ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the Registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the issuer
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ☐ No ☒
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
As of March 4, 2020, the
Registrant’s non-affiliates owned shares of its common stock having an aggregate market value of approximately
$1,856,874 (based upon the closing sales price of the Registrant’s common stock on that date).
On March 4, 2020, there were
133,997,423 shares of common stock issued and 128,997,423 outstanding, which is the Registrant’s only class of voting
stock.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Annual Report
on Form 10-K contains both historical statements and statements that are forward-looking in nature. Historical statements are
based on events that have already happened. Certain of these historical events provide some basis to our management, with which
assumptions are made relating to events that are reasonably expected to happen in the future. Management also relies on information
and assumptions provided by certain third party operators of our projects as well as assumptions made with the information currently
available to predict future events. These future event predictions, or forward-looking statements, include (but are not limited
to) statements related to the uncertainty of the quantity or quality of ore or tailings grades, the fluctuations in the market
price of such reserves, as well as gold, silver and other precious minerals, general trends in our operations or financial results,
plans, expectations, estimates and beliefs. You can identify forward-looking statements by terminology such as “may,”
“could,” “should,” “anticipate,” “believe,” “estimate,” “continue,”
“expect,” “intend,” “plan,” “predict,” “potential” and similar expressions
and their variants. These forward-looking statements reflect our judgment as of the date of this Annual Report with respect to
future events, the outcome of which is subject to risks, which may have a significant impact on our business, operating results
and/or financial condition. Readers are cautioned that these forward-looking statements are inherently uncertain. Should one or
more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes
may vary materially from those described herein. We undertake no obligation to update forward-looking statements. The risks identified
in Item 1A, among others, may impact forward-looking statements contained in this Annual Report.
ITEM 1. BUSINESS
Business Overview
General
Standard Metals Processing,
Inc. (“we,” “us,” “our,” “Standard Metals” or the “Company”) is an
exploration stage company having offices in Gadsden, Alabama and, through its subsidiary, a property in Tonopah, Nevada. Our business
plan is to purchase equipment and build a facility on our Tonopah property to serve as a permitted custom processing toll milling
facility (which includes an analytical lab, pyro-metallurgical plant, and hydro-metallurgical recovery plant).
The Company plans to perform permitted
custom processing toll milling, which is a process whereby mined material is crushed and ground into fine particles to ease the
extraction of any precious minerals contained therein, such as minerals in the gold, silver and platinum metal groups. Custom
milling and refining can include many different processes that are designed specifically for each ore load and to maximize the
extraction of precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill chemicals
and bulk materials on a contractual basis and provide a chemical production outsourcing option for industrial companies, which
lack the expertise, capacity, or regulatory permits for in-house production.
We are required to
obtain several permits before we can begin construction of a small-scale mineral processing facility to conduct permitted processing
toll milling activities and construction of the required additional buildings for us to commence operations.
Any reference herein
to “Standard Metals,” “the Company,” “we,” “our,” or “us” is intended
to mean Standard Metals Processing, Inc. a Nevada corporation, and all of our subsidiaries unless otherwise indicated.
Corporate History
The Company was incorporated
in the State of Colorado on July 10, 1985 as Princeton Acquisitions, Inc. On December 7, 2009, the Company changed its name to
Standard Gold, Inc. Effective March 5, 2013 the Company moved its domicile from Colorado to Nevada and changed its name from Standard
Gold, Inc. to Standard Gold Holdings, Inc. Effective December 6, 2013, the Company changed its name to Standard Metals Processing,
Inc. to more accurately reflect the business of the Company.
On March 15, 2011,
we closed a series of transactions, whereby we acquired certain assets of Shea Mining & Milling, LLC (“Shea Mining”),
which assets include land, buildings, a dormant milling facility, abandoned milling equipment, water permits, mine tailings, mine
dumps and the assignment of a note payable, a lease and a contract agreement with permits. We completed the Shea Exchange Agreement
to acquire the Shea assets to develop a permitted custom processing toll milling of precious minerals business in Tonopah, Nevada.
Toll milling is a process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious
minerals contained therein, such as gold, silver, and platinum group metals. Custom milling and refining can include many different
processes to extract precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill
chemicals and bulk materials on a contractual basis and provide a chemical production outsourcing option for industrial companies
which lack the expertise, capacity, or regulatory permits for in-house production. The land encompasses 1,183 deeded acres, one
of the largest private land holdings in Esmeralda County, Nevada. Approximately 334 acres of this land has an estimated 2.2 million
tons of tailings known as the Millers Tailings from the historic gold rush of Goldfield and Tonopah, Nevada sitting on it.
We are required to
obtain several permits before we can begin construction of a small-scale mineral processing facility and the required additional
buildings to conduct permitted processing toll milling activities and commence operations.
Subsidiaries
The Company has one
wholly owned subsidiary, Tonopah Milling and Metals Group, Inc. (“TMMG”), a Nevada corporation. TMMG has two wholly
owned subsidiaries, Tonopah Resources, Inc., a Nevada corporation and Tonopah Custom Processing, Inc., a Nevada corporation.
Products and Services
We seek to establish
ourselves as a custom processing and permitted toll milling service provider. Our business plan is to build a facility on our
Tonopah property, which includes an analytical lab, pyrometallurgical, and hydrometallurgical recovery plant.
The Company’s
intention is to become a full service permitted custom toll milling and processing company that facilitates the extraction of
precious and strategic minerals from mined material. The Company is in the process of obtaining the permits needed for construction
and operation of our permitted custom processing toll milling facility with state of the art equipment capable of processing gold,
silver and platinum metal groups. Many junior miners do not have the capital or the ability to permit a processing facility, yet
they have a large supply of mined material that requires milling be performed. It is often cost prohibitive or impractical for
these mine operators to send their materials to processing mills owned by the large mining companies, or to other customers with
badly needed milling and processing services.
While Nevada has a
historic role as a mining center with good proximate geology and ample mined product, very little custom processing toll milling
capacity remains in the state. During the last several decades, other processing facilities have been shuttered due to high costs
of regulations and the vertical integration of milling within large mining companies leaving junior miners with few options for
local milling services. As a result, we are in a unique position among processing facilities because we are capable of true permitted
custom processing. We have the only ball mill located within a custom toll milling facility within 300 miles allowing us to serve
miners in the western United States, Canada, Mexico, and Central America.
Many junior miners
are undercapitalized, have limited access to capital markets and have a large supply of mined material that requires milling be
performed. Many large mining companies reserve their milling capacity for their inventory, which does not make providing third
party services worthwhile. This provides the Company with an opportunity to provide these potential customers with badly needed
milling and processing services. Some of our mining customers will be able to take their tailings (the material left over after
the desired minerals have been extracted) from the material they deposited with the Company and put it back in the exact same
mines those particular tailings came from. This eliminates the need for the Company to dispose of those tailings.
Water Pollution Control Permit with
Nevada Department of Environmental Protection
Through Tonopah Custom
Processing, Inc. (“TCP”), a Water Pollution Control Permit (“WPCP”) Application was filed with the Nevada
Department of Environmental Protection (“NDEP”) Bureau of Mines and Mining Reclamation (“BMMR”) for the
approval of the permits necessary for a small-scale mineral processing facility planned for the Tonopah property. The application
will remain pending until the Company submits engineering plans applicable to the plant construction. The plant will perform laboratory
testing, pilot testing, and custom processing of precious metal ores and concentrates from mining industry clients. Processing
of ore materials will employ standard mineral processing techniques including gravity concentration, froth flotation and chemical
leaching and carbon stripping.
The WPCP must be approved
prior to commencing the planned construction of our processing plant in Tonopah, Nevada. While the Company awaits approval, we
are preparing for construction of our processing facility which includes working with contractors that will be building the planned
21,875 square foot processing plant, cleaning and preparing the property, and refurbishing a trailer that will act as our construction
office.
In connection with
our WPCP application, NDEP suggested that we take the following actions: (i) retain a Nevada Certified Environmental Manager (“CEM”),
(ii) perform Meteoric Profile II water testing on ground water directly below the mill as well as surrounding wells located off
site, and (iii) determine baseline values of water using the Meteoric Profile II results. NDEP regulations require that the Company
delay any new construction planned for “metal extraction” until after the permits are in place.
Survey
Advanced Surveying
& Professional Services, a Professional Land Surveyor (“PLS”), completed surveys and testing of the Tonopah property
required for the application of our required permits. After completion of the survey, it was determined the property is 1,183
acres. The scope of work the PLS completed includes: (i) setting a total of 19 permanent monuments at angle points along lines,
(ii) setting eight permanent monuments locating US Hwy 95, (iii) recording a professional map indicating longitude and latitude
for all corners, and (iv) providing a digital map accessible in Auto Cad software.
Site Preparation
We have completed
the initial grading of specific designated areas on the 40 undisturbed acres of land including clearing all vegetation, removing
of all scrap metal, and the excavation of the building pad for the preparation of the new 21,875 square foot processing plant
and have completed the removal of all the extra and unnecessary materials and old equipment that has accumulated on the land.
Toll Milling
Toll milling is a
process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious minerals contained
therein, such as minerals in the gold, silver and platinum metal groups. Custom milling and refining that are designed specifically
for each ore load can include many different processes to maximize the extraction of precious metals from ore, carbon or concentrates.
Procedure
Ore is sent to our
facility at the responsibility and cost of the customer. The Company will take a sample of the ore through a specific ore sampling
procedure. The Company’s metallurgist will test the sample on site. To obtain a quantitative determination of the amount
of a given substance in a particular sample, the Company can perform wet methods and dry methods. In the wet method, the sample
is dissolved in a reagent, like acid, until the purified metal is separated out. In the dry method, the sample is mixed with a
flux (a substance such as borax or silica that helps lower the melting temperature) and then heated so that the impurities in
the metal fuse with the flux, leaving the purified metal as residue.
If it is determined
that the sample is approved for processing, the customer and the Company will then agree upon a value of the metal grade per ton.
If there is any disagreement on the value, a third-party referee determines the value by testing the sample. The Company charges
either a flat fee per ton of the ore processed or a percentage of the precious metals extracted during processing, or a combination
of both based on the amount of work that is performed.
There are various
methods of extraction. The Company determines which method to use based upon the sample sent to the Company. In most situations,
a series of tests will be performed on a bulk sample ranging in size from 250 to 1,000 pounds. A metallurgist will determine the
best process or processes to use for the extraction based on several factors. These include the composition of the host rock,
mineralization of the host rock, whether or not it is an oxide or sulphide ore body, and the particle size of the precious metal.
After the metallurgist reviews these characteristics, the Company will run ore on a gold table and assays the concentrates, middlings,
and tails. An assay is an investigative procedure for qualitatively assessing or quantitatively measuring the presence or amount
of precious metals in ore. If there is too much gold in the middling or tails, the size of the grind is adjusted to increase yield
or if there is not enough gold in the middlings or tails the Company grinds the material to a finer mesh.
Some of our miner
customers will be able to take their tailings (the material left over after the desired minerals have been extracted) from the
material they deposited with the Company and put it back in the exact same mines those particular tailings came from. This eliminates
the need for the Company to dispose of those tailings.
Concentrate/Leach
Circuit
Concentration is the
separation of precious minerals from other materials by utilizing different properties of the minerals to be separated including
density, magnetic or electric and physiochemical. The Company will attempt to create a “concentrate” of minerals to
reduce the size of each ton processed. The Company may also receive concentrates from customers, especially those where transport
of tons of raw ore is not feasible.
The leaching process
uses chemicals to extract the metals from the solid materials (concentrates) and bring them into a solution. Once the metals are
in the solution, it is passed through carbon or resin columns where the precious metals are deposited onto the carbon/resin.
The metals will then
be stripped from the carbon back into a different solution where they are pumped through an electrowinning circuit in a process
called carbon stripping. The metals are then deposited onto stainless steel in the electrowinning circuit. After this stage, the
metals are either sold or further refined off-site. The solution is recycled and used again to process additional material.
Recent Actions
The
Company is working on general maintenance and updating of the Tonopah property in line with the Company’s business plan.
In an effort to move the Company’s business plan forward, Management may evaluate opportunities to acquire, license or joint
venture with other parties involved in toll milling, processing, or mining related activities, which may include Granite Peak Resources,
LLC, and its affiliated entities, including, but not limited to, Nederland Mining Group, LLC, NovaMetallix, Inc., and BlackBear
Natural Resources, LTD. (f/k/a Calais Resources, Inc.).
Employees
As of December 31,
2018, we did not have any employees. The Company’s and its subsidiaries’ officers, directors and independent contractors
conduct all operations.
Available Information
You can request a
free copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically
file such material, or furnish it to the Securities and Exchange Commission (“SEC”) the above filings by writing or
calling us at:
Standard Metals Processing, Inc.
611 Walnut Street
Gadsden, Alabama 35901
(888) 960-7347
ITEM 1A. RISK FACTORS
An investment in our common stock is
highly speculative and involves a high degree of risk. Before making an investment decision, you should carefully consider the
risks described below together with all of the other information included in this prospectus. The statements contained in or incorporated
into this prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the
following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the
value of our common stock could decline, and an investor in our securities may lose all or part of their investment.
Risks Related to Our Capital Stock
INVESTORS MAY BE UNABLE TO ACCURATELY
VALUE OUR COMMON STOCK.
Investors often value
companies based on the stock prices and results of operations of other comparable companies. Currently, we do not believe another
publicly traded permitted custom processing toll milling company exists that is directly comparable to our size and scale. Prospective
investors, therefore, have limited historical information about our permitted custom processing toll milling capabilities on which
to base an evaluation of our performance and prospects and an investment in our common stock. As such, investors may find it difficult
to accurately value our common stock.
INVESTORS MAY FACE SIGNIFICANT RESTRICTIONS
ON THE RESALE OF OUR COMMON STOCK DUE TO FEDERAL REGULATION OF PENNY STOCKS.
The SEC has defined
any equity security with a market price of less than $5.00 per share as a “penny stock.” Penny stocks are subject
to the requirements or Rule 15(g)-9 of the Securities Exchange Act of 1934. Our common stock is quoted on the OTCQB under the
symbol SMPR and is currently below $5.00 per share. Therefore, our common stock is deemed a “penny stock” and is subject
to the requirements of Rule 15(g)-9. Under such rule, broker-dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior
to the transaction. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity
of the securities and the ability of purchasers to sell their securities in the secondary market.
WE DO NOT INTEND TO PAY DIVIDENDS FOR
THE FORESEEABLE FUTURE.
We have never declared
or paid any dividends on our common stock. We intend to retain all of our earnings, if any, for the foreseeable future to finance
the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. Our Board of Directors
retains the discretion to change this policy.
THE MARKET FOR OUR COMMON STOCK MAY FLUCTUATE.
Currently, our common
stock is traded on the Over the Counter Venture Capital Market (“OTCQB”). Stock prices on the Over the Counter Markets
can be more volatile than stocks trading on national market systems such as NSADAQ, NYSE or AMEX. Our stock price may be affected
by factors outside of our control and unrelated to our business operations.
Risks Related to Our Financial Condition
WE CURRENTLY DO NOT HAVE ENOUGH CASH
TO FUND OPERATIONS AND/OR REDUCE OUR DEBT.
We have very limited
funds, and such funds are not adequate to develop our current business plan, or even to satisfy our existing working capital requirements.
We will be required to raise additional funds to effectuate our current business plan for permitted custom processing toll milling
and to satisfy our working capital requirements. Without significant additional capital, we will be unable to start operations.
With respect to our proposed permitted custom processing toll milling operations, the costs and ability to successfully operate
have not been fully verified because none of our proposed tolling operations have begun and we may incur unexpected costs or delays
in connection with starting operations. The cost of designing and building our operations and of finding customers and sources
of ore for our toll milling sources can be extensive and will require us to obtain additional financing, and there is no assurance
that we will have the resources necessary or the financing available to attain operations or to acquire customers and ore sources
necessary for our long-term business. Our ultimate success will depend on our ability to raise additional capital. Additionally,
such additional capital may not be available to us at acceptable terms or at all. Further, if we increase our capitalization and
sell additional shares of our capital stock, a shareholder’s position in our Company will be subject to dilution. In the
event that we are unable to obtain additional capital, we may be forced to cease our search for additional business opportunities,
reduce our operating expenditures or to cease operations altogether.
WE HAVE NOT YET BEGUN OPERATIONS AND
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
We have yet to commence
active operations. We have no prior operating history from which to evaluate our success, or our likelihood of success in operating
our business, generating any revenues, or achieving profitability. This provides a limited basis for you to assess our ability
to commercialize our services and the advisability of investing in our securities. We have not generated revenue from our toll
milling services to date and there can be no assurance that our plans for permitted custom processing toll milling will be successful,
or that we will ever attain significant revenue or profitability. Also, toll milling is a new area of business for us, and our
management team has little experience in permitted custom processing toll milling operations. Although we intend to hire knowledgeable
and experienced employees and/or consultants with significant experience in toll milling operations, there is no guarantee that
we will reach profitability in the near future, if at all. As we develop our Tonopah property to prepare for operations, we are
subject to unforeseen costs, expenses, problems and difficulties inherent in new business ventures.
OUR INDEPENDENT AUDITORS HAVE SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The financial statements
for each of these periods were prepared assuming that we would continue as a going concern. We have had net losses for each of
the years ended December 31, 2018 and 2017, and we have an accumulated a deficit as of December 31, 2018. In the view of our independent
auditors, these conditions raise substantial doubt about our ability to continue as a going concern. Furthermore, since we do
not expect to generate any significant revenues from operations for the foreseeable future, our ability to continue as a going
concern depends, in large part, on our ability to raise additional capital through equity or debt financing transactions. If we
are unable to raise additional capital, we may be forced to discontinue our business.
Risks Related to the Company
WE HAVE LIMITED ASSETS.
Our assets to be used
in the development of a toll milling service have not yet been utilized, we will need to acquire additional equipment and construct
additional facilities and there can be no guarantee that we will be successful in utilizing our current assets or obtaining the
additional equipment and facilities that we will need to operate going forward. We do not anticipate having any revenues from
our permitted custom toll milling processing for the foreseeable future. Additionally, without adequate funding, we may never
produce any significant revenues.
OUR MAJOR ASSETS ARE ENCUMBERED UNDER
A DEED OF TRUST OR PLEDGED.
The Tonopah property
is subject to a first deed of trust securing a $2,500,000 promissory note in default plus interest accrued through December 31,
2018 of $ 1,096,235 currently held by Granite Peak Resources, LLC (“GPR”), a related party. In addition, the Company
entered into a Forbearance Agreement with GPR effective December 20, 2019. GPR has agreed to forbear any foreclosure proceedings
for six months in exchange for the Company pledging the stock of its subsidiary and its subsidiaries as additional collateral
under its outstanding obligations.
OUR MANAGEMENT TEAM MAY NOT BE ABLE
TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGIES.
If our management
team is unable to execute our business strategies, then our development could be materially and adversely affected. In addition,
we may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by
any future growth. We may seek to augment or replace members of our management team or we may lose key members of our management
team, and we may not be able to attract new management talent with sufficient skill and experience.
OUR SUCCESS IN THE FUTURE MAY DEPEND
ON OUR ABILITY TO ESTABLISH AND MAINTAIN STRATEGIC ALLIANCES, AND ANY FAILURE ON OUR PART TO ESTABLISH AND MAINTAIN SUCH RELATIONSHIPS
WOULD ADVERSELY AFFECT OUR MARKET PENETRATION AND REVENUE GROWTH.
We may be required
to establish strategic relationships with third parties in the mining and toll milling industries. Our ability to establish strategic
relationships will depend on a number of factors, many of which are outside our control, such as the suitability of our property,
facilities and equipment relative to our competitors, or the quality grade of precious minerals we are able to extract from the
ore we process. We can provide no assurance that we will be able to establish strategic relationships in the future.
In addition, any strategic
alliances that we establish, will subject us to a number of risks, including risks associated with sharing proprietary information,
loss of control of operations that are material to developed business and profit-sharing arrangements. Moreover, strategic alliances
may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship,
which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic
alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of
our control.
Risks Relating to Our Business
WE WILL REQUIRE ADDITIONAL FINANCING
TO FUND OUR PERMITTED CUSTOM PROCESSING TOLL MILLING DEVELOPMENT AND OPERATIONS.
Substantial additional
financing will be needed in order to fund the current plan to begin toll milling services and develop and maintain the Tonopah
property. Our means of acquiring investment capital is limited to private equity and debt transactions. We have no significant
sources of currently available funds to engage in additional development. Without significant additional capital, we will be unable
to fund our current property interests or effectuate our current business plan for permitted custom processing toll milling and
mining services. See “—Risks Relating to Our Financial Condition – We Currently Do Not Have Enough Cash to Fund
Operations, and/or Reduce Debt”
OUR PERFORMANCE MAY BE SUBJECT TO FLUCTUATIONS IN
MINERAL PRICES.
The profitability
of any permitted custom processing toll milling services could be significantly affected by changes in the market price of minerals.
Demand for minerals can be influenced by economic conditions and attractiveness as an investment vehicle. Other factors include
the level of interest rates, exchange rates and inflation. The aggregate effect of these factors is impossible to predict with
accuracy.
In particular, mine
production and the willingness of third parties such as central banks to sell or lease gold affects the supply of gold. Worldwide
production levels also affect mineral prices. In addition, the price of gold, silver and other precious minerals have, on occasion,
been subject to very rapid short-term changes due to speculative activities.
OUR PERMITTED CUSTOM PROCESSING TOLL
MILLING OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATIONS AND PERMITTING, WHICH COULD RESULT IN THE INCURRENCE OF ADDITIONAL
COSTS AND OPERATIONAL DELAYS.
All phases of our
operations are subject to current environmental protection regulation. There is no assurance that future changes in environmental
regulation, such as greenhouse gas emissions, carbon footprint and the like, will not adversely affect our operations. Some of
our proposed operations will require additional permits, which could incur additional cost and may delay startup and cash flow.
In addition, each toll milling mineral source must be fully permitted for its own operation, a process over which we have no control.
OUR PERMITTED CUSTOM PROCESSING TOLL
MILLING OPERATIONS WILL REQUIRE US TO DEPEND ON THIRD PARTIES AND OTHER ELEMENTS BEYOND OUR CONTROL, WHICH COULD RESULT IN HARM
TO OUR BUSINESS.
Our permitted custom
processing toll milling operations will rely on mineral material produced by others, and we have no control over their operations.
Delivery of ore to our processing facilities is also subject to the risks of transportation, including trucking and aviation operations
run by others, regulations and permits, fuel cost, weather, and travel conditions. Toll milling requires that the mineral producer
and the mineral processor agree on the grade of the incoming material, which can be a source of conflict between parties. Although
a third party will be utilized for any such conflict, any disagreements with mineral producers, or problems with the delivery
of ore, could result in additional costs, disruptions and other problems in the operation of our business.
U.S. FEDERAL LAWS
Under the U.S. Resource
Conservation and Recovery Act, companies such as ours may incur costs for generating, transporting, treating, storing, or disposing
of hazardous waste. Our permitted custom processing toll milling operations may produce air emissions, including fugitive dust
and other air pollutants, from stationary equipment, storage facilities, and the use of mobile sources such as trucks and heavy
construction equipment which are subject to review, monitoring and/or control requirements under the Federal Clean Air Act and
state air quality laws. Permitting rules may impose limitations on our production levels or create additional capital expenditures
in order to comply with the rules.
The U.S. Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA) imposes strict joint and several liability
on parties associated with releases or threats of releases of hazardous substances. The groups who could be found liable include,
among others, the current owners and operators of facilities which release hazardous substances into the environment and past
owners and operators of properties who owned such properties at the time the disposal of the hazardous substances occurred. This
liability could include the cost of removal or remediation of the release and damages for injury to the surrounding property.
We cannot predict the potential for future CERCLA liability with respect to our property.
THE GLOBAL FINANCIAL MARKET MAY HAVE
IMPACTS ON OUR BUSINESS AND FINANCIAL CONDITION THAT WE CURRENTLY CANNOT PREDICT.
The global financial
market, especially the precious metal market and its market price fluctuations have, and may continue to have, an impact on our
business and our financial condition. We may face significant challenges if the price of the minerals we intend to process do
not achieve or stay at adequate price levels. Our ability to access the capital markets may be severely restricted at a time when
we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and
business conditions. The market price of ores, metals and precious metals could have an impact on any potential lenders or investors
or on our customers, causing them to fail to meet their obligations to us.
ITEM 2. PROPERTIES
On March 15, 2011,
in an effort to enter the precious metal toll milling business, we completed the Shea Exchange Agreement, whereby we acquired
the Tonopah property, consisting of land, buildings, mining tailings, a dormant milling facility, abandoned milling equipment
and water permits.
Our Tonopah property
consists of 1,183 acres of land, buildings, mining tailings, a dormant milling facility, abandoned milling equipment and water
permits. The Tonopah property was transferred to Tonopah Milling and Metals Group, Inc. (“TMMG”), the Company’s
wholly owned subsidiary and then transferred to Tonopah Resources, Inc., a wholly owned subsidiary of TMMG.
ITEM 3. LEGAL PROCEEDINGS
Stephen E. Flechner v. Standard Metals
Processing, Inc.
On April 29, 2014,
Stephen E. Flechner filed suit in the United States District Court for the District of Colorado against Standard Metals Processing,
Inc. alleging that Standard Metals had refused to allow him to exercise stock options granted to him pursuant to a Stock Option
Agreement, dated April 1, 2010, and a second Stock Option Agreement, dated January 21, 2011. On June 12, 2014, Standard Metals
filed an Answer and a Motion to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for
the Northern District of Alabama, Middle Division. On January 16, 2015, Standard Metals filed a Motion for Summary Judgment. On
January 23, 2015, the Court issued an Order granting in part and denying in part Standard Metals’ Motion to Dismiss or, Alternatively,
to Stay or Transfer the action to the United States District Court for the Northern District of Alabama, Middle Division. The Court
in its Order stayed further proceedings in Colorado pending the issuance of orders by the Alabama court. Thereafter, on January
26, 2015, the Court issued an Order vacating the February 20, 2015 Trial Preparation Conference and the March 9, 2015 Bench Trial.
On March 23, 2015, the Court issued an Order denying Standard Metals’ Motion for Summary Judgment. On March 30, 2015, Flechner
filed a Motion to Lift the Stay. On March 31, 2015, the Court issued an Order granting Flechner’s Motion to Lift the Stay.
On April 6, 2015, the Court issued an Order scheduling a Bench Trial for July 29, 2015. On April 9, 2015, Flechner filed a Motion
for Reconsideration of the Court’s March 23, 2015 Order Denying Flechner’s Motion to Enforce the Confidential Settlement
Agreement to Settle Certain Issues. On May 1, 2015, the Court issued an Order Granting Flechner’s Motion to Enforce the Confidential
Settlement Agreement to Settle Certain Issues. On August 12, 2015 the United Stated District Court for the District of Colorado
issued a judgment in favor of Stephen E. Flechner for $2,157,000. An amended final judgment was ordered in adjudication of the
Complaint by the U.S. District Court for the District of Colorado (the “Court”) on August 28, 2015 in favor of Flechner
in the amount of $2,157,000, plus interest through the date of judgment of $235,246, plus interest of $472.76/day from August 28,
2015 until paid in full. The Company, in good faith anticipation of a settlement did not appeal the judgment and therefore, the
Company’s notice of appeal was dismissed on November 17, 2015. This judgment is now non-appealable. The Company has recognized
the daily interest due from the date of the August 28, 2015 judgment through December 21, 2018, totaling $584,377, resulting in
a total amount of $2,976,623 being included in the Accrual for settlement of lawsuits relating to this matter in the accompanying
December 31, 2018 consolidated balance sheet.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is
quoted on the OTCQB under the symbol “SMPR.” As of March 4, 2020, the last closing sale price of our common stock as
reported by OTCQB was $0.05 per share. The following table sets forth for the periods indicating the range of high and low
closing sale prices of our common stock:
Period
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2017
|
|
$
|
0.22
|
|
|
$
|
0.04
|
|
Quarter Ended June 30, 2017
|
|
$
|
0.13
|
|
|
$
|
0.06
|
|
Quarter Ended September 30, 2017
|
|
$
|
0.12
|
|
|
$
|
0.06
|
|
Quarter Ended December 31, 2017
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2018
|
|
$
|
0.185
|
|
|
$
|
0.05
|
|
Quarter Ended June 30, 2018
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
Quarter Ended September 30, 2018
|
|
$
|
0.225
|
|
|
$
|
0.064
|
|
Quarter Ended December 31, 2018
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
The quotations from
the OTCQB above reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not reflect actual transactions.
Transfer Agent
Our transfer agent
is American Stock Transfer & Trust Company, LLC, and is located at 6201 15th Avenue, Brooklyn, New York, NY 11219. Their telephone
number is (718) 921-8124 and their website is www.astfinancial.com.
Holders of Common Stock
As of March 4, 2020
there were 197 shareholders of record of our common stock. As of such date, 133,997,423 shares were issued and 128,997,423 were
outstanding.
Dividends
We have never paid
cash dividends on our common stock and have no present intention of doing so in the foreseeable future. Rather, we intend to retain
all future earnings to provide for the growth of our Company. Payment of cash dividends in the future, if any, will depend, among
other things, upon our future earnings, requirements for capital improvements and financial condition.
Recent Sales of Unregistered Securities
On
February 15, 2017 and March 1, 2017, the Company issued convertible promissory notes in the aggregate principal amount of $60,000.
The notes are due one year after issuance, accrue interest at 6% per annum and are convertible into shares of common stock at
a price of $0.02 per share.
On
March 14, 2017, the Company received cash proceeds of $60,000, and on April 18, 2017, the Company issued a convertible promissory
note in exchange for the cash proceeds. The promissory note accrues interest at 6% per annum and is due one year from the date
of issuance. The note is convertible into shares of common stock at $0.075 per share, with no adjustments to the conversion price.
On
June 22, 2017, the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding. The note is convertible into shares of common stock at $0.065 per share, with no adjustments to the conversion
price.
On
August 22, 2017, the Company received cash proceeds of $10,000, and on February 7, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding. The note is convertible into shares of common stock at $0.08 per share, with no adjustments to the conversion
price.
On
October 17, 2017, the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding, with no adjustments to the conversion price. The note is convertible into shares of common stock at $0.05
per share.
On
December 26, 2017, the Company received cash proceeds of $5,000, and on January 24, 2018, the Company issued a convertible promissory
note in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from
the date of funding. The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion
price.
On
December 29, 2017, the Company received cash proceeds of $4,796, and on January 24, 2018, the Company issued a promissory note
in exchange for the cash proceeds. The promissory note accrues interest at 6% per annum and is due one year from the date of funding.
The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion price.
On
January 22, 2018, the Company received cash proceeds of $15,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
January 22, 2018, the Company received cash proceeds of $8,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
January 26, 2018, the Company received cash proceeds of $40,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
April 26, 2018, an outstanding promissory note with a balance of $68,324.38 issued on August 1, 2016 was converted into 1,138,740
shares of restricted common stock at a per share price of $0.06.
On
May 11, 2018, the Company received cash proceeds of $32,500 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.09 per share, with no adjustments to the conversion price.
On
June 11, 2018, a holder of common stock purchase warrants exercised 250,000 warrants. The Company received $25,000.
On
June 14, 2018, the Company received cash proceeds of $12,500 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.09 per share, with no adjustments to the conversion price.
During May 2018 and
June 2018, two of the convertible promissory notes outstanding as of the year ending December 31, 2017, and two notes that were
issued in May 2018 totaling principal of $105,000 together with accrued interest of $2,387, were converted into an aggregate of
2,051,864 shares of restricted common stock, at conversion prices ranging from $0.05 to $0.09.
On
June 14, 2018, the Company settled an outstanding account payable through the issuance and subsequent conversion of a convertible
promissory note in the principal amount of $10,000. The note, which was issued December 29, 2017, was due December 29, 2018 and
accrued interest at 6%. The note was convertible into common shares of the Company at a conversion price of $0.025. The note was
issued as a settlement in exchange for a $91,463 account payable, that the noteholder purchased from a vendor on December 29,
2017. Upon conversion of the note into 411,046 shares of restricted common stock of the Company, the noteholder signed a debt
settlement and release agreement for the outstanding account payable.
On
July 9, 2018, the Company received cash proceeds of $5,000 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.125 per share, with no adjustments to the conversion price.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
should be read in conjunction with the Financial Statements of the Company and notes thereto included elsewhere in this Annual
Report. See “Consolidated Financial Statements and Supplementary Data.”
Cautionary Notice Regarding Forward
Looking Statements
Readers are cautioned
that the following discussion contains certain forward-looking statements and should be read in conjunction with the “Special
Note Regarding Forward-Looking Statements” appearing at the beginning of this Annual Report.
The information contained
in Item 7 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the
forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes
that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that
the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed
in this report.
We desire to take
advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains
a number of forward-looking statements, which reflect management’s current views and expectations with respect to our business,
strategies, products, future results and events, and financial performance. All statements made in this filing other than statements
of historical fact, including statements addressing operating performance, events, or developments which management expects or
anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability,
new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical
information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that
the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including
those discussed below. Our actual results, performance or achievements could differ materially from historical results as well
as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise
these forward-looking statements to reflect any future events or circumstances.
Readers should not
place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections
about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including
those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute
to such differences include, but are not limited to, the risks to be discussed in our Annual Report on form 10-K and in the press
releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of
the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
Water Pollution Control Permit
Through the Company’s
wholly-owned subsidiary, Tonopah Custom Processing, Inc. (“TCP”), a Water Pollution Control Permit (“WPCP”)
Application was filed with the Nevada Department of Environmental Protection (“NDEP”) Bureau of Mines and Mining Reclamation
(“BMMR”) for the approval of the permits necessary for a small-scale mineral processing facility planned for the Tonopah
Property. The application will remain pending until the Company submits engineering drawings to NDEP detailing the planned construction
of its plant. The plant will perform laboratory testing, pilot testing, and custom processing of precious metal ores and concentrates
from mining industry clients. Processing of ore materials will employ standard mineral processing techniques including gravity
concentration, froth flotation and chemical leaching and carbon stripping.
The WPCP must be approved
prior to commencing the planned construction of our processing plant in Tonopah, Nevada.
In connection with
the WPCP application, NDEP suggested that we take the following actions: (i) retain a Nevada Certified Environmental Manager (“CEM”),
(ii) perform Meteoric Profile II water testing on ground water directly below the mill as well as surrounding wells located off
site, and (iii) determine baseline values of water using the Meteoric Profile II results. NDEP regulations require that the Company
delay any new construction planned for “metal extraction” until after the permits are in place.
Advanced Surveying
& Professional Services, a Professional Land Surveyor (“PLS”), completed surveys and testing of the Tonopah property
required for the application of our required permits. After completion of the survey, it was determined the property is 1,186
acres. The scope of work the PLS completed includes: (i) setting a total of 19 permanent monuments at angle points along lines,
(ii) setting eight permanent monuments locating US Hwy 95, (iii) recording a professional map indicating longitude and latitude
for all corners, and (iv) providing a digital map accessible in AutoCAD software.
Site Preparation
We have completed
the initial grading of specific designated areas on the 40 undisturbed acres of land including clearing all vegetation, removing
of all scrap metal, and the excavation of the building pad for the preparation of the new 21,875 square foot processing plant
and have completed the removal of all the extra and unnecessary materials and old equipment that have accumulated on the land.
We refurbished a trailer that will act as our construction office.
Business Plan
The
Company is reexamining its next steps for developing a processing facility. In an effort to move the Company’s business plan
forward, Management may evaluate opportunities to acquire, license or joint venture with other parties involved in toll milling,
processing, or mining related activities, which may include Granite Peak Resources, LLC, and its affiliated entities, including,
but not limited to, Nederland Mining Group, LLC, NovaMetallix, Inc., and BlackBear Natural Resources, LTD. (f/k/a Calais Resources,
Inc.).
Results of Operations
Comparison of the Years Ended December
31, 2018 and December 31, 2017
Revenues
We had no revenues
from any operations for the years ended December 31, 2018 and 2017. Furthermore, we do not anticipate any significant future revenue
until we have sufficiently funded construction and begin operations.
General and Administrative
Expenses
General and administrative
expenses were $123,057 for the year ended December 31, 2018 as compared to $122,615 for the same period in 2017. For the year
ended December 31, 2018, the majority of general and administrative expense was for accrued expenses and professional fees. During
the years ended December 31, 2018 and 2017, the majority of expenses were relatively the same, with legal fees and insurance decreasing
in the current period as compared to the corresponding period in 2017. We anticipate that future expenses will increase and that
will increase for fiscal 2019 as we continue to build the infrastructure to proceed with permitted custom processing toll milling
services.
Other Income and
Expenses
Each year we receive
monthly payments of $608 per month from American Tower Corporation for a cellular tower located on our Tonopah land. In addition,
during the year ended December 31, 2018, the Company recognized gains due to the derecognition of numerous accounts payable and
accrued claims that were no longer enforceable or settled for less than face amount aggregating $1,064,480
Interest expense for
the year ended December 31, 2018 was $885,800, compared to $389,260 for the respective period in 2017. The $496,541 increase during
2018 compared to 2017 is principally related to the Company’s resumption of accruing interest on the Flechner judgement
in 2018, which it had ceased accruing in 2016 and 2017 in anticipation of a likely settlement of the judgement and its interest
in full between the parties which became unlikely in early 2018. The remaining interest expense relates primarily to the interest
due at rates ranging from 6% to 8% on notes payable to related parties and our convertible promissory notes outstanding during
both periods.
Liquidity and Capital Resources
Liquidity is a measure
of an entity’s ability to secure enough cash to meet its contractual and operating needs as they arise. We have funded our
operations and satisfied our capital requirements through the issuance of short-term debt, convertible debt and through equity
capital we have received via certain shareholders exercising their warrants and loans from related parties during the years ended
December 31, 2018 and 2017. We do not anticipate generating sufficient net positive cash flows from our operations to fund the
next twelve months. We had a working capital deficit of approximately $9,418,874 at December 31, 2018. Cash was $1,001 at December
31, 2018, as compared to cash of $2,185 at December 31, 2017.
Our cash reserves
will not be sufficient to meet our operational needs and thus, we need to raise additional capital to pay for our operational
expenses and provide for capital expenditures. Our basic operational expenses are currently estimated at approximately $10,500
per month, without regard to accrued interest of approximately $74,000 per month. Above our basic monthly expenses, we estimate
that we need approximately $10,000,000 to begin limited toll milling operations. If we are not able to raise additional working
capital, we may have to cease operations altogether.
Recent Financings
The Company received
$159,796 in proceeds from the issuance of convertible promissory notes issued in 2017. The notes accrue interest at 6% per annum
and are convertible at per share prices ranging from $0.02 - $0.08 with no adjustments to the conversion price.
The
Company received $113,000 in proceeds from the issuance of convertible promissory notes issued in 2018. The notes accrue interest
at 6% per annum and are convertible at per share prices ranging from $0.-5 - $0.125 with no adjustment to the conversion price.
On
June 11, 2018, the Company received $25,000 from the exercise of 250,000 common stock purchase warrants.
Going Concern
The consolidated financial
statements contained in this annual report on Form 10-K have been prepared assuming that the Company will continue as a going
concern. The Company has accumulated losses from inception through the period ended December 31, 2018 of approximately $103,184,962,
and a working capital deficit of approximately $9,418,874, as well as negative cash flows from operating activities. Presently,
the Company does not have sufficient cash resources to meet its debt obligations in the twelve months following the date of this
filing. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is
in the process of evaluating various financing alternatives in order to finance its capital requirements, as well as for general
and administrative expenses. These alternatives include raising funds through public or private equity markets and either through
institutional or retail investors. Although there is no assurance that the Company will be successful with its fund-raising initiatives,
management believes that the Company will be able to secure the necessary financing as a result of ongoing financing discussions
with third party investors and existing shareholders.
The consolidated financial
statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. The
Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required
and ultimately to attain profitability. If the Company raises additional funds through the issuance of equity, the percentage
ownership of current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to
the rights, preferences and privileges of the Company’s common stock. Additional financing may not be available upon acceptable
terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to
take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict its future
plans for developing its business and achieving commercial revenues. If the Company is unable to obtain the necessary capital,
the Company may have to cease operations.
Working Capital Deficiency
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Current assets
|
|
$
|
1,001
|
|
|
$
|
25,330
|
|
Current liabilities
|
|
|
9,419,875
|
|
|
|
9,762,893
|
|
Working capital deficiency
|
|
$
|
(9,418,874
|
)
|
|
$
|
(9,737,563
|
)
|
The decrease in current
assets is mainly due to the amortization of prepaid expenses. The decrease in current liabilities is primarily due to the derecognition
numerous accounts payable and accrued claims that were no longer enforceable or settled for less than face amount, net of an increase
in accrued interest relating to the Company’s convertible debentures and notes payable.
Cash Flows
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in operating activities
|
|
$
|
(139,184
|
)
|
|
$
|
(158,937
|
)
|
Net cash provided by investing activities
|
|
|
—
|
|
|
|
--
|
|
Net cash provided by financing activities
|
|
|
138,000
|
|
|
|
159,796
|
|
Increase (decrease) in cash
|
|
$
|
(1,184
|
)
|
|
$
|
859
|
|
Operating Activities
Net cash used in operating
activities was $139,184 for the year ended December 31, 2018. Cash used in operating activities during the year ended December
31, 2018 was primarily due to the derecognition of numerous accounts payable and accrued claims that were no longer enforceable
or settled for less than face amount aggregating $1,064,480, as well as the net loss of $10,154 offset by amortization of debt
discounts, and an increase in accrual for settlement of lawsuits.
Net cash used in operating
activities was $158,937 for the year ended December 31, 2017, primarily due to a net loss of $596,693, offset by an increase in
accounts payable, accrued expenses, and by amortization of debt discounts.
Financing
Activities
For the year ended
December 31, 2018, net cash provided by financing activities was $138,000, which was from the issuance of short term convertible
promissory notes aggregating $113,000, and the proceeds from the exercise of an option on 250,000 shares of common stock.at
the reduced price of $25,000. For the year ended December 31, 2017, net cash provided by financing activities was $159,796 from
the issuance of convertible debt notes.
Off-Balance Sheet Arrangements
During the year ended
December 31, 2018, we did not engage in any off-balance sheet arrangements as defined in item 303(a)(4) of the SEC’s Regulation
S-K.
Effects of Inflation
We do not believe
that inflation has had a material impact on our business, revenues or operating results during the periods presented.
Critical Accounting Policies and Estimates
Our significant accounting
policies are more fully described in the notes to our audited consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2017. We believe that the accounting policies below are critical for one to fully
understand and evaluate our financial condition and results of operations.
Impairment of Long-lived Assets
We are reviewing the
property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment
include: an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse change
in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted
operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment
are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted
future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset,
then the asset is considered to be impaired and its carrying value is written down to fair value. There were no impairment charges
in the year ended December 31, 2018, however, we decided to combine the carrying value of our mining and mineral assets as they
are inseparable and depend upon each other in value creation. See Note 3 to Audited Consolidated financial statements.
Income Taxes
Income taxes are accounted for based upon
an asset and liability approach. Accordingly, deferred tax assets and liabilities arise from the difference between
the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided
under currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively,
for the period plus or minus the change in deferred tax assets and liabilities during the period.
Accounting guidance requires the recognition
of a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. The Company believes its income tax filing positions and
deductions will be sustained upon examination and accordingly, no reserves, or related accruals for interest and penalties have
been recorded at December 31, 2018 and 2017. The Company recognizes interest and penalties on unrecognized tax benefits as well
as interest received from favorable tax settlements within income tax expense.
On December 22, 2017, the President of
the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax
years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United
States tax law, including various provisions that are expected to impact the Company. The Tax Reform Law reduces the federal corporate
tax rate from 34% to 21% effective January 1, 2018. The Company believes that this reduction in the federal corporate rate will
have a favorable effect on the consolidated financial statements of its, as well as those other similarly situated small businesses.
Recent Accounting Standards
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue
from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities
beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of
either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09
will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined
the effect of the standard on its ongoing financial reporting, however as there have been no revenues to date, the Company does
not expect the adoption to have a material impact.
In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires all leases that have a term of over 12 months
to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease
will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest
expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January
1, 2019 and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has adopted this standard
beginning in 2018, but as the Company does not have any significant leases, it does not expect it to have a material impact on
its financial position or results of operations.
During the period
covered by this report, there were several new accounting pronouncements issued by the Financial Accounting Standards Board. Each
of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of
any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The information called
for by Item 8 is included following the “Index to Financial Statements” on page F-1 contained in this annual report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
We maintain disclosure
controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer
as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance the objectives of the control system are met.
Under the supervision
of, and the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted
an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and
is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure
controls and procedures were not effective as of December 31, 2018, because of the identification of the material weaknesses in
internal control over financial reporting described below. Notwithstanding the material weaknesses that existed as of December
31, 2018, our Chief Executive Officer and Chief Financial Officer have each concluded that the consolidated financial statements
included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position, results of operations
and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States
of America (“GAAP”). We are currently taking steps to remediate such material weaknesses as described below.
Management’s Report on Internal
Control over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal
financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP and includes those policies and procedures that:
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●
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Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect our transactions and dispositions of our assets;
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●
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Provide reasonable assurance our transactions are recorded
as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and
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●
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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.
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Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system
of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives
of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an assessment of the effectiveness of our internal control over financial reporting based on criteria established in “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), as
of December 31, 2009.
As
a result of our continued material weaknesses described below, management has concluded that, as of December 31, 2018, our internal
control over financial reporting was not effective based on the criteria in “Internal Control-Integrated Framework”
issued by COSO.
Material Weaknesses in Internal Control
over Financial Reporting
A material weakness
is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment, management
identified the following control deficiencies, which were previously identified, that still represent material weaknesses at December
31, 2018:
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●
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The Company, at times in the past prior to the period covered by this
annual statement, entered into material transactions without timely obtaining the appropriate signed agreements and board
approval. Management believes the approval process currently in place is sufficient to alleviate any material issues and will
change procedures if and when circumstances indicate they are needed. Although the Company has taken steps to prevent this
from happening, agreements entered into by prior management will continue to cause an issue
until such prior agreements terminate or expire.
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●
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Management did not design and maintain effective control relating to the
quarter end closing and financial reporting process due to lack of evidence of review surrounding various account
reconciliations and properly evidenced journal entries. Due to the Company’s limited resources, the Company has
insufficient personnel resources and technical accounting and reporting expertise to properly address all of the accounting
matters inherent in the Company’s financial transactions. Management continues to search for additional board members
that are independent and can add financial expertise, and intends to formalize oversight processes in this area in an effort
to remediate part of this material weakness.
|
We are in the process
of establishing certain steps in response to the identification of these material weaknesses that should result in certain changes
in our internal control over financial reporting, but due to the Company’s limited funds and inability to add certain staff
personnel, the changes may be limited and may also not be completely effective. There were no additional material weaknesses noted
during the year ended December 31, 2018.
ITEM 9B. OTHER INFORMATION
None.
The accompanying footnotes are an integral
part of these consolidated financial statements.
The accompanying footnotes are an integral
part of these consolidated financial statements.
The accompanying footnotes are an integral
part of these consolidated financial statements.
The accompanying footnotes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 and 2017
NOTE 1 – NATURE OF BUSINESS
Standard Metals Processing, Inc. (“we,”
“us,” “our,” “Standard Metals” or the “Company”) is an exploration stage company,
incorporated in Nevada having offices in Gadsden, Alabama and through its subsidiary, a property in Tonopah, Nevada. Their business
plan is to purchase equipment and build a facility on the Tonopah property to serve as a permitted custom processing toll milling
facility (which includes an analytical lab, pyro-metallurgical plant, and hydro-metallurgical recovery plant).
The Company plans to perform permitted
custom processing toll milling which is a process whereby mined material is crushed and ground into fine particles to ease the
extraction of any precious minerals contained therein, such as minerals in the gold, silver and platinum metal groups. Custom
milling and refining can include many different processes that are designed specifically for each ore load and to maximize the
extraction of precious metals from carbon or concentrates. These toll-processing services also distill, dry, mix, or mill chemicals
and bulk materials on a contractual basis and provide a chemical production outsourcing option for industrial companies, which
lack the expertise, capacity, or regulatory permits for in-house production.
We are required to obtain several permits
before we can begin construction of a small scale mineral processing facility to conduct permitted processing toll milling activities
and construction of the required additional buildings and well relocation necessary for us to commence operations.
Going Concern
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assuming
we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. For the year ended December 31, 2018, the Company incurred losses from operations of $10,155.
At December 31, 2018, the Company had an accumulated deficit of $103,184,962 and a working capital deficit of
$9,418,874. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. Our ability
to continue as a going concern is dependent on our ability to raise the required additional capital or debt financing to meet short
and long-term operating requirements. During the year ended December 31, 2018, the Company received net cash proceeds of approximately
$113,000 from the convertible promissory notes payable, and an additional $25,000 from the exercise of an outstanding warrant at
an approved reduced price. Management believes that private placements of equity capital and/or additional debt financing will
be needed to fund our long-term operating requirements. The Company may also encounter business endeavors that require significant
cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash. If the Company raises
additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders
could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing
may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms,
the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and
materially restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital
position. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements
include the accounts of Standard Metals Processing, Inc., and its wholly owned subsidiaries Tonopah Milling and Metals Group,
Inc. and its wholly-owned subsidiaries Tonopah Custom Processing, Inc., and Tonopah Resources, Inc. All significant intercompany
transactions, accounts and balances have been eliminated in consolidation.
Cash and Cash Equivalents
We maintain our cash in high-quality financial
institutions. The balances, at times, may exceed federally insured limits.
Property, Plant and Equipment
Property and equipment are recorded at
cost and depreciated, once placed in service, using the straight-line method over estimated useful lives as follows:
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Years
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Machinery and equipment
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2-7
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Vehicle
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2
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Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized. As items of property or equipment are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operating income.
Long-Lived Assets
The Company will periodically evaluate
the carrying value of long-lived assets to be held and used, including but not limited to, mineral properties, mine tailings,
mine dumps, capital assets and intangible assets, when events and circumstances warrant such a review and at least annually. The
carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner,
except that fair values are reduced for the cost to dispose. There were no impairment charges during the years ended December
31, 2018 and December 31, 2017.
Use of Estimates
Preparing financial statements in conformity
with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition and Deferred Revenue
As of December 31, 2018, we have recorded
no revenues from custom permitted processing toll milling. If we achieve revenue generation, the Company plans to report revenues
consistent with ASC Topic 606.
Financial Instruments
The carrying amounts for all financial
instruments approximates fair value. The carrying amounts for cash, accounts payable and accrued liabilities approximated fair
value because of the short maturity of these instruments. The fair value of short-term debt approximated the carrying amounts
based upon the expected borrowing rate for debt with similar remaining maturities and comparable risk.
Loss per Common Share
Basic earnings (loss) per common share
is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding
during the periods presented. Diluted earnings per common share is determined using the weighted average number of common shares
outstanding during the periods presented, adjusted for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of options, warrants and conversion of convertible debt. In periods where losses are reported, the
weighted average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
At December 31, 2018 and 2017, the weighted
average shares from stock options of 32,576,223 and 32,576,223, respectively and warrants of 4,865,640 and 6,125,640, and number
of equivalent shares of convertible notes payable 328,500 and 1,000,000, respectively, were excluded from the diluted weighted
average common share calculation due to the antidilutive effect such shares would have on net loss per common share.
Income Taxes
Income taxes are accounted for based upon
an asset and liability approach. Accordingly, deferred tax assets and liabilities arise from the difference between
the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax amounts are
determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided
under currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively,
for the period plus or minus the change in deferred tax assets and liabilities during the period.
Accounting guidance requires the recognition
of a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. The Company believes its income tax filing positions and
deductions will be sustained upon examination and accordingly, no reserves, or related accruals for interest and penalties have
been recorded at December 31, 2018 and 2017. The Company recognizes interest and penalties on unrecognized tax benefits as well
as interest received from favorable tax settlements within income tax expense.
On December 22, 2017, the President of
the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax
years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United
States tax law, including various provisions that are expected to impact the Company. The Tax Reform Law reduces the federal corporate
tax rate from 34% to 21% effective January 1, 2018. The Company believes the corporate tax rate reduction will have a favorable
effect on its consolidated audited financial statements should it attain profitable operations.
Recent Accounting Standards
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from
Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities
beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use
of either the retrospective or cumulative effect transition method. As there have been no revenues to date, the Company does not
expect the adoption to have a material impact and no transition method will be necessary upon adoption.
In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires all leases that have a term of over 12 months
to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease
will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest
expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January
1, 2019 and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has adopted this standard
beginning in 2018, but as the Company does not have any significant leases, it does not expect it to have a material impact on
its financial position or results of operations.
During the year ended December 31,
2018 and through February 28, 2020, there were several new accounting pronouncements issued by the Financial Accounting
Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on
the Company’s consolidated financial statements.
NOTE 3 – MINING AND MINERAL RIGHTS
The Company will need to finish preparing
the Tonopah property site for the construction of a permitted custom processing toll milling facility including our planned 21,875
square foot building and servicing and drilling various wells for our future operations.
The Company has continued to assess the
realizability of its mining and mineral rights. Based on an assessment the Company conducted in November 2019, the Company determined
its land, mineral rights and water rights are inseparable and depend on each other in value creation, during the nine months ended
September 30, 2018, the Company combined the carrying value the assets to present them more clearly to their intended use together:
FORMERLY -
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Property, Plant and Equipment:
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Shea Mining & Milling asset purchase
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$
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2,108,300
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Equipment, net of $21,000 accumulated depreciation.
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0
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Construction in progress
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1,775,224
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$
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3,883,524
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NOW -
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Mining Assets and Mineral Rights
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$
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3,883,524
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The Tonopah property
is subject to a first deed of trust securing a $2,500,000 promissory note in default plus interest accrued through December 31,
2018 of $ 1,096,235 currently held by Granite Peak Resources, LLC (“GPR”) (formerly held by Pure Path Capital Management
Company LLC until March 2019, see Subsequent Events), a related party. In addition, the Company entered into a Forbearance
Agreement with GPR effective December 20, 2019. GPR has agreed to forbear any foreclosure proceedings for six months in exchange
for the Company pledging the stock of its subsidiary and its subsidiaries as additional collateral under its outstanding obligations.
NOTE 5 – Senior
Secured Promissory Note, related party
On October 10, 2013, a Senior Secured
Convertible Promissory Note for up to $2,500,000 was issued to Pure Path Capital Management Company, LLC (“Pure Path”)
pursuant to a Settlement and Release Agreement. The note had an original principal balance of $1,933,345, with a maturity date
of April 10, 2015, and bears interest at 8% per annum. The settlement agreement included the issuance to Pure Path of 27,000,000
of the Company’s common shares, resulting in Pure Path becoming a related party. Upon an event of default additional interest
will accrue at the rate equal to the lesser of (i) 15% per annum in addition to the Interest Rate or (ii) the highest rate permitted
by applicable law, per annum (the “Default Rate”). The Company has obtained a waiver on the default rate interest,
allowing the 8% interest rate to remain in effect during the default on the note. The Note is securitized by any and all of Borrower’s
tangible or intangible assets, already acquired or hereinafter acquired, including but not limited to: machinery, inventory, accounts
receivable, cash, computers, hardware, mineral rights, etc.
The outstanding principal balance on the
note was $2,229,187 as of both December 31, 2018 and 2017, with related accrued interest of $955,701 and $768,982, respectively.
In March 2019, Pure Path’s interest was acquired by Granite Peak Resources, LLC. This Note is in default. See Note 11–
Subsequent Events.
NOTE 6 – PROMISSORY NOTES PAYABLE
- RELATED PARTY
On February 11, 2015, the Company issued
an unsecured promissory note (the “Note”) to Tina Gregerson Family Properties, LLC, an entity controlled by a former
director of the Company. The Note for up to $750,000, was provided in tranches. Maturity of each tranche is one year from the
date of receipt. Under the terms of the Note, the Company received $200,000 on February 11, 2015, $48,000 on February 13, 2015,
$50,000 on April 13, 2015, $150,000 on July 31, 2015, $2,500 on October 20, 2015, $12,000 on October 29, 2015 and $15,000 on November
4, 2015. Interest accrues at 8% per annum on each tranche. The Note’s principal balance and accrued interest was $477,500
and $140,535, and $477,500 and $102,335, at December 31, 2018 and 2017, respectively. This Note is in default.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
On December 29,
2017, the Company received cash proceeds of $4,756, and on January 22, 2018, the Company issued a convertible promissory note
in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from the
date of funding. The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in Accounting Standards Codification (“ASC”) 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The Company analyzed the conversion feature under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock of the Company on the date of funding as compared to the
conversion price, determined there was a $3,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. No amortization expense was recognized in the year ended December 31, 2017 as
the amount was insignificant.
On December 26,
2017, the Company received cash proceeds of $5,000, and on January 24, 2018, the Company issued a convertible promissory note
in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from the
date of funding. The note is convertible into shares of common stock at $0.025 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in Accounting Standards Codification (“ASC”) 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The Company analyzed the conversion feature under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock of the Company on the date of funding as compared to the
conversion price, determined there was a $3,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. No amortization expense was recognized in the year ended December 31, 2017 as
the amount was insignificant.
On October 17,
2017, the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory note
in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from the
date of funding. The note is convertible into shares of common stock at $0.05 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in Accounting Standards Codification (“ASC”) 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The Company analyzed the conversion feature under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock of the Company on the date of funding as compared to the
conversion price, determined there was a $6,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. Amortization expense of $750 was recognized in the year ended December 31, 2017.
On August 22,
2017, the Company received cash proceeds of $10,000, and on February 7, 2018, the Company issued a convertible promissory note
in exchange for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from the
date of funding. The note is convertible into shares of common stock at $0.08 per share, with no adjustments to the conversion
price. The conversion feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception
in Accounting Standards Codification (“ASC”) 815-10-15-74(a) and would not be bifurcated and accounted for separately
as a derivative liability. The Company analyzed the conversion feature under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock of the Company on the date of funding as compared to the
conversion price, determined there was a $4,000 beneficial conversion feature to recognize, which will be amortized over the term
of the note using the effective interest method. Amortization expense of $1,000 was recognized in the year ended December 31,
2017.
On June 22, 2017,
the Company received cash proceeds of $10,000, and on January 24, 2018, the Company issued a convertible promissory note in exchange
for the cash proceeds. The convertible promissory note accrues interest at 6% per annum and is due one year from the date of funding.
The note is convertible into shares of common stock at $0.065 per share, with no adjustments to the conversion price. The conversion
feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a)
and would not be bifurcated and accounted for separately as a derivative liability. The Company analyzed the conversion feature
under ASC 470-20, and based on the market price of the common stock of the Company on the date of funding as compared to the conversion
price, determined there was a $4,000 beneficial conversion feature to recognize, which will be amortized over the term of the
note using the effective interest method. Amortization expense of $2,000 was recognized in the year ended December 31, 2017.
On March 14,
2017, the Company received cash proceeds of $60,000, and on April 18, 2017, the Company issued a convertible promissory note in
exchange for the cash proceeds. The promissory note accrues interest at 6% per annum and is due one year from the date of issuance.
The note is convertible into shares of common stock at $0.075 per share, with no adjustments to the conversion price. The conversion
feature meets the definition of conventional convertible debt and therefore qualifies for the scope exception in ASC 815-10-15-74(a)
and would not be bifurcated and accounted for separately as a derivative liability. The Company analyzed the conversion feature
under ASC 470-20 and based on the market price of the common stock of the Company on the date of funding as compared to the conversion
price, determined there was no beneficial conversion feature to recognize.
On February 15,
2017 and March 1, 2017, the Company issued convertible promissory notes in the aggregate principal amount of $60,000. The notes
are due one year after issuance, accrue interest at 6% per annum and are convertible into shares of common stock at a price of
$0.02 per share. The Company then analyzed the conversion under ASC 470-20 Debt with conversion and other options for consideration
of a beneficial conversion feature. The Company recorded a discount for the intrinsic value of the conversion feature of $60,000,
which was to be amortized over the term of the note. On March 7, 2017, the convertible promissory notes payable, totaling $60,174
including accrued interest, were converted into 3,008,712 shares of restricted common stock and the remaining debt discount of
$58,164 was recorded as amortization of debt discount.
On
January 22, 2018, the Company received cash proceeds of $15,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
January 22, 2018, the Company received cash proceeds of $8,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
January 26, 2018, the Company received cash proceeds of $40,000 and issued a promissory note in exchange for the cash proceeds.
The promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into
shares of common stock at $0.05 per share, with no adjustments to the conversion price.
On
May 11, 2018, the Company received cash proceeds of $32,500 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.09 per share, with no adjustments to the conversion price.
On
June 14, 2018, the Company received cash proceeds of $12,500 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.09 per share, with no adjustments to the conversion price.
On
July 9, 2018, the Company received cash proceeds of $5,000 and issued a promissory note in exchange for the cash proceeds. The
promissory note accrues interest at 6% per annum and is due one year from the date of issuance. The note is convertible into shares
of common stock at $0.125 per share, with no adjustments to the conversion price.
NOTE 8 – SHAREHOLDERS’
DEFICIT
Preferred Stock
Series A Preferred Stock
As of December 31, 2018, there are 10 million shares of Series
A Preferred Stock outstanding.
Attributes of Series A Preferred Stock include but are not limited
to the following:
Distribution in Liquidation
The Series A Preferred Stock has a liquidation preference of
$10,000,000, payable only upon certain liquidity events or upon achievement of a market value of our equity equaling $200,000,000
or more. Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment
of all its obligations, the remainder of the assets of the Company shall be distributed, either in cash or in kind, first pro rata
to the holders of the Series A Preferred Stock in an amount equal to the Liquidation Value (as described below); then, to any other
series of Preferred Stock, until an amount to be determined by a resolution of the Board of Directors prior to issuances of such
Preferred Stock, has been distributed per share, and, then, the remainder pro rata to the holders of the Common Stock. Upon the
occurrence of any Liquidation Event (as defined below), each holder of Series A Preferred Stock will receive a payment equal to
the Original Issue Price for each share of Series A Preferred Stock held by such holder (the “Liquidation Value”).
A “Liquidation Event” will have occurred when:
● The
Company has an average market capitalization (calculated by adding the value of all outstanding shares of Common Stock valued at
the Company’s closing sale price on the OTCQB or other applicable bulletin board or exchange, plus the value of the outstanding
Series A Preferred Stock at the Original Issues Price per share) of $200,000,000 or more over any 90 day period. The holders of
the Series A Preferred Stock would have the right, for 30 days after the end of such qualifying 90 day measurement period, to require
the Company to purchase the Series A Preferred Stock for an amount equal to the Liquidation Value.
● Any
Liquidity Event in which the Company receives proceeds of $50,000,000 or more. For purposes hereof, a “Liquidity Event”
means any (a) liquidation, dissolution or winding up of the Company; (b) acquisition of the Company by means of any transaction
or series of related transactions (including, without limitation, any reorganization, merger, share exchange, share purchase or
consolidation) provided that the applicable transaction shall not be deemed a liquidation unless the Company’s stockholders
constituted immediately prior to such transaction hold less than 50% of the voting power of the surviving or acquiring entity;
or (c) the sale, lease, transfer or other disposition, in a single transaction or series of related transactions, by the Company
or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or
the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the
assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries.
Written notice of any Liquidation Event (the “Liquidation
Notice”) shall be given by mail, postage prepaid, or by facsimile to non-U.S. residents, not less than five days prior to
the anticipated payment date state therein, to the holders of record of Series A Preferred Stock, such notice to be addressed to
each such holder at its address as shown by the records of the Company. The Liquidation Notice shall state (i) the anticipated
payment date, and (ii) the total Liquidation Value available for distribution to Series A Preferred Stock shareholders upon the
occurrence of the Liquidation Event.
Redemption
The Series A Preferred Stock may be redeemed in whole or in
part as determined by a resolution of the Board of Directors at any time, at a price equal to the Liquidation Value.
Voting Rights
Shares of Series A Preferred Stock shall have no rights to vote
on any matter submitted to a vote of shareholders, except as required by law, in which case each share of Series A Preferred Stock
shall be entitled to one vote.
Conversion Rights
Holders of Series A Preferred Stock will have no right to convert
such shares into any other equity securities of the Company.
Common Stock
Common Stock
issued on conversion of notes payable-
On
April 26, 2018, an outstanding promissory note with a balance of $68,324.38 issued on August 1, 2016 was converted into 1,138,740
shares of restricted common stock at a per share price of $0.06.
During May 2018 and
June 2018, two of the convertible promissory notes outstanding as of the year ending December 31, 2017, and two notes that were
issued in May 2018 totaling principal of $105,000 together with accrued interest of $2,387, were converted into an aggregate of
2,051,864 shares of restricted common stock, at conversion prices ranging from $0.05 to $0.09.
On
June 14, 2018, the Company settled an outstanding account payable through the issuance and subsequent conversion of a convertible
promissory note in the principal amount of $10,000. The note, which was issued December 29, 2017, was due December 29, 2018 and
accrued interest at 6%. The note was convertible into common shares of the Company at a conversion price of $0.025. The note was
issued as a settlement in exchange for a $91,463 account payable, that the noteholder purchased from a vendor on December 29,
2017. Upon conversion of the note into 411,046 shares of restricted common stock of the Company, the noteholder signed a debt
settlement and release agreement for the outstanding account payable.
Sale of Common Stock
On
June 11, 2018, a holder of common stock purchase warrants exercised 250,000 warrants. The Company received $25,000.
Option Grants
The following tables summarize information
about the Company’s stock options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding - December 31, 2016
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Canceled or expired
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding –December 31, 2017
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Canceled or expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding –December 31, 2018
|
|
|
32,576,223
|
|
|
$
|
0.98
|
|
There are no unvested options as of December 31, 2018.
The following tables summarize information
about stock options outstanding and exercisable:
|
|
|
Options Outstanding and Exercisable at December 31, 2018
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
$0.40 to $0.60
|
|
|
|
5,276,223
|
|
|
1.9 years
|
|
$
|
0.46
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
|
9,800,000
|
|
|
1.7 years
|
|
$
|
0.67
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
|
14,500,000
|
|
|
1.8 years
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
|
3,000,000
|
|
|
2.3 years
|
|
$
|
1.63
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
|
32,576,223
|
|
|
1.9 years
|
|
$
|
0.98
|
|
|
$
|
—
|
|
|
|
|
Options Outstanding and Exercisable at December 31, 2017
|
|
Range of
Exercise Prices
|
|
|
Number
Exercisable
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
$0.40 to $0.60
|
|
|
|
5,276,223
|
|
|
1.9 years
|
|
$
|
0.46
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
|
9,800,000
|
|
|
1.7 years
|
|
$
|
0.67
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
|
14,500,000
|
|
|
1.8 years
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
|
3,000,000
|
|
|
2.3 years
|
|
$
|
1.63
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
|
32,576,223
|
|
|
1.9 years
|
|
$
|
0.98
|
|
|
$
|
—
|
|
|
(1)
|
The
aggregate intrinsic value in the table represents the difference between the closing stock price on December 31, 2017 and 2016
and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had
all option holders exercised their options on December 31, 2018 and 2017.
|
Common Stock Purchase
Warrants
For warrants granted to non-employees
in exchange for services, the Company recorded the fair value of the equity instrument using the Black-Scholes pricing model unless
the value of the services is more reliably measurable.
The Company and Wits Basin (Note 3) executed
a Settlement Agreement on January 22, 2016 (Note 9). Pursuant to the terms of the Settlement Agreement, the Company issued 630,000
warrants to purchase common stock at an exercise price of $0.70 and 630,000 warrants at an exercise price of $0.30 to investors
of Wits Basin. The warrants expired on December 31, 2018.
The following table summarizes information
about the Company’s stock purchase warrants outstanding at December 31, 2018 and December 31, 2017:
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Range
of
Exercise
Price
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Outstanding at December 31, 2017
|
|
|
6,125,640
|
|
|
$
|
0.77
|
|
|
$
|
0.20
– 1.23
|
|
|
|
2.2 years
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
6,125,640
|
|
|
$
|
0.77
|
|
|
$
|
0.20 – 1.23
|
|
|
|
2.2 years
|
|
Warrants exercisable at December 31, 2017
|
|
|
6,125,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired Exercised
|
|
|
(1,260,000
|
)
|
|
$
|
0.50
|
|
|
$
|
0.30 – 0.70
|
|
|
|
|
|
Warrants exercisable at December 31, 2018
|
|
|
4,865,640
|
|
|
$
|
0.84
|
|
|
$
|
0.20
- 1.23
|
|
|
|
1.3 years
|
|
|
|
|
4,865,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the 4,865,640
and 6,125,640 outstanding and exercisable warrants at December 31, 2018 and 2017 was $0. The intrinsic value is the difference
between the closing stock price on December 31, 2018 and 2017 and the exercise price, multiplied by the number of in-the-money
warrants had all warrant holders exercised their warrants on December 31, 2018 and 2017.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal Matters
Stephen E. Flechner v. Standard Metals
Processing, Inc.
On April 29, 2014, Stephen E. Flechner
filed suit in the United States District Court for the District of Colorado against Standard Metals Processing, Inc. alleging that
Standard Metals had refused to allow him to exercise stock options granted to him pursuant to a Stock Option Agreement, dated April
1, 2010, and a second Stock Option Agreement, dated January 21, 2011. On June 12, 2014, Standard Metals filed an Answer and a Motion
to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for the Northern District of Alabama,
Middle Division. On January 16, 2015, Standard Metals filed a Motion for Summary Judgment. On January 23, 2015, the Court issued
an Order granting in part and denying in part Standard Metals’ Motion to Dismiss or, Alternatively, to Stay or Transfer the
action to the United States District Court for the Northern District of Alabama, Middle Division. The Court in its Order stayed
further proceedings in Colorado pending the issuance of orders by the Alabama court. Thereafter, on January 26, 2015, the Court
issued an Order vacating the February 20, 2015 Trial Preparation Conference and the March 9, 2015 Bench Trial. On March 23, 2015,
the Court issued an Order denying Standard Metals’ Motion for Summary Judgment. On March 30, 2015, Flechner filed a Motion
to Lift the Stay. On March 31, 2015, the Court issued an Order granting Flechner’s Motion to Lift the Stay. On April 6, 2015,
the Court issued an Order scheduling a Bench Trial for July 29, 2015. On April 9, 2015, Flechner filed a Motion for Reconsideration
of the Court’s March 23, 2015 Order Denying Flechner’s Motion to Enforce the Confidential Settlement Agreement to Settle
Certain Issues. On May 1, 2015, the Court issued an Order Granting Flechner’s Motion to Enforce the Confidential Settlement
Agreement to Settle Certain Issues. On August 12, 2015 the United Stated District Court for the District of Colorado issued a judgment
in favor of Stephen E. Flechner for $2,157,000. An amended final judgment was ordered in adjudication of the Complaint by the U.S.
District Court for the District of Colorado (the “Court”) on August 28, 2015 in favor of Flechner in the amount of
$2,157,000, plus interest through the date of judgment of $235,246, plus interest of $472.76/day from August 28, 2015 until paid
in full. The Company, in good faith anticipation of a settlement did not appeal the judgment and therefore, the Company’s
notice of appeal was dismissed on November 17, 2015. This judgment is now non-appealable. The Company has recognized the daily
interest due from the date of the August 28, 2015 judgment through December 31, 2018, totaling $584,377, resulting in a total amount
of $2,976,623 being included in the Accrual for settlement of lawsuits relating to this matter in the accompanying consolidated
balance sheet.
NOTE 10 - INCOME TAXES
The components of income tax expense for
the years ended December 31, 2018 and 2017 consist of the following:
|
|
2018
|
|
|
2017
|
|
Current tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax benefit
|
|
|
2,100
|
|
|
|
203,000
|
|
Valuation allowance
|
|
|
(2,100
|
)
|
|
|
(203,000
|
)
|
Total income tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliations between the statutory
rate and the effective tax rate for the years ended December 31, 2018 and 2017 consist as follows:
|
|
2018
|
|
|
2017
|
|
Federal statutory tax rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
|
|
0
|
%
|
|
|
0
|
%
|
Permanent differences
|
|
|
0
|
%
|
|
|
—
|
%
|
Valuation allowance
|
|
|
21.0
|
%
|
|
|
34
|
%
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Significant components of the Company’s
deferred tax assets as of December 31, 2018 and 2017 are summarized below. The calculations presented below at December 31, 2018
reflect the new U.S. federal statutory corporate tax rate of 21% effective January 1, 2018 (see Note 2).
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,106,153
|
|
|
$
|
7,133,000
|
|
Impairment of assets
|
|
|
6,940,737
|
|
|
|
6,941,000
|
|
Stock based compensation
|
|
|
2,227,801
|
|
|
|
2,228,000
|
|
Loss on settlement of debt
|
|
|
31,500
|
|
|
|
32,000
|
|
Total deferred tax asset
|
|
|
16,306,191
|
|
|
|
16,334,000
|
|
Valuation allowance
|
|
|
(16,306,191
|
)
|
|
|
(16,334,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2018, the Company had
approximately $33,969,000 of federal net operating loss carry forwards. These carry forwards, if not used, will begin to expire
in 2028. Future utilization of their net operating loss carry forwards is subject to certain limitations under Section 382 of
the Internal Revenue Code. The Company believes that the issuance of their common stock in exchange for the Shea Mining and Milling
properties in March of 2011 resulted in an “ownership change” under the rules and regulations of Section 382. Accordingly,
the Company’s ability to utilize their net operating losses generated prior to this date is limited to approximately $1,000,000
annually.
As of December 31, 2018, we do not believe
any of our net operating loss carry forward consists of deductions generated by the exercise of warrants or options to purchase
our stock. In the future, the stock options referenced in the above table of deferred tax items may be exercised and we may receive
a tax deduction. To the extent that the tax deduction is included in a net operating loss carry forward and is in excess of amounts
recognized for book purposes, no benefit will be recognized until the loss carry forward is recognized. Upon utilization and realization
of the carry forward, the corresponding change in the deferred asset and valuation allowance will be recorded as additional paid-in
capital.
We provide for a valuation allowance when
it is more likely than not that we will not realize a portion of the deferred tax assets. We have established a valuation allowance
against our net deferred tax asset due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions
to utilize the assets. Therefore, we have not reflected any benefit of such deferred tax assets in the accompanying financial statements.
Our net deferred tax asset and valuation allowance decreased by $9,933,000 in the year ended December 31, 2017, $10,089,000 of
which related to the decrease in the expected future tax rate as a result of the Tax Reform Law.
We reviewed all income tax positions taken
or that we expect to be taken for all open years and determined that our income tax positions are appropriately stated and supported
for all open years. The Company is subject to U.S. federal income tax examinations by tax authorities for years after 2011 due
to unexpired net operating loss carryforwards originating in and subsequent to that year. The Company may be subject to income
tax examinations for the various taxing authorities which vary by jurisdiction.
NOTE 11 - SUBSEQUENT EVENTS
Granite Peak Resources, LLC
During March 2019,
the Company was informed that a change of control of the Company had occurred. Granite Peak Resources, LLC
(“GPR”) through its members (including Pure Path Capital Management LLC) acquired 69,464,434 shares of common
stock (including 4,500,000 options to purchase common stock). The members transferred their shares of common stock of the
Company in exchange for a pro-rata ownership interest in GPR. GPR also acquired the senior secured creditor position
previously held by Pure Path Capital Group LLC, which includes a $2,500,000 first deed of trust on the Tonopah property and
an outstanding promissory note with a principal balance of $2,229,187 and accrued interest of $955,701 as of December 31,
2018, which is in default. The members of Granite Peak Resources LLC are listed in the Schedule 13D filed by GPR on March
29, 2019. GPR has not communicated to the Company any plans to change any of the current officers or directors or governing
documents and has expressed the purpose of its acquisition is to assist the Company execute on its business plan and resolve
its current obligations and other claims. During December 2019, GPR purchased another 1,048,428 shares in private
transactions. As of the date of this filing, GPR is the beneficial owner of 52.6% of the Company’s common stock and the
Company’s largest secured creditor.
On December 17, 2019 the Company issued
a promissory note to Granite Peak Resources (“GPR”) for $192,080 representing the disbursements made on the Company’s
behalf during 2019. The note is payable one year from its issuance and accrues interest at 6% per annum. GPR cancelled this note
in exchange for the exercise of the 4,500,000 options in acquired in March 2019. The options were issued in 2013 and originally
exercisable at $0.44 per share, the Company agreed to modify the exercise price of the options if GPR exercised them in total.
GPR exercised the options at a price of $0.0426 per share (the current fair market value per share based on the average of the
median price and VWAP for the preceding 90 days) in exchange for the $192,080 note.
The Company entered
into a Forbearance Agreement with GPR effective December 20, 2019. GPR has agreed to forbear any foreclosure proceedings for six
months in exchange for the Company pledging the stock of its subsidiary and its subsidiaries as additional collateral under its
outstanding obligations.
F-18