NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(US
dollars in thousands, except share amounts)
(unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF BUSINESS
Star
Mountain Resources, Inc. and subsidiaries (the “Company”, “we”, “us”, “our”) is
a minerals exploration company focused on acquiring and consolidating mining claims, mineral leases, producing mines, and historic
mines with production and future growth potential identified through our exploration efforts. Currently, our operations are focused
on re-commencing mining activities at the Balmat Zinc Mine in the Balmat mining district in St. Lawrence County, New York and
evaluating the feasibility of further exploration of minerals at the Star Mountain Mining District, Beaver County, Utah.
The
Company was incorporated on September 2, 2009 in Nevada initially as MyOtherCountryClub.com for the purpose of developing a website
that would offer reciprocal golf privileges, and other related services, to members of private country clubs throughout the United
States. We subsequently changed our name to the Jameson Stanford Resources Corporation in April 2012, and on October 29, 2012,
Jameson Stanford Resources Corporation merged with Bolcán Mining Corporation (the “Merger”). Prior to the Merger,
the Company was a publicly traded shell company with no business operations.
Effective
December 15, 2014, the name of the Company was changed to Star Mountain Resources, Inc. to better reflect its primary focus to
explore and conduct pre-extraction activities for mineral rights it holds in the Star Mining District. In addition, the Company
increased its authorized capital stock from 350,000,000 shares to 400,000,000 shares, of which 350,000,000 shares are common stock
and 50,000,000 shares are preferred stock.
On
November 2, 2015, the Company acquired a 100% interest in Northern Zinc, LLC, a Nevada limited liability company (“Northern
Zinc”), pursuant to an October 13, 2015 purchase agreement the Company entered into with Northern Zinc and its sole member,
Aviano Financial Group, LLC, a Delaware limited liability company (“Aviano”) (the “Northern Zinc Purchase Agreement”).
Northern Zinc and Aviano are unrelated third parties. Concurrent with the Company’s purchase of Northern Zinc, Northern
Zinc acquired (a) 100% of the issued and outstanding common stock of Balmat Holding Corporation (“Balmat”) and its
wholly owned subsidiary, St. Lawrence Zinc Company, LLC, (“SLZ”) the owner of the mining property known as the Balmat
Zinc Mine and (b) certain mining and processing equipment pursuant to an October 13, 2015 purchase agreement the Company entered
into with Northern Zinc, HudBay Minerals Inc. (“Hudbay”), Balmat and SLZ (the “Balmat Purchase Agreement”).
Balmat, SLZ and Hudbay were unrelated third parties. The Balmat Mine is located in upstate New York. See Note 3 for further details.
NOTE
2 – GOING CONCERN
The
unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company
will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
The Company has incurred losses the past two years and had total current assets of $1,175 and total current liabilities of $3,555,
resulting in a negative working capital balance of $2,380 as of March 31, 2016. Further losses are anticipated in the development
of its business. In view of these matters, there is substantial doubt about the Company’s ability to continue as a going
concern.
The
Company’s ability to continue as a going concern is dependent upon obtaining the necessary financing to meet its obligations
and pay its liabilities arising from normal business operations. Management plans to finance the Company’s operating costs
over the next twelve months with loans from significant shareholders and directors, debt financing, and/or the issuance of the
Company’s securities. There can be no assurance that we will be able to raise the necessary financing on acceptable terms
or at all. If management is unsuccessful in these efforts, discontinuance of operations is possible. The unaudited condensed
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
3 – BALMAT ACQUISITION
On
November 2, 2015, the Company completed the acquisition of Northern Zinc. Concurrent with the Company’s acquisition of Northern
Zinc, Northern Zinc acquired Balmat and its wholly owned subsidiary, SLZ (together referred to as the “Balmat Acquisition”).
Each of the agreements is outlined further below.
Northern
Zinc Purchase Agreement
Pursuant
to the terms of the Northern Zinc Purchase Agreement, we issued 10,000,000 shares of our unregistered common stock to Aviano and
assumed $1,390 in debts of Aviano in exchange for 100% of Northern Zinc’s membership interests previously owned by Aviano.
We also entered into a corporate development consulting agreement with David Linsley, a principal of Northern Zinc; appointed
Wayne Rich as our Chief Financial Officer; agreed to appoint two members to our board of directors designated by Aviano; and offered
advisory board positions for a period of at least three years to three other individuals associated with Aviano.
Balmat
Purchase Agreement
Upon
closing, we acquired 100% of the issued and outstanding common stock of Balmat from Hudbay for a cash purchase price ranging from
$8,500 to $17,000 (the “Balmat Cash Amount”) and issued Hudbay 550,000 shares of our unregistered common stock. Subsequent
to closing, and in accordance with the purchase agreement, we must issue Hudbay an additional 78,857 shares of our unregistered
common stock.
The
Balmat Cash Amount is able to be satisfied in any of the following ways:
Option
1
. Under this option, $1,500 was paid at closing and the balance of $15,500 will be paid as follows:
|
●
|
$500
upon completion of the first shipment of ore concentrate from the Balmat Mine;
|
|
|
|
|
●
|
$5,000
on the 12-month anniversary of the first shipment of ore concentrate from the Balmat Mine; and
|
|
|
|
|
●
|
$2,500
on each of the following dates from the first shipment of ore concentrate from the Balmat Mine: 18
th
month, 24
th
month, 30
th
month and the 36
th
month.
|
Option
2
. Under this option, with proper notice to Hudbay within three months of the closing date (which has since passed), the Balmat
Cash Amount would have been reduced to $8,500: $1,500 of which was paid upon closing, and the balance of $7,000 was to have been
paid within three days after proper notice to Hudbay.
Under
Option 2, Northern Zinc would also have immediately assumed all environmental liabilities in respect of the Balmat Mine and all
liabilities relating to or arising from any claims by existing or former employees relating to employment, termination, on-the-job
injuries or death, unsafe working conditions or exposure to potentially harmful substances and waive its right to indemnification
by Hudbay in respect of certain damages identified in the purchase agreement with Hudbay.
Option
3
. Under this option, with proper notice to Hudbay within 30 days before the 12-month anniversary of the first shipment
of ore concentrate from the Balmat Mine, the Balmat Cash Amount will be reduced to $16,000: $1,500 of which was paid upon closing
with the balance of $14,500 being paid as follows:
|
●
|
$400
upon completion of the first shipment of ore concentrate from the Balmat Mine; and
|
|
|
|
|
●
|
$4,700
on each of the following dates from the first shipment of ore concentrate from the Balmat Mine: 12
th
month, 18
th
month and 24
th
month.
|
Notwithstanding
the above Balmat Cash Amount options, if any portion of the purchase price has not been paid under Options 1 or 3 within 48 months
of the closing date (or 54 months of the closing date if we have not elected one of the options) then the entire unpaid balance
shall be immediately due and payable no later than the end of the 48
th
or 54
th
month, respectively.
Fair
Value Determination and Allocation of Consideration
The
purchase price allocation presented below is preliminary and includes the use of estimates. This preliminary allocation is based
on information that was available to management at the time these unaudited condensed consolidated financial statements
were prepared. We believe the estimates used are reasonable and the significant effects of the transaction are properly reflected.
However, the estimates are subject to change as additional information becomes available and is assessed by the Company. These
amounts will be finalized as soon as possible, but no later than one year from the acquisition date.
Upon
the completion of this acquisition, the Company acquired the following assets and assumed the following liabilities:
Assets received:
|
|
|
|
|
Cash
|
|
$
|
72
|
|
Prepaid expense
|
|
|
163
|
|
Spare parts inventory
|
|
|
500
|
|
Land
|
|
|
1,855
|
|
Buildings
|
|
|
850
|
|
Machinery and equipment
|
|
|
23,903
|
|
Mineral reserves
|
|
|
3,165
|
|
Mineral rights
|
|
|
3,660
|
|
Restricted cash – surety bond
|
|
|
1,664
|
|
Total assets received
|
|
$
|
35,832
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Loans payable
|
|
|
1,390
|
|
Asset retirement obligation
|
|
|
17,906
|
|
Liabilities
|
|
|
28
|
|
Total liabilities assumed
|
|
$
|
19,324
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
16,508
|
|
The
consideration paid was comprised of $1,000 in cash, $12,431 in a deferred payment liability, and 10,628,857 shares of the Company’s
stock (which includes 78,857 shares issuable to Hudbay as part of the acquisition purchase price as of March 31, 2016) valued
at $3,078.
The
acquisition has generated no revenues for us since the November 2, 2015 acquisition date.
NOTE
4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Accounting and Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally
accepted principles for interim financial statements. Accordingly, these unaudited condensed consolidated financial statements
do not include certain information and note disclosures that are normally included in annual financial statements prepared in
conformity with U.S. GAAP. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2015. In the opinion of management, all adjustments which are necessary for a fair presentation
of the financial information for the interim periods reported have been made. All such adjustments are of a normal, recurring
nature. The interim results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results
that can be expected for the entire year ending December 31, 2016.
Recent
Accounting Pronouncements
In
August 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU
2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial
doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments
in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently
assessing the impact the adoption of ASU 2014-15 will have on our financial statements and related disclosures.
NOTE
5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Our
financial instruments may at times consist of cash and cash equivalents, accounts receivable, restricted cash, accounts payable
and accrued liabilities, notes payable and asset retirement obligations. U.S. GAAP defines fair value as the price that would
be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price) and establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value using the following
definitions (from highest to lowest priority):
|
●
|
Level
1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities.
|
|
|
|
|
●
|
Level
2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data by correlation or other means.
|
|
|
|
|
●
|
Level
3 — Prices or valuation techniques requiring inputs that are both significant to the fair-value measurement and unobservable.
|
The
Company continually monitors its cash positions with, and the credit quality of, the financial institutions with which it invests.
The Company maintains balances in various U.S. financial institutions in excess of U.S. federally insured limits. The Company’s
balances of cash and cash equivalents, accounts payable and accrued liabilities, and notes payable approximate fair value.
The
following table presents information about financial instruments recognized at fair value on a recurring basis as of March 31,
2016 and December 31, 2015, and indicates the fair value hierarchy:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation deposits
|
|
|
-
|
|
|
$
|
1,688
|
|
|
|
-
|
|
|
|
1,688
|
|
|
|
-
|
|
|
$
|
1,688
|
|
|
|
-
|
|
|
|
1,688
|
|
Total financial assets
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price obligation – Balmat Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
13,361
|
|
|
|
13,361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,431
|
|
|
|
12,431
|
|
Asset retirement obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
17,906
|
|
|
|
17,906
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,906
|
|
|
|
17,906
|
|
Total financial assets and liabilities
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
$
|
31,267
|
|
|
$
|
32,955
|
|
|
$
|
-
|
|
|
$
|
1,688
|
|
|
$
|
30,337
|
|
|
$
|
32,025
|
|
The
fair value of the Company’s purchase price obligation was estimated using a probability-weighted discounted cash flow model
in order to arrive at a fair value of the liability. A discounted cash flow model was used to calculate the net present value
of the remaining payment options (Option 1 and Option 3) to satisfy the outstanding purchase price obligation. See Note 3 –
Balmat Acquisition for a detailed description of each payment option able to satisfy the remaining obligation. An estimated probability
weighting was then assigned to each option’s estimated net present value to arrive at the overall estimated fair value.
Significant unobservable inputs include management’s estimated timing of activities (including option election dates and
timing of first concentrate shipments) associated with payments due under the agreement as well as the 5.6% discount rate applied
within the model. Acceleration of timing of elections or shipments of first concentrates would accelerate payments due, therefore
increasing the net present value of a given payment option. An upward/downward adjustment to the discount rate would result in
an inverse effect on the overall fair value, all else being equal.
The fair value of the
Company’s asset retirement obligation was estimated using a discounted cash flow model to estimate the fair value
of the liability. Significant unobservable inputs include management’s cost estimates and the estimated timing of those
costs, the annual inflation rate applied to cost estimates and the discount rate used to discount the inflated cost estimates.
The undiscounted costs of reclamation were estimated at $19,126 and are expected to be incurred over the next 28 years. A 3.6%
annual inflation rate and 4.6% discount rate were applied. Any upward/downward adjustments to the estimated costs or inflation
rate would result in a corresponding adjustment to the fair value estimate, all else being equal. An upward/downward adjustment
to the discount rate would result in an inverse effect on the overall fair value, all else being equal.
NOTE
6 – PREPAID EXPENSES AND OTHER
As
of March 31, 2016 and December 31, 2015, the Company had prepaid expenses totaling $396 and $333, respectively. These balances
include prepayments associated with property taxes, insurance premiums and consulting contracts. All amounts are being amortized
over the time period associated with the prepaid expense.
NOTE
7 – PROPERTY, PLANT and EQUIPMENT
As
of March 31, 2016 and December 31, 2015, property, plant and equipment consisted of the following:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
892
|
|
|
$
|
35
|
|
|
$
|
857
|
|
|
$
|
892
|
|
|
$
|
16
|
|
|
$
|
876
|
|
Machinery & Equipment
|
|
|
18,913
|
|
|
|
569
|
|
|
|
18,344
|
|
|
|
18,911
|
|
|
|
231
|
|
|
|
18,680
|
|
Mobile Equipment
|
|
|
4,984
|
|
|
|
41
|
|
|
|
4,943
|
|
|
|
4,984
|
|
|
|
16
|
|
|
|
4,968
|
|
Office Furniture & Equipment
|
|
|
38
|
|
|
|
5
|
|
|
|
33
|
|
|
|
33
|
|
|
|
5
|
|
|
|
28
|
|
|
|
$
|
24,827
|
|
|
$
|
650
|
|
|
$
|
24,177
|
|
|
$
|
24,820
|
|
|
$
|
268
|
|
|
$
|
24,552
|
|
Depreciation
expense for the three months ended March 31, 2016 and 2015 was $382 and $2, respectively.
NOTE
8 – RELATED PARTY TRANSACTIONS
During
the three months ended March 31, 2016, there were no related party transactions other than recognition of accrued interest
on notes payable outstanding with related parties.
As
of March 31, 2016, the Company owed the Company’s CEO and Executive Chairman and a Company Director $286 and $625, respectively,
inclusive of interest, for outstanding notes issued on November 10, 2015. See Note 9 for further details.
During
the three months ended March 31, 2015, related party transactions consisting of contributed services from our directors, CEO and
Interim CFO were valued, in aggregate, at $122. This was recorded in the Statement of Operations and Additional Paid in Capital
on the Balance Sheet. Additionally, on March 1, 2015, Mark Osterberg, the Company’s President and COO, was issued 50,000
shares of the Company’s common stock and 250,000 stock options as a one-time signing bonus as part of his employment agreement.
The value of the common stock shares was estimated at $1.20 per share. The details of the options are outlined in Note 11.
As
of March 31, 2015, the Company owed the Company’s CEO and Executive Chairman, a total of $267 for amounts advanced to the
Company. For the three months ended March 31, 2015, the Company recorded $8 in interest expense related to this loan.
NOTE
9 – DEBT
Stipulated
Agreement Liability – Related Party
The
Company entered into an agreement with Michael Christiansen (“Christiansen”), a former officer of the Company on August
13, 2013 (the “Stipulated Agreement”) to pay Christiansen $123 (the “Amount Due”) relating to a promissory
note, accrued compensation and out-of-pocket expenses incurred on behalf of the Company. The Amount Due was agreed to be paid
as follows: $11 on or before August 15, 2013; $11 on or before September 15, 2013; $11 on or before October 15, 2013; and the
balance in installments of $15 beginning on the earlier of (a) the first day of the month following the date on which the Company
receives at least three million dollars of equity funding, or (b) December 31, 2014. The payment of this stipulated agreement
is in default. Subject to completion of the payments due under the agreement, the parties agreed to release certain claims against
each other related to or arising in connection with the matters that gave rise to our agreement to pay the Amount Due. At March
31, 2016 and December 31, 2015, the remaining liability of $79 is recorded as Stipulated Agreement Liability in the accompanying
unaudited condensed consolidated financial statements.
Notes
Payable
On
November 2, 2015, the Company issued an $850 promissory note bearing interest at 8% per annum as part of the Balmat Acquisition
(see Note 3), of which $750 was payable within ten days of issuance with the remaining $100 to be paid no later than November
2, 2016, or such earlier date as the Company has completed a transaction resulting in cash proceeds of at least $6,000. As of
March 31, 2016, the Company had paid $250 of this promissory note and had recorded $24 of accrued interest associated with this
note ($13 during the three months ended March 31, 2016). There were no issuance costs incurred related to this note.
On
November 2, 2015, the Company issued a $540 promissory note bearing interest at 8% per annum for payment of legal fees relating
to the Balmat Acquisition. The Company is obligated to pay $50 per month for ten consecutive months with a final payment of $40
plus accrued interest due on the 15th day of the eleventh month. As of March 31, 2016, the Company had paid $250 of this loan
and had recorded $14 of accrued interest associated with this note ($8 during the three months ended March 31, 2016). There were
no issuance costs incurred related to this note.
On
March 15, 2016, the Company issued a $500 promissory note bearing interest at 2.3% per annum to the Development Authority of the
North Country, a New York public benefit trust (“DANC”). The maturity date of the note is April 1, 2017, and the Company
is obligated to pay interest-only payments on a monthly basis beginning April 1, 2016. Pursuant to the terms of the note, SLZ
granted a security interest in certain of its machinery and equipment as well as mining rights to DANC. In addition, unconditional
guarantees were provided by Balmat, Northern Zinc and Star Mountain. Net proceeds received after fees were $490.
Notes
Payable – Related Party
On
November 10, 2015, the Company sold a total of 87.5 units to the Company’s CEO and Executive Chairman and a Company Director
in a private offering. Each unit consisted of:
|
(i)
|
one
convertible note in the principal amount of $10 per unit that bears simple interest at the rate of 10% per annum and is payable
by the Company on a lump sum basis with respect to principal and interest on or before October 31, 2016, unless earlier repaid
at the sole option of the Company or converted into common stock at a conversion price of $1.00 per share;
|
|
|
|
|
(ii)
|
5,000
shares of the Company’s common stock; and
|
|
|
|
|
(iii)
|
a
warrant to purchase 5,000 shares of the Company’s common stock at $2.00 per share for a period of three years from the
date of issuance.
|
The
aggregate total of all notes issued in connection with this offering was $875. In addition, the Company issued a total of 437,500
common shares and warrants to purchase a total of 437,500 common shares. As equity treatment was determined appropriate for the
common stock and warrants issued with these convertible notes, the proceeds were allocated based on relative fair values. The
fair value of the common stock issuance of 437,500 shares was estimated at $127, or $0.29 per share as estimated by independent
valuation experts as part of the purchase price valuation performed for the Balmat Acquisition. The fair value of the warrants
was estimated at $21 using a Black-Scholes model with inputs including a market price of the Company’s common shares of
$0.29 per share, an exercise price of $2.00, a three-year term, volatility of 70%, a risk-free rate of 0.75% and no assumed dividends.
Based
on the relative fair values, initial note principal and note discount of $875 and $126, respectively, were recorded. During the
three months ended March 31, 2016, the Company recorded $32 in accretion of the note discount and $22 of accrued interest associated
with these related party notes. The effective interest rate of the notes is 24.5%.
Purchase
Price Obligation – Balmat Acquisition
As is described in detail
in Note 3, the Company has the right to satisfy the remaining amount owed to Hudbay related to the Balmat Acquisition in
one of two remaining ways (the purchase price obligation) where:
|
●
|
the
estimated fair value of this purchase price obligation of $13,361 was determined using a discounted cash flow model, with
future cash flows estimated based upon probability-weighted scenarios of payments under the remaining two repayment options;
|
|
|
|
|
●
|
the
current portion of this purchase price obligation of $500 reflects the Company’s plan to resume production at the Balmat
Mine within the next 12-months; and
|
|
|
|
|
●
|
because
of the repayment options available to the Company and the fact that the Company has not yet selected one of these repayment
options, we are not able to say with certainty when the long-term portions of this purchase price obligation will be paid.
|
Notwithstanding
the above, if any portion of the purchase price obligation has not been paid within 48 months of the closing date (or 54 months
of the closing date if we have not elected one of the options) then the entire unpaid balance is immediately due and payable to
Hudbay no later than November 2, 2019 or May 2, 2020, respectively.
NOTE 10 – ASSET RETIREMENT OBLIGATION
Changes
in our asset retirement obligation are summarized in the following table:
Balance,
December 31, 2015
|
$
|
17,906
|
|
Accretion
expense
|
|
206
|
|
Releases
|
|
-
|
|
Revisions
to
cost
estimates
|
|
(206)
|
|
Balance,
March 31, 2016
|
$
|
17,906
|
|
The Company recognized $206 in accretion expense during the three months ended March
31, 2016. An adjustment to the estimated timing of future cash outflows associated with the Company’s planned reclamation
activities resulted in a $206 downward adjustment to the estimated fair value of the Company’s liability as of March 31,
2016.
NOTE
11
– COMMITMENTS AND CONTINGENCIES
Royalty
Payments
On
a portion of the Balmat Mine’s mineral leases, the Company is subject to royalty payments of up to 4% of the net smelter
return on ores mined from these properties.
Potential
Environmental Contingency
Our
exploration and development activities are subject to various federal and state laws and regulations governing the protection
of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Company conducts
its operations so as to protect public health and the environment and believes its operations are materially in compliance with
all applicable laws and regulations. We have made, and expect to make in the future, expenditures to comply with such laws and
regulations.
Legal
Matters
In
connection with our litigation involving Michael Stanford in which the Fifth District Court of Beaver County (Civil Case No. 140500023)
awarded us a judgment against Mr. Stanford as previously disclosed, the court issued a further order on February 2, 2015 authorizing
us to cancel 910,000 shares of our common stock previously issued to Mr. Stanford. This cancellation of shares was in addition
the 25,000,000 shares that Mr. Stanford returned to the Company and were cancelled by us on September 22, 2014. The 910,000 shares
were cancelled on February 2, 2015.
We
are evaluating what future legal proceedings we may pursue in order to collect money damages of approximately $23,495 awarded
to us pursuant to the judgment. Our ability to collect any further amounts on the judgment is, however, inherently unpredictable
and is subject to significant uncertainties and, therefore, determining the likelihood of a recovery and/or the measurement of
any recovery is complex. Consequently, we are unable to estimate the range of reasonably possible further recovery and no amounts
related to this award have been included in our financial statements. Our assessment is based on estimates and assumptions deemed
reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete
or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
Other
than as set forth above, we are not presently a party to any material litigation nor to the knowledge of management is any litigation
threatened against us that may have a material adverse effect on our consolidated financial position, results of operations or
cash flows.
NOTE
12 – EQUITY
Common
Stock
On
January 1, 2016, the Company entered into a consulting agreement for services relating to shareholder information and public relations.
The consulting firm was issued 200,000 shares of the Company’s common stock valued at $0.66 per share for the six-month
agreement.
On
February 24, 2016, the Company entered into a consulting agreement for services relating to management consulting and business
advisory. The consulting firm was issued 150,000 shares of the Company’s common stock valued at $0.51 per share for the
six-month agreement.
Stock
Options
The
Company did not issue any stock option awards during the three months ended March 31, 2016.
On
March 1, 2015, as part of an employment agreement, the Company granted an option to purchase 250,000 shares of the Company’s
common stock with an exercise price of $0.50 per share. The option vested as follows: 50,000 shares upon execution of the employment
agreement and 50,000 shares each on March 31, 2015; June 30, 2015; September 30, 2015; and December 31, 2015. On the grant date,
the Company estimated the fair value of the option grant using the Black Scholes option pricing model based on the closing price
of our common shares on the grant date as quoted on the stock exchange where the majority of our trading volume and value of the
shares occurs and assuming a maturity of 2.7 years, a 0.896% risk free rate and a 88.83% volatility.
The
compensation expense recognized in our unaudited condensed consolidated financial statements for the three-months ended
March 31, 2016 and 2015 for stock option awards was nil and $85, respectively. As of March 31, 2016, there was no unrecognized
compensation cost related to unvested stock options as all outstanding options were fully vested.
The
following table summarizes our stock option activity for each of the three-month periods ended March 31, 2016 and 2015:
.
|
|
2016
|
|
|
2015
|
|
|
|
Number of
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, beginning of period
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
0.50
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
100,000
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per share of options granted during period
|
|
|
n/a
|
|
|
|
|
|
|
$
|
0.85
|
|
|
|
|
|
Warrants
No
warrants were issued during the three months ended March 31, 2016 or 2015.
The
Company’s outstanding warrants, each exercisable for one of the Company’s common shares, were issued to investors
in connection with offerings of the Company that closed on June 30, 2015; October 31, 2015; and November 2, 2015. The exercise
price and exercise period are outlined below:
|
|
Total
Warrants
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
June 30, 2015 Offering
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
6/30/2018
|
October 31, 2015 Offering - Series A Warrants
|
|
|
3,130,000
|
|
|
$
|
0.75
|
|
|
10/31/2017
|
October 31, 2015 Offering - Series B Warrants
|
|
|
3,130,000
|
|
|
$
|
1.50
|
|
|
10/31/2018
|
November 10, 2015 Offering
|
|
|
437,500
|
|
|
$
|
2.00
|
|
|
11/10/2018
|
|
|
|
9,197,500
|
|
|
|
|
|
|
|
The
following table summarizes our warrant activity for the three months ended March 31, 2016 and 2015:
|
|
For the three months ended
March
31,
2016
|
|
|
For the three months ended
March
31,
2015
|
|
|
|
Number of
Warrants
|
|
|
Weighted
-Average
Exercise
Price
(USD$)
|
|
|
Number of
Warrants
|
|
|
Weighted
-Average
Exercise
Price
(USD$)
|
|
Outstanding, beginning of period
|
|
|
9,197,500
|
|
|
$
|
1.13
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exrcised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
9,197,500
|
|
|
$
|
1.13
|
|
|
|
-
|
|
|
$
|
-
|
|
NOTE
13 – SUBSEQUENT EVENTS
On April 15, 2016, we failed to pay the
required $50 monthly installment due under the terms of the promissory note issued for legal services (with an original principal
of $540). On April 18, 2016, following the expiration of the 3-day grace period for making payment, we became in default
on that promissory note. In an event of a default under this note, the note holder may, at its option, (i) declare the entire
unpaid principal balance together with accrued and unpaid interest immediately due and payable; and (ii) pursue other legal
remedies.
|
●
|
Approve
an amendment and restatement of our articles of incorporation (the “Restated Articles”) to:
|
|
●
|
Increase
the number of shares of common stock from 350,000,000 to 400,000,000;
|
|
|
|
|
●
|
Create
two new classes of common stock, namely 10,000,000 shares of Class A Common Stock (voting common stock with 10 votes per share)
and 40,000,000 shares of Class B Common Stock (non-voting common stock) (“
New Classes of Common Stock
”);
|
|
|
|
|
●
|
An
amendment to grant the Board of Directors the right to fix the number of our directors to be elected in the manner provided
in the bylaws;
|
|
●
|
An
amendment to grant the power to the Board of Directors to adopt, amend or repeal our bylaws;
|
|
|
|
|
●
|
An
amendment to our current articles of incorporation to include a limitation of liability;
|
|
|
|
|
●
|
An
amendment to our current articles of incorporation to include indemnification provisions; and
|
|
|
|
|
●
|
Adoption
of the Restated Articles, which makes no material changes to our existing Articles of Incorporation and the Certificates of
Designation of Series B and C Preferred Stock, other than incorporating the amendments described in the proposals noted above.
|
|
●
|
Approve
adoption of the restated bylaws (the “Restated Bylaws”) to:
|
|
●
|
Reduce
the number of stockholder votes required to call a special meeting of the stockholders from 25% to 15%;
|
|
|
|
|
●
|
Reduce
the number of stockholder votes required to constitute a quorum for voting at stockholder meetings from a majority to one-third;
|
|
|
|
|
●
|
Permit
the number of our directors to be fixed from time to time by the Board;
|
|
|
|
|
●
|
Permit
amendment to the bylaws by a majority vote of stockholders or the Board and eliminating the requirement that a vote of two-thirds
of our outstanding shares entitled to vote must approve such action;
|
|
|
|
|
●
|
Require
certain legal proceedings involving our company, or its officers, directors or employees be brought in a state or federal
court located within the state of Nevada;
|
|
|
|
|
●
|
Permit
the prevailing party in any action brought against us to recover their attorney’s fees; and
|
|
|
|
|
●
|
Adoption
of the Restated Bylaws, which makes no material changes to our existing Bylaws, other than incorporating the amendments described
in the proposals noted above and matters permitted under Nevada Revised Statutes.
|
The
information statement was first mailed to the Company’s stockholders on May 2, 2016. In accordance with Rule 14c-2 promulgated
under the Securities Exchange Act of 1934, as amended, the actions described above will become effective no sooner than 20 days
after the information statement was mailed to the Company’s stockholders. We expect that the actions will be effective on
or about May 22, 2016.