See Accompanying Notes to these Condensed Consolidated
Financial Statements
See Accompanying Notes to these Condensed Consolidated
Financial Statements
See Accompanying Notes to these Condensed Consolidated
Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 – DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY
OF SIGNIFICANT POLICIES
Description of business
- Searchlight
Minerals Corp. (the “Company”) is an exploration stage company engaged in a slag reprocessing project and the acquisition
and exploration of mineral properties. The Company is presently focused on the Clarkdale Slag Project, located in Clarkdale, Arizona,
which is a reclamation project to recover precious and base metals from the reprocessing of slag produced from the smelting of
copper ore mined at the United Verde Copper Mine in Jerome, Arizona.
Since the Company’s involvement in the
Clarkdale Slag Project began, the goal has been to demonstrate the economic feasibility of the project by determining a commercially
viable method to extract precious and base metals from the slag material.
The Company has not yet realized any revenues
from its planned operations. Upon the location of commercially minable reserves, the Company plans to prepare for mineral extraction
and enter the development stage.
History
- The Company was incorporated
on January 12, 1999, pursuant to the laws of the State of Nevada under the name L.C.M. Equity, Inc. From 1999 to 2005, the Company
operated primarily as a biotechnology research and development company with its headquarters in Canada and an office in the United
Kingdom. On November 2, 2001, the Company entered into an acquisition agreement with Regma Bio Technologies, Ltd. pursuant to
which Regma Bio Technologies, Ltd. entered into a reverse merger with the Company with the surviving entity named “Regma
Bio Technologies Limited”. On November 26, 2003, the Company changed its name from “Regma Bio Technologies Limited”
to “Phage Genomics, Inc.” (“Phage”).
In February 2005, the Company announced its
reorganization from a biotechnology research and development company to a company focused on the development and acquisition of
mineral properties and its Board of Directors approved a change in its name from Phage to "Searchlight Minerals Corp.”
effective June 23, 2005.
Going concern
- The accompanying condensed
consolidated financial statements were prepared on a going concern basis in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). The going concern basis of presentation assumes that the Company will
continue in operation for the next twelve months and will be able to realize its assets and discharge its liabilities and commitments
in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the Company’s inability
to continue as a going concern. The Company’s history of losses, working capital deficit, minimal liquidity and other factors
raise substantial doubt about the Company’s ability to continue as a going concern. In order for the Company to continue
operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business
it must raise additional equity or debt capital and continue cost cutting measures. There can be no assurance that the Company
will be able to achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available,
will be obtainable on terms satisfactory to management.
If the Company continues to incur operating
losses and does not raise sufficient additional capital, material adverse events may occur including, but not limited to: a reduction
in the nature and scope of the Company’s operations; and the Company’s inability to fully implement its current business
plan. There can be no assurance that the Company will successfully improve its liquidity position. The accompanying consolidated
financial statements do not reflect any adjustments that might be required resulting from the adverse outcome relating to this
uncertainty.
As of June 30, 2016, the Company had cumulative
net losses of $95,177,779 from operations and had not commenced commercial mining and mineral processing operations; rather it
is still in the exploration stage. For the six months ended June 30, 2016, the Company incurred a net loss of $12,685,195, had
negative cash flows from operating activities of $1,602,316 and will incur additional future losses due to planned continued exploration
expenses. In addition, the Company had a working capital deficit totaling $921,766 at June 30, 2016.
To address ongoing liquidity constraints,
the Company continues to seek additional sources of capital through the issuance of equity, debt financing or a combination of
both. The Company has reduced general and administrative expenses and elected to defer payment of certain obligations. Cash conservation
measures include, but are not limited to, the deferred payment where available of outsourced consulting fees, current and future
board fees, certain officer salaries, certain monthly professional fees, and the Verde River Iron Company, LLC (“VRIC”)
monthly payable. These activities have reduced the required cash outlay of the Company’s business significantly. The Company
is focused on continuing to reduce costs and obtaining additional funding. There is no assurance that such funding will be available
on terms acceptable to the Company, or at all. If the Company raises additional funds by selling additional shares of capital
stock, securities convertible into shares of capital stock or the issuance of convertible debt, the ownership interest of the
Company’s existing common stock holders will be diluted.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Basis of presentation
- The accompanying
financial statements have been prepared in accordance with U.S. GAAP. The Company’s fiscal year-end is December 31.
These condensed consolidated financial statements
have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).
In the opinion of management, all adjustments and disclosures necessary for the fair presentation of the Company's Condensed Consolidated
Balance Sheets as of June 30, 2016 and December 31, 2015; the Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2016 and 2015; and the Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2016 and 2015. The Company’s balance sheet at December 31, 2015, is derived from the audited financial statements
at that date. The results reported in these interim condensed consolidated financial statements are not necessarily indicative
of the results that may be reported for the entire year. These interim condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December
31, 2015, filed with the SEC on April 5, 2016.
Principles of consolidation
- The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries, Clarkdale Minerals, LLC (“CML”)
and Clarkdale Metals Corp. (“CMC”). Significant intercompany accounts and transactions have been eliminated.
Use of estimates
- The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates are subject to
measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.
Significant areas requiring management’s estimates and assumptions include the valuation of stock-based compensation and
derivative liabilities, impairment analysis of long-lived assets, and realizability of deferred tax assets. Actual results could
differ from those estimates.
Capitalized interest cost
- The Company
capitalizes interest cost related to acquisition, development and construction of property and equipment which is designed as
integral parts of the manufacturing process. The capitalized interest is recorded as part of the asset it relates to and will
be amortized over the asset’s useful life once production commences.
Mineral properties
- Costs of acquiring
mineral properties are capitalized upon acquisition. Exploration costs and costs to maintain mineral properties are expensed as
incurred while the project is in the exploration stage. Once mineral reserves are established, development costs and costs to
maintain mineral properties are capitalized as incurred while the property is in the development stage. When a property reaches
the production stage, the related capitalized costs will be amortized using the units-of-production method over the proven and
probable reserves.
Mineral exploration and development costs
- Exploration expenditures incurred prior to entering the development stage are expensed and included in mineral exploration
and evaluation expense.
Property and equipment
- Property and
equipment is stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets, which are generally 3 to 15 years. The cost of repairs and maintenance is charged to
expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable
asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operating expenses.
Impairment
of long-lived assets
-
The Company reviews and evaluates its long-lived assets
for impairment at each balance sheet date due to its planned exploration stage losses and documents such impairment testing. Mineral
properties in the exploration stage are monitored for impairment based on factors such as the Company’s continued right
to explore the property, exploration reports, drill results, technical reports and continued plans to fund exploration programs
on the property.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The tests for long-lived assets in the exploration,
development or production stage that would have a value beyond proven and probable reserves would be monitored for impairment
based on factors such as current market value of the mineral property and results of exploration, future asset utilization, business
climate, mineral prices and future undiscounted cash flows expected to result from the use of the related assets. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net cash
flows expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts.
The Company's policy is to record an impairment
loss in the period when it is determined that the carrying amount of the asset may not be recoverable either by impairment or
by abandonment of the property. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds
its fair value.
Deferred financing fees
– Deferred
financing fees represent fees paid in connection with obtaining debt financing. These fees are amortized using the effective interest
method over the term of the financing. If a conversion of the underlying note occurs, a proportionate share of the unamortized
amount is immediately expensed.
Convertible notes – derivative liabilities
– The Company evaluates the embedded features of convertible notes to determine if they are required to be bifurcated
and recorded as a derivative liability. If more than one feature is required to be bifurcated, the features are accounted for
as a single compound derivative. The fair value of the compound derivative is recorded as a derivative liability and a debt discount.
The carrying value of the convertible notes is recorded on the date of issuance at its original value less the fair value of the
compound derivative.
The derivative liability is measured at fair
value on a recurring basis with changes reported in other income (expense). Fair value is determined using a model which incorporates
estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The debt discount is amortized
to non-cash interest expense using the effective interest method over the life of the notes. If a conversion of the underlying
note occurs, a proportionate share of the unamortized amount is immediately expensed.
Reclamation and remediation costs
-
For its exploration stage properties, the Company accrues the estimated costs associated with environmental remediation obligations
in the period in which the liability is incurred or becomes determinable. Until such time that a project life is established,
the Company records the corresponding cost as an exploration stage expense. The costs of future expenditures for environmental
remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule.
Future reclamation and environmental-related
expenditures are difficult to estimate in many circumstances due to the early stage nature of the exploration project, the uncertainties
associated with defining the nature and extent of environmental disturbance, the application of laws and regulations by regulatory
authorities and changes in reclamation or remediation technology. The Company periodically reviews accrued liabilities for such
reclamation and remediation costs as evidence indicating that the liabilities have potentially changed becomes available. Changes
in estimates are reflected in the consolidated statement of operations in the period an estimate is revised.
The Company is in the exploration stage and
is unable to determine the estimated timing of expenditures relating to reclamation accruals. It is reasonably possible that the
ultimate cost of reclamation and remediation could change in the future and that changes to these estimates could have a material
effect on future operating results as new information becomes known.
Fair value of financial instruments
- The Company’s financial instruments consist principally of derivative liabilities and the VRIC payable. Assets and liabilities
measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs
are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input
that is significant to the fair value measurement. The hierarchy is prioritized into three levels defined as follows:
Level 1
|
|
Unadjusted quoted prices in
active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
Level 2
|
|
Quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
|
Level 3
|
|
Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
SEARCHLIGHT MINERALS
CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s financial instruments
consist of the VRIC payable, derivative liabilities (described in Notes 5 and 7) and convertible notes (described in Note 6).
The VRIC payable and the convertible notes are classified within Level 2 of the fair value hierarchy. The fair value of the VRIC
payable approximates carrying value as the imputed interest rate is considered to approximate a market interest rate. The fair
value of the convertible notes approximates carrying value as the interest rate is considered to approximate a market interest
rate.
The Company calculates the fair value of its
derivative liabilities using various models which are all Level 3 inputs. The fair value of the derivative warrant liability (described
in Note 5) is calculated using the Binomial Lattice model, and the fair value of the derivative liability - convertible notes
(described in Note 7) is calculated using a model which incorporates estimated probabilities and inputs calculated by both the
Binomial Lattice model and present values. The change in fair value of the derivative liabilities is classified in other income
(expense) in the condensed consolidated statement of operations. The Company generally does not use derivative financial instruments
to hedge exposures to cash flow, market or foreign currency risks.
There have been no changes in the valuation
techniques used for the derivative liabilities. The Company does not have any non-financial assets or liabilities that it measures
at fair value. During the six months ended June 30, 2016 and 2015, there were no transfers of assets or liabilities between levels.
Per share amounts
- Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. In computing
diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially
dilutive securities. Potentially dilutive shares, such as stock options and warrants, are excluded from the calculation when their
inclusion would be anti-dilutive, such as when the exercise price of the instrument exceeds the fair market value of the Company’s
common stock and when a net loss is reported. The dilutive effect of convertible debt securities is reflected in the diluted earnings
(loss) per share calculation using the if-converted method. Conversion of the debt securities is not assumed for purposes of calculating
diluted earnings (loss) per share if the effect is anti-dilutive. 72,384,390 and 63,779,506 stock options, warrants and common
shares issuable upon the conversion of notes were outstanding as of June 30, 2016 and June 30, 2015, respectively, but were not
considered in the computation of diluted earnings per share as their inclusion would be anti-dilutive.
Stock-based compensation
- Stock-based
compensation awards are recognized in the consolidated financial statements based on the grant date fair value of the award which
is estimated using the Binomial Lattice option pricing model. The Company believes that this model provides the best estimate
of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow
for the actual exercise behavior of option holders. The compensation cost is recognized over the requisite service period which
is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock.
The fair value of performance-based stock
option grants is determined on their grant date through the use of the Binomial Lattice option pricing model. The total value
of the award is recognized over the requisite service period only if management has determined that achievement of the performance
condition is probable. The requisite service period is based on management’s estimate of when the performance condition
will be met. Changes in the requisite service period or the estimated probability of achievement can materially affect the amount
of stock-based compensation recognized in the financial statements.
Income taxes
- For interim reporting
periods, the Company uses the annualized effective tax rate (“AETR”) method to calculate its income tax provision.
Under this method, the AETR is applied to the interim year-to-date pre-tax losses to determine the income tax benefit or expense
for the year-to-date period. The income tax benefit or expense for a quarter represents the difference between the year-to-date
income tax benefit or expense for the current year-to-date period less such amount for the immediately preceding year-to-date
period. Management considers the impact of all known events in its estimation of the Company’s annual operating results
and AETR.
The Company follows the liability method of
accounting for income taxes. This method recognizes certain temporary differences between the financial reporting basis of liabilities
and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income
tax liability or asset as measured by the statutory tax rates in effect. The effect of a change in tax rates is recognized in
operations in the period that includes the enactment date. The Company records a valuation allowance against any portion of those
deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion
or all of the deferred income tax asset will not be realized.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Recent accounting standards
- From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) that
are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact
of recently issued standards did not or will not have a material impact on the Company’s consolidated financial statements
upon adoption.
In March 2016, the FASB issued Accounting
Standards Update (“ASU”) No. 2016-09, “Improvements on Employee Share-Based Payment Accounting”, which
simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2016 and interim
periods within those years. Early adoption is permitted. The standard will be effective for the Company beginning January 1, 2017.
The Company is currently evaluating the impact to its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“Leases”, which requires lessees to put most leases on their balance sheets but recognize the expenses on their income
statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the
obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new
standard is effective for annual periods beginning after December 15, 2018 and interim periods within those years. Early adoption
is permitted. The standard will be effective for the Company beginning January 1, 2019. The Company is currently evaluating the
impact to its condensed consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
“Balance Sheet Classification of Deferred Taxes”, which simplifies income tax accounting. The update requires that
all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes
into current and noncurrent amounts. This update is effective for fiscal years beginning after December 15, 2016, and interim
periods within those fiscal years, and early adoption is permitted. Adoption of the new guidance is not expected to have an impact
on the condensed consolidated financial position, results of operations or cash flows.
In April 2015, the
FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt
Issuance Costs”, which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented
as a deduction from the corresponding debt liability. The update is effective in fiscal years, including interim periods, beginning
after December 15, 2015, and early adoption was permitted. We adopted the provisions of ASU 2015-03 on a retrospective basis for
our annual period ended December 31, 2015. The retrospective adoption of this standard resulted in the reclassification of
approximately $0.1 million of current assets as a direct reduction against the balance of our current debt in the accompanying
condensed consolidated balance sheet at December 31, 2015, but had no effect on our condensed consolidated net loss or stockholders’
equity.
In August 2014, the FASB issued ASU 2014-15,
“Disclosure of Uncertainties about and Entity’s Ability to Continue as a Going Concern”. This update requires
management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to
continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether
its plans alleviate that doubt. The new standard is effective for annual periods ending after December 15, 2016, and interim
periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact to its condensed
consolidated financial statements.
NOTE 2 – RESTRICTED CASH
At December 31, 2015, restricted
cash amounted to $227,345 and had consisted of funds designated for debt collateral. During the six months
ended June 30, 2016, the Company reduced the restricted cash requirement by $227,345, in connection with the conversion of the
Company’s convertible notes payable (as described in Note 6).
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
Furniture and fixtures
|
|
$
|
38,255
|
|
|
$
|
(38,110
|
)
|
|
$
|
145
|
|
|
$
|
38,255
|
|
|
$
|
(37,963
|
)
|
|
$
|
292
|
|
Lab equipment
|
|
|
249,061
|
|
|
|
(249,061
|
)
|
|
|
-
|
|
|
|
249,061
|
|
|
|
(249,061
|
)
|
|
|
-
|
|
Computers and equipment
|
|
|
71,407
|
|
|
|
(64,548
|
)
|
|
|
6,859
|
|
|
|
71,407
|
|
|
|
(61,644
|
)
|
|
|
9,763
|
|
Vehicles
|
|
|
47,675
|
|
|
|
(46,508
|
)
|
|
|
1,167
|
|
|
|
47,675
|
|
|
|
(46,158
|
)
|
|
|
1,517
|
|
Slag conveyance equipment
|
|
|
300,916
|
|
|
|
(300,916
|
)
|
|
|
-
|
|
|
|
300,916
|
|
|
|
(300,916
|
)
|
|
|
-
|
|
Demo module building
|
|
|
6,630,063
|
|
|
|
(4,858,371
|
)
|
|
|
1,771,692
|
|
|
|
6,630,063
|
|
|
|
(4,526,867
|
)
|
|
|
2,103,196
|
|
Grinding circuit
|
|
|
913,679
|
|
|
|
(26,667
|
)
|
|
|
887,012
|
|
|
|
913,679
|
|
|
|
(21,667
|
)
|
|
|
892,012
|
|
Extraction circuit
|
|
|
938,352
|
|
|
|
(556,503
|
)
|
|
|
381,849
|
|
|
|
938,352
|
|
|
|
(462,668
|
)
|
|
|
475,684
|
|
Leaching and filtration
|
|
|
1,300,618
|
|
|
|
(1,300,618
|
)
|
|
|
-
|
|
|
|
1,300,618
|
|
|
|
(1,300,618
|
)
|
|
|
-
|
|
Fero-silicate storage
|
|
|
4,326
|
|
|
|
(2,379
|
)
|
|
|
1,947
|
|
|
|
4,326
|
|
|
|
(2,163
|
)
|
|
|
2,163
|
|
Electrowinning building
|
|
|
1,492,853
|
|
|
|
(821,069
|
)
|
|
|
671,784
|
|
|
|
1,492,853
|
|
|
|
(746,426
|
)
|
|
|
746,427
|
|
Site improvements
|
|
|
1,677,844
|
|
|
|
(778,026
|
)
|
|
|
899,818
|
|
|
|
1,677,844
|
|
|
|
(715,775
|
)
|
|
|
962,069
|
|
Site equipment
|
|
|
360,454
|
|
|
|
(356,011
|
)
|
|
|
4,443
|
|
|
|
360,454
|
|
|
|
(353,638
|
)
|
|
|
6,816
|
|
Construction in progress
|
|
|
1,102,014
|
|
|
|
-
|
|
|
|
1,102,014
|
|
|
|
1,102,014
|
|
|
|
-
|
|
|
|
1,102,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,127,517
|
|
|
$
|
(9,398,787
|
)
|
|
$
|
5,728,730
|
|
|
$
|
15,127,517
|
|
|
$
|
(8,825,564
|
)
|
|
$
|
6,301,953
|
|
Depreciation expense was $286,557 and $356,955
for the three months ended June 30, 2016 and 2015, respectively, and $573,223 and $715,337 for the six months ended June 30, 2016
and 2015, respectively. At June 30, 2016 and December 31, 2015, construction in progress included the gold, copper, and zinc extraction
circuits and electrowinning equipment at the Clarkdale Slag Project.
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted
of the following at June 30, 2016 and December 31, 2015:
|
|
June 30, 2016
|
|
|
December 31,
2015
|
|
Trade accounts payable
|
|
$
|
541,677
|
|
|
$
|
589,657
|
|
Accrued compensation and related taxes
|
|
|
811,102
|
|
|
|
435,469
|
|
Accrued interest
|
|
|
57,803
|
|
|
|
126,057
|
|
|
|
$
|
1,410,582
|
|
|
$
|
1,151,183
|
|
Amounts due to related parties are discussed in Note 12.
NOTE 5 – DERIVATIVE WARRANT LIABILITY
Related to a private placement completed on
November 12, 2009, the Company issued 6,341,263 warrants to purchase shares of common stock. The warrants had an initial expiration
date of November 12, 2012 and an initial exercise price of $1.85 per share. The warrants have anti-dilution provisions, including
provisions for the adjustment to the exercise price and to the number of warrants granted if the Company issues common stock or
common stock equivalents at a price less than the exercise price.
The Company determined that the warrants were
not afforded equity classification because the warrants are not considered to be indexed to the Company’s own stock due
to the anti-dilution provisions. In addition, the Company determined that the anti-dilution provisions shield the warrant holders
from the dilutive effects of subsequent security issuances and therefore the economic characteristics and risks of the warrants
are not clearly and closely related to the Company’s common stock. Accordingly, the warrants are treated as a derivative
liability and are carried at fair value.
On various dates commencing in November since
2012, the latest being March 18, 2016, the Company’s Board of Directors unilaterally determined, without any negotiations
with the warrant holders to amend these private placement warrants. The expiration date of the warrants was extended for approximately
one year at each extension. The current expiration date is November 30, 2017. In all other respects, the terms and conditions
of the warrants remained the same.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
With respect to the March 18, 2016 extension,
the Company did not recognize any additional expense as the fair values of the warrants were calculated at zero using the Binomial
Lattice model with the following assumptions:
|
|
June 30,
2016
|
Risk-free interest rate
|
|
0.64% - 0.87%
|
Expected volatility
|
|
122.95% - 176.27%
|
Expected life (years)
|
|
1 - 1.75
|
As of June 30, 2016, the
cumulative adjustment to the warrants was as follows: (i) the exercise price was adjusted from $1.85 per share to $0.59 per
share for warrants held by Luxor Capital Partners, L.P. and its affiliates (“Luxor”) and to $0.58 per share for
all other warrant holders (“all others”), and (ii) the number of warrants during the six months ended June 30,
2016 was increased by a total of 10,859,777, being 6,392,803 warrants for Luxor and its affiliates and 4,466,974 warrants for
all others. In connection with the financing completed with Luxor on June 7, 2012, Luxor waived its right to the
anti-dilution adjustments on 4,252,883 warrants it holds from the 2009 private placement. Future anti-dilution adjustments
were not waived. The adjusted exercise price of those warrants is $0.59 per share. The total warrants accounted for as a
derivative liability were 20,006,807 and 9,147,029 as of June 30, 2016 and December 31, 2015, respectively. The Company
valued the derivative liability as of June 30, 2016, using the Binomial Lattice pricing model. As a result of changes in the
inputs as noted below, the value of the derivative liability as of June 30, 2016, was immaterial.
The following table sets forth the changes
in the fair value of derivative liability for the six months ended June 30, 2016 and the year ended December 31 2015:
|
|
June 30,
2016
|
|
|
December 31, 2015
|
|
Beginning balance
|
|
$
|
(53,141
|
)
|
|
$
|
-
|
|
Adjustment to warrants
|
|
|
(104,075
|
)
|
|
|
-
|
|
Change in fair value
|
|
|
157,216
|
|
|
|
(53,141
|
)
|
Ending balance
|
|
$
|
-
|
|
|
$
|
(53,141
|
)
|
The Company estimates the fair value of the
derivative liabilities by using the Binomial Lattice pricing-model, with the following assumptions used for the six months ended
June 30, 2016 and the year ended December 31, 2015:
|
|
June 30,
2016
|
|
December 31,
2015
|
Expected volatility
|
|
122.95% - 176.27%
|
|
30.46% - 141.15%
|
Risk-free interest rate
|
|
0.45% - 0.84%
|
|
0.00% - 0.65%
|
Expected life (years)
|
|
0.75 - 1.75
|
|
0.10 - 0.90
|
Suboptimal exercise factor
|
|
2.0
|
|
2.5
|
The expected volatility is based on the historical
volatility levels on the Company’s common stock. The risk-free interest rate is based on the implied yield available on
US Treasury zero-coupon issues over equivalent lives of the options. The expected life is impacted by all of the underlying assumptions
and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly lower
or higher fair value measurement.
NOTE 6 – CONVERTIBLE NOTES
On September 18, 2013, the Company completed
a private placement of secured convertible notes (the “Notes”) resulting in gross proceeds of $4,000,000. At issuance,
the Notes were convertible into shares of common stock at $0.40 per share, subject to certain adjustments. The term of the Notes
was five years, but the Notes could be demanded by the holders. The Notes bore interest at 7% which was payable semi-annually.
The Notes had customary provisions relating to events of default including an increase in the interest rate to 9%. The Notes were
secured by a first priority lien on all of the assets of the Company including its subsidiaries. At June 30, 2016, all of the
convertible notes were converted and cancelled and the first priority lien was released.
The Company was not able to incur additional
secured indebtedness or other indebtedness with a maturity prior to that of the Notes without the written consent of the holders
of the majority-in-interest of the Notes. In the event of a change of control of the Company, the Notes would have become due
and payable at 120% of the principal balance. The holders of the Notes had the right to purchase, pro rata, up to $600,000 of
additional separate notes by September 18, 2014 on the same general terms and conditions as the original Notes. In September 2014,
$69,000 of additional notes were purchased and issued.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
At December 31, 2015, the Notes were convertible
into 10,433,333 shares of common stock at $0.39 per share, as adjusted for anti-dilutive provisions and the if-converted value
equaled the principal amount of the Notes. Certain embedded features in the Notes were required to be bifurcated and accounted
for as a single compound derivative and reported at fair value as discussed in Note 7.
During the six months ended June 30, 2016,
Luxor, on behalf of itself and certain of its affiliates (collectively, the “Luxor Group”), demanded repayment from
the Company, of all of the outstanding principal and interest owing on the Luxor Group’s Secured Convertible Promissory
Notes, each dated September 18, 2013 (the “Luxor Notes”). Lacking sufficient funds to make such repayments, on March
18, 2016 the Company agreed, pursuant to an Amendment to Secured Convertible Promissory Note, dated September 18, 2013, to allow
the Luxor Group to convert all of the outstanding principal amount and accrued but unpaid interest owing on the Luxor Notes into
shares of the Company’s common stock, at a rate of $0.035 per share. In the aggregate, the Luxor Group converted $2,600,000
of principal owing on the Luxor Notes and $91,000 of interest owing on the Luxor Notes in exchange for 76,885,714 shares of the
Company’s common stock. As a condition of the Private Placement Offering on March 18, 2016, as discussed in Notes 8 and
Note 12, the Luxor Group agreed that all of its 12,128,708 currently owned warrants would not be exercised until at least September
18, 2016. The Company has subsequently cancelled the Luxor Notes. In connection with the conversion of the Luxor Notes the Company
has recognized a loss on conversion of $6,998,571.
On March 18, 2016, Martin Oring, one of our
directors and our Chief Executive Officer, and members of his family, pursuant to Amendments to Convertible Promissory Notes,
dated March 18, 2016, provided us with Conversion Notices whereby they elected to convert all of the principal and accrued but
unpaid interest owing on their Secured Convertible Promissory Notes (“Oring Notes”), each dated September 18, 2013,
into shares of the Company’s common stock at a rate of $0.035 per share. In the aggregate, Mr. Oring and his family members
converted $414,000 in principal and $14,491 in accrued interest owing on such notes in exchange for 12,242,600 shares of the Company’s
common stock. The Company has subsequently cancelled the Oring Notes. In connection with the conversion of the Oring Notes the
Company has recognized a loss on conversion of $1,114,391.
On March 17, 2016 the Board of Directors of
the Company approved an offer to the remaining nine holders of the Secured Convertible Promissory Notes. The offer, effective
March 18, 2016, included the conversion of principal and interest outstanding as of March 18, 2016 at a rate of $0.035 per share.
On April 27, 2016, the remaining nine holders of the Secured Convertible Promissory Notes converted $1,055,000 in principal and
$21,583 in accrued interest in exchange for 31,037,855 shares of the Company’s common stock. The Company subsequently cancelled
the Notes. In connection with the conversion of the Notes the Company has recognized a loss on conversion of $324,159.
As a result of the aforementioned conversions,
as of June 30, 2016 all the Secured Convertible Promissory Notes and associated accrued interest have been converted and cancelled.
At issuance, the fair value of the compound
derivative was $1,261,285 and was recorded as both a derivative liability and a debt discount. The debt discount was being amortized
to interest expense over the term of the Notes and the derivative liability was carried at fair value through the conversion dates.
The Company incurred $126,446 of financing fees related to the Notes. Such amounts were capitalized and were amortized to interest
expense over the term of the Notes. The carrying value of the convertible debt, net of discount was comprised of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Convertible notes at face value
|
|
$
|
4,069,000
|
|
|
$
|
4,069,000
|
|
Conversion of notes at face value
|
|
|
(4,069,000
|
)
|
|
|
-
|
|
Unamortized discount and deferred financing fees
|
|
|
-
|
|
|
|
(816,788
|
)
|
Convertible notes, net of discount
|
|
$
|
-
|
|
|
$
|
3,252,212
|
|
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Interest expense related to the Notes included
the following for the three and six months ended June 30, 2016 and June 30, 2015:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Interest rate at 7%
|
|
$
|
667
|
|
|
$
|
71,204
|
|
|
$
|
63,702
|
|
|
$
|
142,395
|
|
Amortization of debt discount
|
|
|
168,106
|
|
|
|
58,817
|
|
|
|
744,058
|
|
|
|
116,531
|
|
Amortization of deferred financing fees
|
|
|
16,338
|
|
|
|
6,108
|
|
|
|
72,729
|
|
|
|
12,102
|
|
Total interest expense on convertible notes
|
|
$
|
185,111
|
|
|
$
|
136,129
|
|
|
$
|
880,489
|
|
|
$
|
271,028
|
|
Included in amortization of debt discount
for the three and six months ended June 30, 2016 is expense of $738,748 and $570,642 related to the conversion of $4,069,000
Secured Convertible Promissory Notes payable in March and April, 2016. These amounts have been recorded as interest expense
on our condensed consolidated statements of operations and comprehensive loss.
NOTE 7 – DERIVATIVE LIABILITY – CONVERTIBLE NOTES
As further discussed in Note 6, the Company
had issued $4,069,000 of secured convertible notes between September, 2013 and September, 2014. The Notes were convertible at
any time into shares of common stock at $0.39 per share. As discussed further in Note 6, during the six months ended June 30,
2016 all of the notes were converted and cancelled.
The Notes had several embedded conversion
and redemption features. The Company determined that two of the features were required to be bifurcated and accounted for under
derivative accounting as follows:
|
1.
|
The embedded conversion feature
included a provision for the adjustment to the conversion price if the Company issued
common stock or common stock equivalents at a price less than the exercise price. Derivative
accounting was required for this feature due to this anti-dilution provision.
|
|
2.
|
One embedded redemption feature
required the Company to pay 120% of the principal balance due upon a change of control.
Derivative accounting was required for this feature as the debt involved a substantial
discount, the option was only contingently exercisable and its exercise was not indexed
to either an interest rate or credit risk.
|
These two embedded features had been accounted
for together as a single compound derivative. The Company estimated the fair value of the compound derivative using a model with
estimated probabilities and inputs calculated by the Binomial Lattice model and present values. The assumptions included in the
calculations were highly subjective and subject to interpretation. Assumptions used for the six months ended June 30, 2016 and
the year ended December 31, 2015 included redemption and conversion estimates/behaviors, estimates regarding future anti-dilutive
financing agreements and the following other significant estimates:
|
|
June 30,
2016
|
|
December 31,
2015
|
Expected volatility
|
|
20.57% – 222.29%
|
|
101.46 – 139.57%
|
Risk-free interest rate
|
|
0.29% – 1.04%
|
|
0.92 - 1.31%
|
Expected life (years)
|
|
1.0 – 2.51
|
|
2.0 – 2.75
|
Suboptimal exercise factor
|
|
1.0 – 2.0
|
|
2.5
|
The expected volatility was based on the historical
volatility levels on the Company’s common stock. The risk-free interest rate was based on the implied yield available on
US Treasury zero-coupon issues over equivalent lives of the options. The expected life was impacted by all of the underlying assumptions
and calibration of the Company’s model. Significant increases or decreases in inputs would result in a significantly lower
or higher fair value measurement.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The following table sets forth the changes
in the fair value of the derivative liability for the six months ended June 30, 2016 and the year ended December 31, 2015:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Beginning balance
|
|
$
|
590,536
|
|
|
$
|
1,218,619
|
|
Conversion of convertible debt
|
|
|
(1,694,693
|
)
|
|
|
-
|
|
Change in fair value
|
|
|
1,104,157
|
|
|
|
(628,083
|
)
|
Ending balance
|
|
$
|
-
|
|
|
$
|
590,536
|
|
NOTE 8 – STOCKHOLDERS’ EQUITY
During the six months ended June 30, 2016,
the Company’s stockholders’ equity activity consisted of the following:
|
a)
|
On March 18, 2016, the Company
issued 76,885,714 shares of common stock at $0.035 per share to the Luxor noteholders
as consideration for the conversion of $2,600,000 in principal and $91,000 in accrued
interest. In connection with the conversion of the notes payable, a loss on conversion
of $6,998,571 has been recognized as discussed in Note 6.
|
|
b)
|
On March 18, 2016, the Company
issued 12,242,600 shares of common stock at $0.035 per share to the Oring noteholders
as consideration for the conversion of $414,000 in principal and $14,491 in accrued interest.
In connection with the conversion of the notes payable, a loss on conversion of $1,114,391
has been recognized as discussed in Note 6.
|
|
c)
|
On March 18, 2016, the Company completed
a private placement offering with the Luxor Group for proceeds of $1,500,000. A total
of 42,857,143 shares of common stock at $0.035 were issued in connection with this offering.
As a condition of the Private Placement Offering on March 18, 2016, as discussed in Note
6 and Note 12, the Luxor Group agreed that all of its 12,128,708 currently owned warrants
would not be exercised until at least September 18, 2016.
|
|
d)
|
On March 17, 2016, the Board of
Directors has also authorized, subject to stockholder approval, which has yet to occur
certain amendments to our Articles of Incorporation and Amended and Restated Bylaws that,
would increase the number of authorized shares of our capital stock.
|
|
e)
|
On March 31, 2016, the Company issued
18,750 shares of common stock at $0.08 per share to the estate of the late Robert McDougal.
Mr. McDougal had been a director of the Company through January 15, 2016, the date that
Mr. McDougal passed away. The shares were issued as consideration for his services a
director of the Company.
|
|
f)
|
On April 27, 2016, the Company
issued 31,037,855 shares of common stock at $0.035 per share to various convertible note
holders, as consideration for the conversion of $1,055,000 in principal and $21,583 in
accrued interest. In connection with the conversion of the notes payable, a loss on conversion
of $324,159 has been recognized as discussed in Note 6.
|
|
g)
|
On May 23, 2016, the Company completed
a private placement offering with various qualified investors for proceeds of $988,800.
A total of 28,251,430 shares of common stock at $0.035 were issued in connection with
this offering.
|
During the six months ended June
30, 2015, the Company’s stockholders’ equity activity consisted of the following:
|
a)
|
As of June 30, 2015, the Company
had received $700,400 of subscriptions for a private placement offering. The Company
offered up to 5,714,285 units of the Company’s securities at a purchase price of
$0.35 per unit. Each unit consists of one share of the Company’s common stock and
one share purchase warrant exercisable at $0.50 per share. Such warrants will expire
five years from the date of issuance and are considered to be indexed to the Company’s
common stock. The offering was completed on July 30, 2015 for total gross proceeds of
$775,400.
|
|
b)
|
b) On May 21, 2015, the Company
completed a private placement offering for gross proceeds of $995,050. A total of 2,843,000
units were issued at a price of $0.35. Each unit consists of one share of the Company’s
common stock and one share purchase warrant exercisable at $0.50 per share. Such warrants
will expire five years from the date of issuance and are considered to be indexed to
the Company’s common stock.
|
|
c)
|
On March 23, 2015, the Company’s
Board of Directors approved a private placement offering for gross proceeds of $1,500,000
with Luxor. A total of 4,250,000 units were issued at a price of $0.3529 per unit. Each
unit consisted of one share of the Company’s common stock and one share purchase
warrant exercisable at $0.50 per share. Such warrants will expire five years from the
date of issuance and are considered to be indexed to the Company’s common stock.
The financing was completed on March 25, 2015.
|
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
d)
|
On March 18, 2015, the Company
issued 516,460 shares of common stock at a price of $0.25 per share to certain convertible
note holders as consideration for cancellation of an aggregate of $129,115 for interest
payments due on the convertible notes as of March 18, 2015. The remaining note holders
received interest payments in cash.
|
The following summarizes the exercise price
per share and expiration date of the Company’s outstanding warrants issued to investors and vendors to purchase common stock
at June 30, 2016:
Shares Underlying
Outstanding Warrants
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
3,410,526
|
|
|
$
|
0.58
|
|
|
November 2017
|
|
5,736,501
|
|
|
|
0.59
|
|
|
November 2017
|
|
7,042,387
|
|
|
|
1.85
|
|
|
November 2017
|
|
3,000,000
|
|
|
|
0.375
|
|
|
June 2017
|
|
316,752
|
|
|
|
0.30
|
|
|
September 2019
|
|
2,197,496
|
|
|
|
0.30
|
|
|
October 2019
|
|
1,000,000
|
|
|
|
0.30
|
|
|
November 2019
|
|
1,498,750
|
|
|
|
0.30
|
|
|
December 2019
|
|
3,981,000
|
|
|
|
0.50
|
|
|
December 2019
|
|
4,250,000
|
|
|
|
0.50
|
|
|
March 2020
|
|
2,843,000
|
|
|
|
0.50
|
|
|
May 2020
|
|
2,215,429
|
|
|
|
0.50
|
|
|
July 2020
|
|
327,900
|
|
|
|
0.50
|
|
|
September 2020
|
|
27,067
|
|
|
|
0.58
|
|
|
November 2017
|
|
44,816
|
|
|
|
0.59
|
|
|
November 2017
|
|
2,750,045
|
|
|
|
0.58
|
|
|
November 2017
|
|
4,641,296
|
|
|
|
0.59
|
|
|
November 2017
|
|
687,511
|
|
|
|
0.58
|
|
|
November 2017
|
|
1,139,968
|
|
|
|
0.59
|
|
|
November 2017
|
|
592,682
|
|
|
|
0.58
|
|
|
November 2017
|
|
976,393
|
|
|
|
0.59
|
|
|
November 2017
|
|
48,679,519
|
|
|
|
|
|
|
|
NOTE 9 – STOCKHOLDER RIGHTS AGREEMENT
The Company adopted a Stockholder Rights Agreement
(the “Rights Agreement”) in August 2009 to protect stockholders from attempts to acquire control of the Company in
a manner in which the Company’s Board of Directors determines is not in the best interest of the Company or its stockholders.
Under the Rights Agreement, each currently outstanding share of the Company’s common stock includes, and each newly issued
share will include, a common share purchase right. The rights are attached to and trade with the shares of common stock
and generally are not exercisable. The rights will become exercisable if a person or group acquires, or announces an
intention to acquire, 15% or more of the Company’s outstanding common stock. The Company’s Board of Directors had
previously waived the 15% limitation in the Rights Agreement with respect to Luxor, to allow Luxor to become the beneficial owner
of up to 26% of the shares of our Common Stock, without being deemed to be an “acquiring person” under the Rights
Agreement. In connection with the Offering, completed on March 18, 2016 the Company agreed to further waive all of the existing
limitations under the Rights Agreement so that Luxor would not be considered an “acquiring person” under the Rights
Agreement under any circumstance. Following the Offering, Luxor is the beneficial owner (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, the “Exchange Act”) of approximately 49.83% of our Common Stock. As of June 30,
2016, Luxor was the beneficial owner of approximately 44.27% of our common stock. The Rights Agreement was not adopted in response
to any specific effort to acquire control of the Company. The issuance of rights had no dilutive effect, did not affect
the Company’s reported earnings per share and was not taxable to the Company or its stockholders.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 10 – INCOME TAXES
The Company is a Nevada corporation and
is subject to federal and Arizona income taxes. Nevada does not impose a corporate income tax. The Company recognized no income
tax expense for the period ended June 30, 2016 as compared to June 30, 2015. The Company has recorded a full valuation allowance
for any income tax benefits recognized in the current period. The effective tax rate for the period ended June 30, 2016 was 0%
as compared to 38% for the 2015 period. The overall effective income tax rate for the year could be different from the effective
tax rate for the six months ended June 30, 2016. A summary of our deferred tax assets and liabilities as well as the Company’s
federal and state net operating loss carryforwards are included in Note 14 “Income Taxes” in our Annual Report on
Form 10-K for the year ended December 31, 2015.
The Company and its subsidiaries file
income tax returns in the United States. These tax returns are subject to examination by taxation authorities provided the years
remain open under the relevant statutes of limitations, which may result in the payment of income taxes and/or decreases in its
net operating losses available for carryforward. The Company has losses from inception to date, and thus all years remain open
for examination. While the Company believes that its tax filings do not include uncertain tax positions, the results of potential
examinations or the effect of changes in tax law cannot be ascertained at this time. The Company does not have any tax returns
currently under examination by the Internal Revenue Service.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Severance agreements
– The
Company has a severance agreement with an executive officer that provides for various payments if the officer’s employment
agreement is terminated by the Company, other than for cause. At June 30, 2016, the total potential liability for the severance
agreement was $80,000.
Clarkdale Slag Project royalty agreement
- NMC
- Under the original JV Agreement, the Company agreed to pay NMC a 5% royalty on NSR payable from the Company’s
50% joint venture interest in the production from the Clarkdale Slag Project. Upon the assignment to the Company of VRIC’s
50% interest in the Joint Venture Agreement in connection with the reorganization with TI, the Company continues to have an obligation
to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project.
Purchase consideration Clarkdale Slag
Project
- In consideration of the acquisition of the Clarkdale Slag Project from VRIC, the Company has agreed to certain additional
contingent payments. The acquisition agreement contains payment terms which are based on the Project Funding Date as defined in
the agreement:
|
a)
|
The Company has agreed to pay VRIC $6,400,000 on the Project
Funding Date;
|
|
b)
|
The Company has agreed to pay
VRIC a minimum annual royalty of $500,000, commencing on the Project Funding Date (the
“Advance Royalty”), and an additional royalty consisting of 2.5% of the NSR
on any and all proceeds of production from the Clarkdale Slag Project (the “Project
Royalty”). The Advance Royalty remains payable until the first to occur of: (i)
the end of the first calendar year in which the Project Royalty equals or exceeds $500,000
or (ii) February 15, 2017. In any calendar year in which the Advance Royalty remains
payable, the combined Advance Royalty and Project Royalty will not exceed $500,000; and,
|
|
c)
|
The Company has agreed to pay
VRIC an additional amount of $3,500,000 from the net cash flow of the Clarkdale Slag
Project.
|
The Advance Royalty shall continue for
a period of ten years from the Agreement Date or until such time that the Project Royalty shall exceed $500,000 in any calendar
year, at which time the Advance Royalty requirement shall cease.
On July 25, 2011, the Company and NMC
entered into an amendment (the “Third Amendment”) to the assignment agreement between the parties dated June 1, 2005.
Pursuant to the Third Amendment, the Company agreed to pay Advance Royalties to NMC of $15,000 per month (the “Minimum Royalty
Amount”) effective as of January 1, 2011. The Third Amendment also provides that the Minimum Royalty Amount will continue
to be paid to NMC in every month where the amount of royalties otherwise payable would be less than the Minimum Royalty Amount,
and such Advance Royalties will be treated as a prepayment of future royalty payments. In addition, fifty percent of the aggregate
consulting fees paid to NMC from 2005 through December 31, 2010 were deemed to be prepayments of any future royalty payments.
As of December 31, 2010, aggregate consulting fees previously incurred amounted to $1,320,000, representing credit for advance
royalty payments of $660,000.
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Total Advance Royalty fees were $45,000
for the three months ended June 30, 2016 and 2015, respectively, and $90,000 for the six months ended June 30, 2016 and 2015 respectively.
Advance Royalty fees have been included in mineral exploration and evaluation expenses – related party on the statements
of operations.
Development agreement
- In January
2009, the Company submitted a development agreement to the Town of Clarkdale for development of an Industrial Collector Road (the
“Road”). The purpose of the Road is to provide the Company the capability to transport supplies, equipment and products
to and from the Clarkdale Slag Project site efficiently and to meet stipulations of the Conditional Use Permit for the full production
facility at the Clarkdale Slag Project.
The timing of the development of the Road
is to be within two years of the effective date of the agreement. The effective date shall be the later of (i) 30 days from the
approving resolution of the agreement by the Town Council, (ii) the date on which the Town of Clarkdale obtains a connection dedication
from separate property owners who have land that will be utilized in construction of the Road, or (iii) the date on which the
Town of Clarkdale receives the proper effluent permit. The contingencies outlined in (ii) and (iii) above are beyond control of
the Company.
The Company estimates the initial cost
of construction of the Road to be approximately $3,500,000 and the cost of additional enhancements to be approximately $1,200,000
which will be required to be funded by the Company. Based on the uncertainty of the contingencies, this cost is not included in
the Company’s current operating plans. Funding for construction of the Road will require obtaining project financing or
other significant financing. As of the date of this filing, these contingencies had not changed.
Registration Rights Agreement
-
In connection with the June 7, 2012 private placement, the Company entered into a Registration Rights Agreement (“RRA”)
with the purchasers. Pursuant to the RRA, the Company agreed to certain demand registration rights. These rights include the requirement
that the Company file certain registration statements within a specified time period and to have these registration statements
declared effective within a specified time period. The Company also agreed to file and keep continuously effective such additional
registration statements until all of the shares of common stock registered thereunder have been sold or may be sold without volume
restrictions. If the Company is not able to comply with these registration requirements, the Company will be required to pay cash
penalties equal to 1.0% of the aggregate purchase price paid by the investors for each 30-day period in which a registration default,
as defined by the RRA, exists. The maximum penalty is equal to 3.0% of the purchase price which amounts to $121,500. As of the
date of this filing, the Company does not believe the penalty to be probable and accordingly, no liability has been accrued.
NOTE 12 – RELATED PARTY TRANSACTIONS
NMC
- The Company utilizes
the services of NMC to provide technical assistance and financing related activities. In addition, NMC provides the Company with
use of its laboratory, instrumentation, milling equipment and research facilities. One of the Company’s executive officers,
Mr. Ager, is affiliated with NMC. In 2011, the Company and NMC agreed to an advance royalty of $15,000 per month and to reimburse
NMC for actual expenses incurred and consulting services provided. In 2016, the Company incurred no expense for consulting services.
The Company has an existing obligation
to pay NMC a royalty consisting of 2.5% of the NSR on any and all proceeds of production from the Clarkdale Slag Project. The
royalty agreement and Advance Royalty payments are more fully discussed in Note 11.
The following table provides details of
transactions between the Company and NMC for the three and six months ended;
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement of expenses
|
|
$
|
-
|
|
|
$
|
360
|
|
|
$
|
-
|
|
|
$
|
360
|
|
Consulting services provided
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
Advance royalty payments
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Mineral and exploration expense – related party
|
|
$
|
45,000
|
|
|
$
|
45,360
|
|
|
$
|
90,000
|
|
|
$
|
120,360
|
|
SEARCHLIGHT MINERALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The Company had outstanding balances due
to NMC of $278,725 and $188,725 at June 30, 2016 and December 31, 2015, respectively.
Cupit, Milligan, Ogden & Williams,
CPAs
– The Company utilized CMOW to provide accounting support services through April 11, 2016. CMOW is an affiliate
of the Company’s former CFO, Mr. Williams. Fees for services provided by CMOW do not include any charges that had been incurred
for Mr. Williams’ time. Mr. Williams was compensated for his time under his employment agreement.
The following table provides details of
transactions between the Company and CMOW and the direct benefit to Mr. Williams for the three and six months ended:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting support services
|
|
$
|
32,548
|
|
|
$
|
32,541
|
|
|
$
|
50,474
|
|
|
$
|
95,605
|
|
Direct benefit to CFO
|
|
$
|
11,066
|
|
|
$
|
9,437
|
|
|
$
|
17,161
|
|
|
$
|
27,725
|
|
The Company had an outstanding balance
due to CMOW of $208,931 and $158,457 as of June 30, 2016 and December 31, 2015, respectively.
Financial Consulting Services
– Beginning in October of 2014, the Company utilized five individuals to provide financial consulting services. During the
third quarter of 2015, the Company entered into consulting agreements with three of these individuals, all of the consultants
provided similar services. One of these individuals is the son of the Company’s CEO. In consideration for his services,
the Company issued to him 2,063,143 warrants to purchase common stock at an exercise price of $0.50 per share, which the Company
has valued at an aggregate of $258,553. The warrants are fully vested and expire five years from the date of grant.
Ireland Inc.
– The
Company leases corporate office space on month-to-month terms from Ireland Inc. (“Ireland”). NMC is a shareholder
in both the Company and Ireland. Additionally, one of the Company’s late directors was the former CFO, Treasurer and a director
of Ireland and the Company’s CEO provides consulting services to Ireland.
Total rent expense incurred to Ireland
was $5,202 and $10,404 and $5,001 and $10,002 for the three and six months ended June 30, 2016 and 2015, respectively. At June
30, 2016, no amounts were due to Ireland. At December 31, 2015, $1,734 was due to Ireland.
Luxor
–
As of June
30, 2016, Luxor owned an aggregate of 142,665,754 shares of common stock and warrants to purchase up to an additional 18,525,032
shares of common stock. All 18,525,032 warrants, however, are not exercisable until September 18, 2016.
As of June 30, 2016, no amounts were payable
to Luxor.
During the six months ended June 30, 2016,
the Company recognized a loss on conversion of $6,998,571 related to the conversion $2,691,000 in convertible notes payable and
accrued interest owing to the Luxor Group. In connection with this conversion the Company issued to the Luxor Group 76,885,714
shares of common stock, as discussed in Note 6.
During the six months ended June 30, 2016, The Luxor Group purchased
from the Company 42,857,143 shares of common stock at $0.035 per share in exchange for $1,500,000 cash, as discussed in Note 8.
NOTE 13 – SUBSEQUENT EVENTS
The Company has evaluated events through August 12, 2016, and
has determined there are no material subsequent events.