Quarterly Report (10-q)

Date : 08/12/2016 @ 11:07AM
Source : Edgar (US Regulatory)
Stock : Star Mountain Resources, Inc. (PC) (SMRS)
Quote : 0.013  0.0 (0.00%) @ 12:59PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 000-54405

 

 

 

STAR MOUNTAIN RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   90-0963619
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

8307 Shaffer Parkway, Suite 201, Littleton, Colorado   80127
(Address of principal executive offices)   (Zip Code)

 

(844) 443-7677

(Registrant’s telephone number, including area code)

 

NA

(Former Name, former address and former fiscal year, if changed since last report)

 

Copies of Communications to:

Laura Anthony, Esq.

Legal& Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, FL 33401

(561) 514-0936

Fax (561) 514-0832

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

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

 

The number of shares of Common Stock, $0.001 par value, issued and outstanding o n August 11, 2016, was 38,151,229 shares.

 

 

 

     
     

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
     
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information 23
Item 6. Exhibits 24
Signatures   25

 

    2  
     

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report includes forward-looking statements. These forward-looking statements are based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including but not limited to: our ability to continue as a going concern; difficult global capital market conditions and our ability to raise the capital needed to fund our ongoing operations; uncertainty of our future revenues and financial performance; risks associated with our planned development of our historically operating mine; the accuracy of estimates and assumptions associated with our reserves and/or mineralized material; challenges to title of our properties; risks associated with operating in a complex environmental and regulatory business environment; risks of shortages of supplies, equipment, materials and/or water; our ability to retain key personnel; disruption, damage or failure of information technology systems; the minimal public market for our common stock and the potential of dilution through future issuances of our common stock. You should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL

 

“Mineralized material” as used in this Quarterly Report on Form 10-Q, although permissible under the United States Securities and Exchange Commission’s (“SEC”) Industry Guide 7, does not indicate “reserves” by SEC standards. We cannot be certain that any mineralized materials will ever be converted into SEC Industry Guide 7-compliant “reserves”. Investors are cautioned not to assume that all or any part of the disclosed mineralized material estimates will ever be confirmed or converted into reserves or that mineralized material can be economically or legally extracted.

 

    3  
     

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

STAR MOUNTAIN RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(US dollars in thousands, except share amounts)

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
             
ASSETS                
                 
CURRENT ASSETS                
Cash and cash equivalents   $ 1,538     $ 1,201  
Restricted cash     301       -  
Prepaid and other     293       333  
Parts and supplies inventory     500       500  
                 
Total current assets     2,632       2,034  
                 
Land     1,876       1,876  
Property & equipment, net     23,792       24,552  
Mineral reserves     3,165       3,165  
Mineral rights     3,684       3,684  
Restricted cash – reclamation deposits     1,688       1,688  
                 
TOTAL ASSETS   $ 36,837     $ 36,999  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
CURRENT LIABILITIES                
Accounts payable and accrued expenses   $ 1,024     $ 404  
Accounts payable - related party     63       19  
Notes Payable, net of unamortized debt issuance costs     3,749       1,380  
Notes payable - related parties, net of discounts     833       770  
Purchase price obligation – Balmat acquisition     500       500  
Stipulated agreement liability     79       79  
                 
Total current liabilities     6,248       3,152  
                 
Asset retirement obligation     17,906       17,906  
Purchase price obligation – Balmat acquisition     12,861       11,931  
Total long term liabilities     30,767       29,837  
                 
Total Liabilities     37,015       32,989  
                 
STOCKHOLDERS’ EQUITY (DEFICIT)                
Preferred stock, 50,000,000 authorized, $0.001 par value, consisting of Series B preferred stock, 100,000 shares authorized, 5,000 and 5,000 shares issued and outstanding, respectively, and Series C preferred stock, 5,000,000 shares authorized, 3,130,000 and 3,130,000 shares issued and outstanding, respectively     3       3  
Common stock, authorized 350,000,000 shares, $0.001 par value, 38,151,229 and 37,951,229 issued and outstanding, respectively     38       38  
Common stock subscribed     27       27  
Additional paid in capital     18,586       18,476  
Accumulated deficit     (18,832 )     (14,534 )
                 
Total Stockholders’ Equity (Deficit)     (178 )     4,010  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 36,837     $ 36,999  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

    4  
     

 

STAR MOUNTAIN RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(US dollars in thousands, except share amounts)

(unaudited)

 

    Three Month Ended     Six Months Ended  
    June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
OPERATING EXPENSES                                
Compensation   $ 122     $ 493     $ 242     $ 623  
Exploration and development costs     90       45       139       112  
Mine maintenance costs     444       -       985       -  
Depreciation and amortization     383       1       765       3  
Accretion expense     206       -       412       -  
General and administrative     390       1,227       1,066       1,461  
                                 
Total Operating Expenses     1,635       1,766       3,609       2,199  
                                 
Loss from Operations     (1,635 )     (1,766 )     (3,609 )     (2,199 )
                                 
OTHER INCOME (EXPENSE)                                
Interest income     3       -       5       -  
Interest expense     (97 )     (10 )     (175 )     (18 )
Unrealized gain (loss)     206       -       (519 )     -  
Total Other Income (Expense)     112       (10 )     (689 )     (18 )
                                 
NET LOSS   $ (1,523 )   $ (1,776 )   $ (4,298 )   $ (2,217 )
                                 
Basic and Diluted Loss Per Share   $ (0.04 )   $ (0.10 )   $ (0.11 )   $ (0.12 )
                                 
Weighted Average Number of Common Shares Outstanding     38,243,537       18,052,740       38,212,279       17,737,873  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

    5  
     

 

STAR MOUNTAIN RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(US dollars in thousands)

(unaudited)

 

    Six Months Ended  
    June 30, 2016     June 30, 2015  
             
Cash flows from operating activities                
Net loss   $ (4,298 )   $ (2,217 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     765       3  
Shares and warrants issued for services     183       1,765  
Stock options     -       128  
Accretion expense     412       -  
Change in estimate of asset retirement obligation     (412 )     -  
Change in estimate of purchase price obligation – Balmat acquisition     931       -  
Amortization of debt discount     66       -  
    Cancellation of shares     (99 )        
Changes in operating assets and liabilities                
Prepaid expense     66       12  
Restricted cash     (301 )     -  
Accounts payable and accrued expenses     456       81  
Accounts payable - related party     (5 )     17  
Accrued interest     38       -  
Accrued interest - related party     48       16  
Accrued compensation     125       -  
                 
Net cash used in operating activities     (2,025 )     (195 )
                 
Cash flows from investing activities                
Purchase of equipment     (5 )     -  
                 
Net cash used in investing activities     (5 )     -  
                 
Cash flows from financing activities                
Proceeds from issuance of notes payable     2,934       -  
Payments on notes payable     (567 )     -  
Proceeds from issuance of common stock     -       1,180  
Proceeds from loan payable – related party     250       34  
Payments on loan payable – related party     (250 )     -  
                 
Net cash provided by financing activities     2,367       1,214  
                 
Net increase in cash     337       1,019  
                 
Cash, beginning of period     1,201       46  
                 
Cash, end of period   $ 1,538     $ 1,065  
                 
Supplemental Information:                
Cash paid for:                
Taxes   $ -     $ -  
Interest Expense   $ 16     $ -  
Non-cash investing and financing activities                
Stock issued for future services   $ 110     $ -  
Stock issued for settlement of related party debt     -       86  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

    6  
     

 

STAR MOUNTAIN RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars in thousands, except share amounts)

(unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

 

Star Mountain Resources, Inc. and subsidiaries (the “Company”, “we”, “us”, “our”) is a minerals exploration company focused on acquiring and consolidating mining claims, mineral leases, producing mines, and historic mines with production and future growth potential identified through our exploration efforts. Currently, our operations are focused on re-commencing mining activities at the Balmat Zinc Mine in the Balmat mining district in St. Lawrence County, New York and evaluating the feasibility of further exploration of minerals at the Star Mountain Mining District, Beaver County, Utah.

 

On November 2, 2015, the Company acquired a 100% interest in Northern Zinc, LLC, a Nevada limited liability company (“Northern Zinc”), pursuant to an October 13, 2015 purchase agreement the Company entered into with Northern Zinc and its sole member, Aviano Financial Group, LLC, a Delaware limited liability company (“Aviano”) (the “Northern Zinc Purchase Agreement”). Northern Zinc and Aviano are unrelated third parties. Concurrent with the Company’s purchase of Northern Zinc, Northern Zinc acquired (a) 100% of the issued and outstanding common stock of Balmat Holding Corporation (“Balmat”) and its wholly owned subsidiary, St. Lawrence Zinc Company, LLC, (“SLZ”) the owner of the mining property known as the Balmat Zinc Mine and (b) certain mining and processing equipment pursuant to an October 13, 2015 purchase agreement the Company entered into with Northern Zinc, HudBay Minerals Inc. (“Hudbay”), Balmat and SLZ (the “Balmat Purchase Agreement”). Balmat, SLZ and Hudbay were unrelated third parties. The Balmat Mine is located in upstate New York. See Note 3 for further details.

 

NOTE 2 – GOING CONCERN

 

The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses the past two years and had total current assets of $2,632 and total current liabilities of $6,248, resulting in a negative working capital balance of $3,616 as of June 30, 2016. Further losses are anticipated in the development of its business. In view of these matters, there is substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s ability to continue as a going concern is dependent upon obtaining the necessary financing to meet its obligations and pay its liabilities arising from normal business operations. Management plans to finance the Company’s operating costs over the next twelve months with loans from significant shareholders and directors, debt financing, and/or the issuance of the Company’s securities. There can be no assurance that we will be able to raise the necessary financing on acceptable terms or at all. If management is unsuccessful in these efforts, discontinuance of operations is possible. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3 – BALMAT ACQUISITION

 

On November 2, 2015, the Company completed the acquisition of Northern Zinc. Concurrent with the Company’s acquisition of Northern Zinc, Northern Zinc acquired Balmat and its wholly owned subsidiary, SLZ (together referred to as the “Balmat Acquisition”). Each of the agreements is outlined further below.

 

Northern Zinc Purchase Agreement

 

Pursuant to the terms of the Northern Zinc Purchase Agreement, we issued 10,000,000 shares of our unregistered common stock to Aviano and assumed $1,390 in debts of Aviano in exchange for 100% of Northern Zinc’s membership interests previously owned by Aviano. We also entered into a corporate development consulting agreement with David Linsley, a principal of Northern Zinc; appointed Wayne Rich as our Chief Financial Officer; agreed to appoint two members to our board of directors designated by Aviano; and offered advisory board positions for a period of at least three years to three other individuals associated with Aviano.

 

    7  
     

 

 

Balmat Purchase Agreement

 

Upon closing, we acquired 100% of the issued and outstanding common stock of Balmat from Hudbay for a cash purchase price ranging from $8,500 to $17,000 (the “Balmat Cash Amount”) and issued Hudbay 550,000 shares of our unregistered common stock. Subsequent to closing, and in accordance with the purchase agreement, we must issue Hudbay an additional 78,857 shares of our unregistered common stock.

 

The Balmat Cash Amount is able to be satisfied in any of the following ways:

 

Option 1 . Under this option, $1,500 was paid at closing and the balance of $15,500 will be paid as follows:

 

  $500 upon completion of the first shipment of ore concentrate from the Balmat Mine;
     
  $5,000 on the 12-month anniversary of the first shipment of ore concentrate from the Balmat Mine; and
     
  $2,500 on each of the following dates from the first shipment of ore concentrate from the Balmat Mine: 18 th month, 24 th month, 30 th month and the 36 th month.

 

Option 2 . Under this option, with proper notice to Hudbay within three months of the closing date (which has since passed), the Balmat Cash Amount would have been reduced to $8,500: $1,500 of which was paid upon closing, and the balance of $7,000 was to have been paid within three days after proper notice to Hudbay.

 

Under Option 2, Northern Zinc would also have immediately assumed all environmental liabilities in respect of the Balmat Mine and all liabilities relating to or arising from any claims by existing or former employees relating to employment, termination, on-the-job injuries or death, unsafe working conditions or exposure to potentially harmful substances and waive its right to indemnification by Hudbay in respect of certain damages identified in the purchase agreement with Hudbay.

 

Option 3 . Under this option, with proper notice to Hudbay within 30 days before the 12-month anniversary of the first shipment of ore concentrate from the Balmat Mine, the Balmat Cash Amount will be reduced to $16,000: $1,500 of which was paid upon closing with the balance of $14,500 being paid as follows:

 

  $400 upon completion of the first shipment of ore concentrate from the Balmat Mine; and
     
  $4,700 on each of the following dates from the first shipment of ore concentrate from the Balmat Mine: 12 th month, 18 th month and 24 th month.

 

Notwithstanding the above Balmat Cash Amount options, if any portion of the purchase price has not been paid under Options 1 or 3 within 48 months of the closing date (or 54 months of the closing date if we have not elected one of the options) then the entire unpaid balance shall be immediately due and payable no later than the end of the 48 th or 54 th month, respectively.

 

Fair Value Determination and Allocation of Consideration

 

The purchase price allocation presented below is preliminary and includes the use of estimates. This preliminary allocation is based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. We believe the estimates used are reasonable and the significant effects of the transaction are properly reflected. However, the estimates are subject to change as additional information becomes available and is assessed by the Company. These amounts will be finalized as soon as possible, but no later than one year from the acquisition date.

 

    8  
     

 

Upon the completion of this acquisition, the Company acquired the following assets and assumed the following liabilities:

 

Assets received:        
Cash   $ 72  
Prepaid expense     163  
Spare parts inventory     500  
Land     1,855  
Buildings     850  
Machinery and equipment     23,903  
Mineral reserves     3,165  
Mineral rights     3,660  
Restricted cash – surety bond     1,664  
Total assets received   $ 35,832  
         
Liabilities assumed:        
Loans payable     1,390  
Asset retirement obligation     17,906  
Liabilities     28  
Total liabilities assumed   $ 19,324  
         
Total consideration paid   $ 16,508  

 

The consideration paid was comprised of $1,000 in cash, $12,431 in a deferred payment liability, and 10,628,857 shares of the Company’s stock (which includes 78,857 shares issuable to Hudbay as part of the acquisition purchase price as of June 30, 2016) valued at $3,078.

 

The acquisition has generated no revenues for us since the November 2, 2015 acquisition date.

 

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting and Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted principles for interim financial statements. Accordingly, these unaudited condensed consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments which are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal, recurring nature. The interim results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results that can be expected for the entire year ending December 31, 2016.

 

Recent Accounting Pronouncements

 

In August 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact the adoption of ASU 2014-15 will have on our financial statements and related disclosures.

 

    9  
     

 

In April 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of its simplification initiative. This ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact the adoption of ASU 2016-09 will have on our financial statements and related disclosures.

 

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company continually monitors its cash positions with, and the credit quality of, the financial institutions with which it invests. The Company maintains balances in various U.S. financial institutions in excess of U.S. federally insured limits. The Company’s balances of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, and notes payable approximate fair value.

 

The following table presents information about financial instruments recognized at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, and indicates the fair value hierarchy:

 

    June 30, 2016     December 31, 2015  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
Assets                                                                
Reclamation deposits     -     $ 1,688       -       1,688       -     $ 1,688       -       1,688  
Total financial assets   $ -     $ 1,688     $ -     $ 1,688     $ -     $ 1,688     $ -     $ 1,688  
                                                                 
Liabilities                                                                
Purchase price obligation – Balmat Acquisition     -       -       13,361       13,361       -       -       12,431       12,431  
Asset retirement obligation     -       -       17,906       17,906       -       -       17,906       17,906  
Total financial assets and liabilities   $ -     $ 1,688     $ 31,267     $ 32,955     $ -     $ 1,688     $ 30,337     $ 32,025  

 

The fair value of the Company’s purchase price obligation was estimated using a probability-weighted discounted cash flow model in order to arrive at a fair value of the liability. A discounted cash flow model was used to calculate the net present value of the remaining payment options (Option 1 and Option 3) to satisfy the outstanding purchase price obligation. See Note 3 – Balmat Acquisition for a detailed description of each payment option able to satisfy the remaining obligation. An estimated probability weighting was then assigned to each option’s estimated net present value to arrive at the overall estimated fair value. Significant unobservable inputs include management’s estimated timing of activities (including option election dates and timing of first concentrate shipments) associated with payments due under the agreement as well as the 5.6% discount rate applied within the model. Acceleration of timing of elections or shipments of first concentrates would accelerate payments due, therefore increasing the net present value of a given payment option. An upward/downward adjustment to the discount rate would result in an inverse effect on the overall fair value, all else being equal.

 

The fair value of the Company’s asset retirement obligation was estimated using a discounted cash flow model to estimate the fair value of the liability. Significant unobservable inputs include management’s cost estimates and the estimated timing of those costs, the annual inflation rate applied to cost estimates and the discount rate used to discount the inflated cost estimates. The undiscounted costs of reclamation were estimated at $19,126 and are expected to be incurred over the next 28 years. A 3.6% annual inflation rate and 4.6% discount rate were applied. Any upward/downward adjustments to the estimated costs or inflation rate would result in a corresponding adjustment to the fair value estimate, all else being equal. An upward/downward adjustment to the discount rate would result in an inverse effect on the overall fair value, all else being equal.

 

    10  
     

 

NOTE 6 – RESTRICTED CASH

 

As of June 30, 2016 and December 31, 2015, the Company had current restricted cash balances of $301 and zero, respectively. The June 30, 2016 balance includes funds held in escrow by TCA related to property tax payments owed for the Balmat property and an obligation associated with the stipulated agreement liability. These restricted funds will become unrestricted upon satisfaction of proof of payment or release of the liability.

 

NOTE 7 – PREPAID EXPENSES AND OTHER

 

As of June 30, 2016 and December 31, 2015, the Company had prepaid expenses totaling $293 and $333, respectively. These balances include prepayments associated with property taxes, insurance premiums and consulting contracts. All amounts are being amortized over the time period associated with the prepaid expense.

 

NOTE 8 – PROPERTY, PLANT and EQUIPMENT

 

As of June 30, 2016 and December 31, 2015, property, plant and equipment consisted of the following:

 

    June 30, 2016     December 31, 2015  
          Accumulated     Net Book           Accumulated     Net Book  
    Cost     Depreciation     Value     Cost     Depreciation     Value  
                                     
Buildings   $ 892     $ 59     $ 833     $ 892     $ 16     $ 876  
Machinery & Equipment     18,911       901       18,010       18,911       231       18,680  
Mobile Equipment     4,984       65       4,919       4,984       16       4,968  
Office Furniture & Equipment     38       8       30       33       5       28  
    $ 24,825     $ 1,033     $ 23,792     $ 24,820     $ 268     $ 24,552  

 

Depreciation expense for the six months ended June 30, 2016 and 2015 was $765 and $3, respectively.

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

2016

On May 12, 2016, Joseph Marchal, the Company’s CEO and Executive Chairman, and Edward Brogen, one of the Company’s Directors, each loaned the Company $125 bearing interest at 15% per annum (“May 2016 Bridge Loans”). The loans were repaid in full upon closing of the TCA Global debt on June 28, 2016.

 

As of June 30, 2016, the Company owed Mr. Marchal and Mr. Brogen $293 and $640, respectively, inclusive of interest, for outstanding notes issued on November 10, 2015. See Note 10 for further details. Additionally, the Company owed each party $2 in interest associated with the May 2016 Bridge Loans.

 

2015

 

Mr. Marchal loaned the Company an aggregate of $20 in cash and paid expenses totaling $15 on behalf of the Company at various times during the six months ended June 30, 2015. In addition, Mr. Marchal agreed to convert $86 of outstanding loans as part of the Unit Offering that closed on June 30, 2015. As of June 30, 2015, the Company owed Mr. Marchal a total of $202 for amounts advanced to the Company. For the six months ended June 30, 2015, the Company recorded $16 in interest expense related to loans from Mr. Marchal.

 

Mr. Brogen purchased $250 worth of units in the Unit Offering that closed on June 30, 2015.

 

On March 1, 2015, Mark Osterberg, the Company’s President and COO, was issued 50,000 shares as a one-time signing bonus as part of his employment agreement. The value of the shares was estimated at $1.20 per share.

 

During the six months ended June 30, 2015, related parties were issued shares of common stock for services rendered in lieu of cash compensation. These shares were issued at $1.10 per share. The related party, date of issuance and number of shares are outlined below:

 

    11  
     

 

 

Related Party

 

 

Date of Issuance

  Number of Shares Issued
Joseph Marchal, CEO and Executive Chairman   May 15, 2015   500,000
Edward Brogan, Director   May 15, 2015   250,000
Donna Moore, Controller and CAO*   May 15, 2015   50,000
Doug MacLellan, Director   May 15, 2015   50,000
Donald Sutherland, Director   May 15, 2015   50,000
Mark Osterberg, President and COO   May 15, 2015   50,000
John Heinzig, Operations Manager*   May 15, 2015   100,000
Summit Capital USA, Inc.*   May 15, 2015   500,000
TOTAL       1,550,000

 

*These parties were related parties at the time of the transaction, but are no longer related parties

  

NOTE 10 – DEBT

 

The Company’s current debt balance at June 30, 2016 is net of reductions of $564 for unamortized discounts and unamortized debt issuance costs; and at December 31, 2015 there were no reductions. The components of debt follow:

 

    June 30, 2016     December 31, 2015  
             
Aviano Note Payable   $ 600     $ 850  
Fognani Note Payable     200       440  
DANC Note Payable     500       -  
Less: Deferred financing fees     (7 )     -  
      493       -  
TCA Global Note Payable     3,000       -  
Less: Deferred financing fees     (557 )     -  
      2,443       -  
Other     13       90  
Total current debt   $ 3,749     $ 1,380  

 

Stipulated Agreement Liability

 

The Company entered into an agreement with Michael Christiansen (“Christiansen”), a former officer of the Company on August 13, 2013 (the “Stipulated Agreement”) to pay Christiansen $123 (the “Amount Due”) relating to a promissory note, accrued compensation and out-of-pocket expenses incurred on behalf of the Company. The payment of this agreement is in default. Subject to completion of the payments due under the agreement, the parties agreed to release certain claims against each other related to or arising in connection with the matters that gave rise to our agreement to pay the Amount Due. At June 30, 2016 and December 31, 2015, the remaining liability of $79 is recorded as Stipulated Agreement Liability in the accompanying unaudited condensed consolidated financial statements.

 

Notes Payable

 

Aviano Note Payable

 

On November 2, 2015, the Company issued an $850 promissory note bearing interest at 8% per annum as part of the Balmat Acquisition (see Note 3), of which $750 was payable within ten days of issuance with the remaining $100 to be paid no later than November 2, 2016, or such earlier date as the Company has completed a transaction resulting in cash proceeds of at least $6,000. As of June 30, 2016, the Company had paid $250 of this promissory note and had recorded $36 of accrued interest associated with this note ($25 during the six months ended June 30, 2016).

 

    12  
     

 

Fognani Note Payable

 

On November 2, 2015, the Company issued a $540 promissory note bearing interest at 8% per annum for payment of legal fees relating to the Balmat Acquisition. The Company is obligated to pay $50 per month for ten consecutive months with a final payment of $40 plus accrued interest due on the 15th day of the eleventh month. As of June 30, 2016, the Company had paid $340 of this loan and had recorded $20 of accrued interest associated with this note ($13 during the six months ended June 30, 2016). As of June 30, 2016, we were delinquent in our payments under the terms of this note.

 

DANC Note Payable

 

On March 15, 2016, the Company issued a $500 promissory note bearing interest at 2.3% per annum to the Development Authority of the North Country, a New York public benefit trust (“DANC”). The maturity date of the note is April 1, 2017, and the Company is obligated to pay interest-only payments on a monthly basis beginning April 1, 2016. Pursuant to the terms of the note, SLZ granted a security interest in certain of its machinery and equipment as well as mining rights to DANC. In addition, unconditional guarantees were provided by Balmat, Northern Zinc and Star Mountain. The Company paid $3 in interest during the six months ended June 30, 2016. Net proceeds received after fees were $490.

 

TCA Global Note Payable

 

On June 28, 2016 the Company entered into and completed the transactions contemplated by the Securities Purchase Agreement (the “SPA”) it entered into with TCA Global Credit Master Fund, LP, a limited partnership organized and existing under the laws of the Cayman Islands (“TCA Global”), whereby the Company agreed to sell and issue to TCA Global up to $5,000 of senior secured convertible, redeemable debentures (the “Debenture”), of which $3,000 was purchased by TCA Global on the Closing Date for the total purchase price of $3,000. Up to $2,000 of additional Debentures may be purchased in additional closings by TCA Global upon our mutual agreement with TCA Global.

 

Pursuant to the SPA, the Company issued the Debenture to TCA Global in the principal amount of $3,000 which bears interest at 18% per annum. The Company agreed to make monthly payments of principal and interest to TCA Global provided the first two monthly payments after the Closing Date will consist of interest only. Beginning on the third month after the Closing Date, the entire principal amount will be amortized in equal payments over the next 10 months along with interest on the unpaid balance until the maturity date which is 12 months after the Closing Date. In the event of default under any term or condition of the Debenture, the interest on the Debenture will accrue at the rate of 22% per annum until it is paid.

 

The Company has the right to redeem the Debenture in full and for cash, at any time prior to the Maturity Date, with three business days advance written notice to TCA Global. The amount required to redeem the Debenture in full is equal to: (i) the aggregate principal amount then outstanding under the Debenture; plus all accrued and unpaid interest due under the Debenture as of the redemption date. The Company is required to deliver the redemption amount to TCA Global on the third business day after the date of the redemption notice.

 

TCA Global may at any time and from time to time while the Debenture is outstanding on or after the Closing Date, during the period of time when an event of default has occurred under the Debenture and remains uncured and at the sole option of TCA Global, convert the Debenture into shares of our common stock (the “Conversion Shares”) at a conversion price equal to: (i) the amount to be converted; divided by (ii) eighty-five percent (85%) of the lowest of the volume weighted average price of our common stock during the five (5) trading days immediately prior to a conversion date. The Company agreed to give TCA Global make-whole rights whereby the Company agreed that upon liquidation by TCA Global of the Conversion Shares, provided that TCA Global realizes a net amount from such liquidation equal to less than the conversion amount specified in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company agreed to issue to TCA Global additional shares of our common stock equal to: (i) the conversion amount; minus (ii) the Realized Amount; divided by (iii) the average volume weighted average price of our Common Stock during the five (5) Business Days immediately prior to the date upon which TCA Global delivers notice to the Company that such additional shares are requested by TCA Global. Following the sale of the make-whole shares by TCA Global: (i) in the event that TCA Global receives net proceeds from such sale which, when added to the Realized Amount from the prior relevant conversion notice, is less than the conversion amount specified in the relevant conversion notice, TCA Global shall deliver an additional make-whole notice to us and our obligation to issue make-whole shares shall continue until the conversion amount has been fully satisfied; and (ii) in the event that TCA Global received net proceeds from the sale of make-whole shares in excess of the conversion amount specified in the relevant conversion notice, such excess amount shall be applied to satisfy any and all amounts owed hereunder in excess of the conversion amount specified in the relevant conversion notice.

 

    13  
     

 

Negative Covenants

 

Pursuant to the terms of the SPA, the Company agreed to that the Company would not take any of the following actions so long as TCA Global owns the Debentures:

 

    Incur or assume any additional indebtedness or permitting any encumbrances on any of our assets except as provided for in the SPA or approved by TCA Global.
     
  Make any new investments.
     
  Issue any new equity, debt or convertible or derivative instruments or securities that would result in a Change of Control.
     
    Enter into any transaction involving a “Change of Control”, or any other merger, consolidation, sale, transfer, license, Lease, Encumbrance or other disposition of all or substantially all of its properties or business or all or substantially all of its Assets, except for the sale, lease or licensing of property or our assets in the Ordinary Course of our business.
     
    Purchase or redeem any shares of our capital stock; (ii) declare or pay any dividends or distributions, whether in cash or otherwise, or set aside any funds for any such purpose; (iii) make any distribution to its shareholders, make any distribution of our property or Assets or make any loans, advances or extensions of credit to, or investments in, any Person, including, without limitation, any our Affiliates, or our officers, directors, employees or Material Shareholder; (iv) pay any of our outstanding indebtedness, except for indebtedness and other Obligations permitted under the SPA; (v) increase the annual salary paid to any of our officers or directors, unless any such increase is part of a written employment contract with any such officers entered into prior to the Closing Date; or (vi) add, replace, remove, or otherwise change any directors or officers of the Credit Parties from the directors and officers existing as of the Closing Date, unless first approved by TCA Global in writing, which approval may be granted or withheld or conditioned by TCA Global in its sole and absolute discretion.

 

    Use any portion of the proceeds of the Debentures except as provided for in the use of proceeds confirmation approved by TCA Global in its sole and absolute discretion.
     
  Engage in any line of business other than the businesses engaged in as of the Closing Date and business reasonably related thereto; (ii) change its name, organizational identification number (if applicable), its type of organization, its jurisdiction of organization or other legal structure; or (iii) permit its Certificate of Incorporation, Bylaws or other organizational documents to be amended or modified in any way which could reasonably be expected to have a material adverse effect.
     
  Enter into any transaction with any of its Affiliates, officers, directors, employees, Material Shareholders or other insiders, except in the Ordinary Course of Business and upon fair and reasonable terms that are no less favorable to us than the Company would obtain in a comparable arm’s length transaction with a Person not an Affiliate of ours.
     
  Maintain any bank, deposit, credit card payment processing accounts, or other accounts with any financial institution, or any other Person, other than our accounts listed in the SPA without TCA Global’s prior written approval, which approval may be withheld or conditioned in TCA Global’s sole and absolute discretion.

 

    14  
     

 

Transaction and Advisory Fees and Expenses

 

The Company paid TCA Global a commitment fee equal to one percent (1%) of the amount of the Debentures purchased by TCA Global on the Closing Date. In the event of any additional closings, the Company agreed to pay TCA Global a commitment fee equal to one percent (1%) of the amount of the Debentures purchased by TCA Global at any such additional closings. In addition, the Company paid TCA Global a due diligence fee equal to $15 on the Closing Date. The Company also agreed to pay TCA Global’s legal fees and expenses of incurred by TCA Global in connection with: (i) the preparation, negotiation, execution, delivery, recordation, administration, amendment, subordination, waiver or other modification or termination of the SPA or any other documents related thereto (the “Transaction Document”); (ii) any documentary stamp taxes, intangibles taxes, recording fees, filing fees, or other similar taxes, fees or charges imposed by or due to any Governmental Authority in connection with the SPA or any other Transaction Documents; (iii) the exercise or enforcement of any of the rights of TCA Global under the SPA or the Transaction Documents; or (iv) the failure by the Credit Parties to perform or observe any of the provisions of the SPA or any of the Transaction Documents. Included in the foregoing shall be the amount of all expenses paid or incurred by TCA Global in consulting with counsel concerning any of its rights under the SPA or any other Transaction Document or under applicable law. In addition, the Company paid TCA Fund Management Group an advisory fee of $300 on the Closing Date pursuant to the terms of an Advisory Services Agreement. Net proceeds received after fees were $2,444.

 

Collateral

 

To secure our obligations under the Debenture, the Company entered into a Security Agreement covering all of our assets, a pledge agreement covering our ownership interest in our subsidiaries and our subsidiaries entered into security agreements covering all of their assets and pledge agreements covering their ownership interest in their subsidiaries (our indirect subsidiaries) (collectively, the “Pledge Agreements”), our wholly owned, indirect subsidiary St. Lawrence Zinc Company, LLC entered into a Mortgage, Security Agreement, Assignment of Leases and Rents, and Fixture Filing in favor of TCA Global encumbering all of its real property and mining interests (“Mortgage”) (such mortgage is subject to the $500 principal amount promissory note the Company issued to DANC, which loan is pari passu with the Debenture as provided for in an Intercreditor Agreement entered into between DANC and TCA Global), Guarantee Agreements whereby our subsidiaries guaranteed our performance and payment under the Debenture.

 

Notes Payable – Related Parties

 

The Company’s current notes payable – related parties balance at June 30, 2016 is net of reductions of $42 for unamortized discounts; and at December 31, 2015 there were reductions of $105. The components of notes payable – related parties follow:

 

    June 30, 2016     December 31, 2015  
Note payable – Mr. Marchal   $ 600     $ 600  
Less: Discount     (29 )     (72 )
      571       528  
Note payable – Mr. Brogen     275       275  
Less: Discount     (13 )     (33 )
      262       242  
Total current notes payable – related parties   $ 833     $ 770  

 

On November 10, 2015, the Company sold a total of 87.5 units to Mr. Marchal and Mr. Brogen in a private offering. Each unit consisted of:

 

    15  
     

 

  (i) one convertible note in the principal amount of $10 per unit that bears simple interest at the rate of 10% per annum and is payable by the Company on a lump sum basis with respect to principal and interest on or before October 31, 2016, unless earlier repaid at the sole option of the Company or converted into common stock at a conversion price of $1.00 per share;
     
  (ii) 5,000 shares of the Company’s common stock; and
     
  (iii) a warrant to purchase 5,000 shares of the Company’s common stock at $2.00 per share for a period of three years from the date of issuance.

 

The aggregate total of all notes issued in connection with this offering was $875. In addition, the Company issued a total of 437,500 common shares and warrants to purchase a total of 437,500 common shares. As equity treatment was determined appropriate for the common stock and warrants issued with these convertible notes, the proceeds were allocated based on relative fair values. The fair value of the common stock issuance of 437,500 shares was estimated at $127, or $0.29 per share as estimated by independent valuation experts as part of the purchase price valuation performed for the Balmat Acquisition. The fair value of the warrants was estimated at $21 using a Black-Scholes model with inputs including a market price of the Company’s common shares of $0.29 per share, an exercise price of $2.00, a three-year term, volatility of 70%, a risk-free rate of 0.75% and no assumed dividends.

 

Based on the relative fair values, initial note principal and note discount of $875 and $126, respectively, were recorded. During the six months ended June 30, 2016, the Company recorded $63 in accretion of the note discount and $44 of accrued interest associated with these related party notes. The effective interest rate of the notes is 24.5%.

 

Purchase Price Obligation – Balmat Acquisition

 

As is described in detail in Note 3, the Company has the right to satisfy the remaining amount owed to Hudbay related to the Balmat Acquisition in one of two remaining ways (the purchase price obligation) where:

 

  the estimated fair value of this purchase price obligation of $13,361 was determined using a discounted cash flow model, with future cash flows estimated based upon probability-weighted scenarios of payments under the remaining two repayment options;
   
  the current portion of this purchase price obligation of $500 reflects the Company’s plan to resume production at the Balmat Mine within the next 12-months; and
     
  because of the repayment options available to the Company and the fact that the Company has not yet selected one of these repayment options, we are not able to say with certainty when the long-term portions of this purchase price obligation will be paid.

 

Notwithstanding the above, if any portion of the purchase price obligation has not been paid within 48 months of the closing date (or 54 months of the closing date if we have not elected one of the options) then the entire unpaid balance is immediately due and payable to Hudbay no later than November 2, 2019 or May 2, 2020, respectively.

 

NOTE 11 – ASSET RETIREMENT OBLIGATION

 

Changes in our asset retirement obligation are summarized in the following table:

 

Balance, December 31, 2015 $ 17,906
Accretion expense   412
Releases   -
Revisions to cost estimates   (412)
Balance, June 30, 2016 $ 17,906

 

    16  
     

 

The Company recognized $412 in accretion expense during the six months ended June 30, 2016. An adjustment to the estimated timing of future cash outflows associated with the Company’s planned reclamation activities resulted in a $412 downward adjustment to the estimated fair value of the Company’s liability as of June 30, 2016.

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Royalty Payments

 

On a portion of the Balmat Mine’s mineral leases, the Company is subject to royalty payments of up to 4% of the net smelter return on ores mined from these properties.

 

Potential Environmental Contingency

 

Our exploration and development activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Company conducts its operations so as to protect public health and the environment and believes its operations are materially in compliance with all applicable laws and regulations. We have made, and expect to make in the future, expenditures to comply with such laws and regulations.

 

Legal Matters

 

In connection with our litigation involving Michael Stanford, formerly the Company’s CEO, in which the Fifth District Court of Beaver County (Civil Case No. 140500023) awarded us a judgment against Mr. Stanford, the court issued a further order on February 2, 2015 authorizing us to cancel 910,000 shares of our common stock previously issued to Mr. Stanford. This cancellation of shares was in addition the 25,000,000 shares that Mr. Stanford returned to the Company and were cancelled by us on September 22, 2014. The 910,000 shares were cancelled on February 2, 2015.

 

We are evaluating what future legal proceedings we may pursue in order to collect money damages of approximately $23,495 awarded to us pursuant to the judgment. Our ability to collect any further amounts on the judgment is, however, inherently unpredictable and is subject to significant uncertainties and, therefore, determining the likelihood of a recovery and/or the measurement of any recovery is complex. Consequently, we are unable to estimate the range of reasonably possible further recovery and no amounts related to this award have been included in our financial statements. Our assessment is based on estimates and assumptions deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

 

Other than as set forth above, we are not presently a party to any material litigation nor to the knowledge of management is any litigation threatened against us that may have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

NOTE 13 – EQUITY

 

Common Stock

 

On January 1, 2016, the Company entered into a consulting agreement for services relating to shareholder information and public relations. The consulting firm was issued 200,000 shares of the Company’s common stock valued at $0.66 per share for the six-month agreement. Subsequently, on May 27, 2016, the Company cancelled 150,000 of the issued shares upon termination of the agreement.

 

On February 24, 2016, the Company entered into a consulting agreement for services relating to management consulting and business advisory. The consulting firm was issued 150,000 shares of the Company’s common stock valued at $0.51 per share for the six-month agreement.

 

    17  
     

 

Stock Options

 

The Company did not issue any stock option awards during the six months ended June 30, 2016.

 

On March 1, 2015, as part of an employment agreement, the Company granted an option to purchase 250,000 shares of the Company’s common stock with an exercise price of $0.50 per share. The option vested as follows: 50,000 shares upon execution of the employment agreement and 50,000 shares each on March 31, 2015; June 30, 2015; September 30, 2015; and December 31, 2015. On the grant date, the Company estimated the fair value of the option grant using the Black Scholes option pricing model based on the closing price of our common shares on the grant date as quoted on the stock exchange where the majority of our trading volume and value of the shares occurs and assuming a maturity of 2.7 years, a 0.896% risk free rate and a 88.83% volatility.

 

The compensation expense recognized in our unaudited condensed consolidated financial statements for the six months ended June 30, 2016 and 2015 for stock option awards was zero and $85, respectively. As of June 30, 2016, there was no unrecognized compensation cost related to unvested stock options as all outstanding options were fully vested.

 

The following table summarizes our stock option activity for each of the six-month periods ended June 30, 2016 and 2015:

 

  2016     2015  
    Number of
Stock Options
    Weighted
Average
Exercise Price
    Number of
Stock Options
    Weighted
Average
Exercise Price
 
Outstanding, beginning of period     250,000     $ 0.50       -     $ -  
                                 
Granted     -       -       250,000       0.50  
Cancelled/Expired     -       -       -       -  
Exercised     -       -       -       -  
                                 
Outstanding, end of period     250,000     $ 0.50       250,000     $ 0.50  
                                 
Exercisable, end of period     250,000     $ 0.50       150,000     $ 0.50  
                                 
Weighted-average fair value per share of options granted during period      n/a             $ 0.85          

 

Warrants

 

On May 12, 2016, as part of the consideration for the May 2016 Bridge Loans (described further in Note 9 – Related Party Transactions), the Company issued 125,000 warrants to purchase common stock to each party, Mr. Marchal and Mr. Brogen. Each warrant is exercisable for one of the Company’s common shares. Further details are outlined below.

 

The Company’s outstanding warrants, each exercisable for one of the Company’s common shares, were issued to investors in connection with offerings of the Company that closed on June 30, 2015; October 31, 2015; and November 2, 2015. In addition, warrants were issued as part of the consideration for the May 2016 Bridge Loans. The exercise price and exercise period are outlined below:

 

    Total
Warrants
    Exercise
Price
    Expiration
Date
June 30, 2015 Offering     2,500,000     $ 1.00     6/30/2018
October 31, 2015 Offering - Series A Warrants     3,130,000     $ 0.75     10/31/2017
October 31, 2015 Offering - Series B Warrants     3,130,000     $ 1.50     10/31/2018
November 10, 2015 Offering     437,500     $ 2.00     11/10/2018
May 2016 Bridge Loans     250,000     $ 1.00     6/28/2019
      9,447,500              

 

The following table summarizes our warrant activity for the six months ended June 30, 2016 and 2015:

 

   

For the six months ended

June 30, 2016

   

For the six months ended

June 30, 2015

 
    Number of
Warrants
    Weighted
-Average
Exercise
Price
(USD$)
    Number of
Warrants
    Weighted
-Average
Exercise
Price
(USD$)
 
Outstanding, beginning of period     9,197,500     $ 1.13       -     $ -  
                                 
Granted     250,000       1.00       2,280,000       1.00  
Exercised     -       -       -       -  
Expired     -       -       -       -  
                                 
Outstanding, end of period     9,447,500     $ 1.13       2,280,000     $ 1.00  

 

    18  
     

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of the consolidated financial results and condition of Star Mountain Resources, Inc. (collectively, “we,” “us,” “our,” “Star Mountain” or the “Company”) for the six-month period ended June 30, 2016, should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herewith and the audited consolidated financial statements of Star Mountain for the year ended December 31, 2015, and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Forward-Looking Statements.”

 

All amounts are expressed in thousands of U.S. dollars, except per share and common share amounts, unless otherwise noted.

 

INTRODUCTION

 

Our primary focus is currently on the re-start of mining operations at our Balmat Mine in upstate New York, which includes raising the capital needed to fund these re-start activities. If successful in our efforts, this re-start will transition us from a junior exploration company with no revenues to a producing mining company capable of generating a consistent stream of revenues through the production of a salable zinc concentrate material.

 

OVERVIEW AND OUTLOOK

 

We currently have limited cash resources on hand and a cash burn rate that ranges from approximately $200 to $300 per month and will increase to approximately $500 to $600 per month beginning in September to satisfy a $3,000 debt obligation we incurred on June 28, 2016 as discussed in Note 10 to our financial statements included in this report. Unless we are able to secure additional funds shortly, we may not be able to meet some or all of our obligations. As a result, capital raising has been and continues to be our number one priority and will remain our top priority until we have successfully raised the capital to meet our projected cash needs; including our working capital needs as well as the capital needed for the re-start of operations at the Balmat Mine.

 

As part of our capital raising efforts, we have had discussions with a number of possible financing sources about various forms of financing including, but not limited to (i) equity investment; (ii) term debt; (iii) joint venture arrangements; (iv) off-take agreements; (v) sales of a royalty interest and (vi) streaming deals. Notwithstanding, the market to finance mining related transactions such as ours has been and continues to be very challenging and because of this we cannot assure you that we will be successful in our efforts to secure the needed funds.

 

If our capital raising efforts are successful, our plan is to return the Balmat Mine to production following a six to nine month re-commissioning period during which time it is estimated that we will need to invest approximately $14,700 refurbishing and upgrading the Balmat Mine’s facilities and equipment and hiring and training the required work force. Following this re-commissioning phase, the Balmat Mine would transition to a production start-up mode producing an estimated 300 to 500 tons of ore per day during the initial ramp-up period before ultimately reaching the planned, near-term, full production run rate of 1,000 to 1,200 tons of ore per day; or roughly 360,000 to 430,000 tons per year. At full production, the Balmat Mine is expected to employ a work force of over 100 employees.

 

To the extent that we are able to secure some but not the full amount of capital required for the Balmat Mine’s re-start, we would still plan to return the Balmat Mine to production but on a scaled basis.

 

    19  
     

 

RESULTS OF OPERATIONS

 

Three and Six months ended June 30, 2016 and June 30, 2015

 

Summary

 

Our consolidated net losses were $1,523 and $1,776 for the three months ended June 30, 2016 and June 30, 2015, respectively and $4,298 and $2,217 for the six months ended June 30, 2016 and June 30, 2015, respectively.

 

For the three months ended June 30, 2016 and 2015, the decrease in our consolidated net loss was primarily due to (i) a decrease in general and administrative expenses of $837, (ii) a decrease in executive compensation of $371, and (iii) an unrealized gain of $206. These decreases were partially offset by (i) an increase in mine maintenance costs of $444, (ii) an increase in depreciation and amortization of $382, (iii) an increase in accretion expense of $206, and (iv) an increase in interest expense of $87.

 

For the six months ended June 30, 2016 and 2015, the increase in our consolidated net loss was primarily due to (i) an increase in mine maintenance costs of $985, (ii) an increase in depreciation and amortization of $762, (iii) an unrealized loss of $519, (iv) an increase in accretion expense of $412, and (v) an increase in interest expense of $157. These increases were partially offset by (i) a decrease in general and administrative expenses of $395, and (ii) a decrease in executive compensation of $381.

 

Revenue

 

Revenues for the three and six months ended June 30, 2016 and 2015 were zero as we had no properties in production during either period.

 

Executive Compensation

 

Executive compensation was $122 and $493 for the three months ended June 30, 2016 and June 30, 2015, respectively and $242 and $623 for the six months ended June 30, 2016 and June 30, 2015, respectively. In May 2015, the Company issued shares to executives for their services in lieu of cash, accounting for $593 of the $623 incurred during the six-month period.

 

Exploration and development costs

 

Exploration and development costs were $90 and $45 for the three months ended June 30, 2016 and June 30, 2015, respectively and $139 and $112 for the six months ended June 30, 2016 and June 30, 2015, respectively. The increase during the 2016 period was due to the acquisition of the Balmat Mine acquired in November 2015. While we have performed minimal exploration at our Chopar project during 2016, we continue to incur development costs at the Balmat Mine as we continue to pursue restarting production.

 

Mine Maintenance

 

Mine maintenance costs were $444 and zero for the three months ended June 30, 2016 and June 30, 2015, respectively and $985 and zero for the six months ended June 30, 2016 and June 30, 2015, respectively. The costs incurred during the 2016 period related to the Balmat Mine the Company purchased in November 2015. No such costs were incurred during the same period of 2015.

 

Depreciation and Amortization

 

Depreciation and amortization was $383 and $1 for the three months ended June 30, 2016 and June 30, 2015, respectively and $765 and $3 for the six months ended June 30, 2016 and June 30, 2015, respectively. The increase during the 2016 period was due to the increase in depreciable property, plant and equipment at the Balmat Mine acquired in November 2015.

 

Accretion Expense

 

Accretion expense was $206 and zero for the three months ended June 30, 2016 and June 30, 2015, respectively and $412 and zero for the three months ended June 30, 2016 and June 30, 2015, respectively. The expense incurred during the 2016 period related to the asset retirement obligation assumed as part of the Balmat Mine acquisition in November 2015. No such expense was incurred during the same period of 2015.

 

    20  
     

 

General and Administrative

 

General and administrative expenses were $390 and $1,227 for the three months ended June 30, 2016 and June 30, 2015, respectively and $1,066 and $1,461, for the six months ended June 30, 2016 and June 30, 2015, respectively. During the second quarter of 2015, the Company issued shares for services to Directors and consultants in lieu of cash. No similar share issuance occurred in the corresponding 2016 period. Absent the costs associated with the share issuance in 2015, remaining general and administrative expenses increased during the corresponding 2016 period as a result of the acquisition of the Balmat Mine in November 2015. With the closing of the acquisition, the Company employed an additional seven full-time employees from the Balmat Mine as well as increased the number of employees and consultants at the corporate offices. Accounting and legal fees associated with a more complex entity and operating structure also contributed to increased fees incurred.

 

Interest Expense

 

Total interest expense was $97 and $10 for the three months ended June 30, 2016 and June 30, 2015, respectively and $175 and $18, for the six months ended June 30, 2016 and June 30, 2015, respectively. The increase in interest expense was due to the increase in outstanding debt as the Company issued several notes in late 2015 and 2016 to help finance the acquisition and development of the Balmat Mine.

 

Unrealized Gain/Loss

 

The Company recognized an unrealized gain of $206 and zero for the three months ended June 30, 2016 and June 30, 2015, respectively. The gain represents the change in estimated fair value of the Company’s asset retirement obligation. The Company’s asset retirement obligation did not exist as of June 30, 2016, as the Balmat Acquisition closed in November 2015.

 

The Company recognized an unrealized loss of $519 and zero for the six months ended June 30, 2016 and June 30, 2015, respectively. The unrealized loss for the six month period of 2016 consists of an unrealized net loss of $931, representing the change in fair value of the Company’s outstanding purchase price obligation associated with the Balmat acquisition, partially offset by an unrealized gain of $412, representing the change in estimated fair value of the Company’s asset retirement obligation. No such changes in fair value occurred during the comparative period in 2015.

 

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

 

Operating Activities

 

Net cash used in operating activities was $2,025 for the six months ended June 30, 2016, compared with $195 for the same period in 2015. The increase in cash used is mostly the result of (a) mine maintenance activities during the 2016 period occurring as a result the Balmat Mine acquisition in November 2015 as well as the Company’s cash payments to executives and third party vendors/consultants during 2016 (whereas much of the expenses incurred during the comparative 2015 period were settled through the issuance of stock or considered contributed capital).

 

Financing Activities

 

Net cash provided by financing activities was $2,367 for the six months ended June 30, 2016, compared to $1,214 for the same period in 2015. The net activity in the 2016 period included proceeds from the issuance of new debt for net proceeds of $3,184, offset by debt repayments of $815. The net proceeds in 2015 related to issuances of common stock as well as proceeds from related party notes issued during the period.

 

Liquidity and Capital Resources

 

At June 30, 2016, we had a working capital deficit of $3,616 which represented an increase of $2,498 over our December 31, 2015 working capital deficit of $1,118. This increase was largely the result of (i) increases in notes payable and associated interest payable, accounting for approximately $2,432 and (ii) an increase in accounts payable and accrued expenses of $664, partially offset by (iii) increased cash and cash equivalents and restricted cash balances, accounting for $638.

 

    21  
     

 

To the extent that we are unable to raise the funds for Balmat Mine’s restart and have no production from the mine, the $500 deferred purchase price obligation to Hudbay would not have to be paid within the next twelve months as the timing of this payment is tied to our first shipments of zinc concentrates from the mine (subject to a final “no later than” payment date as is more fully explained in Note 9 – Debt to the unaudited condensed consolidated financial statements).

 

Total outstanding debt as of June 30, 2016 was $17,943, of which $5,082 was estimated to come due within the next twelve months. These amounts are primarily made up of obligations associated with the Balmat acquisition. The remaining long-term debt of $12,861 is associated with our outstanding obligation to Hudbay for the Balmat Mine acquisition and becomes due at various dates commencing upon completion of the first shipment of ore concentrate from the Balmat Mine.

 

Going Concern

 

We do not have sufficient funds to satisfy our current cash needs and, as a result, we will need to raise additional capital in order to service our debt, fund our on-going operation expenses and, to the extent the capital is available, fund the refurbishment activities necessary to return the Balmat Mine to production. As a result, there is substantial doubt as to whether our existing cash resources and working capital are sufficient to enable us to continue our operations for the next 12 months as a going concern.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company”, we are not required to provide the information under Item 3.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls as of the end of the period covered by this report, June 30, 2016. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Joseph Marchal, and our Chief Financial Officer, Wayne Rich, the certifying officers. Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective in ensuring that: (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation of our controls performed during the three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

    22  
     

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, that may materially affect us.

 

ITEM 1A. RISK FACTORS.

 

As a “smaller reporting company”, we are not required to provide disclosure under this Item 1A.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On January 1, 2016, the Company issued 200,000 shares of the Company’s common stock valued at $0.66 per share in exchange for consulting services.

 

On February 24, 2016, the Company issued 150,000 shares of the Company’s common stock valued at $0.51 per share for management consulting and business advisory services.

 

On June 28, 2016 the Company issued 250,000 common stock purchase warrants exercisable at $1.00 per share as partial consideration for certain loans.

 

The securities referenced herein were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act of 1933, as amended, (“Securities Act”), and/or Regulation D, as promulgated by the U.S. Securities and Exchange Commission under the Securities Act.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, issuers that are operators, or that have a subsidiary that is an operator of a mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. The table that follows reflects citations, orders, violations and proposed assessments issued to the Company by MSHA during the six months ended June 30, 2016 for the Balmat Mine and mill and all legal actions pending before the Federal Mine Safety and Health Review Commission as of June 30, 2016. Due to timing and other factors, the data may not agree with the mine data retrieval system maintained by MSHA at www.MSHA.gov .

 

Mine or Operating   Section 104   Section   Section 104(d) Citations   Section   Section   Total Dollar Value of MSHA   Total Number of Mining   Received Notice of Pattern of Violations Under   Received Notice of Potential to Have Pattern Under   Legal Actions Pending as of Last   Legal Actions Initiated   Legal Actions Resolved
Name/MSHA   S&S   104(b)   and   110(b)(2)   107(a)   Assessments   Related   Section   Section   Day of   During   During
Identification   Citations   Orders   Orders   Violations   Orders   Proposed   Fatalities   104(e)   104(e)   Period   Period   Period
Number   (#)   (#)   (#)   (#)   (#)   ($)   (#)   (yes/no)   (yes/no)   (#)   (#)   (#)
Balmat Mine No. 4 & Mill 30-01185   1   -   -   -   -   $               0.5   -   No   No   -   -   -

 

ITEM 5. OTHER INFORMATION.

 

None.

 

    23  
     

 

ITEM 6. EXHIBITS.

 

Exhibit Number   Description of Exhibit

 

3.1   Amended and Restated Articles of Incorporation as filed with the Secretary of State of Nevada on May 19, 2016 effective as of May 22, 2016 (Incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K as filed with the SEC on May 25, 2016).
     
3.2   Amended and Restated Bylaws, effective as of May 22, 2016 (Incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K as filed with the SEC on May 25, 2016).
     

 

10.1   Securities Purchase Agreement between Star Mountain Resources, Inc. and TCA Global Credit Master Fund, LP dated June 28, 2016 (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).
     
10.2   Senior Secured, Convertible, Redeemable Debenture issued by Star Mountain Resources, Inc. in favor of TCA Global Credit Master Fund, LP dated June 28, 2016 (Incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).
     
10.3   Advisory Services Agreement between Star Mountain Resources, Inc. and TCA Fund Management Group dated June 28, 2016 (Incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).
     
10.4   Mortgage, Security Agreement, Assignment of Leases and Rents, and Fixture Filing by St. Lawrence Zinc Company, LLC to TCA Global Credit Master Fund, LP dated June 28, 2016 (Incorporated by reference to Exhibit 10.4 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).
     
10.5  

Form of Security Agreement in favor of TCA Global Credit Master Fund, LP (Incorporated by reference to Exhibit 10.5 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).

 

10.6  

Form of Pledge Agreement in favor of TCA Global Credit Master Fund, LP (Incorporated by reference to Exhibit 10.6 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).

 

10.7  

Form of Guarantee Agreement in favor of TCA Global Credit Master Fund, LP (Incorporated by reference to Exhibit 10.7 to the Company’s current report on Form 8-K as filed with the SEC on July 7, 2016).

 

10.8   Form of Common Stock Warrant issued in June 2016 (Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed with the SEC on June 17, 2015)

 

 31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
     
 31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
     
 32.1   Section 1350 Certification of Chief Executive Officer*
     
 32.2   Section 1350 Certification of Chief Financial Officer*
     
101.INS   XBRL INSTANCE DOCUMENT*
     
101.SCH   XBRL TAXONOMY EXTENSION SCHEMA*
     
101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE*
     
101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE*
     
101.LAB   XBRL TAXONOMY EXTENSION LABEL LINKBASE*
     
101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE*

 

* Filed herewith.

 

† Management contract or compensatory plan or arrangement.

 

    24  
     

 

SIGNATURES

 

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

 

  Star Mountain Resources, Inc.
     
Date: August 11, 2016 By: /s/ Joseph Marchal
    Joseph Marchal
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 11 , 2016 By: /s/ Wayne Rich
    Wayne Rich
    Chief Financial Officer and Vice President of Finance
    (Principal Financial and Accounting Officer)

 

    25  
     

 

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