Impact of COVID–19 Pandemic on Financial Statements
In December 2019, a novel strain of COVID-19 was reported in China. Since then, COVID-19 has spread globally, to include Canada, the United States and several European countries. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses.
As local jurisdictions continue to put restrictions in place, our ability to continue to operate our business may also be limited. Such events may result in a period of business, supply and product manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. In response to COVID-19, the Company implemented remote working and thus far, has not experienced a significant disruption or delay in our operations.
To date, COVID-19 has had a financial impact on the Company. In particular certain customers have delayed purchases of DRAGONITE due to the impact of COVID-19 on their business. COVID-19 has, to some extent, impacted the Company’s access to certain of its professional advisors. The small size of the Company’s accounting staff as well as the additional responsibilities assumed by management due to COVID-19 may continue to adversely affect the Company’s ability to complete subsequent reports in a timely manner.
NOTE 2 – GOING CONCERN AND BASIS OF PRESENTATION
The Company has suffered recurring losses from operations and currently a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management believes that in order for the Company to meet its obligations arising from normal business operations through August
20
, 2022 that the Company may be required (i) to raise additional capital either in the form of a private placement of common stock or debt and/or (ii) generate additional sales of its products that will generate sufficient operating profit and cash flows to fund operations. Without additional capital or additional sales of its products, the Company’s ability to continue to operate may be limited.
Based on the Company’s current cash usage expectations, management believes it may not have sufficient liquidity to fund its operations through August
20
, 2022. Further, management cannot provide any assurance that it is probable that the Company will be successful in accomplishing any of its plans to raise debt or equity financing or generate additional product sales. Collectively these factors raise substantial doubt regarding the Company’s ability to continue as going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.
NOTE 3 – BASIS OF REPORTING AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Applied Minerals, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, these interim unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature, which are considered necessary for a fair presentation of the financial position of the Company and the results of its operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the financial statements and related disclosures for the year ended December 31, 2020, included in the Annual Report of Applied Minerals, Inc. on Form 10-K filed with the SEC on April 15, 2021.
The accompanying interim unaudited consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes. As of August
20
, 2021, the Company’s significant accounting policies and estimates remain unchanged from those detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Condensed Financial Statements and accompanying notes. Actual results may differ materially from those estimates. As of March 31, 2021, the extent to which the COVID-19 pandemic will impact our business going forward depends on numerous dynamic factors which we cannot reliably predict. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As the events continue to evolve with respect to the pandemic, our estimates may materially change in future periods.
Concentration of Credit Risk
Cash balances, accounts receivable and derivative financial instruments are financial instruments potentially subject to credit risk. Cash and cash equivalents are maintained in bank deposit accounts, which, at times, may exceed the federally insured limits. Management periodically reviews and assesses the financial condition of the banks to mitigate the risk of loss.
For the six months ended June 30, 2021 and 2020, revenues from the Company’s largest customer accounted for 58.3% and 49.2% of total revenues, respectively. As of June 30, 2021 and 2020, amounts owed from these customers comprised 17.8% and 84.8% of accounts receivable, respectively.
Trade receivables are reported at outstanding principal amounts, net of an allowance for doubtful accounts.
Management evaluates the collectability of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and financial condition, as well as current and projected economic and market conditions, in determining the amount of the allowance. Receivable balances are written off when management determines that the balance is uncollectable. No allowance was required at June 30, 2021 and December 31, 2020.
Property and equipment are carried at cost net of accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or the life of the lease, whichever is shorter, as follows:
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Building and Building Improvements
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Office and shop furniture and equipment
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Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of long-lived assets to determine whether current events or circumstances warrant adjustment to such carrying amounts. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying amount. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell. The Company has determined that there was no impairment of its long-lived assets as of June 30, 2021 and 2020.
Stock Options and Warrants
The Company follows ASC 718 (Stock Compensation) and ASU 2018-07 (Compensation – Stock Compensation), which provide guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company instituted a formal long-term and short-term incentive plan on November 20, 2012, which was approved by its shareholders. Prior to that date, we did not have a formal equity plan, but all equity grants, including stock options and warrants, were approved by our Board of Directors. We determine the fair value of the stock-based compensation awards granted to non-employees as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. Beginning in the quarter ended June 30, 2013 the Company began using the simplified method to determine the expected term for any options granted because the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The Company previously utilized the contractual term as the expected term.
Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are expensed. Liabilities are recognized when environmental assessments indicate that remediation efforts are probable, and the costs can be reasonably estimated.
Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors and include estimates of associated legal costs. These amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by The Environmental Protection Agency or other organizations. Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology, and inflation. Recoveries are evaluated separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated liability.
The Company has posted a cash bond in the amount of 297,000 required by the Utah Department of Oil, Gas and Minerals to cover estimated reclamation costs related the Company large mining permit for its Dragon Mine property.
Note Payable - Convertible
The Company follows ASC 480-10,
Distinguishing Liabilities from Equity
(“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives, and are carried as a liability at fair value at each balance sheet date with remeasurements reported in interest expense in the accompanying Consolidated Statements of Operations.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments within ASU No. 2019-12 are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and early adoption is permitted. The adoption of ASU 2019-12 had no material impact on the Company’s financial results.
On March 16, 2017, the Company entered into a 5-year operating lease agreement for permanent office space, base rent payment is approximately $9,000 per month, subject to annual adjustments.
Supplemental cash flow information related to leases:
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Operating leases liabilities
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Supplemental balance sheet information related to leases:
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Operating lease Right-of-use assets
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Current portion of operating lease liabilities
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Long-term operating lease liabilities
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Total operating lease liabilities
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Weighted average remaining operating lease term
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Weighted average discount rate
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The following table summarizes the maturity of lease liabilities under operating leases as of June 30, 2021:
2021 (remaining six months)
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In July 2020, the Company entered into a sublease agreement with respect to its N.Y. office. The sublease agreement expires in April 2022. The base rent of the sublease agreement is $7,049 per month and increases by 2.5% in July 2021.
The Company entered into an agreement to sublet a portion of its office space. The sublease is considered to be an operating lease and the Company has not been released from its obligations under the March 16, 2017, 5-year lease agreement. The Company recognizes income from sublease on a straight-line basis over the term of the sublease, as a reduction to lease expense. The sublease is not measured under ASC 842 since the Company remains the primary obligor under the original lease and the sublease is considered to be an operating lease
.
On May 14, 2021, the Company entered into a 4-year financing lease agreement for an equipment, base rent payment is approximately $1,107 per month.
Supplemental cash flow information related to leases:
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Finance cash flows from finance lease
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Operating cash flows from finance lease
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Supplemental balance sheet information related to leases:
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Finance lease Right-of-use assets
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Current portion of finance lease liability
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Long-term finance lease liability
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Total finance lease liability
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Weighted average remaining operating lease term
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Weighted average discount rate
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The following table summarizes the maturity of lease liability under finance lease as
of June 30, 2021:
2021 (remaining six months)
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The following is a summary of deposit:
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Cash Bond (Mine Permit deposit)
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Office Lease Security Deposit
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Notes payable at June 30, 2021 and December 31, 2020 consist of the following:
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Note payable to insurance companies, payable $1,839 - $15,124 monthly, (a)
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Notes Payable, Long-Term Portion
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On October 2020, the Company signed two notes payable with interest rate of 4.04% and 6.89% with an insurance company for liability insurance, payable in 10 monthly installment payments which started on November 2020.
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During the three months ended June 30, 2021 and 2020, the Company's interest payments totalled $985 and $1,288, respectively. During the six months ended June 30, 2021 and 2020, the Company’s interest payments totalled $1,970 and $3,358, respectively.
NOTE 7 – PAYCHECK PROTECTION PROGRAM LOAN
On May 5, 2020 the Company entered into a promissory note (“PPP Loan”) in the amount of $223,075 from Bank of America, N.A. under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The term of the promissory note is two years and the annual interest rate is 1.0%, which shall be deferred for the first six months of the term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.
The promissory note evidencing each PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under such PPP Loan, collection of all amounts owing from the respective Borrower, filing suit and obtaining judgment against the respective Borrower.
Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act, as described above, during the 8-week period after loan origination and the maintenance or achievement of certain employee levels. No assurance is provided that any Borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.
On February 25, 2021, the Company entered into a second promissory note (“Second PPP Loan”) in the amount of $264,472 from Bank of America, N.A. under the Paycheck Protection Program. The terms of the Second PPP Loan are similar to the PPP Loan the Company entered into on May 5, 2020.
On March 1, 2021, the
Company applied for and was granted full forgiveness of the outstanding principal and accrued interest of the PPP Loan it entered into
on May 5, 2020 in the amount of $223,075.
NOTE 8 – CONVERTIBLE DEBT
The Company raised $23 million of financing through the issuance of two series of Paid-In-Kind (“PIK”)-Election Convertible Notes in 2013 (“Series 2023 Notes”) and 2014 (“Series A Notes”). The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of the Series 2023 Notes included among other things: (i) a maturity of August 1, 2023, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $1.40, adjusted downward based on an anti-dilution provision. On December 14, 2017, an amendment agreement, entered into between the Company and the holders of the Series A Notes and Series 2023 Notes, went into effect. The agreement resulted in changes to certain terms of the Series A and Series 2023 Notes.
The key terms of the Series A and Series 2023 Notes, as amended, are highlighted in the table below:
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Principal (Initial Liability)
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Matures on August 1, 2023, but convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
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Matures on May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are still outstanding. Convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
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$0.57, adjusted downward based on anti-dilution provisions/downround protection
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$0.37, adjusted downward based on anti-dilution provisions/down-round protection;
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10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually;
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10% per annum through December
14
, 2017, 3% per annum thereafter, due semiannually;
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$2,055,000 established at inception due to the existence of down-round protection; revalued every quarter using Monte Carlo model.
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$9,212,285 established at inception due to existence of down-round protection; revalued every quarter using a Monte Carlo model.
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In April 2019 the Company entered into a settlement agreement with the holders of the Series A Notes and Series 2023 Notes (the “PIK Notes”). Per the terms of the agreement the Company will pay to holders of PIK Notes on a pro rata basis the following percentages of revenue booked during a fiscal quarter: (a) three percent (3%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is less than $3 million on the last day of the fiscal quarter; or (b) five percent (5%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is greater than $3 million but less than $5 million the last day of the fiscal quarter; or (c) twelve percent (12%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is greater than $5 million.
As of June 30, 2021, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:
As of December 31, 2020, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:
On November 3, 2014 (“Issue Date”), the Company issued, in a private placement pursuant to investment agreements, $19,848,486 principal amount of 10% PIK-Election Convertible Notes due 2018 ("Series A Notes") in exchange for $12,500,000 in cash and the cancellation of previously-issued warrants held by one investor.
The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of both the Series A notes and Series 2023 Notes can be as exhibits to Forms 8-K filed on November 5, 2014.
During the six months ended June 30, 2021, the Company amortized $198,305 of debt discount relating to the Series A Notes Payable and issued additional PIK Notes of $
426,097
in lieu of cash interest payments. The carrying value of the Series A Notes Payable as of June 30, 2021 was $28,610,960.
As of June 30, 2021, the Company was in compliance with the covenants of the Series A Notes.
As of June 30, 2021, The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. owned $1,413,725, $2,838,912 and $275,837, respectively, of principal of the Series A Notes. The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. are managed by IBS Capital, LLC. At June 30, 2020, IBS Capital, LLC owned 12.3% of the shares of the common stock of the Company.
Series 2023 Notes (Amended)
In August 2013, the Company received $10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash.
During the six months ended June 30, 2021, the Company issued additional PIK Notes of $255,141 in lieu of cash interest payments. The carrying value of the Series 2023 Notes Payable was $17,504,573 as of June 30, 2021.
As of June 30, 2021, the Company was in compliance with the covenants of the Series 2023 Notes.
NOTE 9 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue 10,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share.
At June 30, 2021 and December 31, 2020, 176,136 and 128,000 shares of preferred stock were issued and outstanding, respectively.
On February 17, 2021, 95,000 shares of Series B Preferred Stock were issued at a stated price of $1.084 per share for cash proceeds of $100,000, net of $3,000 legal fees.
At the time of issuance, the Company evaluated the nature of Series B Preferred Stock and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded $60,738 beneficial conversion feature to additional paid in capital and amortized at the time of issuance. For the six months ended June 30, 2021, the Company recorded Deemed dividend on Convertible Series B Preferred Stock of $60,738.
On May 24, 2021, 81,136 shares of Series B Preferred Stock were issued at a stated price of $1.084 per share for cash proceeds of $85,000, net of $3,000 legal fees.
At the time of issuance, the Company evaluated the nature of Series B Preferred Stock and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded $51,874 beneficial conversion feature to additional paid in capital and amortized at the time of issuance. On June 30, 2021, the Company recorded Deemed dividend on Convertible Series B Preferred Stock of $51,874.
Each share of Series B Preferred Shares will carry an annual dividend in the amount of twelve percent (12%) of the Stated Value (the “Divided Rate”), which shall be cumulative and compounded daily, payable solely upon redemption, liquidation or conversion. The Company have the right to redeem all or any portion of the shares within 180 days following the issuance day.
The Holder shall have the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following the Issuance Date, to convert all or any part of the outstanding Series B Preferred Stock into fully paid and non-assessable shares of Common Stock. The conversion price (the “Conversion Price”) shall equal the 61% multiplied by the Market Price (representing a discount rate of 39%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
During the year ended December 31, 2020, 128,000 shares of Series B Preferred Stock were issued at a stated price of $1.00 per share for cash proceeds of $125,000, net of $3,000 legal fees.
Each share of Series B Preferred Shares will carry an annual dividend in the amount of twelve percent (12%) of the Stated Value (the “Divided Rate”), which shall be cumulative and compounded daily, payable solely upon redemption, liquidation or conversion. The Company have the right to redeem all or any portion of the shares within 180 days following the issuance day.
The Holder shall have the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following the Issuance Date, to convert all or any part of the outstanding Series B Preferred Stock into fully paid and non-assessable shares of Common Stock. The conversion price (the “Conversion Price”) shall equal the 61% multiplied by the Market Price (representing a discount rate of 39%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
At the time of issuance, the Company evaluated the nature of Series B Preferred and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded $81,836 beneficial conversion feature to additional paid in capital and amortized at the time of issuance. For the year ended December 31, 2020, the Company recorded deemed dividend on Convertible Series B Preferred Stock of $81,836.
The Company is authorized to issue 700,000,000 shares of common stock with a $0.001 par value per share.
At June 30, 2021 and December 31,
2020
, 195,105,088 and 183,938,549 shares were issued and outstanding, respectively.
During the six months ended June 30, 2021, (i) 6,167,273 shares were issued upon the conversion of 128,000 shares of Preferred Stock, (ii) 3,836,475 shares were issued upon cashless exercised of 9,528,689 options, and (iii) 1,162,791 shares were issued in lieu of a bonus payment of $58,140.
During the year ended December 31, 2020, (i) 125,000 shares were issued at a price of $0.01 per share to note holders as financing cost and (ii) 8,300,000 shares were issued upon the conversion of $40,504 of principal and accrued interest related to the FirstFire Convertible Note.
NOTE 10 – OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK
Outstanding Stock Warrants
A summary of the status and changes of the warrants issued for the six months ended June 30, 2021:
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Outstanding at January 1, 2021
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Outstanding at June 30, 2021
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At June 30, 2021, the intrinsic value of the outstanding warrants was $0.
A summary of the status of the warrants outstanding and exercisable at June 30, 2021 is presented below:
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Warrants Outstanding and Exercisable
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Outstanding Stock Options
On November 20, 2012, the shareholders of the Company approved the adoption of the Applied Minerals, Inc. 2012 Long-Term Incentive Plan (“LTIP”) and the Short-Term Incentive Plan (“STIP”) and the performance criteria used in setting performance goals for awards intended to be performance-based. Under the LTIP, 8,900,000 shares are authorized for issuance. The STIP does not refer to a particular number of shares under the LTIP, but would use the shares authorized in the LTIP for issuance under the STIP. The CEO, the CFO, and named executive officers, and directors, among others are eligible to participate in the LTIP and STIP. Prior to the adoption of the LTIP and STIP, stock options were granted under individual arrangements between the Company and the grantees, and approved by the Board of Directors.
On December 7, 2016, the stockholders of the Company approved the 2016 Incentive Plan. The purpose of the 2016 Incentive Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company to offer eligible employees, consultants, and non-employee directors incentive awards in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders. The aggregate number of shares of Common Stock that may be issued or used for reference purposes under the 2016 Incentive Plan or with respect to which awards may be granted may not exceed 15,000,000 shares, which may be either (i) authorized and unissued Common Stock or (ii) Common Stock held in or acquired for the treasury of the Company.
The Compensation Committee of the Company Board of Directors has full authority to administer and interpret the 2016 Incentive Plan, to grant awards under the 2016 Incentive Plan, to determine the persons to whom awards will be granted, to determine the types of awards to be granted, to determine the terms and conditions of each award, to determine the number of shares of Common Stock to be covered by each award and to make all other determinations in connection with the 2016 Incentive Plan and the awards thereunder as the Committee, in its sole discretion, deems necessary or desirable.
The fair value of each of the Company's stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury Bond on the date the award is granted with a maturity equal to the expected term of the award. The Company did not grant any stock option awards during the six months ended June 30, 2021.
A summary of the status and changes of the options granted under stock option plans and other agreements during the six months ended June 30, 2021:
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Outstanding at December 31, 2020
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Outstanding at June 30, 2021
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A summary of the status of the options outstanding at June 30, 2020 is presented below:
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Range of per
share
exercise
price
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Weighted
average
remaining
contractual
life
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Per share
weighted
average
exercise
price
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Weighted
average
remaining
contractual
life
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Per share
weighted
average
exercise price
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Compensation expense of $3,943 and $7,886 was recognized for vested options for the three and six months ended June 30, 2021. The aggregate intrinsic value of the outstanding options at June 30, 2021 was $0. At June 30, 2021, (i) $7,754 of unamortized compensation expense for time-based unvested options will be recognized over the next 0.50 years on a weighted average basis; (ii) $38,784 of unamortized compensation expense for performance-based unvested options will be recognized if the performance targets are achieved.
On August 18, 2017, the Company’s management was granted performance-based options to purchase 27.5 million shares of the Company’s common stock at $0.06 per share. The options expire on August 18, 2027. On November 1, 2017, the first fifty percent (50%) of the performance-based options vested as management was able to (i) close the sale of an aggregate of $600,000 of units (consisting of a share of common stock of the Company and a warrant to buy 0.25 of a share of common stock of the Company) at $0.04 per unit and (ii) establish toll processing arrangements with two toll processors of halloysite that, in management’s good faith belief, can process halloysite to the Company’s specifications. An additional twenty-five percent (25%) of the performance-based options vested on January 18, 2018 when management generated $900,000 of additional cash proceeds through (i) the sale of common stock and (ii) the licensing of a right to explore the Dragon Mine property for certain precious metals. The vesting of the remaining 8.3%, 8.3% and 8.4% of the performance-based options occurs when (i) EBITDA is positive over a twelve-month period, (ii) EBITDA is at or greater than $2 million over a twelve-month period and (iii) EBITDA is at or greater than $4 million over a twelve-month period, respectively. Of the 27.5 million performance options granted to management in August 2017, approximately 14.3 million were outstanding at June 30, 2021. The reduction was due to the forefeiture of options to purchase 0.4 million shares of common stock and the exercise of options to purchase approximately 9.5 million shares of common stock during the three months ended March 31, 2021. At June 30, 2021, management, based on its financial expectations for 2020, did not consider the vesting of the remaining 25% of the option grants owned by management to be probable.
The computation of basic earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding under the treasury method and the average market price per share during the year as well as the conversion of notes.
At June 30, 2021, the weighted average shares outstanding excluded options to purchase 44,740,845 shares of common stock of the Company, warrants to purchase 12,875,000 shares of common stock of the Company and 111,206,785, shares of common stock of the Company issuable upon the conversion of notes because their effect would be anti-dilutive.
At December 31, 2020, the weighted average shares outstanding excluded options to purchase 56,661,515 shares of common stock of the Company, warrants to purchase 24,619,623 shares of common stock of the Company and 107,025,597 shares of common stock of the Company issuable upon the conversion of notes payable because their effect would be anti-dilutive.
I
TEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.
Applied Minerals, Inc. is focused primarily on (i) the development, marketing and sale of our halloysite clay-based DRAGONITE™ line of products for use in advanced applications such as, but not limited to, reinforcement additives for polymer composites, flame retardant additives for polymers, catalysts, controlled release carriers for paints and coatings, strength reinforcement additives for cement, concrete, mortars and grouts, advanced ceramics, rheology additives for drilling fluids, environmental remediation media, and carriers of agricultural agents and (ii) the development, marketing and sale of our AMIRON™ line of iron oxide products for pigmentary and technical applications. Halloysite is an aluminosilicate with a tubular structure that provides functionality for a number of applications. Iron oxides are inorganic compounds that are widely used as pigments in paints, coatings and colored concrete.
The Company owns the Dragon Mine, which has significant deposits of high-quality halloysite clay and iron oxide. The 267-acre property is located in southwestern Utah and its resource was mined for halloysite on a large-scale, commercial basis between 1949 and 1976 for use as a petroleum cracking catalyst. The mine was idle until 2001 when the Company leased it to initially develop its halloysite resource for advanced, high-value applications. We purchased 100% of the property in 2005. After further geological characterization of the mine, the Company identified a high-purity, natural iron oxide resource that it has commercialized to supply certain pigmentary and technical markets.
The Company has a mineral processing plant with a capacity of up to 45,000 tons per annum for certain applications. The Company has a smaller processing facility with a capacity of 5,000 – 10,000 tons per annum that is currently dedicated to its halloysite resource. The Company believes it can increase its halloysite production capacity to meet an increase in demand through (i) an expansion of our on-site production capacity through a relatively modest capital investment and (ii) the use of a manufacturing tolling agreement.
The Company currently sells its DRAGONITE product as functional additive for advanced molecular sieves, as a nucleating agent for injection molding applications and as a binder for ceramic applications. For a number of markets mentioned above, the Company is currently working with a number of customers, which are in the latter stages of commercializing new and existing products that will utilize DRAGONITE as a functional additive.
Applied Minerals is a publicly traded company incorporated in the state of Delaware. The common stock trades on the OTC market under the symbol AMNL.
Critical Accounting Policies and Estimates
A complete discussion of our critical accounting policies and estimates is included in our Form 10-K for the year ended December 31, 2020. There have been no material changes in our critical accounting policies and estimates during the six-month period ended June 30, 2021 compared to the disclosures on Form 10-K for the year ended December 31, 2020.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
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Three Months Ended June 30,
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General and administrative
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Interest expense, net (including amortization of deferred financing cost and debt discount)
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Revenue for the three months ended June 30, 2021 totalled $465,493, an increase of $321,900 or 224%, compared to the same period in 2020. The increase was driven primarily by a $183,686 increase in the sale of AMIRON iron oxide and a $138,214 increase in the sale of DRAGONITE halloysite clay.
Sales of AMIRON during the period totalled $277,297, an increase of 196% when compared to the same period in 2020. The increase was due to an increase in sales of AMIRON to a producer of cement. Sales of DRAGONITE halloysite clay during the period totalled $188,196, an increase of 277% when compared to the same period in 2020. The increase in sales of DRAGONITE halloysite clay was driven primarily by a general increase in sales of DRAGONITE to a number of customers for use as a flame retardant additive, a binder for a catalyst and ceramic bodies and as a nucleating agent for polymers.
Total operating expenses for the three months ended June 30, 2021 totalled $907,167, a reduction of $165,553, or 15%, compared to the same period in 2020. The reduction was driven primarily by a $188,471, or 82%, increase in production costs, partially offset by a $388,238, or 49%, decline in general and administrative expense.
Production costs include those operating expenses which management believes are directly related to the mining and processing of the Company’s iron oxide and halloysite minerals, which result in the production of its AMIRON and DRAGONITE products for commercial sale. Production costs include, but are not limited to, wages and benefits of employees who mine material and who work in the Company’s milling operations, energy costs associated with the operation of the Company’s two mills, the cost of mining and milling supplies and the cost of the maintenance and repair of the Company’s mining and milling equipment. Wages and energy are the two largest components of the Company’s production costs.
Production costs incurred during the three months ended June 30, 2021 were $418,959, an increase of $188,471, or 82%, compared to the same period in 2020. The increase was driven primarily by $82,460 in contract labor costs needed to increase our iron production, a $46,272 increase in toll processing costs of certain grades of DRAGONITE, and a $39,320 increase in wages due to the increase in iron production.
Exploration costs include operating expenses incurred at the Dragon Mine that are not directly related to production activities. Exploration costs incurred during the three months ended June 30, 2021 were $76,259, an increase of $34,214, or 81%, compared to the same period in 2020. The increase was due to a $14,708 increase in certain mine maintenance expense and the reclassification of $11,403 of workers’ compensation expense previously included in production expense.
General and administrative expenses incurred during the three months ended June 30, 2021 totalled $411,949, a $388,238, or 49%, decline when compared to the same period in 2020. The decrease was driven primarily by a $180,811 decrease in director expense due to a reduction in the number of directors from seven to five serving on the Company’s board, a $157,535 reduction in wages due to a reduction in the number of corporate executives from five to two, and a $31,575 decrease in D&O insurance expense.
Operating loss incurred during the three months ended June 30, 2021 was $441,674, a $487,453, or 52%, decrease when compared to the same period in 2020. The decline was driven primarily by a $321,900 increase in revenue and a $388,238 decrease in general and administrative expense, offset by a $188,471 increase in production costs when compared to the same period in 2020.
Total Other Expense was $393,519 for the three months ended June 30, 2021 compared to Total Other Expense of $454,187 in same period in 2020. The $60,668 decline in Total Other Expense was due primarily to a $69,789 increase in other income, partially offset by a $9,121 increase in PIK Note Discount amortization expense, when compare to the same period in 2020.
Net Loss for the three-month period ending June 30, 2021 was $835,193, a decline of $548,121, or 40%, when compared to the same period in 2020. The decrease was primarily driven by a $487,453 decline in operating loss and $60,668 decrease in Total Other Expense.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
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Six Months Ended June 30,
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General and administrative
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Interest expense, net (including amortization of deferred financing cost and debt discount)
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Total Other Income (Expense)
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Revenue for the six months ended June 30, 2021 totalled $739,165, an increase of $443,096, or 150%, compared to the same period in 2020. The increase was driven primarily by a $285,132 increase in the sale of AMIRON iron oxide and a $158,001 increase in the sale of DRAGONITE halloysite clay.
Sales of AMIRON during the period totalled $430,859, an increase of 196% when compared to the same period in 2020. The increase was due to an increase in the production and sale of AMIRON to a producer of cement. Sales of DRAGONITE halloysite clay during the period totalled $308,343, an increase of 105% when compared to the same period in 2020. The increase in sales of DRAGONITE halloysite clay was driven primarily by a general increase in sales of DRAGONITE to a number of customers for use as a flame retardant additive, a binder for a catalyst and ceramic bodies and as a nucleating agent for polymers.
Total operating expenses for the six months ended June 30, 2021 totalled $1,810,446, a decrease of $162,393, or 8%, compared to the same period in 2020. The decline was driven primarily by a $633,650, or 44%, decline in general and administrative costs, partially offset by an increase of $431,087 or 96% in production costs.
Production costs include those operating expenses which management believes are directly related to the mining and processing of the Company’s iron oxide and halloysite minerals, which result in the production of its AMIRON and DRAGONITE products for commercial sale. Production costs include, but are not limited to, wages and benefits of employees who mine material and who work in the Company’s milling operations, energy costs associated with the operation of the Company’s two mills, the cost of mining and milling supplies and the cost of the maintenance and repair of the Company’s mining and milling equipment. Wages and energy are the two largest components of the Company’s production costs.
Production costs incurred during the six months ended June 30, 2021 were $881,125, an increase of $431,087, or 96%, compared to the same period in 2020. The increase was due primarily to $179,330 of contract labor expense related to the increase in the Company’s iron production, a $109,390 increase in clay toll processing costs related to sales of certain grades of DRAGONITE, a $108,285 increase in wages related primarily to the addition of an employee and an increase in iron production, and increase in vehicle and equipment maintenance expense of $48,290 and an increase in fuel expense of $19,020 primarily related to the increase in iron production, partially offset by a $38,884 decrease in utility expense due primarily to a refund.
Exploration costs include operating expenses incurred at the Dragon Mine that are not directly related to production activities. Exploration costs incurred during the six months ended June 30, 2021 were $127,849, a $40,170, or 46%, increase compared to the same period in 2020. The increase was driven primarily to a $22,363 in mine maintenance expense and $15,235 of workers’ compensation and healthcare expense reclassified during the period as exploration expense.
General and administrative expenses incurred during the six months ended June 30, 2021 totalled $801,472, a decline of $633,650, or 44%, when compared to the same period in 2020. The decrease was driven primarily by a $392,886 decrease in wages and related payroll taxes due to a reduction in corporate executives from five to two and a $220,811 decline in director expense related to a reduction in the number of directors from seven to five.
Operating loss incurred during the six months ended June 30, 2021 was $1,071,281, a $605,489, or 36%, decrease when compared to the same period in 2020. The decline was driven primarily by a $443,096 increase in revenue and a $633,650 decrease in general and administrative expense, offset by a $431,087 increase in production costs when compared to the same period in 2020.
Total Other Expense for the six months ended June 30, 2021 was $609,870, an increase of $1,010,351, or 252%, when compared to the same period in 2020. The $1,010,351 increase in Total Other Expense was due primarily to a $27,431 increase in PIK Note interest expense, offset by a $982,920 decline in other income when compared to the same period in 2020.
Net Loss for the six-month period ending June 30, 2021 was $1,681,151, an increase of $404,862, or 32%, when compared to the same period in 2020. The increase was driven by an $1,010,351 increase in Total Other Expense and a $605,489 decline in operating loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered recurring losses from operations and currently a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management believes that in order for the Company to meet its obligations arising from normal business operations through August 20, 2022 that the Company may be required (i) to raise additional capital either in the form of a private placement of common stock or debt and/or (ii) generate additional sales of its products that will generate sufficient operating profit and cash flows to fund operations. Without additional capital or additional sales of its products, the Company’s ability to continue to operate may be limited.
Based on the Company’s current cash usage expectations, management believes it may not have sufficient liquidity to fund its operations through August 20, 2022. Further, management cannot provide any assurance that it is probable that the Company will be successful in accomplishing any of its plans to raise debt or equity financing or generate additional product sales. Collectively these factors raise substantial doubt regarding the Company’s ability to continue as going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.
Cash used in operating activities during the six months ended June 30, 2021 was $848,263 compared to $311,399 provided during the same period in 2020. During the period the Company used $850,291 primarily due to a net loss of approximately $1,681,151 and a gain of approximately $223,000 from the forgiveness of a PPP loan, partially offset by non-cash items related to accrual of approximately $702,000 of interest expense with respect to the PIK Notes, stock-based compensation expense of approximately $66,000 and net changes in operating assets and liabilities and others of approximately $75,000. Cash used in operating activities during 2021 before adjusting for changes in operating assets and liabilities was $874,664, $503,910 more than the comparable period in 2020.
Cash provided by financing activities during the six months ended June 30, 2021 was $347,632 compared to $134,855 used during the same period in 2020. The $482,487 increase in cash provided during the period was due primarily to $185,000 of proceeds from a private placement of Series B Preferred Stock during the current period and the elimination of $315,625 of payments of notes payable that occurred during the same period in 2020.
Total assets at June 30, 2021 were $1,351,956 compared to $1,900,307 at December 31, 2020, a decrease of $548,351 due primarily to decrease in the Company cash, prepaid expenses and operating lease right-of-use assets. Total liabilities were $50,603,838 compared to $49,729,744 at December 31, 2020. The increase of $874,094 in total liabilities was due primarily to the increase in Paycheck Protection Program Loan, increase in accounts payable resulting from cash management, amortization of PIK Notes debt discount which increased the carrying value of PIK Notes payable, proceeds from issuance of notes payable and offset by repayment of notes payable to related party.
ISSUANCE OF CONVERTIBLE DEBT
For information with respect to issuance of convertible debt, see Note 8 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonable likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.