversion Notices whereby they elected to convert all of the principal and accrued but unpaid interest owing on their Secured Convertible Promissory Notes, each dated September 18, 2013 (the “Oring Notes” and together with the Luxor Notes, the “2013 Notes”), into shares of our Common Stock at a rate of $0.035 per share. In the aggregate, Mr. Oring and his family members converted $428,491 owing on such notes in exchange for 12,242,600 shares of the Company’s Common Stock. The Company has subsequently cancelled the Oring Notes.

  

 

The following sets forth information regarding unregistered securities sold in the fourth quarter of 2015:

 

Purchase of Additional Securities

 

On September 18, 2015, nine note holders (“Note Holders”) of our secured convertible promissory notes (“Notes”) that were issued pursuant to a Secured Convertible Note Purchase Agreement entered into on September 18, 2013, elected to purchase “Units” of the Company’s securities in consideration of cancellation of amounts owed by the Company to such Note Holders for their September 18, 2015 interest on such Notes (the “September Interest Payment”), at a rate of $0.35 per Unit. Each Unit consists of one share of our common stock and one common stock purchase warrant. Each warrant is exercisable at $0.50 and expires five years after the issuance date. In the aggregate, $114,765 of the $142,415 of interest owed was cancelled in exchange for 327,900 units. Such Note Holders included Luxor Capital Partners, LP and certain of its affiliates, Martin Oring, one of our directors, and our Chief Executive Officer and President, and certain of Mr. Oring’s affiliates.

 

In connection with the issuance of such Units, we entered a registration rights agreement (the “September Registration Rights Agreement”), dated September 18, 2015, with the Note Holders.

 

Pursuant to the September Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the Securities and Exchange Commission (the “SEC”) within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Note Holders in exchange for the cancellation of the September Interest Payment.

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act of 1933, as amended, (the “Securities Act”). The Note Holders will also be granted piggyback registration rights with respect to such shares.

 

Completion of Private Placement

 

On July 30, 2015, we completed a private placement (the “Offering”) of our securities to certain accredited investors. The securities were issued and sold in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold 2,215,429 “Units” of the Company’s securities at a purchase price of $0.35 per Unit, resulting in aggregate gross proceeds to us of $775,400. We intend to use the net proceeds from the Offering for general working capital purposes.

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a subscription agreement and a registration rights agreement (the “Registration Rights Agreement”) with each Investor.

 

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement, and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares issued to the Investors in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full).

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of Common Stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Investors will also be granted piggyback registration rights with respect to such shares.

 

Completion of Private Placement

 

On May 21, 2015, we completed a private placement (the “Offering”) of our securities to five (5) investors (the “Investors”). The securities were issued and sold in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold 2,843,000 “Units” of the Company’s securities at a purchase price of $0.35 per Unit, resulting in aggregate gross proceeds to us of $995,050. We intend to use the net proceeds from the Offering for general working capital purposes.

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a subscription agreement and a registration rights agreement (the “Registration Rights Agreement”) with each Investor.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement, and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares issued to the Investors in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full).

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of Common Stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Investors will also be granted piggyback registration rights with respect to such shares.

 

 

Purchase of Additional Securities

 

On March 18, 2015, 13 note holders (“Note Holders”) of our secured convertible promissory notes (“Notes”) that were issued pursuant to a Secured Convertible Note Purchase Agreement entered into on September 18, 2013, elected to purchase shares of our common stock in consideration of cancellation of amounts owed by the Company to such Note Holders for their March 18, 2015 interest on such Notes (the “March Interest Payment”), at a rate of $0.25 per share. In the aggregate, $129,115 of the $142,415 of interest owed was cancelled in exchange for 516,460 shares of the Company’s common stock. Such Note Holders included Luxor, Martin Oring, one of our directors, and our Chief Executive Officer and President, and certain of Mr. Oring’s affiliates.

 

In connection with the issuance of such shares, we entered a registration rights agreement (the “March Registration Rights Agreement”), dated March 18, 2015, with the Note Holders.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Note Holders in exchange for the cancellation of the March Interest Payment.

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Note Holders will also be granted piggyback registration rights with respect to such shares.

 

Completion of Private Placement

 

On March 25, 2015, we completed a private placement (the “Offering”) of our securities to Luxor Capital Partners, LP (“Luxor”). Luxor and certain of its affiliates (the “Luxor Group”) are principal stockholders of the Company. The securities were issued in reliance on exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold Four Million Two Hundred and Fifty Thousand (4,250,000) “Units” of the Company’s securities at a purchase price of $0.3529 per Unit, resulting in aggregate gross proceeds to us of $1,500,000. We intend to use the net proceeds from the Offering for general working capital purposes.

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a common stock and warrant purchase agreement (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”), each dated March 25, 2015, with Luxor.

 

The Purchase Agreement contains representations and warranties of the Company and Luxor that are customary for transactions of the type contemplated in connection with the Offering.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Luxor in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full). 

 

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. Luxor will also be granted piggyback registration rights with respect to such shares.

 

In connection with the Offering, our board of directors agreed to waive certain provisions of our Rights Agreement, dated August 24, 2009, with respect to accounts managed by Luxor. In connection with the Rights Agreement, the Board of Directors previously declared a dividend of one common share purchase right for each outstanding share of our common stock. The rights become exercisable, under certain circumstances, in the event that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of our common stock (an “acquiring person”). Our Board of Directors has previously waived the 15% limitations currently in the Rights Agreement with respect to Luxor, to allow Luxor to become the beneficial owners of up to 22% of the shares of our common stock, without being deemed to be an “acquiring person” under the Rights Agreement. In connection with the Offering, we have agreed further waive the existing limitations to allow Luxor to become the beneficial owners of up to 26% of the shares of our common stock, without being deemed to be an “acquiring person” under the Rights Agreement. Following the Offering, Luxor was the beneficial owner of approximately 24.43% of our common stock (including giving effect to any warrants or other rights to purchase share of our common stock).

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this report.

 

This discussion presents management’s analysis of our results of operations and financial condition as of and for each of the years in the two-year period ended December 31, 2015. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this report.

 

Executive Overview

 

We are an exploration stage company engaged in a slag reprocessing project and the acquisition and exploration of mineral properties. Our business is presently focused on the Clarkdale Slag Project, located in Clarkdale, Arizona, which is a reclamation project to recover precious and base metals from the reprocessing of slag produced from the smelting of copper ore mined at the United Verde Copper Mine in Jerome, Arizona.

 

 

 

 

Since our involvement in the Clarkdale Slag Project, our goal has been to demonstrate the economic feasibility of the project by determining a commercially viable method to extract precious and base metals from the slag material. We believe that in order to demonstrate this, we must successfully operate four major steps of our production process: crushing and grinding, leaching, continuous process operation, and extraction of gold from solution.

 

Our Production Process

 

1.

Crushing and Grinding. The first step of our production process involves grinding the slag material from rock-size chunks into sand-size grains (minus-20 mesh size). Because of the high iron content and the glassy/siliceous nature of the slag material, grinding the slag material creates significant wear on grinding equipment. Batch testing with various grinders produced significant wear on the equipment to render them unviable for a continuous production facility.

 

High pressure grinding rolls (HPGR) are commonly used in the mining industry to crush ore and have shown an ability to withstand very hard and abrasive ores. Tests using HPGRs on our slag material showed that grinding our slag material on a continuous basis did not produce wear on the equipment beyond the expected levels.

 

When we tested the HPGR-ground slag in our autoclave process, results showed liberation of gold, which our technical team believes is due to the micro-fractures imparted to the slag during the HPGR grinding process.  The technical team also believes that the high pressures that exist in the autoclave (see autoclave discussion in 2. below) environment are able to drive the leach solution into the micro-fracture cracks created in the slag material by the HPGR crusher, thereby dissolving the gold without having to employ a more expensive process to grind the slag material to a much finer particle size.

 

We believe that the HPGR is a viable grinder for our production process because it appears to have solved our grinding equipment wear issue and the HPGR produces ground slag from which gold can be leached into solution in an autoclave process.

 

2.

Leaching. The second step of our production process involves leaching gold from the ground slag material using the autoclave process. Autoclaving, a proven technology that is widely used within the mining industry, is a chemical leach process that utilizes elevated temperature and pressure in a closed autoclave system to extract precious and base metals from the slag material. Our independent consultant, Arrakis Inc. (“Arrakis”) has performed over 200 batch autoclave tests under various leach protocols and grind sizes as well as numerous pilot-scale autoclave tests in our 900-liter autoclave. Arrakis’ test results have consistently leached approximately 0.5 ounces per ton (opt) of gold into solution. In addition, these results indicate that autoclaving does not dissolve significant levels of iron and silica into solution, will improve our ability to recover gold from solution and thus improve process technical feasibility. The operating conditions identified by Arrakis thus far are mild to moderate compared with most current autoclaves and are anticipated to result in lower capital, operating and maintenance costs.

 

 

3.

Continuous Operation. The third step in our production process involves being able to perform the leaching step in a larger continuous operation. While lab and bench-scale testing provides critical data for the overall development of a process, economic feasibility can only be achieved if the process can be performed in a continuous operation.

 

During the second quarter of 2012, we received the results of tests conducted by an independent Australian metallurgical testing firm whereby they conducted autoclave tests under various conditions, using the pressure oxidative leach (“POL”) method in a four-compartment, 25-liter autoclave. The completion of a continuous 14 hour test with 100% mechanical availability (i.e. no “down time”) demonstrates the ability of a pilot autoclave to process the Clarkdale slag material on a continuous basis. The pilot multi-compartment autoclave is routinely used to simulate operating performance in a full-scale commercial autoclave as part of a bankable feasibility study.

 

In addition, the PLS that was produced from the 14 hour continuous run was analyzed by the Australian testing firm. Analysis using the AAS/ICP-OES method resulted in approximately 0.2 - 0.6 opt of gold extracted into solution. The 0.2 opt was achieved during the startup of the test run. After making adjustments to the pH, volume of the leach solution and other process parameters, the higher 0.6 opt was obtained toward the completion of the test. Our independent technical consultants believe we can replicate these higher test results in future test runs.

 

We believe that the POL autoclave method in a large multi-compartment autoclave has shown to be viable for our production process because it can operate on a continuous basis and leaches higher levels of gold and much lower levels of iron and silica into solution than other methods. The results from POL autoclaving testing were comparable to bench-scale and pilot-scale autoclave tests performed by Arrakis.

 

4.

Extraction. The fourth and final step in our production process involves being able to extract and recover metallic gold from PLS. Economic feasibility can only be achieved if a commercially viable method of metallic gold recovery is determined. In addition, the recovery of metallic gold will not only define the most cost-effective method of such recovery, but will also provide a better definition to the total process system mass balance and help reduce any discrepancy in analytical tests. Recovery of gold beads provides the ability to determine more accurately the amount of gold that was recovered from leach solution. Simple weighing of the gold bead and having the weight of the initial slag sample used to provide the bead gives a more accurate determination of an extractable gold grade in the slag sample. In this effort, we and our consultants are continuing to perform tests to recover gold from solution, using carbon, ion exchange resin technologies, or other commonly used methods of extracting gold from solution.

 

To provide additional PLS which is necessary to expedite the gold recovery tests and commercial viability of the project, we acquired and have been operating a large batch titanium autoclave (approximately 900 liter capacity). Numerous tests have been conducted in this autoclave in an effort to optimize the process parameters in order to maximize gold extraction from the slag material. The latter tests have resulted in gold metal recovery of 0.38 opt, with a back-calculated average slag head grade of 0.46 opt, resulting in an average 84% recovery of the gold in the slag material.

 

 

We have been performing tests whereby the slag material is pretreated prior to processing it in the autoclave. These tests indicate that pretreatment, by melting the slag at high temperature, aids in the recovery of the gold from solution derived from the autoclave.  We believe that the high temperature process aids in breaking down the refractory coating on the gold particles that are subsequently put into solution after the autoclaving of the slag material and also separates out the iron that makes up approximately one third of the untreated slag material.

 

The heat treated slag material, after the removal of the iron is, for ease of reference, hereinafter referred to as glass.  This processed glass material contains the gold and, because of the heat treatment process, is now easily and readily assayed by standard fire assay techniques. It is anticipated that incorporating this additional step into our flow chart renders process optimization testing much easier and will allow this phase of the development program to be concluded more quickly.

 

Significant Technical Achievements

 

In 2014, the precise nature of the gold contained in the Clarkdale slag was determined. Test work done with high resolution microscopes – a Scanning Electron Microscope (“SEM”) and a Transmission Electron Microscope (“TEM”) – have photographed and measured the gold contained within sulfides and further encapsulated by a highly refractory silicate very resistant to thermal and chemical attack. This explains the difficulty in fire assaying the gold or using ambient temperature strong reagent leaching. Further, the gold is present as colloids (very small particles) less than 100 nm in size which is 1,000 times less than the width of a human hair. (This microscopic size is in the range of most of the gold contained within the Carlin Trend in Nevada – one of North America’s richest gold deposits that went undetected for decades due to the small “invisible” gold particles. The Carlin Trend material was also very difficult to assay and process until the true nature and deportment of the gold was determined.) The temperature required to break the silicate coating of the Clarkdale slag material exceeds standard fire assay temperature which is why the gold is not captured in the lead collector used in a standard fire assay. Specialized grinding using high pressure grinding rolls (HPGR) and high temperature leaching used in the current proposed process flow diagram aid in breaking this coating, oxidizing the sulfide, and converting the gold from a colloid to a charged ionic form in solution.

 

Testing using this process thus far has verified the prior test results achieved and reported by us of gold grades between 0.4 to 0.6 ounces per ton (average).  The processed material being derived from the heat treated slag is also much easier to be analyzed using standard analytical techniques.  Small autoclave tests conducted on the glass from the heat treatment have produced up to an 85% extraction of gold into the pregnant leach solution (PLS) solution.

 

Other Positive Developments

 

In addition to the breakthrough discussed above, as a byproduct of this new process, the high temperature pre-treatment produces a high quality iron product grading over 95% iron content in a pelletized form. The high quality of the iron and its pellet size form make it a readily marketable product for sale to the China, Korea, or India markets. We believe that this high grade iron product will secure a premium price selling either into the scrap iron or pig iron market. Test work is continuing in an effort to maximize iron content while maintaining gold recovery.

 

The existing railroad spur on the Clarkdale Project Site connects to a major railroad for low cost transportation to a seaport or domestic market. It is believed that this pre-treatment process may pay for itself or provide a net cash flow from the sale of the iron. To examine the efficacy of this concept, we engaged Samuel Engineering of Denver, Colorado to perform a preliminary assessment and marketing study. This study suggests that a marketable high grade iron product could be made and sold as a byproduct to generate net cash flow or reduce the overall costs of producing gold. Toward this end we have commenced contacting commercial iron producers for expressions of interest.

 

 

Pilot Autoclave Test Results

 

In the fourth quarter of 2014, three successful pilot autoclave tests, which consisted of heat treating the Clarkdale slag material prior to autoclave processing, confirmed feed grades of 0.3 to 0.6 opt gold contained in the slag material and gold recoveries of 0.25 to 0.50 ounces per ton. The percentage recoveries ranged from 79% to 94%, with an 84% average recovery. The first two tests (the highest recovered gold values) were conducted from fresher ground slag material that was pulverized using high pressure grinding rolls (HPGR). A third test was conducted from older HPGR-pulverized material and resulted in the lowest recovered gold value referred to above. We believe the third test was negatively affected by oxide layers that commonly form on the surface of older (aged) ground slag material.

 

A fourth pilot autoclave test was unable to be completed due to a mechanical problem with the autoclave. Even though it was pronounced a failed test and not included in the above results, the fourth test nonetheless produced a gold grade of 0.2 opt.

 

Two of the successful tests included processing the pre-treated slag through the autoclave twice. This simulates, to a degree, what is commonly done in large commercial multi-compartment autoclaves to achieve optimum extraction. One of the tests involved a single autoclave run. Therefore, a total of five pilot-scale autoclave tests were successfully conducted with the high temperature pre-treatment. These tests resulted in the processing of over 1,200 kg of raw slag and the production of over 3,800 liters of gold-bearing solutions. The gold contained in these solutions is now being recovered as metallic gold.

 

High temperature pre-treatment allows the refractory material from the Clarkdale Slag Project to be fire assayed, resulting in the recovery of gold beads, and all results have been reported by fire assay.

 

Whereas previously reported slag material gold grade results were similar to those reported above, the most recent tests resulted in higher percentage recoveries of the gold from solution (as gold beads) using a variety of standard processes (i.e., electro-winning, direct precipitation, activated carbon, and ion exchange resins). All of these commonly used processes represent “off the shelf” technologies utilized globally in base and precious metals processing.

 

The methodology that consistently provided the highest percentage recovery of metal from solution in the most recent tests was an ion exchange resin process, which was originally used in our plant in Clarkdale, Arizona.

 

An additional benefit of utilizing the large-capacity heat treating unit prior to the large-capacity pilot autoclave is that high grade ‘pig iron’ has been produced, containing a greater than 95% iron content, whereas previously reported results at bench-scale levels resulted in 75% - 85% iron extraction. The 95%-plus iron product commands a much higher price, and we believe that it may be able to profitably sell such pig iron into the domestic scrap iron market. If such sales of pig iron can be realized, we can eliminate the cost of overseas transport while simultaneously obtaining a much higher price per ton. In addition, the original railroad line to the Clarkdale Slag Project site is intact and has been well maintained. The cost of upgrading the line for pig iron transport would be minimal relative to the cost of new railroad construction. It is currently anticipated that this additional byproduct, if buyers are found, will further enhance the commercial profitability of the Clarkdale Slag Project by improving recoverable gold grades and generating an additional revenue stream.

 

 

Current Work Program

 

We are currently working on the following key steps in an effort to move expeditiously towards commercial operation:

 

1.

Thermal Pre-treatment Testing: Previous testing on slag material conducted by us on material from our Clarkdale Slag Project indicated that a high quality iron product could be produced from the slag material by using a thermal pre-treatment step prior to the autoclave process, which is designed to extract the gold. We conducted such tests to determine whether high quality iron could be produced from the slag material with the goal that the resulting iron may be sold at a price, which could at a minimum, pay for the cost of producing it and perhaps produce an additional cash flow above and beyond the revenue that we may receive from the extraction of gold from the slag pile. We also believe that the iron-removing pre-treatment of the slag material in this manner results in greater gold extraction from the autoclave process.

 

In the second quarter of 2015, we awarded a contract to Midrex Technologies, Inc. (“Midrex”) to run bench scale testing in their test facility in Charlotte, N.C. to determine if their technology could produce a high quality iron product from the Company’s slag material in a more cost effective manner than previously used by us.

 

The report provided in connection with these tests by Midrex states: “This work successfully demonstrated the technical suitability of using Midrex’s FASTMET® technology to allow iron to be removed from copper slag. Up to 97.8% iron metallization was achieved in bench scale box furnace testing, exceeding the goal of 90.0% iron metallization. FASTMET® DRI was then melted in a crucible furnace separating the iron metal from the residual iron-lean slag. 350 grams of this resulting slag was ground and representative samples were sent to Searchlight for gold analysis. This report satisfies the deliverables contracted under proposal no. MTI-9502-99 and presents the evolution of the mix chemistries and bench scale testing.”

 

We believe that the Midrex technology uses much less costly natural gas coupled with a flux additive which also provides thermal energy, compared with our previously used method which uses electricity as its energy source. Since the leading cost source in the production of iron from the slag material is energy, we believe that the net result is a projected significant cost savings by using the Midrex technology. It is our intent to have Midrex perform additional bench tests and pilot scale tests to confirm these test results and to scale up their process.

 

We have also had discussions with Midrex on their potential interest in participating in a commercial scale project to produce iron from our slag pile.

 

An initial test performed by us on the glass (the resulting product following Midrex’s removal of the iron from the slag material) has shown the presence of gold. However, additional testing needs to be performed in order to quantify the amount of gold contained in the glass as well as to determine the optimal autoclave chemistry to use on the glass.

 

 

A work plan is being assembled with Midrex to include performing a pilot scale test which will allow a much larger quantity of glass to be produced for additional bench and pilot scale autoclave testing. Midrex’s pilot scale test unit is anticipated to process 50 to 100 kilograms of slag material per hour, thus producing sufficient glass for the Company to run pilot scale tests in our 900 liter autoclave which requires 100 kilograms of material per test run.

 

2.

Autoclave Optimization: We have installed certain required components to switch from using chlorine reagents to chlorine gas for the autoclave process. We believe that this will not only significantly lower supply costs on the commercial unit but will eliminate the potential problems of salt formation in the autoclave. We anticipate that this will also simplify and increase recovery of gold from the pregnant leach solution (PLS) derived from the autoclave process.

 

Initial test work conducted with the chlorine gas system has indicated that this system, used in lieu of the previous chlorine chemical system, provides a much higher oxidizing capability at a much lower total reagent cost, reduces the salt load in solution and therefore, eliminates the piping plugging problems encountered in previous autoclave test runs. Once additional bench autoclave tests have been completed to finalize the chemical and operating conditions, the 900 liter pilot autoclave will be operated to verify results to date at a larger scale.

 

3.

Third Party Review and Verification: We have hired an independent team of well qualified and experienced experts to complete a technical review of the project. It is anticipated that a favorable report from this review would be used to facilitate the financing of the bankable feasibility study and commercial production facility.

 

Anticipated Cash Requirements

 

Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project. During the next 12 months, our management anticipates that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will be approximately $7,300,000. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our testing and feasibility programs during the next 12 months and we will require additional financing in order to fund these activities. As of December 31, 2015, our financial statements and this report do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

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

 

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

Use of estimates - The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Significant areas requiring estimates and assumptions include the valuation of stock-based compensation and derivative liabilities, impairment analysis of long-lived assets, and realizability of deferred tax assets. Actual results could differ from those estimates.

 

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

 

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

 

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

 

 

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

 

Impairment of long-lived assets - We review and evaluate our long-lived assets for impairment at each balance sheet date due to our planned exploration stage losses and document such impairment testing. Mineral properties in the exploration stage are monitored for impairment based on factors such as our continued right to explore the property, exploration reports, drill results, technical reports and continued plans to fund exploration programs on the property.

 

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

 

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

 

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

 

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

 

We account for stock options issued to non-employees based on the estimated fair value of the awards using the Binomial Lattice option pricing model. The measurement of stock-based compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in our consolidated statements of operations during the period the related services are rendered.

 

Derivative warrant liability - We have certain warrants with anti-dilution provisions, including provisions for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price. We determined that these warrants were not afforded equity classification because they embody risks not clearly and closely related to the host contract. Accordingly, the warrants are treated as a derivative liability and are carried at fair value.

 

 

We calculate the fair value of the derivative liability using the Binomial Lattice model, a Level 3 input. The change in fair value of the derivative liability is classified in other income (expense) in the consolidated statement of operations. We generally do not use derivative financial instruments to hedge exposures to cash flow, market or foreign currency risks. We are not exposed to significant interest or credit risk arising from these financial instruments.

 

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

 

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

 

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

 

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

 

 

Results of Operations

 

Years Ended December 31, 2015 and 2014

 

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

 

		Year Ended December 31
		2015				2014
Revenue		$	-			$	-
Operating expenses			(6,442,039	)			(27,388,661	)
Rental revenue			20,400				26,875
Interest and dividend income			1,833				516
Interest expense			(553,862	)			(527,841	)
Other expense			(10,591	)			(18,659	)
Change in derivative liabilities			574,942				(381,336	)
Income tax (expense) benefit			(20,677,458	)			9,775,503
Net loss		$	(27,086,775	)		$	(18,513,603	)

 

Revenue. We are currently in the exploration stage of our business, and have not earned any revenues from our planned mineral operations to date. We did not generate any revenues from inception in 2000 through the year ended December 31, 2015. We do not anticipate earning revenues from our planned mineral operations until such time as we enter into commercial production of the Clarkdale Slag Project or other mineral properties we may acquire from time to time, and of which there are no assurances.

 

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

 

		Year Ended December 31
		2015				2014
Mineral exploration and evaluation expenses		$	2,284,197			$	2,136,184
Mineral exploration and evaluation expenses – related party			225,360				307,408
Administrative – Clarkdale site			110,965				108,529
General and administrative			2,207,915				5,009,328
General and administrative – related party			195,555				175,095
(Gain) loss on asset dispositions and impairment			(2,548	)			18,140,349
Depreciation			1,420,595				1,511,768
Total operating expenses		$	6,442,039			$	27,388,661

 

Operating expenses decreased by 76.5% to $6,442,039 during the year ended December 31, 2015 from $27,388,661 during the year ended December 31, 2014. Operating expenses were higher in 2014 primarily as a result of abandonment of the Searchlight mining claims and to additional general and administrative expenses incurred.

 

Mineral exploration and evaluation expenses increased by 6.9% to $2,284,197 during the year ended December 31, 2015 from $2,136,184 during the year ended December 31, 2014. Mineral exploration and evaluation expenses increased in 2015 primarily as a result of more consulting fees incurred due to hiring firms to independently validate the technical program.

 

 

Mineral exploration and evaluation expenses – related party decreased by 26.7% to $225,360 during the year ended December 31, 2015 from $307,408 during the year ended December 31, 2014. Expenses include advance royalty payments, consulting fees and expense reimbursements due to NMC. The decrease was due to less consulting fees provided by NMC in 2015 as more work was performed by outside firms hired to independently validate the technical program.

 

General and administrative expenses decreased by 55.9% and amounted to $2,207,915 during the year ended December 31, 2015 from $5,009,328 during the year ended December 31, 2014. General and administrative expenses decreased primarily as a result of granting significantly less stock options and warrants to executive officers, directors, employees, consultants and affiliates during 2015 as compared to 2014. Additionally, we incurred significantly less legal fees due to a change in our fee arrangement with our legal counsel from a fixed monthly fee to actual charges incurred.

 

General and administrative – related party amounted to $195,555 and $175,095 for the years ended December 31, 2015 and 2014, respectively. These expenses include accounting support services and rent expense. The accounting support services are performed by Cupit, Milligan, Ogden & Williams, CPAs, an affiliate of Melvin L. Williams, our Chief Financial Officer. Rent payments are made to Ireland Inc. (“Ireland”) for corporate office space. NMC is a shareholder in both Searchlight and Ireland. Additionally, one of our directors is the CFO, Treasurer and a director of Ireland and our CEO provides consulting services to Ireland.

 

Accounting expenses – related party increased to $175,283 during the year ended December 31, 2015 from $145,875 for the year ended December 31, 2014. The increase was due to more complex transactions. These fees do not include any fees for Mr. Williams’ time in directly supervising the support staff. Mr. Williams’ compensation has been provided in the form of salary. The direct benefit to Mr. Williams was $59,596 and $42,304 of the above fees for the years ended December 31, 2015 and 2014, respectively.

 

Rent expense – related party decreased to $20,272 during the year ended December 31, 2015 from $29,220 for the year ended December 31, 2014. The decrease was due to reduced monthly rental payments required under a new sublease agreement.

 

Loss on asset dispositions and impairment amounted to $18,140,349 during the year ended December 31, 2014. The amount was comprised of the write off of the Searchlight mining claims, adjustment to the loss on the sale of a building and lot and writing down land that was classified as held for sale. We completed the sale of the land in 2015 and recognized a gain of $2,548.

 

Depreciation expense decreased 6% to $1,420,595 during the year ended December 31, 2015 from $1,511,768 during the year ended December 31, 2014. The decrease was due to certain large equipment becoming fully depreciated in the fourth quarter of 2014.

 

Other Income and Expenses. Total other income (expense) increased to net income of $32,722 during the year ended December 31, 2015 from net expense of $900,445 during the year ended December 31, 2014. The change was primarily due to the change in fair values of our derivative liabilities.

 

We received incidental rental revenue of $20,400 and $26,875 during the years ended December 31, 2015 and 2014, respectively. Rental arrangements are minor in amount and are typically on a month to month basis.

 

 

Income Tax (Expense) Benefit. Income tax expense was $20,677,458 during the year ended December 31, 2015 and income tax benefit was $9,775,503 during the year ended December 31, 2014. In 2015, income tax expense was primarily the result of a change in judgement regarding the need for a full valuation allowance on all of the beginning-of-year and current year deferred tax assets arising from federal and state net operating loss carryforwards, property, plant and equipment and stock based compensation. The change in judgment with respect to the application of the valuation allowance resulted from delays in receiving third party validation of the Company’s production process and as such, our timeline to production remains uncertain. During 2014, the income tax benefit was primarily a result of reversal of deferred tax liabilities related to the Searchlight mining claims which were written off in September 2014 and to an increase in income tax benefit due to granting 18,661,000 stock options and warrants to officers, directors, employees, consultants and affiliates.

 

Net Loss. The aforementioned factors resulted in a net loss of $27,086,775 or $0.18 per common share, for the year ended December 31, 2015, as compared to a net loss of $18,513,603, or $0.14 per common share, for the year ended December 31, 2014.

 

As of December 31, 2015 and 2014, we had cumulative net operating loss carryforwards of $55,099,095 and $50,227,272, respectively, for federal income tax purposes. The federal net operating loss carryforwards expire between 2025 and 2035.

 

We had cumulative state net operating losses of $21,580,786 and $23,374,445 as of December 31, 2015 and 2014, respectively, for state income tax purposes. The state net operating loss carryforwards began expiring in 2012 and unless used will continue to expire through 2035.

 

Liquidity and Capital Resources

 

Historically, we have financed our operations primarily through the sale of common stock and other convertible equity securities. During 2015 and 2014, we completed the following issuances of convertible notes and conducted the following financings of our securities:

 

Purchase of Additional Securities

 

On September 18, 2015, 9 note holders (“Note Holders”) of our secured convertible promissory notes (“Notes”) that were issued pursuant to a Secured Convertible Note Purchase Agreement entered into on September 18, 2013, elected to purchase “Units” of the Company’s securities in consideration of cancellation of amounts owed by the Company to such Note Holders for their September 18, 2015 interest on such Notes (the “September Interest Payment”), at a rate of $0.35 per Unit. Each Unit consists of one share of our common stock and one common stock purchase warrant. Each warrant is exercisable at $0.50 and expires five years after the issuance date. In the aggregate, $114,765 of the $142,415 of interest owed was cancelled in exchange for 327,900 units. Such Note Holders included Luxor Capital Partners, LP and certain of its affiliates, Martin Oring, one of our directors, and our Chief Executive Officer and President, and certain of Mr. Oring’s affiliates.

 

In connection with the issuance of such Units, we entered a registration rights agreement (the “September Registration Rights Agreement”), dated September 18, 2015, with the Note Holders.

 

Pursuant to the September Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the Securities and Exchange Commission (the “SEC”) within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Note Holders in exchange for the cancellation of the September Interest Payment.

 

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act of 1933, as amended, (the “Securities Act”). The Note Holders will also be granted piggyback registration rights with respect to such shares.

 

Completion of Private Placement

 

On July 30, 2015, we completed a private placement (the “Offering”) of our securities to certain accredited investors. The securities were issued and sold in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold 2,215,429 “Units” of the Company’s securities at a purchase price of $0.35 per Unit, resulting in aggregate gross proceeds to us of $775,400. We intend to use the net proceeds from the Offering for general working capital purposes.

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a subscription agreement and a registration rights agreement (the “Registration Rights Agreement”) with each Investor.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement, and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares issued to the Investors in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full).

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of Common Stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Investors will also be granted piggyback registration rights with respect to such shares.

 

Completion of Private Placement

 

On May 21, 2015, we completed a private placement (the “Offering”) of our securities to five (5) investors (the “Investors”). The securities were issued and sold in reliance on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold 2,843,000 “Units” of the Company’s securities at a purchase price of $0.35 per Unit, resulting in aggregate gross proceeds to us of $995,050. We intend to use the net proceeds from the Offering for general working capital purposes.

 

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a subscription agreement and a registration rights agreement (the “Registration Rights Agreement”) with each Investor.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement, and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares issued to the Investors in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full).

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of Common Stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Investors will also be granted piggyback registration rights with respect to such shares.

 

Purchase of Additional Securities

 

On March 18, 2015, 13 note holders (“Note Holders”) of our secured convertible promissory notes (“Notes”) that were issued pursuant to a Secured Convertible Note Purchase Agreement entered into on September 18, 2013, elected to purchase shares of our common stock in consideration of cancellation of amounts owed by the Company to such Note Holders for their March 18, 2015 interest on such Notes (the “March Interest Payment”), at a rate of $0.25 per share. In the aggregate, $129,115 of the $142,415 of interest owed was cancelled in exchange for 516,460 shares of the Company’s common stock. Such Note Holders included Luxor, Martin Oring, one of our directors, and our Chief Executive Officer and President, and certain of Mr. Oring’s affiliates.

 

In connection with the issuance of such shares, we entered a registration rights agreement (the “March Registration Rights Agreement”), dated March 18, 2015, with the Note Holders.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Note Holders in exchange for the cancellation of the March Interest Payment.

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. The Note Holders will also be granted piggyback registration rights with respect to such shares.

 

 

Completion of Private Placement

 

On March 25, 2015, we completed a private placement (the “Offering”) of our securities to Luxor Capital Partners, LP (“Luxor”). Luxor and certain of its affiliates (the “Luxor Group”) are principal stockholders of the Company. The securities were issued in reliance on exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.

 

In the Offering, we sold Four Million Two Hundred and Fifty Thousand (4,250,000) “Units” of the Company’s securities at a purchase price of $0.3529 per Unit, resulting in aggregate gross proceeds to us of $1,500,000. We intend to use the net proceeds from the Offering for general working capital purposes.

 

Each Unit consists of one (1) share of the Company’s common stock, $0.001 par value per share (the “Common Stock”); and one common stock purchase warrant. Each warrant will entitle the warrant holder to purchase one (1) share of the Company’s Common Stock, at an exercise price (the “Warrant Exercise Price”) of $0.50 per share (the “Warrants,” and as exercised, collectively, the “Warrant Shares”). Such Warrants will expire five years from the date of issuance.

 

In connection with the Offering, we entered into a common stock and warrant purchase agreement (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”), each dated March 25, 2015, with Luxor.

 

The Purchase Agreement contains representations and warranties of the Company and Luxor that are customary for transactions of the type contemplated in connection with the Offering.

 

Pursuant to the Registration Rights Agreement, we have agreed to file a Form S-3 registration statement with the SEC within 90 calendar days after the Company is permitted under the Securities Act and any SEC guidance to file such registration statement and we will use our commercial best efforts to cause such registration statement to become effective as promptly as possible. The registration statement shall cover the resale of the shares of common stock issued to Luxor in the Offering, as well as any Warrant Shares (assuming that on the date of determination the Warrants are exercised in full). 

 

We also have agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions pursuant to Rule 144 of the Securities Act. Luxor will also be granted piggyback registration rights with respect to such shares.

 

In connection with the Offering, our board of directors agreed to waive certain provisions of our Rights Agreement, dated August 24, 2009, with respect to accounts managed by Luxor. In connection with the Rights Agreement, the Board of Directors previously declared a dividend of one common share purchase right for each outstanding share of our common stock. The rights become exercisable, under certain circumstances, in the event that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of our common stock (an “acquiring person”). Our Board of Directors has previously waived the 15% limitations currently in the Rights Agreement with respect to Luxor, to allow Luxor to become the beneficial owners of up to 22% of the shares of our common stock, without being deemed to be an “acquiring person” under the Rights Agreement. In connection with the Offering, we have agreed further waive the existing limitations to allow Luxor to become the beneficial owners of up to 26% of the shares of our common stock, without being deemed to be an “acquiring person” under the Rights Agreement. Following the Offering, Luxor was the beneficial owner of approximately 24.43% of our common stock (including giving effect to any warrants or other rights to purchase share of our common stock).

 

 

Unit Offering

 

On December 8, 2014, we closed on the sale of $599,500 of our securities (the “Second Closing”) of a private placement (the “Offering”) to certain investors. The securities were issued in reliance on exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D thereunder. We previously sold $1,005,700 of our securities in a first closing to the Offering held on October 24, 2014. As of the Second Closing on December 8, 2014, we completed the Offering. We intend to use the net proceeds from the Offering for general working capital purposes.

 

In the Second Closing, we sold 2,997,500 “Units,” with each Unit consisting of: one share of the our common stock, $0.001 par value per share (each, a “Share”); and one half of a common stock purchase warrant, where each full warrant (each, a “Warrant”) will entitle the warrant holder to purchase one Share of our common stock at an exercise price of $0.30 per Share. Such Warrants will expire five years from the date of issuance. Such Units were sold to 11 investors for gross proceeds of $599,500. The price of each Unit was $0.20.

 

In the First Closing, we sold 5,028,500 “Units,” with each Unit consisting of: one share of the Company’s common stock, $0.001 par value per share; and one half of a common stock purchase warrant, where each full warrant (each, a “Warrant”) will entitle the warrant holder to purchase one share of the Company’s common stock at an exercise price of $0.30 per share. Such Warrants will expire five years from the date of issuance. The price of each Unit (including the value used to determine the cancellation of debt) was $0.20.

 

Of the 5,028,500 Units, 4,395,000 were sold to 16 investors for gross proceeds of $879,000. In addition, 633,500 Units were issued to 13 Note Holders in consideration of cancellation of an aggregate of $126,700 in debt owing by the Company to such Note Holders for interest payments due on the Notes as of September 18, 2014. Such Note Holders include Luxor Capital Group, LP and certain of its associates and affiliates (collectively, “Luxor”), who received $91,000 worth of Units in the First Closing in consideration of cancellation of the September 18, 2014 interest payment owed to them on their Notes. Luxor and certain other funds managed by Luxor are principal stockholders of the Company and Michael Conboy, one of our directors, currently serves as Luxor’s Director of Research. Following the First Closing, Luxor is the beneficial owner of approximately 19.93% of our common stock (including giving effect to derivative securities or other rights to purchase or acquire shares of our common stock).

 

Altogether, out of the 16 total Note Holders, 13 Note Holders (including Luxor), participated in the First Closing. In addition to Luxor, affiliates of Martin Oring, one of our directors, and our Chief Executive Officer and President, purchased $100,000 of Units for cash and received an additional $8,225 worth of Units in consideration of the cancellation of the September 18, 2014 interest payment owed on Notes held by such affiliates. The three remaining Note Holders elected to receive their September 18, 2014 interest payment in cash, for an aggregate amount of $13,300.

 

 

In addition to the Offering, between September 10, 2014 and September 18, 2014, five Note Holders exercised their option as set forth in the September 18, 2013 Secured Convertible Note Purchase Agreement to purchase $69,000 of additional Notes. Mr. Oring and certain affiliates of Mr. Oring purchased $35,250 of such Notes.

 

Working Capital

 

The following is a summary of our working capital at December 31, 2015 and 2014:

 

		At December 31,
		2015				2014
Current assets		$	613,798			$	887,690
Current liabilities			(6,126,012	)			(1,235,042	)
Working capital deficit		$	(5,512,214	)		$	(347,352	)

 

As of December 31, 2015, we had an accumulated deficit of $82,492,584. As of December 31, 2015, we had working capital deficit of $5,512,214, compared to $347,352 as of December 31, 2014. The decrease in our working capital was primarily attributable to our net loss offset by the receipt of net proceeds of $3,248,279 from stock issuances and net proceeds of $457,548 from the disposition of property in 2015. Cash was $453,744 as of December 31, 2015, as compared to $584,976 as of December 31, 2014.

 

Cash Flows

 

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

 

		Year Ended December 31,
		2015				2014
Cash used in operating activities		$	(3,604,928	)		$	(3,086,798	)
Cash provided by investing activities			452,762				181,737
Cash provided by financing activities			3,020,934				1,424,213
Net decrease in cash during year		$	(131,232	)		$	(1,480,848	)

 

Net Cash Used in Operating Activities. Net cash used in operating activities increased to $3,604,928 during the year ended December 31, 2015 from $3,086,798 during the year ended December 31, 2014. In 2014, less cash was consumed by operating activities due to voluntary relinquishment of certain accounts payable – related party, accrued salaries and directors fees. Additionally, certain accounts payable – related party were satisfied through the issuance of common stock.

 

Net Cash Provided by Investing Activities. Net cash provided by investing activities increased to $452,762 during the year ended December 31, 2015 from net cash provided by investing activities of $181,737 during the year ended December 31, 2014. The change was due to more proceeds received from the sale of a property in 2015 and to less equipment purchases during 2015.

 

 

Net Cash Provided by Financing Activities. Net cash provided by financing activities increased to $3,020,934 for the year ended December 31, 2015 compared to $1,424,213 for the year ended December 31, 2014. The increase in cash provided by financing activities was the result of more cash received from private placements in 2015 as compared to 2014.

 

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

 

·

our ability to locate a profitable mineral property;

 

·

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

 

·

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

 

·

our ability to generate revenues.

 

We may not generate sufficient revenues from our proposed business plan in the future to achieve profitable operations. As of December 31, 2015, we had a working capital deficit of $5,512,214, compared to $347,352 as of December 31, 2014. If we are not able to achieve profitable operations at some point in the future, we eventually will have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion plans. In addition, our losses may increase in the future as we expand our business plan. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock will decline and there would be a material adverse effect on our financial condition.

 

Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project. For the next twelve months, our management anticipates that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will be approximately $7,300,000. As of March 31, 2016, we had operating cash reserves in the amount of approximately $1,670,000. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our testing and feasibility programs and operating overhead during the next twelve months and we will require additional financing in order to fund these activities. As of December 31, 2015, our financial statements and this report do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

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

 

In order to proceed with our testing and feasibility activities during the next 12 months we will need additional financing. There are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

 

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

 

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

 

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

 

Off-Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

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

 

In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from the previous GAAP.  The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. Adoption of the new guidance is not expected to have an impact on the consolidated financial position, results of operations or cash flows.

 

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

 

 

In November 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015. We are currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. The new standard requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Adoption of the new guidance is expected to affect only the presentation and disclosures of the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which is effective for financial statements issued for interim and annual periods beginning on or after December 15, 2015. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. Adoption of the new guidance is not expected to have an impact on the consolidated financial position, results of operations or cash flows. 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

We had unrestricted cash totaling $453,744 at December 31, 2015 and $584,976 at December 31, 2014. Our cash is invested primarily in money market funds and are not materially affected by fluctuations in interest rates. The unrestricted cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes.

 

Item 8.

Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
CONSOLIDATED BALANCE SHEETS	F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS	F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY	F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS	F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-6

 

  

Tel: 702-784-0000 Fax: 702-784-0161 www.bdo.com

6671 Las Vegas Blvd. South, Suite 200 Las Vegas, NV 89119

  

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Searchlight Minerals Corp.

Henderson, Nevada

 

We have audited the accompanying consolidated balance sheets of Searchlight Minerals Corp. (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Searchlight Minerals Corp.at December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BDO USA, LLP

Las Vegas, Nevada
April 4, 2016

 

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

 

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

  

 

SEARCHLIGHT MINERALS CORP.
CONSOLIDATED BALANCE SHEETS

 

		December 31, 2015				December 31, 2014
ASSETS
Current assets
Cash		$	453,744			$	584,976
Prepaid expenses			87,325				75,214
Deferred financing fees			72,729				-
Assets held for sale			-				227,500
Total current assets			613,798				887,690
Property and equipment, net			6,301,953				7,717,762
Assets held for sale, non-current portion			-				227,500
Restricted cash			227,345				-
Slag project			121,874,102				121,829,655
Land - smelter site and slag pile			5,916,150				5,916,150
Land			1,696,242				1,696,242
Deferred financing fees			-				97,401
Reclamation bond and deposits, net			14,566				14,566
Total non-current assets			136,030,358				137,499,276
Total assets		$	136,644,156			$	138,386,966
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	1,151,183			$	897,951
Accounts payable - related party			348,916				21,539
VRIC payable, current portion - related party			657,295				315,552
Convertible debt, net of discount			3,324,941				-
Derivative liability - convertible debt			590,536				-
Derivative warrant liability			53,141				-
Total current liabilities			6,126,012				1,235,042
Long-term liabilities
VRIC payable, net of current portion - related party			40,849				382,592
Convertible debt, net of discount			-				3,087,380
Derivative liability - convertible debt			-				1,218,619
Deferred tax liability			48,224,926				27,547,468
Total long-term liabilities			48,265,775				32,236,059
Total liabilities			54,391,787				33,471,101
Commitments and contingencies - Note 15
Stockholders' equity
Common stock, $0.001 par value; 400,000,000 shares authorized, 154,306,537 and 144,153,748 shares, respectively, issued and outstanding			154,306				144,153
Additional paid-in capital			164,590,647				160,177,521
Accumulated deficit			(82,492,584	)			(55,405,809	)
Total stockholders' equity			82,252,369				104,915,865
Total liabilities and stockholders' equity		$	136,644,156			$	138,386,966

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

		For the year ended
		December 31, 2015				December 31, 2014
Revenue		$	-			$	-
Operating expenses
Mineral exploration and evaluation expenses			2,284,197				2,136,184
Mineral exploration and evaluation expenses - related party			225,360				307,408
Administrative - Clarkdale site			110,965				108,529
General and administrative			2,207,915				5,009,328
General and administrative - related party			195,555				175,095
(Gain) loss on asset dispositions			(2,548	)			18,140,349
Depreciation			1,420,595				1,511,768
Total operating expenses			6,442,039				27,388,661
Loss from operations			(6,442,039	)			(27,388,661	)
Other income (expense)
Rental revenue			20,400				26,875
Other expense			(10,591	)			(18,659	)
Change in fair value of derivative liabilities			574,942				(381,336	)
Interest expense			(553,862	)			(527,841	)
Interest and dividend income			1,833				516
Total other income (expense)			32,722				(900,445	)
Loss before income taxes			(6,409,317	)			(28,289,106	)
Income tax (expense) benefit			(20,677,458	)			9,775,503
Net loss		$	(27,086,775	)		$	(18,513,603	)
Comprehensive loss		$	(27,086,775	)		$	(18,513,603	)
Loss per common share - basic and diluted
Net loss		$	(0.18	)		$	(0.14	)
Weighted average common shares outstanding -
Basic			150,629,365				136,874,342
Diluted			150,629,365				136,874,342

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

																		Total
		Common Stock												Accumulated				Stockholders'
		Shares				Amount				Paid-in Capital				Deficit				Equity
Balance, December 31, 2013			135,768,318			$	135,768			$	154,268,204			$	(36,892,206	)		$	117,511,766
Share-based compensation			-				-				2,229,233				-				2,229,233
Contributions of capital			-				-				1,108,953				-				1,108,953
Issuance of common stock for cash under Common Stock Purchase Agreement, $0.20 per share net of $3,287 issuance costs			7,392,500				7,392				1,467,821				-				1,475,213
Issuance of common stock for accrued interest under Common Stock Purchase Agreement, $0.20 per share			633,500				634				126,066				-				126,700
Loss on interest settled in shares			-				-				19,005				-				19,005
Issuance of common stock for accounts payable related party, $0.32 per share			359,430				359				114,659				-				115,018
Modification of private placement warrants			-				-				13,863				-				13,863
Issuance of warrants to affiliates			-				-				829,717				-				829,717
Net loss, December 31, 2014			-				-				-				(18,513,603	)			(18,513,603	)
Balance, December 31, 2014			144,153,748				144,153				160,177,521				(55,405,809	)			104,915,865
Share-based compensation			-				-				878,866				-				878,866
Issuance of common stock for accrued interest, $0.25 per share			516,460				516				128,599				-				129,115
Issuance of common stock for accrued interest, $0.35 per share			327,900				328				125,103				-				125,431
Issuance of common stock for cash under Common Stock Purchase Agreement, $0.35 per share, net of $22,172 financing costs			9,308,429				9,309				3,238,970				-				3,248,279
Modification of private placement warrants			-				-				41,588				-				41,588
Net loss, December 31, 2015			-				-				-				(27,086,775	)			(27,086,775	)
Balance, December 31, 2015			154,306,537			$	154,306			$	164,590,647			$	(82,492,584	)		$	82,252,369

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

SEARCHLIGHT MINERALS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the year ended
		December 31, 2015				December 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(27,086,775	)		$	(18,513,603	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			1,420,595				1,511,768
Stock based compensation			878,866				2,229,233
Stock based expenses			41,588				843,580
(Gain) loss on asset dispositions and impairment			(2,548	)			18,140,349
Amortization of prepaid expense			341,141				394,754
Amortization of debt financing fees and debt discount			262,233				242,709
Deferred income taxes			20,677,458				(9,775,503	)
Change in fair value of derivative liabilities			(574,942	)			381,336
Loss on interest settled in shares			10,666				19,005
Accounts payable settlement			(378,136	)			-
Changes in operating assets and liabilities:
Prepaid expenses			(353,252	)			(332,365	)
Reclamation bond and deposits			-				(325	)
Accounts payable and accrued liabilities			1,158,178				1,772,264
Net cash used in operating activities			(3,604,928	)			(3,086,798	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from property and equipment dispositions			457,548				245,943
Purchase of property and equipment			(4,786	)			(64,206	)
Net cash provided by investing activities			452,762				181,737
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance			3,270,451				1,478,500
Stock issuance costs			(22,172	)			(3,287	)
Cash restricted for debt collateral			(227,345	)			-
Proceeds from convertible notes			-				69,000
Payments on VRIC payable - related party			-				(120,000	)
Net cash provided by financing activities			3,020,934				1,424,213
NET CHANGE IN CASH			(131,232	)			(1,480,848	)
CASH AT BEGINNING OF PERIOD			584,976				2,065,824
CASH AT END OF PERIOD		$	453,744			$	584,976
-
SUPPLEMENTAL INFORMATION
Interest paid, net of capitalized amounts		$	47,748			$	157,416
Income taxes paid		$	-			$	-
Non-cash investing and financing activities:
Accounts payable satisfied by contribution of capital - related party		$	-			$	342,427
Accrued salaries and fees satisfied by contribution of capital		$	-			$	511,526
VRIC payable satisfied by contribution of capital - related party		$	-			$	255,000
Common stock issued in satisfaction of accrued interest		$	243,880			$	126,700
Common stock issued in satisfaction of accounts payable - related party		$	-			$	115,018
Derivative liability - convertible debt		$	-			$	9,519

 

See Accompanying Notes to these Consolidated Financial Statements

 

 

1.

DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES

 

Description of business - Searchlight Minerals Corp. (the “Company”) has been in the exploration stage since its formation, and the Company has not yet realized any revenues from its planned operations. The Company is primarily focused on the exploration, acquisition and development of mining and mineral properties. Upon the location of commercially minable reserves, the Company plans to prepare for mineral extraction and enter the development stage.

 

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

 

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

 

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

 

If the Company continues to incur operating losses and does not raise sufficient additional capital, material adverse events may occur including, but not limited to, 1) a reduction in the nature and scope of the Company’s operations and 2) the Company’s inability to fully implement its current business plan. There can be no assurance that the Company will successfully improve its liquidity position. The accompanying consolidated financial statements do not reflect any adjustments that might be required resulting from the adverse outcome relating to this uncertainty.

 

 

1.

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

 

As of December 31, 2015, the Company had cumulative net losses of $82,492,584 from operations and had not commenced its commercial mining and mineral processing operations; rather it is still in the exploration stage. For the year ended December 31, 2015, the Company incurred a net loss of $27,086,775, had negative cash flows from operating activities of $3,604,928 and will incur additional future losses due to planned continued exploration expenses. In addition, the Company had a working capital deficit totaling $5,512,214 at December 31, 2015.

 

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

 

Basis of presentation - The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company’s fiscal year-end is December 31.

 

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

 

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

 

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

 

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

 

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

 

 

1.

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

 

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

 

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

 

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

 

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

 

Deferred financing fees – Deferred financing fees represent fees paid in connection with obtaining debt financing. These fees are amortized using the effective interest method over the term of the financing.

 

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

 

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

 

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

 

 

1.

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

 

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

 

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

 

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

 

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

 

The Company’s financial instruments consist of the VRIC payable (described in Note 9), derivative liabilities and convertible notes (described in Note 7). The VRIC payable and the convertible notes are classified within Level 2 of the fair value hierarchy. The fair value of the VRIC payable approximates carrying value as the imputed interest rate is considered to approximate a market interest rate. The fair value of the convertible notes approximates carrying value as the interest rate is considered to approximate a market interest rate.

 

The Company calculates the fair value of its derivative liabilities using various models which are all Level 3 inputs. The fair value of the derivative warrant liability (described in Note 6) is calculated using the Binomial Lattice model, and the fair value of the derivative liability - convertible notes (described in Note 8) is calculated using a model which incorporates estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The change in fair value of the derivative liabilities is classified in other income (expense) in the consolidated statement of operations. The Company generally does not use derivative financial instruments to hedge exposures to cash flow, market or foreign currency risks.

 

There have been no changes in the valuation techniques used for the derivative liabilities. The Company does not have any non-financial assets or liabilities that it measures at fair value. During the years ended December 31, 2015 and 2014, there were no transfers of assets or liabilities between levels.

 

 

1.

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

 

Per share amounts - Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. Potentially dilutive shares, such as stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as when the exercise price of the instrument exceeds the fair market value of the Company’s common stock and when a net loss is reported. The dilutive effect of convertible debt securities is reflected in the diluted earnings (loss) per share calculation using the if-converted method. Conversion of the debt securities is not assumed for purposes of calculating diluted earnings (loss) per share if the effect is anti-dilutive. 73,189,240 and 60,761,162 stock options, warrants and common shares issuable upon the conversion of notes were outstanding as of December 31, 2015 and 2014, respectively, but were not considered in the computation of diluted earnings per share as their inclusion would be anti-dilutive.

 

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

 

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

 

The Company accounts for stock options issued to non-employees based on the estimated fair value of the awards using the Binomial Lattice option pricing model. The measurement of stock-based compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in the Company’s consolidated statements of operations during the period the related services are rendered.

 

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

 

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

 

 

1.

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

 

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

 

In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from the previous GAAP.  The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. Adoption of the new guidance is not expected to have an impact on the consolidated financial position, results of operations or cash flows.

 

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

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The update is effective in fiscal years, including interim periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

 

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. The new standard requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Adoption of the new guidance is expected to affect only the presentation and disclosures of the Company’s consolidated financial statements.

 

 

1.

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

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which is effective for financial statements issued for interim and annual periods beginning on or after December 15, 2015. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. Adoption of the new guidance is not expected to have an impact on the consolidated financial position, results of operations or cash flows.

 

2.

RESTRICTED CASH

 

At December 31, 2015, restricted cash amounted to $227,345 and consisted of funds designated for debt collateral.

 

3.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		December 31, 2015												December 31, 2014
		Cost				Accumulated Depreciation				Net Book  Value				Cost				Accumulated Depreciation				Net Book Value
Furniture and fixtures		$	38,255			$	(37,963	)		$	292			$	38,255			$	(37,476	)		$	779
Lab equipment			249,061				(249,061	)			-				249,061				(247,356	)			1,705
Computers and equipment			71,407				(61,644	)			9,763				68,558				(54,025	)			14,533
Vehicles			47,675				(46,158	)			1,517				47,675				(45,458	)			2,217
Slag conveyance equipment			300,916				(300,916	)			-				300,916				(300,916	)			-
Demo module building			6,630,063				(4,526,867	)			2,103,196				6,630,063				(3,863,860	)			2,766,203
Grinding circuit			913,679				(21,667	)			892,012				913,679				(11,667	)			902,012
Extraction circuit			938,352				(462,668	)			475,684				938,352				(274,997	)			663,355
Leaching and filtration			1,300,618				(1,300,618	)			-				1,300,618				(1,040,494	)			260,124
Fero-silicate storage			4,326				(2,163	)			2,163				4,326				(1,731	)			2,595
Electrowinning building			1,492,853				(746,426	)			746,427				1,492,853				(597,141	)			895,712
Site improvements			1,677,844				(715,775	)			962,069				1,675,906				(591,259	)			1,084,647
Site equipment			360,454				(353,638	)			6,816				360,454				(338,588	)			21,866
Construction in progress			1,102,014				-				1,102,014				1,102,014				-				1,102,014
		$	15,127,517			$	(8,825,564	)		$	6,301,953			$	15,122,730			$	(7,404,968	)		$	7,717,762

 

Depreciation expense was $1,420,595 and $1,511,768 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015, construction in progress included the gold, copper, and zinc extraction circuits and electrowinning equipment at the Clarkdale Slag Project.

 

The Company rents corporate office space on month-to-month terms from a related party as further discussed in Note 18. Total rent expense was $20,272 and $29,220 for the years ended December 31, 2015 and 2014, respectively.

 

On March 9, 2015, the Company completed the sale of three parcels of land for net proceeds of $457,548 with half of the net proceeds designated for operating purposes and the remaining half designated for debt and is recorded as restricted cash on the consolidated balance sheet.

 

 

4.

CLARKDALE SLAG PROJECT

 

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

 

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

 

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

 

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

 

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

 

The $130.3 million purchase price was comprised of a combination of the cash paid, the deferred tax liability assumed in connection with the acquisition, and the fair value of our common shares issued, based on the closing market price of our common stock, using the average of the high and low prices of our common stock on the closing date of the acquisition. The Clarkdale Slag Project is without known reserves and the project is exploratory in nature in accordance with Industry Guides promulgated by the Commission, Guide 7 paragraph (a)(4)(i). As required by ASC 930-805-30, Mining – Business Combinations – Initial Recognition, and ASC 740-10-25-49-55, Income Taxes – Overall – Recognition – Acquired Temporary Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, the Company then allocated the purchase price among the assets as follows (and also further described in this Note 4 to the financial statements): $5,916,150 of the purchase price was allocated to the slag pile site, $3,300,000 to the remaining land acquired, and $309,750 to income property and improvements. The remaining $120,766,877 of the purchase price was allocated to the Clarkdale Slag Project, which has been capitalized as a tangible asset in accordance with ASC 805-20-55-37, Use Rights. Upon commencement of commercial production, the asset will be amortized using the unit-of-production method over the life of the Clarkdale Slag Project.

 

 

4.

CLARKDALE SLAG PROJECT (continued)

 

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

 

a)

The Company paid $200,000 in cash to VRIC on the execution of a letter agreement;

 

b)

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

 

c)

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

 

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

 

d)

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

 

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

 

e)

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

 

f)

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

 

g)

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

 

Under the original JV Agreement, the Company agreed to pay NMC a 5% royalty on NSR payable from the Company’s 50% joint venture interest in the production from the Clarkdale Slag Project. Upon the assignment to the Company of VRIC’s 50% interest in the Joint Venture Agreement in connection with the reorganization with TI, the Company continues to have an obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project. On July 25, 2011, the Company agreed to pay NMC an advance royalty payment of $15,000 per month effective January 1, 2011. The advance royalty payment is more fully discussed in Note 15.

 

 

4.

CLARKDALE SLAG PROJECT (continued)

 

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

 

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

 

The following table reflects allocation of purchase price to the components of the Clarkdale Slag Project:

 

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

 

The Company agreed to continue to pay VRIC $30,000 per month until the earlier of the Project Funding Date or the tenth anniversary of the date of the execution of the letter agreement. As of December 31, 2015 and 2014, the cumulative interest cost capitalized and included in the Slag Project was $1,107,226 and $1,062,778 respectively.

 

 

4.

CLARKDALE SLAG PROJECT (continued)

 

The following table sets forth the changes to the Clarkdale Slag Project components for the years ended December 31:

 

		2015				2014
Slag Pile, beginning balance		$	121,829,655			$	121,759,811
Capitalized interest costs			44,447				69,844
Slag Pile, ending balance		$	121,874,102			$	121,829,655
Land - smelter site and slag pile		$	5,916,150			$	5,916,150
Land, beginning balance		$	1,696,242			$	3,300,000
Held for sale			-				(1,603,758	)
Land, ending balance		$	1,696,242			$	1,696,242
Income property and improvements, beginning balance		$	-			$	309,750
Assets sold			-				(309,750	)
Income property and improvements,  ending balance		$	-			$	-

 

 

5.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following at December 31:

 

		2015				2014
Trade accounts payable		$	589,657			$	728,021
Accrued compensation and related taxes			435,469				88,293
Accrued interest			126,057				81,637
		$	1,151,183			$	897,951

 

Amounts due to related parties are discussed in Note 18.

 

6.

DERIVATIVE WARRANT LIABILITY

 

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

 

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

 

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

 

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

 

		November 12, 2015				November 11, 2014
Risk-free interest rate			0.51	%			0.14	%
Expected volatility			88.50	%			142.72	%
Expected life (years)			1.0				1.0

 

 

6.     DERIVATIVE WARRANT LIABILITY (continued)

 

As of December 31, 2015, the cumulative adjustment to the warrants was as follows: (i) the exercise price was adjusted from $1.85 per share to $1.27 per share, and (ii) the number of warrants was increased by 2,805,766 warrants. In connection with the financing completed with Luxor Capital Partners, L.P. and its affiliates (“Luxor”) on June 7, 2012, Luxor waived its right to the anti-dilution adjustments on 4,252,883 warrants it holds from the 2009 private placement. Future anti-dilution adjustments were not waived. The adjusted exercise price of those warrants is $1.29 per share. During the year ended December 31, 2015, the warrants increased by 993,332 as a result of dilutive issuances.

 

The total warrants accounted for as a derivative liability were 9,147,029 and 8,153,697 as of December 31, 2015 and 2014, respectively.

 

The following table sets forth the changes in the fair value of derivative liability for the years ended December 31:

 

		2015				2014
Beginning balance		$	-			$	(81,574	)
Adjustment to warrants			-				-
Change in fair value			(53,141	)			81,574
Ending balance		$	(53,141	)		$	-

 

The Company estimates the fair value of the derivative liabilities by using the Binomial Lattice pricing-model, with the following assumptions used for the years ended December 31:

 

			2015				2014
Dividend yield			-				-
Expected volatility			30.46% - 141.15%				29.38% - 153.76%
Risk-free interest rate			0.00% - 0.65%				0.02% - 0.26%
Expected life (years)			0.10 - 0.90				0.10 – 1.0

 

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

 

 

7.

CONVERTIBLE NOTES

 

On September 18, 2013, the Company completed a private placement of secured convertible notes (the “Notes”) resulting in gross proceeds of $4,000,000. At issuance, the Notes were convertible into shares of common stock at $0.40 per share, subject to certain adjustments. The term of the Notes was five years, but the Notes can be demanded by the holders. The Notes bear interest at 7% which is payable semi-annually. The Notes have customary provisions relating to events of default including an increase in the interest rate to 9%. The Notes are secured by a first priority lien on all of the assets of the Company including its subsidiaries. At December 31, 2015, the first priority lien included $227,345 of restricted cash specifically dedicated to debt collateral.

 

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

 

At December 31, 2015, the Notes were convertible into 10,433,333 shares of common stock at $0.39 per share, as adjusted for anti-dilutive provisions and the if-converted value equaled the principal amount of the Notes. Certain embedded features in the Notes were required to be bifurcated and accounted for as a single compound derivative and reported at fair value as discussed in Note 8.

 

At issuance, the fair value of the compound derivative was $1,261,285 and was recorded as both a derivative liability and a debt discount. The debt discount is being amortized to interest expense over the term of the Notes and the derivative liability is carried at fair value until conversion or maturity. The Company incurred $126,446 of financing fees related to the Notes. Such amounts were capitalized and are being amortized to interest expense over the term of the Notes. The carrying value of the convertible debt, net of discount was comprised of the following at December 31:

 

		2015				2014
Convertible notes at face value		$	4,069,000			$	4,000,000
Issuance of additional notes			-				69,000
Unamortized discount			(744,059	)			(981,620	)
Convertible notes, net of discount		$	3,324,941			$	3,087,380

 

Interest expense related to the Notes included the following for the years ended December 31:

 

		2015				2014
Interest rate at 7%		$	284,830			$	281,015
Amortization of debt discount			237,561				219,875
Amortization of deferred financing fees			24,671				22,834
Total interest expense on convertible notes		$	547,062			$	523,724

 

 

8.

DERIVATIVE LIABILITY – CONVERTIBLE NOTES

 

As further discussed in Note 7, the Company has issued $4,069,000 of convertible notes. The Notes are convertible at any time into shares of common stock at $0.39 per share.

 

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

 

1.

The embedded conversion feature includes a provision for the adjustment to the conversion price if the Company issues common stock or common stock equivalents at a price less than the exercise price. Derivative accounting was required for this feature due to this anti-dilution provision.

 

2.

One embedded redemption feature requires the Company to pay 120% of the principal balance due upon a change of control. Derivative accounting was required for this feature as the debt involves a substantial discount, the option is only contingently exercisable and its exercise is not indexed to either an interest rate or credit risk.

 

These two embedded features have been accounted for together as a single compound derivative. The Company estimated the fair value of the compound derivative using a model with estimated probabilities and inputs calculated by the Binomial Lattice model and present values. The assumptions included in the calculations are highly subjective and subject to interpretation. Assumptions used for the years ended December 31, 2015 and 2014 included redemption and conversion estimates/behaviors, estimates regarding future anti-dilutive financing agreements and the following other significant estimates:

 

	2015		2014
Expected volatility	101.46 – 139.57%		96.46 – 117.85%
Risk-free interest rate	0.92 - 1.31%		1.25 – 1.73%
Expected life (years)	2.0 – 2.75		2.5 - 3.0

 

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

 

The following table sets forth the changes in the fair value of the derivative liability for the years ended December 31:

 

		2015				2014
Beginning balance		$	1,218,619			$	755,709
Issuance of convertible debt			-				9,519
Change in fair value			(628,083	)			453,391
Ending balance		$	590,536			$	1,218,619

 

 

9.

VRIC PAYABLE - RELATED PARTY

 

Pursuant to the Clarkdale acquisition agreement, the Company agreed to pay VRIC $30,000 per month until the Project Funding Date. Mr. Harry Crockett was an affiliate of VRIC and served on the Company’s Board of Directors subsequent to the acquisition until he passed away in 2010.

 

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

 

Interest costs related to this obligation were $44,448 and $69,844 for the years ended December 31, 2015 and 2014, respectively. Interest costs incurred have been capitalized and included in the Slag Project. To address liquidity constraints, the Company has deferred payment of the VRIC payable effective May 1, 2014. On December 18, 2014, VRIC relinquished $255,000 of payments due to them. The relinquishment was recorded as a contribution of capital.

 

The following table represents future minimum payments on the VRIC payable for each of the years ending December 31:

 

2016		$	720,000
2017			41,195
Thereafter			-
Total minimum payments			761,195
Less: amount representing interest			(63,051	)
Present value of minimum payments			698,144
VRIC payable, current portion			657,295
VRIC payable, net of current portion		$	40,849

 

The acquisition agreement also contains payment terms which are based on the Project Funding Date as defined in the agreement. The terms and conditions of these payments are discussed in more detail in Notes 4 and 15.

 

 

10.

STOCKHOLDERS’ EQUITY

 

During the year ended December 31, 2015, the Company’s stockholders’ equity activity consisted of the following:

 

a)

On November 12, 2015, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holders, to amend the expiration dates of certain outstanding warrants to purchase up to an aggregate of 16,189,414 shares of the Company’s common stock. The expiration date of the warrants was extended from November 12, 2015 to November 30, 2016. In all other respects, the terms and conditions of the warrants remain the same. The warrants were originally issued in connection with the Company’s February 23, 2007, March 22, 2007, December 26, 2007, February 7, 2008 and November 12, 2009 private placements. The Company calculated the fair value of the warrants at zero.

 

b)

On September 18, 2015, the Company issued 327,900 units as consideration for cancellation of an aggregate of $114,765 of interest payments due on the convertible notes as of September 18, 2015. Each unit consists of one share of the Company’s common stock at $0.35 per share and one share purchase warrant exercisable at $0.50 per share. Such warrants will expire five years from the date of issuance and are considered to be indexed to the Company’s common stock. The Company recognized a loss on the settlement of $10,666. The remaining note holders received interest payments in cash.

 

c)

On July 30, 2015, the Company completed a private placement offering for gross proceeds of $775,400. A total of 2,215,429 units were issued at a price of $0.35. Each unit consists of one share of the Company’s common stock and one share purchase warrant exercisable at $0.50 per share. Such warrants will expire five years from the date of issuance and are considered to be indexed to the Company’s common stock. Financing fees related to this placement were $9,468.

 

d)

On May 21, 2015, the Company completed a private placement offering for gross proceeds of $995,050. A total of 2,843,000 units were issued at a price of $0.35. Each unit consists of one share of the Company’s common stock and one share purchase warrant exercisable at $0.50 per share. Such warrants will expire five years from the date of issuance and are considered to be indexed to the Company’s common stock. Financing fees related to this placement were $12,704.

 

e)

On April 20, 2015, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holders, to amend the expiration dates of certain outstanding warrants to purchase up to an aggregate of 3,000,000 shares of the Company’s common stock. The expiration date of the warrants was extended from June 1, 2015 to June 1, 2017. In all other respects, the terms and conditions of the warrants remain the same. The warrants were originally issued in connection with the Company’s June 1, 2005 private placement. Related to this amendment, an expense of $41,588 was recorded and included in general and administrative expense.

 

f)

On March 25, 2015, the Company completed a private placement offering for gross proceeds of $1,500,000 with Luxor. A total of 4,250,000 units will be issued at a price of $0.3529. Each unit consists of one share of the Company’s common stock and one share purchase warrant exercisable at $0.50 per share. Such warrants will expire five years from the date of issuance and are considered to be indexed to the Company’s common stock.

 

 

10.

STOCKHOLDERS’ EQUITY (continued)

 

g)

On March 18, 2015, the Company issued 516,460 shares of common stock at a price of $0.25 per share to certain convertible note holders as consideration for cancellation of an aggregate of $129,115 of interest payments due on the convertible notes as of March 18, 2015. The remaining note holders received interest payments in cash.

 

During the year ended December 31, 2014, the Company’s stockholders’ equity activity consisted of the following:

 

a)

On December 23, 2014, the Board of Directors approved of entering into an exchange agreement with Cupit, Milligan, Ogden and Williams (“CMOW”) which provided for issuance of 359,430 shares of the Company’s common stock directly to Mr. Williams for the balance due to CMOW of $115,018 as of November 30, 2014. The price of $0.32 per share used in the exchange was the closing market price of the Company’s common stock on the agreement date. CMOW is a related party as further discussed in Note 18.

 

b)

On December 23, 2014, the Company granted warrants for the purchase of 2,041,000 and 1,940,000 shares of common stock at $0.50 per share to VRIC and NMC, respectively. The warrants were granted in part to incentivize their continued support of the Company. The warrants expire on December 23, 2019. The warrants are considered indexed to the Company’s common stock and are classified as equity. The fair value of the warrants was calculated by the binomial lattice model and amounted to $720,840. VRIC and NMC are related parties as further discussed in Note 18.

 

c)

On December 18, 2014, due to liquidity needs, certain of the Company’s officers, directors, employees, consultants and affiliates voluntarily agreed to relinquish certain accrued salary, directors’ fees, invoices and other amounts due to them as of December 15, 2014 in the aggregate total of $1,008,953. The relinquishments were recorded as contributions of capital. The relinquishments involved certain related parties as more fully described in Notes 10 and 18.

 

d)

On December 8, 2014, the Company completed a private placement offering for gross proceeds of $599,500. A total of 2,997,500 units were issued at a price of $0.20. Each unit consisted of one share of the Company’s common stock and one-half of one share purchase warrant where each full warrant entitles the holder to purchase one share of the Company’s common stock at an exercise price of $0.30 per share. Such warrants expire five years from the date of issuance. The warrants are considered indexed to the Company’s common stock and are classified as equity.

 

Total financing fees related to the October and December 2014 private placements amounted to $3,287.

 

e)

On November 11, 2014, the Company granted warrants for the purchase of 1,000,000 shares of common stock at $0.30 per share to NMC. The warrants were granted for investor relations. The warrants are fully vested and expire on November 11, 2019. The fair value of the warrants was calculated by the binomial lattice model and amounted to $108,877. The warrants are considered indexed to the Company’s common stock and are classified as equity. NMC is a related party as more fully described in Note 18.

 

 

10.

STOCKHOLDERS’ EQUITY (continued)

 

f)

On November 11, 2014, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holders, to amend the expiration dates of certain outstanding warrants to purchase up to an aggregate of 14,520,373 shares of the Company’s common stock. The expiration date of the warrants was extended from November 12, 2014 to November 12, 2015. In all other respects, the terms and conditions of the warrants remain the same. The warrants were originally issued in connection with the Company’s February 23, 2007, March 22, 2007, December 26, 2007, February 7, 2008 and November 12, 2009 private placements. The Company calculated the fair value of the warrants at zero.

 

h)

On November 11, 2014, the Company’s Board of Directors unilaterally determined, without any negotiations with the warrant holder, to amend the expiration date of 1,000,000 warrants issued in June 1, 2005. The expiration date of the warrants was extended from June 1, 2015 to June 1, 2017. The modification resulted in additional expense of $13,863.

 

i)

On October 24, 2014, the Company completed a private placement offering for gross proceeds of $1,005,700. A total of 5,028,500 units were issued at a price of $0.20. Each unit consisted of one share of the Company’s common stock and one-half of one share purchase warrant where each full warrant entitles the holder to purchase one share of the Company’s common stock at an exercise price of $0.30 per share. Such warrants will expire five years from the date of issuance. The warrants are considered indexed to the Company’s common stock and are classified as equity. 4,395,000 units were sold for gross proceeds of $879,000 and 633,500 units were issued to convertible note holders in consideration of cancellation of an aggregate of $126,700 of interest payments due on the convertible notes as of September 18, 2014.

 

Luxor was issued 455,000 units as consideration of cancellation of $91,000 of interest payments due on the convertible notes as of September 18, 2014. In addition, Mr. Martin Oring, one of the Company’s directors, and Chief Executive Officer and President, and certain of his affiliates, purchased 500,000 units for gross proceeds of $100,000, and was issued 41,125 units as consideration of cancellation of $8,225 of interest payments due on the convertible notes as of September 18, 2014.

 

j)

On October 1, 2014 and on September 1, 2014, NMC contributed $50,000, respectively, of capital to the Company for payment of invoices from a consulting firm for metallurgical services. NMC is a related party as more fully described in Note 18.

 

 

10.

STOCKHOLDERS’ EQUITY (continued)

 

The following summarizes the exercise price per share and expiration date of the Company’s outstanding warrants issued to investors and vendors to purchase common stock at December 31, 2015:

 

Shares Underlying Outstanding Warrants				Exercise Price				Expiration Date
	1,000,000			$	0.375			June 2016
	3,410,526				1.27			November 2016
	5,736,501				1.29			November 2016
	7,042,387				1.85			November 2016
	3,000,000				0.375			June 2017
	316,752				0.30			September 2019
	2,197,496				0.30			October 2019
	1,000,000				0.30			November 2019
	1,498,750				0.30			December 2019
	3,981,000				0.50			December 2019
	4,250,000				0.50			March 2020
	2,843,000				0.50			May 2020
	2,215,429				0.50			July 2020
	327,900				0.50			September 2020
	38,819,741

 

 

11.

STOCK-BASED COMPENSATION

 

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

 

Stock option plans - The Company has adopted several stock option plans, all of which have been approved by the Company’s stockholders that authorize the granting of stock option awards subject to certain conditions. At December 31, 2015, the Company had 5,371,576 of its common shares available for issuance for stock option awards under the Company’s stock option plans.

 

At December 31, 2015, the Company had the following stock option plans available:

 

·

2009 Incentive Plan – The terms of the 2009 Incentive Plan, as amended, allow for up to 7,250,000 options to be issued to eligible participants. Under the plan, the exercise price is generally equal to the fair market value of the Company’s common stock on the grant date and the maximum term of the options is generally ten years. No participants shall receive more than 500,000 options under this plan in any one calendar year. For grantees who own more than 10% of the Company’s common stock on the grant date, the exercise price may not be less than 110% of the fair market value on the grant date and the term is limited to five years. The plan was approved by the Company’s stockholders on December 15, 2009 and the amendment was approved by the Company’s stockholders on May 8, 2012. As of December 31, 2015, the Company had granted 3,437,500 options under the 2009 Incentive Plan with a weighted average exercise price of $0.68 per share, of which, 3,397,500 were outstanding. At December 31, 2015, options available for issuance under this plan amounted to 3,812,500.

 

·

2009 Directors Plan - The terms of the 2009 Directors Plan, as amended, allow for up to 2,750,000 options to be issued to eligible participants. Under the plan, the exercise price may not be less than 100% of the fair market value of the Company’s common stock on the grant date and the term may not exceed ten years. No participants shall receive more than 250,000 options under this plan in any one calendar year. The plan was approved by the Company’s stockholders on December 15, 2009 and the amendment was approved by the Company’s stockholders on May 8, 2012. As of December 31, 2015, the Company had granted 2,238,877 options under the 2009 Directors Plan with a weighted average exercise price of $0.68 per share, of which 2,177,627 were outstanding. As of December 31, 2015, options available for issuance under this plan amounted to 511,123.

 

·

2007 Plan - Under the terms of the 2007 Plan, options to purchase up to 4,000,000 shares of common stock may be granted to eligible participants. Under the plan, the option price for incentive stock options is the fair market value of the stock on the grant date and the option price for non-qualified stock options shall be no less than 85% of the fair market value of the stock on the grant date. The maximum term of the options under the plan is ten years from the grant date. The 2007 Plan was approved by the Company’s stockholders on June 15, 2007. As of December 31, 2015, the Company had granted 2,952,047 options under the 2007 Plan with a weighted average exercise price of $0.61 per share, of which 2,750,321 were outstanding. As of December 31, 2015, options available for issuance under this plan amounted to 1,047,953.

 

As of December 31, 2015, the Company had granted 15,610,714 options and warrants outside of the aforementioned stock option plans with a weighted average exercise price of $0.48 per share. As of December 31, 2015, all of the options and warrants granted were outstanding.

 

 

11.

STOCK-BASED COMPENSATION (continued)

 

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

 

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

 

Valuation of awards – At December 31, 2015, the Company had options outstanding that vest on two different types of vesting schedules, service-based and performance-based. For both service-based and performance-based stock option grants, the Company estimates the fair value of stock-based compensation awards by using the Binomial Lattice option pricing model with the following assumptions used for the years ended December 31:

 

		2015		2014
Risk-free interest rate		0.24% - 1.76%		0.39% - 1.76%
Dividend yield		-		-
Expected volatility		91.23% - 123.12%		98.65% - 118.15%
Suboptimal exercise factor		2.00		2.50
Expected life (years)		1.00 - 4.10		2.00 - 4.25

 

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

 

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

 

 

11.

STOCK-BASED COMPENSATION (continued)

 

Stock-based compensation activity – During the year ended December 31, 2015, the Company granted stock-based awards as follows:

 

a)

On December 31, 2015, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.11 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on December 31, 2020. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

b)

On September 30, 2015, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.22 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on September 30, 2020. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

c)

On August 28, 2015, the Company granted stock options for the purchase of 3,804,000 shares of common stock at an exercise price of $0.50 per share. The options were granted to certain officers, directors, employees and consultants, are fully vested and expire on December 19, 2020.

 

d)

On August 28, 2015, the Company granted warrants for the purchase of 2,591,714 shares of common stock at an exercise price of $0.50 per share. The warrants were granted to three of the Company’s consultants for services provided, are fully vested and expire on August 28, 2020.

 

e)

On June 30, 2015, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.25 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on June 30, 2020. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

f)

On March 31, 2015, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.33 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on March 31, 2020. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

g)

On March 23, 2015, the Company’s Board of Directors unilaterally determined to amend 659,890 stock options by extending their expiration dates. The options were granted at various dates between October 6, 2008 and December 31, 2010 and have a weighted average exercise price of $0.83 per share. The expiration dates of all of the options were extended by twelve months. In all other respects, the terms and conditions of the extended options remain the same. The modification resulted in additional expense of $31,544.

 

During the year ended December 31, 2014, the Company granted stock-based awards as follows:

 

a)

On December 31, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.30 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on December 31, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

 

11.

STOCK-BASED COMPENSATION (continued)

 

b)

On December 23, 2014, the Company granted stock options for the purchase of 4,099,000 shares of common stock at $0.50 per share. The options were granted to certain of the Company’s directors, executive officers and employees for compensation, are fully vested and expire on December 23, 2019. The exercise price of the stock options exceeded the closing price of the Company’s common stock for the grant date.

 

c)

On December 18, 2014, the Company granted stock options for the purchase of 7,965,000 shares of common stock at $0.41 per share. 4,734,000 of the options were granted under stock option plans. The options were granted to certain of the Company’s directors, executive officers and employees for compensation, are fully vested and expire on December 18, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

d)

On December 18, 2014, the Company granted stock options for the purchase of 225,000 shares of common stock at $0.41 per share. The options were granted to consultants for compensation, are fully vested and expire on December 18, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

e)

On December 18, 2014, the Company granted stock warrants for the purchase of 200,000 shares of common stock at $0.41 per share. The warrants were granted to a consultant for compensation, are fully vested and expire on December 18, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

f)

On November 19, 2014, the Company granted stock warrants for the purchase of 975,000 shares of common stock at $0.30 per share. The warrants were granted to consultants for compensation, are fully vested and expire on November 19, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

g)

On September 30, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.22 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on September 30, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

h)

On June 30, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.24 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on June 30, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

i)

On March 31, 2014, the Company granted stock options under the 2009 Directors Plan for the purchase of 54,000 shares of common stock at $0.26 per share. The options were granted to three of the Company’s non-management directors for directors’ compensation, are fully vested and expire on March 31, 2019. The exercise price of the stock options equaled the closing price of the Company’s common stock for the grant date.

 

j)

On January 13, 2014, the Company extended the expiration date of 200,000 warrants issued to a consultant. The expiration date was extended from January 13, 2014 to January 13, 2016. All other terms were unchanged. The modification resulted in additional expense of $5,011.

 

 

11.

STOCK-BASED COMPENSATION (continued)

 

Expenses related to the vesting, modifying and granting of stock-based compensation awards were $878,866 and $2,229,233 for the years ended December 31, 2015 and 2014, respectively. Such expenses have been included in general and administrative and mineral exploration and evaluation expense.

 

The following table summarizes the Company’s stock-based compensation activity for the years ended December 31, 2015 and 2014:

 

		Number of Shares				Weighted Average Grant   Date Fair Value				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)				Aggregate Intrinsic Value
Outstanding, December 31, 2013			3,800,331			$	0.56			$	1.01				3.76
Options/warrants granted			13,680,000				0.16				0.43				4.96
Options/warrants expired			(92,586	)			0.76				1.42
Options/warrants exercised			-				-				-				-
Outstanding, December 31, 2014			17,387,745				0.24				0.55				4.53
Options/warrants granted			6,611,714				0.13				0.49				4.84
Options/warrants expired			(63,297	)			0.25				0.76				-
Options/warrants exercised			-				-				-				-
Outstanding, December 31, 2015			23,936,162			$	0.21			$	0.53				3.88			$	-
Exercisable, December 31, 2015			23,636,162			$	0.20			$	0.52				3.89			$	-

  

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the year ended December 31, 2015 in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable.

 

Unvested awards - The following table summarizes the changes of the Company’s stock-based compensation awards subject to vesting for the year ended December 31, 2015:

 

		Number of Shares Subject to Vesting				Weighted Average Grant Date Fair Value
Unvested, December 31, 2014			350,000			$	0.93
Options/warrants granted			3,804,000				0.13
Options/warrants vested			(3,854,000	)			0.13
Unvested, December 31, 2015			300,000			$	0.99

 

For the years ended December 31, 2015 and 2014, the total grant fair value of shares vested was $515,152 and $102,439, respectively. As of December 31, 2015, there was $3,475 of total unrecognized compensation cost related to unvested stock-based compensation awards. The weighted average period over which the related expense will be recognized was 0.92 years as of December 31, 2015. Included in the total of unvested stock options at December 31, 2015, was 250,000 performance-based stock options. At December 31, 2015, management determined that achievement of the performance targets was probable. The weighted average period over which they are estimated to vest was one year as of December 31, 2015.

 

 

12.

STOCKHOLDER RIGHTS AGREEMENT

 

The Company adopted a Stockholder Rights Agreement (the “Rights Agreement”) in August 2009 to protect stockholders from attempts to acquire control of the Company in a manner in which the Company’s Board of Directors determines is not in the best interest of the Company or its stockholders.  Under the agreement, each currently outstanding share of the Company’s common stock includes, and each newly issued share will include, a common share purchase right.  The rights are attached to and trade with the shares of common stock and generally are not exercisable.  The rights will become exercisable if a person or group acquires, or announces an intention to acquire, 15% or more of the Company’s outstanding common stock. The Rights Agreement was not adopted in response to any specific effort to acquire control of the Company.  The issuance of rights had no dilutive effect, did not affect the Company’s reported earnings per share and was not taxable to the Company or its stockholders. 

 

The Company has agreed to waive the 15% limitation currently in the Rights Agreements with respect to Luxor, and to allow Luxor to become the beneficial owners of up to 26% of the Company’s common stock, without being deemed to be an “acquiring person” under the Rights Agreement.

 

13.

PROPERTY RENTAL AGREEMENTS AND LEASES

 

The Company, through its subsidiary CML, has the following rental agreement as lessor:

 

Clarkdale Arizona Central Railroad – rental – CML rents land to Clarkdale Arizona Central Railroad on month-to-month terms at $1,700 per month.

 

14.

INCOME TAXES

 

The Company is a Nevada corporation and is subject to federal, Arizona income taxes. Nevada does not impose a corporate income tax.

 

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

 

		2015				2014
Deferred income tax assets:
Net operating loss carryforward		$	20,133,546			$	18,520,488
Option compensation			1,779,327				1,451,484
Property, plant & equipment			1,523,674				1,264,961
Gross deferred income tax assets			23,436,547				21,236,933
Less: valuation allowance			(23,436,547	)			(480,288	)
Net deferred income tax assets			-				20,756,645
Deferred income tax liabilities:
Acquisition related liabilities			(48,224,926	)			(48,304,113	)
Net deferred income tax liability		$	(48,224,926	)		$	(27,547,468	)

 

 

14.

INCOME TAXES (continued)

 

The realizability of deferred tax assets are reviewed at each balance sheet date. During the year ended December 31, 2015, the Company had a change in judgment regarding the need for a full valuation allowance on all of the beginning-of-year and current year deferred tax assets arising from federal and state net operating loss carryforwards, property, plant and equipment and stock based compensation. The change in judgment with respect to the application of the valuation allowance resulted from delays in receiving third party validation of the Company’s production process and as such, the Company’s timeline to production remains uncertain. The valuation allowance recorded on the beginning-of-year deferred tax assets was $20,756,645.

 

The Company’s deferred tax liabilities are related to depletable assets. Deferred income tax liabilities were recorded on GAAP basis over income tax basis using statutory federal and state rates with the corresponding increase in the purchase price allocation to the assets acquired. The resulting estimated future federal and state income tax liabilities associated with the temporary difference between the acquisition consideration and the tax basis are reflected as an increase to the total purchase price which has been applied to the underlying mineral and slag project assets in the absence of there being a goodwill component associated with the acquisition transactions.

 

A reconciliation of the deferred income tax (expense) benefit for the years ended at U.S. federal and state income tax rates to the actual tax provision recorded in the financial statements consisted of the following components for the years ended December 31:

 

		2015				2014
Deferred tax benefit at statutory rates		$	2,243,261			$	9,901,187
State deferred tax benefit, net of federal benefit			192,280				848,673
Increase (decrease) in deferred tax benefit from:
Change in valuation allowance			(22,956,259	)			252,999
Change in state NOL’s			(238,122	)			(191,495	)
Gain (loss) on the change in fair value of derivative liabilities			218,478				(131,595	)
Other permanent differences			(137,096	)			(904,266	)
Deferred income tax (expense) benefit		$	(20,677,458	)		$	9,775,503

 

The Company had cumulative net operating losses of $55,099,095 as of December 31, 2015 for federal income tax purposes. The federal net operating loss carryforwards will expire between 2025 and 2035.

 

State income tax allocation - The Company had cumulative net operating losses of $21,580,786 as of December 31, 2015 for state income tax purposes. The state net operating loss carryforwards expire at various dates through 2035.

 

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

 

 

15.

COMMITMENTS AND CONTINGENCIES

 

Severance agreements – The Company has severance agreements with two executive officers that provide for various payments if the officer’s employment agreement is terminated by the Company, other than for cause. At December 31, 2015, the total potential liability for severance agreements was $112,500.

 

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

 

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

 

a)

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

 

b)

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

 

c)

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

 

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

 

 

15.

COMMITMENTS AND CONTINGENCIES (continued)

 

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

 

Total advance royalty fees were $180,000 for the years ended December 31, 2015 and 2014. Advanced royalty fees have been included in mineral exploration and evaluation expenses – related party on the statements of operations.

 

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

 

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

 

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

 

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

 

 

15.

COMMITMENTS AND CONTINGENCIES (continued)

 

Registration Rights Agreement - In connection with the September 18, 2013 convertible notes issuance, the Company entered into a RRA with the investors. Pursuant to the RRA, the Company agreed to file a registration statement covering the resale of the shares of common stock issuable upon conversion of the notes and the additional notes allowed for under the agreement. Pursuant to the RRA, the Company agreed to certain demand registration rights. These rights include the requirement that the Company file certain registration statements within a specified time period and to have these registration statements declared effective within a specified time period. The Company also agreed to file and keep continuously effective such additional registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume restrictions. The Purchasers will also be granted piggyback registration rights with respect to such shares. If the Company is not able to comply with these registration requirements, the Company will be required to pay cash penalties equal to 1.0% of the purchase price. The maximum penalty is equal to 3.0% of the purchase price which amounts to $120,000 for the convertible notes and $18,000 for the additional notes. As of the date of this filing, the Company does not believe the penalty to be probable and accordingly, no liability has been accrued.

 

16.

CONCENTRATION OF CREDIT RISK

 

The Company maintains its cash accounts in financial institutions. Cash accounts at these financial institutions are insured by the Federal Deposit Insurance Corporation (the “FDIC”) for up to $250,000 per institution. The Company has never experienced a material loss or lack of access to its cash accounts; however, no assurance can be provided that access to the Company’s cash accounts will not be impacted by adverse conditions in the financial markets. At December 31, 2015, the Company had $91,355 of deposits in excess of FDIC insured limits.

 

17.

CONCENTRATION OF ACTIVITY

 

The Company currently utilizes a mining and environmental firm to perform significant portions of its mineral property and metallurgical exploration work programs. A change in the lead mining and environmental firm could cause a delay in the progress of the Company’s exploration programs and would cause the Company to incur significant transition expense and may affect operating results adversely.

 

18.

RELATED PARTY TRANSACTIONS

 

NMC - The Company utilizes the services of NMC to provide technical assistance and financing related activities. In addition, NMC provides the Company with use of its laboratory, instrumentation, milling equipment and research facilities. One of the Company’s executive officers, Mr. Ager, is affiliated with NMC. The Company and NMC agreed to an advance royalty of $15,000 per month and to reimburse NMC for actual expenses incurred and consulting services provided.

 

The Company has an existing obligation to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project. The royalty agreement and advance royalty payments are more fully discussed in Note 15.

 

 

18.

RELATED PARTY TRANSACTIONS (continued)

 

The following table provides details of transactions between the Company and NMC for the years ended December 31:

 

		2015				2014
Reimbursement of expenses		$	360			$	7,008
Consulting services provided			45,000				120,400
Advance royalty payments			180,000				180,000
Mineral and exploration expense – related party		$	225,360			$	307,408

 

During the year ended December 31, 2014, NMC paid $100,000 of the Company’s expenses. In addition, on December 18, 2014, NMC relinquished $242,428 of amounts due to them. Such amounts were recorded as contributions to capital. The Company had outstanding balances due to NMC of $188,725 and $13,365 at December 31, 2015 and 2014, respectively.

 

On December 23, 2014, the Company granted warrants for the purchase of 1,940,000 shares of common stock at $0.50 per share to NMC. The warrants were granted in part to incentivize their continued efforts and support of the Company. The warrants expire on December 23, 2019. The fair value of the warrants was calculated by the binomial lattice model and amounted to $351,276.

 

On November 11, 2014, the Company granted warrants for the purchase of 1,000,000 shares of common stock at $0.30 per share to NMC. The warrants were granted for investor relations. The warrants are fully vested and expire on November 11, 2019. The fair value of the warrants was calculated by the binomial lattice model and amounted to $108,877.

 

Cupit, Milligan, Ogden & Williams, CPAs - The Company utilizes CMOW to provide accounting support services. CMOW is an affiliate of the Company’s CFO, Mr. Williams. Fees for services provided by CMOW do not include any charges for Mr. Williams’ time. Mr. Williams is compensated for his time under his employment agreement.

 

The following table provides details of transactions between the Company and CMOW and the direct benefit to Mr. Williams for the years ended December 31:

 

		2015				2014
Accounting support services		$	175,283			$	145,875
Direct benefit to CFO		$	59,596			$	42,304

 

On December 23, 2014, the Board of Directors approved of entering into an exchange agreement with CMOW which provided for issuance of 359,430 shares of the Company’s common stock directly to Mr. Williams for the balance due to CMOW of $115,018 as of November 30, 2014. The price of $0.32 per share used in the exchange was the closing market price of the Company’s common stock on the agreement date. The Company had an outstanding balance due to CMOW of $158,457 and $8,174 as of December 31, 2015 and 2014, respectively.

 

 

18.

RELATED PARTY TRANSACTIONS (continued)

 

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

 

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

 

Total rent expense incurred to Ireland was $20,272 and $29,220 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015, $1,734 was due to Ireland. No amounts were due as of December 31, 2014.

 

19.

SUBSEQUENT EVENTS

 

Conversion of Convertible Notes - Luxor, on behalf of itself and certain of its affiliates (collectively, the “Luxor Group”), demanded repayment from the Company, of all of the outstanding principal and interest owing on the Luxor Group’s Secured Convertible Promissory Notes, each dated September 18, 2013 (the “Luxor Notes”). Lacking sufficient funds to make such repayments, the Company agreed, pursuant to an Amendment to Secured Convertible Promissory Note, dated September 18, 2013, to allow the Luxor Group to convert all of the outstanding principal amount and accrued but unpaid interest owing on the Luxor Notes into shares of the Company’s Common Stock, at a rate of $0.035 per share. In the aggregate, the Luxor Group converted $2,600,000 owing on the Luxor Notes and $91,000 of interest owing on the Luxor Notes in exchange for 76,885,714 shares of the Company’s Common Stock. The Company has subsequently cancelled the Luxor Notes.

 

Also on March 18, 2016, Martin Oring, one of our directors and our Chief Executive Officer, and members of his family, pursuant to Amendments to Convertible Promissory Notes, dated March 18, 2016, provided us with Conversion Notices whereby they elected to convert all of the principal and accrued but unpaid interest owing on their Secured Convertible Promissory Notes, each dated September 18, 2013 (the “Oring Notes” and together with the Luxor Notes, the “Notes”), into shares of the Company’s Common Stock at a rate of $0.035 per share. In the aggregate, Mr. Oring and his family members converted $428,491 owing on such notes in exchange for 12,242,600 shares of the Company’s Common Stock. The Company has subsequently cancelled the Oring Notes.

 

Private Placement – On March 18, 2016, the Company also agreed to sell to the Luxor Group, pursuant to a Common Stock Purchase Agreement, $1,500,000 of the Company’s Common Stock at a rate of $0.035 per share, totaling 42,857,143 shares.

 

The Luxor Group has agreed, as a condition of the Offering, that all of its 12,128,708 currently owned warrants shall not be exercisable until at least September 18, 2016.

 

In addition, in connection with the Offering, the Board of Directors agreed to further waive all of the existing limitations under the Rights Agreement, dated August 24, 2009, so that the Luxor Group would not be deemed an “acquiring person” under the Rights Agreement under any circumstance.

 

 

 

19.

SUBSEQUENT EVENTS (continued)

 

Amendment to Certain Outstanding Common Stock Purchase Warrants - On March 17, 2016, the Board of Directors approved an amendment to the expiration dates of certain outstanding warrants to purchase up to an aggregate of 16,189,414 shares of the Company’s common stock. Prior to the amendment, these warrants were set to expire on November 30, 2016. After the amendment, these warrants are now set to expire on November 30, 2017. The terms and conditions of these warrants remain the same in all other respects. These warrants were originally issued in connection with the Company’s February 23, 2007, March 22, 2007, December 26, 2007, February 7, 2008 and November 12, 2009 private placements. The modification resulted in additional expense of $40,250.

 

Amendment to Certain Outstanding Stock Options – On March 17, 2016, the Company’s Board of Directors unilaterally determined to amend 1,428,748 stock options by extending their expiration dates. The options were granted at various dates between October 6, 2008 and December 31, 2011 and have a weighted average exercise price of $0.98 per share. The expiration dates of all of the options were extended by twelve months. In all other respects, the terms and conditions of the extended options remain the same. The modification resulted in additional expense of $8,813.

 

Increase in Authorized Shares of Common Stock - The Board of Directors has authorized, subject to stockholder approval, certain amendments to our Articles of Incorporation and Amended and Restated Bylaws that, among other things, would increase the number of authorized shares of the Company’s capital stock.

 

  

Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

Item 9A.        Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with this Annual Report on Form 10-K for the year ended December 31, 2015, our management, with the participation of principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.

 

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015, such disclosure controls and procedures were effective at a reasonable level of assurance to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

·

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

 

·

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

 

·

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

 

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.

 

We are a smaller reporting company under the Rule 12b-2 of the Exchange Act. Therefore, this Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to certain rules of the Securities and Exchange Commission that permit us to provide only management’s report in the Report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2015 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9B.        Other Information

 

Not applicable.

 

PART III

 

Item 10.         Directors, Executive Officers and Corporate Governance

 

General

 

Our bylaws provide that the terms of office of the members of our board of directors be divided into three classes, Class I, Class II and Class III, the members of which serve for a staggered three-year term. The terms of the current Class I, Class II and Class III directors are set to expire at the next annual meeting of stockholders for the 2016, 2015 and 2017 years, respectively. At each annual meeting of stockholders, directors chosen to succeed those whose terms then expire are elected for a term of office expiring at the third succeeding annual meeting of stockholders after their election or until their successors are elected and qualify, subject to their prior death, resignation or removal. Our board presently consists of six directors. Two directors serve in each class of directors. None of our directors or executive officers is related to one another.

 

Our board members are encouraged to attend meetings of the board of directors and the annual meeting of stockholders. The board of directors held 14 meetings 2015. Officers serve at the discretion of the board of directors.

 

 

The following table sets forth certain biographical information with respect to our directors and executive officers:

 

Name		Position		Age
Martin B. Oring		Director (Class III), Chairman of the board, Chief Executive Officer and President		69
Carl S. Ager		Director (Class II), Vice President, Secretary and Treasurer		40
John E. Mack		Director (Class II)		67
Michael W. Conboy		Director (Class I)		39
Jordan M. Estra		Director (Class I)		67
Melvin L. Williams		Chief Financial Officer		54

 

Martin B. Oring, Director, Chairman of the Board, President and Chief Executive Officer. Mr. Oring has been a member of our board of directors since October 6, 2008 and our Chairman of the board, President and Chief Executive Officer since October 1, 2010. Mr. Oring has been a member of Eos Petro, Inc. since October 12, 2012, and its Chief Executive Officer since June 23, 2013. Mr. Oring, a senior financial/planning executive, has served as the President of Wealth Preservation, LLC, a financial advisory firm that serves high-net-worth individuals, since 2001. Since the founding of Wealth Preservation, LLC in 2001, Mr. Oring has completed the financial engineering, structuring, and implementation of over $1 billion of proprietary tax and estate planning products in the capital markets and insurance areas for wealthy individuals and corporations. From 1998 until 2001, Mr. Oring served as Managing Director, Executive Services at Prudential Securities, Inc., where he was responsible for advice, planning and execution of capital market and insurance products for high-net-worth individuals and corporations. From 1996 to 1998, he served as Managing Director, Capital Markets, during which time he managed Prudential Securities’ capital market effort for large and medium-sized financial institutions. From 1989 until 1996, he managed the Debt and Capital Management group at The Chase Manhattan Corporation as Manager of Capital Planning (Treasury). Prior to joining Chase Manhattan, he spent approximately eighteen years in a variety of management positions with Mobil Corporation, one of the world’s leading energy companies. When he left Mobil in 1986, he was Manager, Capital Markets & Investment Banking (Treasury). Mr. Oring is also currently a director and chief executive officer of PetroHunter Energy Corporation, and was previously a director of Parallel Petroleum Corporation, each of which is a publicly traded oil and gas exploration and production company. He also served as a director of Falcon Oil & Gas Australia Limited, a subsidiary of Falcon Oil & Gas Ltd., an international oil and gas exploration and production company, headquartered in Dublin, Ireland, which trades on the TSX Venture Exchange. Mr. Oring has served as a Lecturer at Lehigh University, the New York Institute of Technology, New York University, Xerox Corporation, Salomon Brothers, Merrill Lynch, numerous Advanced Management Seminars, and numerous in-house management courses for a variety of corporations and organizations. He has an MBA Degree in Production Management, Finance and Marketing from the Graduate School of Business at Columbia University, and a B.S. Degree in Mechanical Engineering from Carnegie Institute of Technology. As a financial planner and an executive with experience in banking and finance, we believe that Mr. Oring contributes his leadership skills, knowledge and finance background, and business experience to our board of directors. In addition, we believe that Mr. Oring’s membership on our board of directors helps to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

 

Carl S. Ager, Director, Vice President, Secretary and Treasurer. Mr. Ager has been a member of our board of directors since July 25, 2005 and our Vice President, Secretary and Treasurer since October 7, 2005. In 1997, Mr. Ager obtained his Bachelor of Applied Sciences – Engineering Geophysics degree from Queen’s University in Kingston, Ontario. Since January, 2003, Mr. Ager has been President of CSA Management Corp, a private Nevada corporation which provides consulting services, including business planning and administration. However, CSA has not had active operations since 2005. Mr. Ager also served as Vice President and a director of Nanominerals from June 2003 until June 2007. Prior to joining Nanominerals and CSA Management, Mr. Ager’s experience included working as an investment executive for Scotia McLeod, one of Canada’s leading full-service brokerage firms (2000-2002). As an engineer and an executive with experience in working with natural resource companies, we believe that Mr. Ager contributes his leadership skills, knowledge, finance and technology background, and business experience to our board of directors. In addition, we believe that Mr. Ager’s membership on our board of directors helps to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

John E. Mack, Director. Mr. Mack has over 35 years of international banking and financial business management experience. From November 2002 through September 2005, Mr. Mack served as Senior Managing Executive Officer and Chief Financial Officer of Shinsei Bank, Limited in Tokyo, Japan. Prior to joining Shinsei Bank and for more than twenty-five years Mr. Mack served in senior management positions at Bank of America and its predecessor companies, including twelve years as Corporate Treasurer. Since 2006, Mr. Mack has been retired and has served as a director in several companies. Mr. Mack is a member of the Board of Directors of Flowers National Bank, Incapital Holdings LLC and Medley Capital Corporation, and is Vice-Chairman and a director of Islandsbanki hf located in Reykjavik, Iceland.  Mr. Mack holds an MBA from the University of Virginia Darden School of Business and received his bachelor's degree in economics from Davidson College. Mr. Mack is a “Financial Expert” in accordance with SEC and exchange listing Audit Committee requirements. In determining Mr. Mack’s qualifications to serve on our Board of Directors, the Board has considered, among other things, his experience and expertise in finance, accounting and management. In addition, the Board believes that Mr. Mack’s membership on the Company’s Board of Directors helps to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

Michael W. Conboy, Director. Mr. Conboy has been a member of our board of directors since October 26, 2010. Since 2003, Mr. Conboy has worked at Luxor Capital Group, LP, an investment management firm based in New York, New York, and currently serves as its Director of Research. Luxor Capital Group, LLC is one of the Company’s principal stockholders. From 2000-2003, Mr. Conboy worked as a distressed investments analyst at ING in New York and London for ING’s internal proprietary desk, where he was actively involved in numerous restructurings. Since 2010, he also has served as the Chairman of the Board of Directors of CML Metals Corp., which is focused on redeveloping the Comstock/Mountain Lion iron ore mine in southwestern Utah. Mr. Conboy also serves as a director of Innovate Loan Servicing Corporation, a finance company focused on the subprime auto loan sector. Mr. Conboy earned his B.S. in Business Administration from Georgetown University. As an investment banker and an executive with experience in working with natural resource companies, we believe that Mr. Conboy contributes his leadership skills, knowledge, finance and industry background, and business experience to our Board of Directors. In addition, we believe that Mr. Conboy’s membership on our Board of Directors helps to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

 

Jordan M. Estra, Director. Mr. Estra has been a member of our board of directors since March 1, 2010. Mr. Estra is also a Director of Starcore International Mines and Meadow Bay Gold, both publicly traded gold mining companies. Since July 2010, Mr. Estra has been President and Chief Executive Officer of Ensurge, Inc., a mining investment company seeking gold mining opportunities in Brazil. He became a Director of Ensurge in February 2010. From May 2009 until July 2010, Mr. Estra had been the Managing Director of Private Equity at Sutter Securities Incorporated in San Francisco, California and Boca Raton, Florida, where he specializes in raising capital for emerging natural resource companies. From October 2009 through December 2009, Mr. Estra served as the Chief Executive Officer of Signature Exploration and Production Corp. From April 2007 to April 2009, Mr. Estra was a Managing Director of Investment Banking with Jesup & Lamont Securities, Inc. Mr. Estra was a Senior Vice President of Investment Banking with Dawson James Securities, Inc. from September 2006 to March 2007 and a Managing Director of Healthcare Investment Banking with Stanford Financial Group from June 2003 to September 2006. From 1986 to 2003 Mr. Estra held senior research and/or investment banking positions with a number of brokerage and investment banking firms. From 1971 to 1986 Mr. Estra held various positions in finance, corporate strategic planning and marketing with AMAX, Inc., a global natural resources leader with interests in precious metals, copper, lead, zinc, coal, oil and gas, molybdenum, tungsten and iron ore. He served as Assistant to the Chairman and was Vice President of Marketing and Strategic Planning when he resigned in 1986 to pursue a career on Wall Street. Mr. Estra graduated with High Distinction from Babson College with a degree in International Economics and with Honors from the Columbia University Graduate School of Business with an MBA in Finance. He holds Series 7, 24, 63, 86 and 87 securities licenses. As an investment banker and an executive with experience in working with natural resource companies and as an Audit Committee financial expert, we believe that Mr. Estra contributes his leadership skills, knowledge, finance and technology background, and business experience to our board of directors. In addition, we believe that Mr. Estra’s membership on our board of directors helps to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

Melvin L. Williams, Chief Financial Officer. Mr. Williams has been our Chief Financial Officer since June 14, 2006. Mr. Williams is a certified public accountant with over 20 years' experience in the public accounting industry with the firm of Cupit, Milligan, Ogden and Williams in Reno, Nevada. During this period, he provided auditing, consulting, merger/acquisition, valuation and tax services to companies in the manufacturing, technology, mining, healthcare and service industries, including publicly traded mining companies, as well as to various non-profit organizations. From 1984 until 1987, Mr. Williams served on the accounting staff of the University of Oregon Foundation, a private fund raising entity that also maintains endowment and trust investments for the continuing support of the University. Mr. Williams, a member of the American Institute of Certified Public Accountants since 1989, is also a member of the Nevada Society of CPAs and past president of the Reno, Nevada chapter of the Institute of Management Accountants. He earned a Bachelor of Business Administration degree at the University of Oregon in 1983.

 

Consultants

 

Nanominerals is a private Nevada corporation principally engaged in the business of mineral exploration. We have engaged Nanominerals as a consultant to provide us with the use of its laboratory, instrumentation, milling equipment and research facilities which has allowed us to perform tests and analysis both effectively and in a more timely manner than would otherwise be available from other such consultants. Dr. Charles A. Ager performs the services for us in his authorized capacity with Nanominerals under our consulting arrangement with Nanominerals. Carl S. Ager, our Vice President, Secretary and Treasurer, is the son of Dr. Ager. Dr. Ager currently is the sole officer and director of Nanominerals, and controls its day to day operations. The following sets forth certain biographical information with respect to Dr. Ager:

 

 

Dr. Charles A. Ager is a geophysical engineer with approximately 40 years of experience in the areas of mining discovery and production. He is a registered geophysicist in the State of California and a registered professional engineer and professional geoscientist in British Columbia, Canada. Dr. Ager received a PhD degree in geophysics from the University of British Columbia in 1974 and a Master’s of Science degree from the University of British Columbia in 1972. He received his undergraduate degree in mathematics and physics from California State University, Sacramento in 1968. Dr. Ager has been associated with Nanominerals from 1988 until present. Dr. Ager was the Chairman of ABM Mining Group from 1979 until 1988, when it was acquired by Northgate Mining. ABM Mining Group was involved in providing technical and financial assistance in building and operating medium sized mining companies. Project duties included property acquisition, exploration, permitting, development, production and finance. Dr. Ager also was the President of the Ager Group of Geotechnical Companies from 1968 to 1979. The Ager Group of Geotechnical Companies was involved in providing technical and financial assistance for exploration and development projects in Canada, the United States, Africa and the Far East. Project work included the use of water, ground and air surveys in the exploration for oil and gas, coal, industrial minerals and base and precious metals. Dr. Ager is a member of the Association of Professional Engineers and Geoscientists of British Columbia, Canada, the Society of Exploration Geophysicists and the Society of Mining, Metallurgy and Exploration.

 

Director Qualifications

 

We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business or banking. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties for us. Each director must represent the interests of all stockholders. When considering potential director candidates, the board of directors also considers the candidate’s character, judgment, age and skills, including financial literacy and experience in the context of our needs and the needs of the board of directors. In addition to considering an appropriate balance of knowledge, experience and capability, the board of directors has as an objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

Independent Directors; Review, Approval or Ratification of Transactions with Related Persons

 

We currently have six members on our board of directors. We believe that each of John E. Mack, Michael W. Conboy and Jordan M. Estra is independent under the criteria established by Section 803A of the NYSE Amex LLC (“AMEX”) Company Guide for director independence, but that none of the remaining two members are independent. The AMEX criteria include various objective standards and a subjective test. A member of the board of directors is not considered independent under the objective standards if, for example, he or she is employed by us. Mr. Oring and Mr. Ager are not independent because they are our employees. The subjective test requires that each independent director not have a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We considered commercial, financial services, charitable, and other transactions and other relationships between us and each director and his or her family members and affiliated entities.

 

 

For Messrs. Mack, Conboy and Estra, we believe that each did not have any transactions or other relationships which would have exceeded the AMEX objective standards or would otherwise interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

With respect to our other two directors, we believe that we have ongoing business relationships with these directors or their affiliates which would not satisfy the AMEX subjective standards regarding the exercise of independent judgment in carrying out the responsibilities of a director.

 

We have ongoing business relationships with affiliates of our management and principal stockholders. In particular, we have continuing obligations under the agreements under which we acquired the assets relating to our Clarkdale Slag Project. We remain obligated to pay a royalty which may be generated from the operations of the Clarkdale Slag Project with Nanominerals, one of our principal stockholders, which is an affiliate of a member of our executive management and board of directors, Carl S. Ager. In addition, Martin B. Oring, our President and Chief Executive Officer and a member of our board of directors, serves as a consultant to Ireland Inc. These persons are subject to a fiduciary duty to exercise good faith and integrity in handling our affairs. However, the existence of these continuing obligations may create a conflict of interest between us and all of our board members and senior executive management, and any disputes between us and such persons over the terms and conditions of these agreements that may arise in the future may raise the risk that the negotiations over such disputes may not be subject to being resolved in an arms’ length manner. In addition, Nanominerals’ interest in Ireland, Inc. and its other mining related business interests may create a conflict of interest between us and our board members and senior executive management who are affiliates of Nanominerals.

 

Because we currently only have four independent directors, the existence of these continuing obligations to our affiliates may create a conflict of interest between us and our non-independent board members and senior executive management, and any disputes between us and such persons over the terms and conditions of these agreements that may arise in the future may raise the risk that the negotiations over such disputes may not be subject to being resolved in an arms’ length manner. We intend to make good faith efforts to recruit independent persons to our board of directors. We intend to evaluate the independence of each of our directors in connection with the preparation of the proxy statement for our next annual meeting of stockholders.

 

Although we only have four independent directors, the board of directors has adopted a written Related Person Transactions Policy, that describes the procedures used to identify, review, approve and disclose, if necessary, any transaction or series of transactions in which: (i) we were, are or will be a participant, (ii) the amount involved exceeds $120,000, and (iii) a related person had, has or will have a direct or indirect material interest. There can be no assurance that the above conflicts will not result in adverse consequences to us and the interests of the other stockholders.

 

Although our management intends to avoid situations involving conflicts of interest and is subject to a Code of Ethics, there may be situations in which our interests may conflict with the interests of those of our management or their affiliates. These could include:

 

·

competing for the time and attention of management,

 

·

potential interests of management in competing investment ventures, and

 

·

the lack of independent representation of the interests of the other stockholders in connection with potential disputes or negotiations over ongoing business relationships.

 

 

Committees of the Board Of Directors

 

Audit Committee. We have an Audit Committee and an audit committee charter. Our Audit Committee is presently comprised of Michael W. Conboy, Jordan M. Estra and John E. Mack. Mr. Mack is the Chairman of the Audit Committee. Each of Messrs. Conboy, Estra and Mack is an independent director. We believe that each of Messrs. Estra and Mack qualifies as an “audit committee financial expert” under Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended (the “Securities Act”). On September 8, 2006, we adopted a revised audit committee charter and a whistle blower policy. The purpose of the amendments to the audit committee charter is to expand on the role of the Audit Committee’s relationship with external auditors and the primary committee responsibilities. The purpose of the whistle blower policy is to encourage all employees to disclose any wrongdoing that may adversely impact us, our stockholders, employees, investors, or the public at large. The policy also sets forth (i) an investigative process of reported acts of wrongdoing and retaliation, and (ii) procedures for reports of questionable auditing, accounting and internal control matters from employees on a confidential and anonymous basis and from other interested third parties. A copy of our audit committee charter was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 27, 2006. Our Audit Committee is responsible for:

 

·

selecting, hiring and terminating our independent auditors,

 

·

evaluating the qualifications, independence and performance of our independent auditors,

 

·

approving the audit and non-audit services to be performed by our independent auditors,

 

·

reviewing the design, implementation, adequacy and effectiveness of our internal controls and critical accounting policies,

 

·

overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters,

 

·

establishing procedures for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters,

 

·

reviewing with management and our independent auditors, any earnings announcements and other public announcements regarding our results of operations,

 

·

preparing the Audit Committee report that the SEC requires in our annual proxy statement,

 

·

engaging outside advisors, and

 

·

authorizing funding for the outside auditor and any outside advisors engaged by the Audit Committee.

 

Compensation Committee. We have a Compensation Committee and have adopted a Compensation Committee charter. Our Compensation Committee assists our board of directors in determining and developing plans for the compensation of our officers, directors and employees. Specific responsibilities include the following:

 

·

approving the compensation and benefits of our executive officers,

 

 

·

reviewing the performance objectives and actual performance of our officers, and

 

·

administering our stock option and other equity compensation plans.

 

Our Compensation Committee is comprised of John E. Mack, Michael W. Conboy and Jordan M. Estra. Mr. Estra is the Chairman of the Compensation Committee. Each of Messrs. Mack, Conboy and Estra is an independent director.

 

Nominating and Governance Committee. We have a Nominating and Governance Committee and have adopted a Nominating and Governance Committee charter. Our Nominating and Governance Committee will assist the Board of Directors by identifying and recommending individuals qualified to become members of our Board of Directors, reviewing correspondence from our stockholders, establishing, evaluating and overseeing our corporate governance guidelines, and recommending compensation plans for our directors. Specific responsibilities include the following:

 

·

evaluating the composition, size and governance of our Board of Directors and its committees and making recommendations regarding future planning and the appointment of directors to our committees,

 

·

establishing a policy for considering stockholder nominees for election to our Board of Directors,

 

·

evaluating and recommending candidates for election to our Board of Directors; and

 

·

recommending and determining the compensation of our directors.

 

Our Nominating and Governance Committee is comprised of Martin B. Oring, John E. Mack, Michael W. Conboy, Jordan M. Estra and Carl S. Ager. Mr. Conboy is the Chairman of the Nominating and Governance Committee. Each of Messrs. Mack, Conboy and Estra is an independent director. However, Messrs. Oring and Ager are not independent directors.

 

Disclosure Committee and Charter. We have a Disclosure Committee and a Disclosure Committee charter. A copy of the disclosure committee charter was filed as an exhibit to our Form 10-KSB filed with the SEC on April 13, 2004. The purpose of the committee is to provide assistance to the Chief Executive Officer and the Chief Financial Officer in fulfilling their responsibilities regarding the identification and disclosure of material information about us and the accuracy, completeness and timeliness of our financial reports.

 

Our Disclosure Committee is presently comprised of John E. Mack, Carl S. Ager, Martin B. Oring, Michael W. Conboy and Jordan M. Estra. Mr. Mack is the Chairman of the Disclosure Committee. Each of Messrs. Mack, Conboy and Estra is an independent director. However, Messrs. Oring and Ager are not independent directors.

 

 

Board Leadership Structure and Risk Oversight

 

Our board of directors has an integrated structure in which the roles of Chairman and Chief Executive Officer are combined. The board has determined that only four of our non-management directors are independent. Generally, our board structure provides that an independent lead director presides at the executive sessions of the non-management directors and at all board meetings at which the Chairman is not present, serves as liaison between the Chairman and the independent directors, frequently communicates with the Chief Executive Officer, calls meetings of the independent directors, obtains board member and management input and sets the agenda for the board with the Chief Executive Officer, approves meeting schedules to assure there is sufficient time for discussion of all agenda items, works with the Chief Executive Officer to ensure the board members receive the right information on a timely basis, stays current on major risks and focuses the board members on such risks, molds a cohesive board, works with the Audit Committee and Compensation Committee to evaluate board and committee performance, facilitates communications among directors, assists in recruiting and retention for new board members, ensures that committee structure and committee assignments are appropriate and effective, ensures outstanding governance processes, and leads discussions regarding Chief Executive Officer performance, personal development and compensation. Our former lead independent director, Martin B. Oring, became our President and Chief Executive Officer in October 2010, and therefore, no longer is an independent director. We currently do not have a lead independent director.

 

The board has had several years of successful experience with a leadership structure in which the roles of Chairman and Chief Executive Officer are combined, and has determined that this structure, together with a very active and involved group of independent directors, is most appropriate and effective for us. The board believes that this structure promotes greater efficiency, within the context of an active and independent board, through more direct communication of critical information from management to the board and from the board to management. In addition, the Chief Executive Officer’s extensive knowledge of our business uniquely qualifies him, in close consultation with our independent directors, to lead the board in assessing risks and focusing on the issues that are most material to us.

 

The board’s involvement in risk oversight includes receiving regular reports from members of senior management and evaluating areas of material risk to us, including operational, financial, legal and regulatory, and strategic and reputational risks. The Audit Committee, pursuant to its charter, is responsible for overseeing the assessment of the business risk management process, including the adequacy of our overall control environment and controls in selected areas representing significant financial and business risk. In carrying out this responsibility, the Audit Committee regularly evaluates our risk identification, risk management and risk mitigation strategies and practices. In general, the reports identify, analyze, prioritize and provide the status of major risks to us. In addition, the Compensation Committee regularly considers potential risks related to our compensation programs. Further, the Disclosure Committee reviews the identification and disclosure of material information about us and the accuracy, completeness and timeliness of our financial reports.

 

Related Person Transactions Policy

 

On March 17, 2009, the board of directors adopted a written Related Person Transactions Policy, that describes the procedures used to identify, review, approve and disclose, if necessary, any transaction or series of transactions in which: (i) we were, are or will be a participant, (ii) the amount involved exceeds $120,000, and (iii) a related person had, has or will have a direct or indirect material interest. Related party transactions, which are limited to those described in this policy, are subject to the approval or ratification by the Audit Committee in accordance with this policy.

 

Our Code of Ethics, which applies to our directors and executive officers, including our Chief Executive Officer, Chief Financial Officer and all senior financial officers, provides that all conflicts of interest should be avoided. Pursuant to Item 404 of Regulation S-K of the SEC, certain transactions between the issuer and certain related persons need to be disclosed in our filings with the SEC. In addition, under Section 78.140 of the Nevada Revised Statutes, certain transactions between us and our directors and officers may need to be approved by our board of directors or a duly authorized committee of the board. Finally, SEC rules require our board to assess whether relationships or transactions exist that may impair the independence of our outside directors. The policy is intended to provide guidance and direction on related party transactions.

 

 

A “related party transaction” is any transaction directly or indirectly involving any related party that would need to be disclosed under Item 404(d) of Regulation S-K. Under Item 404(d), we are required to disclose any transaction occurring since the beginning of our last fiscal year, or any currently proposed transaction, involving us where the amount involved exceeds the lesser of $120,000 or one percent of the average of the smaller reporting company's total assets at year end for the last two completed fiscal years and in which any related person had or will have a direct or indirect material interest. “Related party transaction” also includes any material amendment or modification to an existing related party transaction.

 

For purposes of the policy, “related party” means any of the following:

 

·

a director (which term when used therein includes any director nominee),

 

·

an executive officer,

 

·

a person known by us to be the beneficial owner of more than 5% of our common stock (a “5% stockholder”),

 

·

an entity which is owned or controlled by a person listed above, or an entity in which a person listed above has a substantial ownership interest or control of such entity, or

 

·

a person who is an immediate family member of any of the foregoing.

 

“Immediate family member” means a child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer, nominee for director or beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee for director or beneficial owner.

 

All related party transactions are required to be disclosed to the Audit Committee of the board and any material related party transaction are required to be disclosed to the full board of directors. Related party transactions will be brought to management’s and the board’s attention in a number of ways. Each of our directors and executive officers is instructed and periodically reminded to inform the Office of the Secretary of any potential related party transactions. In addition, each such director and executive officer completes a questionnaire on an annual basis designed to elicit information about any potential related party transactions. Any potential related party transactions that are brought to our attention are analyzed by our legal department, or if none exists, our outside counsel, in consultation with management, as appropriate, to determine whether the transaction or relationship does, in fact, constitute a related party transaction requiring compliance with the policy.

 

At each of its meetings, the Audit Committee will be provided with the details of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the transaction, and the benefits to us and to the relevant related party. In determining whether to approve a related party transaction, the Audit Committee will consider, among other factors, the following factors to the extent relevant to the related party transaction:

 

·

whether the terms of the related party transaction are fair to us and on the same basis as would apply if the transaction did not involve a related party,

 

 

·

whether there are business reasons for us to enter into the related party transaction,

 

·

whether the related party transaction would impair the independence of an outside director,

 

·

whether the related party transaction would present an improper conflict of interests for any of our directors or executive officers, taking into account the size of the transaction, the overall financial position of the director, executive officer or related party, the direct or indirect nature of the director’s, executive officer’s or related party’s interest in the transaction and the ongoing nature of any proposed relationship, and

 

·

any other factors the Audit Committee deems relevant.

 

The Audit Committee will apply these factors, and any other factors it deems relevant to its determination, in a manner that is consistent with the rules and regulations promulgated by the Commission and the objectives of the policy. Given that this list of factors is non-exclusive and, further, that the factors have not been assigned any particular level of importance with respect the other factors, the Audit Committee will have a certain amount of discretion in applying these factors. The members of the Audit Committee, however, must exercise their reasonable business judgment in making a determination regarding the transaction at issue.

 

As a result, the specific application of these factors will be determined by the Audit Committee on a case-by-case basis. The Audit Committee will examine each factor, both individually and collectively, in the context of our overall business and financial position, as well as our short-term and long-term strategic objectives. In doing so, the Audit Committee will look at the particular facts and circumstances of the transaction at issue, as well as the totality of the circumstances surrounding the transaction as a whole. The Audit Committee will examine the relationship of the facts and circumstances with our overall business and financial position and strategic objectives. If, as and when special or unique concerns must be addressed, the Audit Committee will take such concerns into account.

 

For example, regarding transactions that would impair independence, if our securities become listed on a national securities exchange that requires a certain percentage of the board of directors to be independent, and the Audit Committee determines that a particular transaction will impair the independence of an outside director, potentially causing us to contradict the exchange mandated independence requirement, that particular transaction may be rejected. However, there could arise a situation where, due to the importance of the transaction to our overall business and financial position and strategic objectives and our ability to appoint another independent director, such a transaction might be approved by the Audit Committee.

 

Any member of the Audit Committee who has an interest in the transaction under discussion will abstain from voting on the approval of the related party transaction, but may, if so requested by the Chairperson of the Audit Committee, participate in some or all of the Audit Committee’s discussions of the related party transaction. Upon completion of its review of the transaction, the Audit Committee may determine to permit or to prohibit the related party transaction.

 

A related party transaction entered into without pre-approval of the Audit Committee will not be deemed to violate the policy, or be invalid or unenforceable, so long as the transaction is brought to the Audit Committee as promptly as reasonably practical after it is entered into or after it becomes reasonably apparent that the transaction is covered by the policy.

 

Under the policy, any “related party transaction” will be consummated or will continue only if:

 

 

·

the Audit Committee shall approve or ratify such transaction in accordance with the guidelines set forth in the policy and if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party,

 

·

the transaction is approved by the disinterested members of the board of directors, or

 

·

if the transaction involves compensation, that such transaction is approved of by our Compensation Committee.

 

Corporate Governance Guidelines

 

Our Board has adopted Corporate Governance Guidelines which govern, among other things, Board member criteria, responsibilities, compensation and education, Board committee composition and charters and management succession.

 

Code of Ethics

 

Our directors and executive officers, including our Chief Executive Officer, Chief Financial Officer and all senior financial officers, are bound by a Code of Ethics that complies with Item 406 of Regulation S-K of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

A Code of Ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:

 

·

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,

 

·

full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer,

 

·

compliance with applicable governmental laws, rules and regulations,

 

·

the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code, and

 

·

accountability for adherence to the code.

 

We will mail without charge, upon written request, a copy of our Code of Ethics. Requests should be sent to: Searchlight Minerals Corp., 2360 W. Horizon Ridge Pkwy., Suite 100, Henderson, Nevada, 89052, Attn. Corporate Secretary.

 

 

Rule 10b5-1 Plans

 

The board of directors has authorized directors and other executive officers who are subject to our stock-trading pre-clearance and quarterly blackout requirements, at their election, to enter into plans, at a time they are not in possession of material non-public information, to purchase or sell shares of our common stock that satisfy the requirements of Exchange Act Rule 10b5-1. Rule 10b5-1 permits trading on a pre-arranged, “automatic-pilot” basis subject to certain conditions, including that the person for whom the plan is created (or anyone else aware of material non-public information acting on such person’s behalf) not exercise any subsequent influence regarding the amount, price and dates of transactions under the plan. Using these plans, officers and directors can gradually diversify their investment portfolios and spread stock trades over a period of time regardless of any material, non-public information they may receive after adopting their plans. As a result, trades under 10b5-1 plans by our directors, and other executive officer may not be indicative of their respective opinions of our performance at the time of the trade or of our potential future performance. The board believes that it is appropriate to permit directors and senior executives, whose ability to purchase or sell our common stock is otherwise substantially restricted by quarterly and special stock-trading blackouts and by their possession from time to time of material nonpublic information, to engage in pre-arranged trading in accordance with Rule 10b5-1. Trades by our directors and executive officers pursuant to 10b5-1 trading plans will be disclosed publicly through Form 144 and Form 4 filings with the SEC, as required by applicable law. Currently, we do not have any 10b5-1 trading plans for any of our officers and directors.

 

Stockholder Communication with Our Board of Directors

 

Our board of directors has established a process for stockholders to communicate with the board of directors or with individual directors. Stockholders who wish to communicate with our board of directors or with individual directors should direct written correspondence to our Corporate Secretary at our principal executive offices located at 2360 West Horizon Ridge Pkwy., Suite 100, Henderson, Nevada, 89052. Any such communication must contain:

 

·

a representation that the stockholder is a holder of record of our capital stock,

 

·

the name and address, as they appear on our books, of the stockholder sending such communication, and

 

·

the class and number of shares of our capital stock that are beneficially owned by such stockholder.

 

The Corporate Secretary will forward such communications to our board of directors or the specified individual director to whom the communication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case the Corporate Secretary has the authority to discard the communication or to take appropriate legal action regarding such communication.

 

Section 16(A) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership and reports of changes in ownership of our equity securities. As of the date of this Report, and based solely on our review of the copies of such reports furnished to us and written representations from the directors and executive officers, we believe that all reports needed to be filed by current Section 16 reporting persons have been filed in a timely manner for the year ended December 31, 2015, with the exception of the following:

 

Item 11.         Executive Compensation

 

Information required by this item is incorporated by reference to the information set forth in our Definitive Proxy Statement, which we will file with the Securities and Exchange Commission within 120 days after our fiscal year end.

 

 

Item 12.         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Information required by this item is incorporated by reference to the information set forth in our Definitive Proxy Statement, which we will file with the Securities and Exchange Commission within 120 days after our fiscal year end.

 

Item 13.         Certain Relationships and Related Transactions, and Director Independence

 

Information required by this item is incorporated by reference to the information set forth in our Definitive Proxy Statement, which we will file with the Securities and Exchange Commission within 120 days after our fiscal year end.

 

Item 14.         Principal Accountant Fees and Services

 

Information required by this item is incorporated by reference to the information set forth in our Definitive Proxy Statement, which we will file with the Securities and Exchange Commission within 120 days after our fiscal year end.

 

PART IV

 

Item 15.         Exhibits and Financial Statement Schedules

 

EXHIBIT INDEX

 

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

 

Reference Number		Item
3.1		Amended and Restated Articles of Incorporation (1)
3.2		Amended and Restated Bylaws (2)
3.3		First Amendment to the Amended and Restated Bylaws of Searchlight Minerals Corp.(3)
4.1		Specimen Stock Certificate (4)
4.2		Rights Agreement, dated August 24, 2009, between Searchlight Minerals Corp. and Empire Stock Transfer Inc. (5)
10.1		2009 Stock Incentive Award Plan, adopted December 15, 2009 (6)
10.2		2009 Equity Incentive Plan for Directors, adopted December 15, 2009 (6)
10.3		2007 Stock Option Plan (7)
10.4		Assignment Agreement dated for reference June 1, 2005 between Searchlight Minerals Corp. and Nanominerals Corp. (8)
10.5		First Amendment to Assignment Agreement between Nanominerals Corp. and Searchlight Minerals Corp. dated August 31, 2005 (9)
10.6		Second Amendment to Assignment Agreement between Nanominerals Corp. and Searchlight Minerals Corp. dated October 24, 2005 (10)
10.7		Employment Agreement between Searchlight Minerals Corp. and Carl S. Ager dated as of January 1, 2006 (11)
10.8		Employment Agreement between Searchlight Minerals Corp. and Melvin L. Williams dated as of June 14, 2006 (12)

 

 

10.9		Letter Agreement dated November 22, 2006 among Verde River Iron Company, LLC, Harry B. Crockett, Gerald Lembas and Searchlight Minerals Corp.  (13)
10.10		Notice of Exercise Option (14)
10.11		Amendment No. 1 to Letter Agreement dated February 15, 2007 (15)
10.12		Agreement and Plan of Merger dated February 15, 2007 between Verde River Iron Company, LLC, Transylvania International, Inc., Clarkdale Minerals LLC and Searchlight Minerals Corp. (16)
10.13		Special Warranty Deed dated February 15, 2007 (16)
10.14		Bill of Sale dated February 15, 2007 (16)
10.15		Effluent lease dated August 25, 2004 between Town of Clarkdale, Transylvania International, Inc. and Verde River Iron Company, LLC (16)
10.16		First Amendment to Employment Agreement dated February 16, 2007 between Searchlight Minerals Corp. and Carl S. Ager. (16)
10.17		First Amendment to Employment Agreement dated February 16, 2007 between Searchlight Minerals Corp. and Melvin L. Williams. (17)
10.18		Employment Agreement with Martin B. Oring, dated October 1, 2010, and as amended on November 8, 2010 (18), (19)
10.19		Non-Qualified Stock Option Agreement with Martin B. Oring, dated October 1, 2010 (18)
10.20		Mining Claim Purchase Agreements regarding transfer of title to Searchlight Claims (20)
10.21		Development Agreement, dated as of January 9, 2009, between Clarkdale Minerals, LLC and the Town of Clarkdale, Arizona (21)
10.22		Third Amendment to Assignment Agreement between Nanominerals Corp. and Searchlight Minerals Corp. dated  July 25, 2011 (22)
10.23		Form of Securities Purchase Agreement, dated June 7, 2012 (23)
10.24		Form of Registration Rights Agreement, dated June 7, 2012 (23)
10.25		Form of Voting Agreement, dated June 7, 2012 (23)
10.26		Form of Secured Convertible Note Purchase Agreement, dated September 18, 2013, by and between Searchlight Minerals Corp. and the investors listed on Schedule I attached thereto (24)
10.27		Form of Secured Convertible Promissory Note of Searchlight Minerals Corp. dated September 18, 2013 (24)
10.28		Form of Registration Rights Agreement, dated September 18, 2013, between Searchlight Minerals Corp. and each of the several purchasers signatory thereto (24)
10.29		Form of Pledge and Security Agreement, dated September 18, 2013, by and among Searchlight Minerals Corp., Clarkdale Minerals, LLC, and Clarkdale Metals Corp. in favor of the Collateral Agent on behalf of the Secured Parties listed on the signature pages thereto (24)
10.30		First Amendment to Voting Agreement and Irrevocable Proxy Coupled with Interest, effective September 18, 2013, by and among Searchlight Minerals Corp. and each of the undersigned stockholders thereto (24)
10.31		Sublease Agreement, dated September 1, 2013, by and between Ireland, Inc. and Searchlight Minerals Corp. (24)
10.32		Effluent lease dated August 25, 2005 between Town of Clarkdale and Clarkdale Minerals, LLC (25)
10.33		Form of Warrant, dated October 24, 2014 (26)
10.34		Letter from Cupit, Milligan, Ogden & Williams, dated as of December 23, 2014 (27)
10.35		Common Stock and Warrant Purchase Agreement, dated March 25, 2015 (28)
10.36		Warrant, dated March 25, 2015 (28)
10.37		Registration Rights Agreement, dated March 18, 2015 (28)
10.38		Form of Registration Rights Agreement, dated March 18, 2015 (28)
10.39		Form of Warrant, dated May 21, 2015 (29)
10.40		Form of Registration Rights Agreement, dated May 21, 2015 (29)
10.41		Form of Warrant, dated July 30, 2015 (30)
10.42		Form of Registration Rights Agreement, dated July 30, 2015 (30)
10.43		Form of Amendment to Secured Convertible Promissory Note, dated March 18, 2016 (31)
10.44		Common Stock Purchase Agreement, dated March 18, 2016 (31)
10.45		Form of Registration Rights Agreement, dated March 18, 2016 (31)
10.46		Letter Agreement, dated March 18, 2016 (31)
10.47		Second Common Stock Purchase Agreement, dated March 18, 2016 (31)

    

 

14.1		Code of Ethics (32)
21.1		List of Wholly Owned Subsidiaries*
23.3		Consent BDO USA, LLP*
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934*
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934*
32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
95.1		Mine Safety Disclosure*
99.1		Audit Committee Charter (32)
99.2		Disclosure Committee Charter (33)
99.3		Related Party Transactions Policy (34)
99.4		Compensation Committee Charter (35)
99.5		Nominating and Corporate Governance Charter (35)
99.6		Corporate Governance Guidelines (35)
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

  

 

 

(1)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on December 28, 2009.
(2)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on April 29, 2009.
(3)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on September 24, 2013.
(4)	Filed with the SEC as an exhibit to our Registration Statement on Form 10-SB originally filed on July 11, 2000.
(5)	Filed with the SEC as an exhibit to our Registration Statement on Form 8-A filed on August 25, 2009 (No. 000-30995), which includes as Exhibit A thereto the Form of Right Certificate and as Exhibit B thereto the Summary of Common Share Purchase Rights.
(6)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on December 17, 2009.
(7)	Filed with the SEC as an exhibit to our proxy statement on Schedule 14A filed on May 22, 2007.
(8)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on June 16, 2005.
(9)	Filed with the SEC as an exhibit to our Quarterly Report on Form 10-QSB filed on November 21, 2005.
(10)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on October 28, 2005.
(11)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on March 2, 2006.
(12)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on June 20, 2006.
(13)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on November 28, 2006.
(14)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on January 16, 2007.
(15)	Filed with the SEC as an exhibit to our registration statement on Form S-1/A (No. 333-132929) filed on February 12, 2009.
(16)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on February 22, 2007.
(17)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on February 23, 2007.
(18)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on October 4, 2010.
(19)	Filed with the SEC as an exhibit to our Quarterly Report on Form 10-Q filed on November 9, 2010.
(20)	Filed with the SEC as an exhibit to our registration statement on Form S-1/A (No. 333-132929) filed on December 23, 2008.
(21)	Filed with the SEC as an exhibit to our registration statement on Form S-1/A (No. 333-132929) filed on May 7, 2009.
(22)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on July 27, 2011.
(23)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on June 11, 2012.
(24)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on September 24, 2013.
(25)	Filed with the SEC as an exhibit to our Quarterly Report on Form 10-Q filed on November 12, 2013
(26)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on October 28, 2014
(27)	Filed with the SEC as an exhibit to our Current Report on Form 8-K fled on December 29, 2014
(28)	Filed with the SEC as an exhibit to our Current Report on Form 8-K fled on March 30, 2015
(29)	Filed with the SEC as an exhibit to our Current Report on Form 8-K fled on May 28, 2015
(30)	Filed with the SEC as an exhibit to our Current Report on Form 8-K fled on August 4, 2015
(31)	Filed with the SEC as an exhibit to our Current Report on Form 8-K fled on March 23, 2016
(32)	Filed with the SEC as an exhibit to our Current Report on Form 8-K filed on September 27, 2006.
(33)	Filed with the SEC as an exhibit to our Annual Report on Form 10-KSB filed on April 13, 2004.
(34)	Filed with the SEC as an exhibit to our registration statement on Form S-1/A (No. 333-132929) filed on September 2, 2009.
(35)	Filed with the SEC as an exhibit to Form 10-K/A filed on April 30, 2010.
*	Filed herewith

 

 

SIGNATURES

 

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

 

Date:  April 4, 2016	SEARCHLIGHT MINERALS CORP.
		a Nevada corporation
	By:	/s/ MARTIN B. ORING
		Martin B. Oring
		President and Chief Executive Officer
		(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ MARTIN B. ORING		Chief Executive Officer, President and Director		April 4, 2016
Martin B. Oring		(Principal Executive Officer)
/s/ CARL S. AGER		Vice President, Secretary, Treasurer and		April 4, 2016
Carl S. Ager		Director
/s/ MELVIN L. WILLIAMS		Chief Financial Officer		April 4, 2016
Melvin L. Williams		(Principal Accounting Officer)
/s/ MICHAEL W. CONBOY		Director		April 4, 2016
Michael W. Conboy
/s/ JOHN E. MACK		Director		April 4, 2016
John E. Mack
/s/ JORDAN M. ESTRA		Director		April 4, 2016
Jordan M. Estra