NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020
(unaudited)
NOTE
1 – NATURE OF BUSINESS
Standard
Metals Processing, Inc. (“we,” “us,” “our,” “Standard Metals” or the “Company”)
is an exploration stage company, incorporated in Nevada having offices in Gadsden, Alabama and through its subsidiary, a property
in Tonopah, Nevada. The business plan is to purchase and install the equipment necessary to complete a facility on the Tonopah
property to serve as a permitted custom processing toll milling facility (which includes an analytical lab, pyrometallurgical
plant, and hydrometallurgical recovery plant).
The
Company plans to perform permitted custom processing toll milling which is a process whereby mined material is crushed and ground
into fine particles to ease the extraction of any precious minerals contained therein, such as minerals in the gold, silver and
platinum metal groups. Custom milling and refining can include many different processes that are designed specifically for each
ore load and to maximize the extraction of precious metals from carbon or concentrates. These toll-processing services also distill,
dry, mix, or mill chemicals and bulk materials on a contractual basis and provide a chemical production outsourcing option for
industrial companies, which lack the expertise, capacity, or regulatory permits for in-house production.
We
are required to obtain several permits before we can begin construction of a small-scale mineral processing facility to conduct
permitted processing toll milling activities and construction of the required additional buildings and well relocation necessary
for us to commence operations.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, assuming we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2020, the Company had
a net loss of $202,047. At June 30, 2020, the Company had an accumulated deficit of $104,064,174 and a working capital deficit
of $10,094,506. Additionally, all of the Company’s assets are under lien pursuant to the First Deed of Trust, UCC filings
and securities pledge held by GPR, a related party. These circumstances raise 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 on their ability to raise
the required additional capital or debt financing to meet short and long-term operating requirements. During the six months ended
June 30, 2020, a related party advanced $103,779 on the Company’s behalf to pay certain operating expenses directly. As
the related party intends to apply its advance toward a convertible note, it has been classified as such at June 30, 2020.
Management
believes that private placements of equity capital and/or additional debt financing will be needed to fund our long-term operating
requirements. The Company may also encounter business endeavors that require significant cash commitments or unanticipated problems
or expenses that could result in a requirement for additional cash. If the Company raises additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and such securities
might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable
terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to
take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict our operations.
We are continuing to pursue external financing alternatives to improve our working capital position. If the Company is unable
to obtain the necessary capital, the Company may have to cease operations.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of Standard Metals Processing, Inc., and its wholly owned subsidiary Tonopah
Milling and Metals Group, Inc. and its wholly owned subsidiaries Tonopah Custom Processing, Inc., (“TCP”) and Tonopah
Resources, Inc. (“TR”) All significant intercompany transactions, accounts and balances have been eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”), for interim financial information pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all
of the information and footnotes required by US GAAP for complete financial statements. The unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our
Form 10-K for the year ended December 31, 2019 filed April 2, 2020. In the opinion of management, all adjustments (consisting
of normal recurring adjustments unless otherwise indicated) considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year
as a whole.
Mineral
Properties
Mineral
property acquisition costs are recorded at cost and are deferred until the viability of the property is determined. No properties
have produced operating revenues at this time. Exploration, mineral property evaluation, option payments, related acquisition
costs for mineral properties acquired under an option agreement, general overhead, administrative and holding costs to maintain
a property on a care and maintenance basis are expensed in the period they are incurred. When reserves are determined for a property
and a bankable feasibility study is completed, subsequent exploration and development costs on the property would be capitalized.
If a project were to be put into production, capitalized costs would be depleted on the unit of production basis.
Management
reviews the net carrying value of each mineral property as changes may materialize with a property or at a minimum, on an annual
basis. Where information and conditions suggest impairment, estimated future net cash flows from each property are calculated
using estimated future prices, proven and probable reserves and value beyond proven and probable reserves, and operating, capital
and reclamation costs on an undiscounted basis. If it is determined that the future cash flows are less than the carrying value,
a write-down to the estimated fair value is made with a charge to loss for the period. Where estimates of future net cash flows
are not available and where other conditions suggest impairment, management assesses if the carrying value can be recovered.
Management’s
estimates of gold prices, recoverable reserves, probable outcomes, operating capital and reclamation costs are subject to risks
and uncertainties that may affect the recoverability of mineral property costs. The Company does not own any mining claims.
It owns tailings located on the Tonopah property and some tailings located in Manhattan, Nevada. The Company has not disturbed
or processed any of this material and does not intend to do so in the foreseeable future.
Impairment
of Long-Lived Assets and Long-Lived Assets
The
Company will periodically evaluate the carrying value of long-lived assets to be held and used, including but not limited to,
mineral properties, mine tailings, mine dumps, capital assets and intangible assets, when events and circumstances warrant such
a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Use
of Estimates
Preparing
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue
Recognition and Deferred Revenue
As
of June 30, 2020, the Company has not recognized any revenues from custom permitted processing toll milling. If we achieve revenue
generation, the Company plans to report such revenues consistent with ASC Topic 606.
Income
Taxes
Income
taxes are accounted for based upon an asset and liability approach. Accordingly, deferred tax assets and liabilities arise from
the difference between the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax
amounts are determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received,
as provided under currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period
plus or minus the change in deferred tax assets and liabilities during the period.
Accounting
guidance requires the recognition of a financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. The Company believes its income tax filing positions
and deductions will be sustained upon examination and accordingly, no reserves, or related accruals for interest and penalties
have been recorded at June 30, 2020 and December 31, 2019. The Company recognizes interest and penalties on unrecognized tax benefits
as well as interest received from favorable tax settlements within income tax expense.
On
December 22, 2017, the President of the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The
Tax Reform Law, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant
changes to existing United States tax law, including various provisions that are expected to impact the Company. The Tax Reform
Law reduces the federal corporate tax rate from 34% to 21% effective January 1, 2018. Management believes the provisions of the
Tax Reform Law will have a favorable impact on the Company’s consolidated financial statements should it attain a level
of profitable operations.
Recent
Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires all leases that have a term of
over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use
asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these
leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs
of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term.
Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use
asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual
periods beginning January 1, 2019 and must be applied on a modified retrospective basis to leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The
Company has adopted the standard during 2018, but as the Company does not have any significant leases, it does not expect it to
have a material impact on its financial position or results of operations.
During
the six months ended June 30, 2020 and through the date of this filing, there were several new accounting pronouncements issued
by the Financial Accounting Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the
Company’s consolidated financial statements.
NOTE
3 – MINING AND MINERAL RIGHTS
The
Company is preparing the Tonopah property site for the construction of a permitted custom processing toll milling facility including
grading the land, installing fencing and working with contractors for our planned 21,875 square foot building and servicing and
drilling various wells for our future operations.
The
Company has continued to assess the realizability of its mining and mineral rights. Based on an assessment the Company conducted
in January 2020. The Company decided its land, mineral rights and water rights are inseparable and depend upon each other in value
creation. Accordingly, during the year ended December 31, 2018, the Company combined the carrying value of the assets to present
more clearly their intended use together.
NOTE
4 – CONVERTIBLE NOTES PAYABLE
On
March 16, 2020 the Company executed a Line of Credit (“LOC”) with Granite Peak Resources, LLC (“GPR”),
a related party, evidenced by a convertible promissory note. The LOC is for up to $2,500,000, provides that all requests for funds
may be approved or disapproved in GPR’s sole discretion, matures over three years, bears interest at 10% per annum, is convertible
into shares of the Company’s common stock at a per share price of $0.04, and will be secured by the real and personal property
GPR already has under lien or in pledge. See Note 7. The LOC is for funding operating expenses critical to the Company’s
redirection including the resolution, on terms and conditions satisfactory to GPR, of the Company’s claims. However, GPR
and the Company make no representation that the Company’s claims can be satisfactorily resolved voluntarily. Accordingly,
GPR and the Company reserve all rights to employ every means legally available to seek the Company’s recapitalization.
At
December 31, 2019, GPR had advanced $13,575 in contemplation of the LOC. During the six months ended June 30, 2020 GPR advanced
an additional $103,779 which it used to pay directly certain operating expenses on the Company’s behalf. Both advances,
amounting to $117,354 in total, have been included in the convertible promissory issued by the Company in connection with the
LOC and classified accordingly at June 30, 2020.
Including
the foregoing advances under the LOC, there was $217,354 of principal and $106,105 of accrued interest outstanding on convertible
debentures at June 30, 2020. With exception of the $117,354 of principal advanced under the LOI to date, the pre-existing convertible
note is in default.
NOTE
5 – SHAREHOLDERS’ DEFICIT
Common
Stock
Common
Stock issued on conversion of notes payable
On
December 21, 2019 a promissory note payable totaling $192,080 was exchanged as consideration for exercising a stock option for
4,500,000 restricted common shares at a Board approved reduced exercise price of $0.0426, which was the market price on exercise.
Option
Grants
Option
Grants
The
Company recorded no compensation expense for the six months ended June 30, 2020 and 2019. As of June 30, 2020, there was $0 in
unrecognized compensation expense.
During
the six months ended June 30, 2020, the Company did not grant any options, 826,223 options expired, and none were cancelled. During
May 2020, 500,000 options were exercised at the reduced price of $0.023 per share, based upon market conditions which provided
$11,500 for operations. There are no unvested options at June 30, 2020.
The
following tables summarize information about stock options outstanding and exercisable:
|
|
Options Outstanding
and Exercisable at June 30, 2020
|
|
Range of Exercise Prices
|
|
Number
Exercisable
|
|
|
Weighted
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
$0.40 to $0.60
|
|
|
250,000
|
|
|
|
.25 years
|
|
|
$
|
0.60
|
|
|
$
|
—
|
|
$0.61 to $1.00
|
|
|
9,750,000
|
|
|
|
.33 years
|
|
|
$
|
0.66
|
|
|
$
|
—
|
|
$1.01 to $1.50
|
|
|
14,500,000
|
|
|
|
.33 years
|
|
|
$
|
1.25
|
|
|
$
|
—
|
|
$1.51 to $2.25
|
|
|
2,250,000
|
|
|
|
.75 years
|
|
|
$
|
1.93
|
|
|
$
|
—
|
|
$0.40 to $2.25
|
|
|
26,750,000
|
|
|
|
.4 years
|
|
|
$
|
1.07
|
|
|
$
|
—
|
|
|
(1)
|
The
aggregate intrinsic value in the table represents the difference between the closing stock price on June 30, 2020 and December
31, 2019, and the exercise price, multiplied by the number of in-the-money options that would have been received by the option
holders had all option holders exercised their options on June 30, 2020 and December 31, 2019.
|
Common
Stock Purchase Warrants
For
warrants granted to non-employees in exchange for services, the Company recorded the fair value of the equity instrument using
the Black-Scholes pricing model unless the value of the services is more reliably measurable.
The
Company did not grant any warrants during the six months ended June 30, 2020, no warrants were exercised, 1,982,720 expired, and
none were cancelled. At June 30, 2020 there were 1,882,290 warrants outstanding.
The aggregate intrinsic value of the 1,882,290 outstanding
and exercisable warrants at June 30, 2020, was $0. The intrinsic value is the difference between the closing stock price on June
30, 2020 and the exercise price, multiplied by the number of in-the-money warrants had all warrant holders exercised their warrants
on June 30, 2020.
NOTE
6 – COMMITMENTS AND CONTINGENCIES
Legal
Matters
Stephen
E. Flechner v. Standard Metals Processing, Inc.
On April 29, 2014, Stephen
E. Flechner filed suit in the United States District Court for the District of Colorado against Standard Metals Processing, Inc.
alleging that Standard Metals had refused to allow him to exercise stock options granted to him pursuant to a Stock Option Agreement,
dated April 1, 2010, and a second Stock Option Agreement, dated January 21, 2011. On June 12, 2014, Standard Metals filed an Answer
and a Motion to Dismiss or, Alternatively, to Stay or Transfer the action to the United States District Court for the Northern
District of Alabama, Middle Division. On January 16, 2015, Standard Metals filed a Motion for Summary Judgment. On January 23,
2015, the Court issued an Order granting in part and denying in part Standard Metals’ Motion to Dismiss or, Alternatively,
to Stay or Transfer the action to the United States District Court for the Northern District of Alabama, Middle Division. The
Court in its Order stayed further proceedings in Colorado pending the issuance of orders by the Alabama court. Thereafter, on
January 26, 2015, the Court issued an Order vacating the February 20, 2015 Trial Preparation Conference and the March 9, 2015
Bench Trial. On March 23, 2015, the Court issued an Order denying Standard Metals’ Motion for Summary Judgment. On March
30, 2015, Flechner filed a Motion to Lift the Stay. On March 31, 2015, the Court issued an Order granting Flechner’s Motion
to Lift the Stay. On April 6, 2015, the Court issued an Order scheduling a Bench Trial for July 29, 2015. On April 9, 2015, Flechner
filed a Motion for Reconsideration of the Court’s March 23, 2015 Order Denying Flechner’s Motion to Enforce the Confidential
Settlement Agreement to Settle Certain Issues. On May 1, 2015, the Court issued an Order Granting Flechner’s Motion to Enforce
the Confidential Settlement Agreement to Settle Certain Issues. On August 12, 2015 the United Stated District Court for the District
of Colorado issued a judgment in favor of Stephen E. Flechner for $2,157,000. An amended final judgment was ordered in adjudication
of the Complaint by the U.S. District Court for the District of Colorado (the “Court”) on August 28, 2015 in favor
of Flechner in the amount of $2,157,000, plus interest through the date of judgment of $235,246, plus interest of $472.76/day
from August 28, 2015 until paid in full. The Company, in good faith anticipation of a settlement did not appeal the judgment and
therefore, the Company’s notice of appeal was dismissed on November 17, 2015. This judgment is now non-appealable. The Company
has recognized the daily interest due from the date of the August 28, 2015 judgment through June 30, 2020, totaling $878,388,
resulting in a total amount of $3,270,634 being included in the Accrual for settlement of lawsuits relating to this matter in
the accompanying June 30, 2020 condensed consolidated balance sheet.
NOTE
7 – RELATED PARTY TRANSACTIONS
During
March 2019, the Company was informed that a change of control of the Company had occurred. Granite Peak Resources, LLC (“GPR”)
through its members (including Pure Path Capital Management LLC) acquired 69,464,434 shares of common stock (including 4,500,000
warrants to purchase common stock). The members transferred their shares of common stock of the Company in exchange for a pro-rata
ownership interest in GPR. GPR also acquired the senior secured creditor position previously held by Pure Path Capital Group LLC,
which includes a $2,500,000 first deed of trust on the Tonopah property and an outstanding promissory note with a principal balance
of $2,229,187 and accrued interest of $1,236,580 as of June 30, 2019. The members of Granite Peak Resources LLC are listed in
the Schedule 13D filed by GPR on March 29, 2019. GPR has not communicated to the Company any plans to change any of the current
officers or directors or governing documents and has expressed the purpose of its acquisition is to assist the Company execute
on its business plan and resolve its current obligations and other claims. Neither GPR nor the Company, however, can give any
assurances that such creditors or claimants will be amicably resolved. As of the date of this filing, GPR is the beneficial owner
of 56.4% of the Company’s common stock and the Company’s largest secured creditor. The background regarding Pure Path’s
Senior Secured Note is described below.
During
the Company’s acquisition of the Shea assets in 2011, Pure Path purchased the Loan
Modification Agreement and the NJB Forbearance Agreement directly from NJB Mining, Inc. In connection with the assignment
of a forbearance agreement the Company and Pure Path executed an Agreement in Principle setting forth terms of the forbearance
agreement which were subsequently further revised pursuant to Settlement and Release Agreement executed October 10, 2013 with
the Company (collectively the “Pure Path Agreements”).The Pure Path Agreements provided for Pure Path’s forbearance
of collection remedies and legal proceedings against the Company including foreclosure on the Deed of Trust, and, in connection
with the settlement and release of various debts of approximately $1,500,000 and the consulting fees owed by the Company, the
Company issued 27,000,000 restricted shares and a Promissory Note (the “Pure Path Note”) for an amount of up to $2,500,000
with a beginning principal balance of $1,933,345 bearing interest of 8% per year for the current balance of the amounts owed under
the Pure Path Agreements. The forbearance period has long since expired and the Pure Path Note has retained all of its original
remedies under its First Deed of Trust. In addition, pursuant to a Forbearance Agreement with GPR dated December 20, 2019, the
Company pledged of 100% of its stock in Tonopah Milling and Metals Group, Inc. and that of its subsidiaries TCP and TR, in exchange
for GPR’s agreement to forbear foreclosure proceedings for six months further securing GPR’s combined Pure Path Note
and LOC positions. The outstanding principal balance on the Pure Path Note was $2,229,187 as of both June 30, 2020 and December
31, 2019, with related accrued interest of $1,236,580 and $1,143,474, respectively. This Senior Secured Note is in default. GPR’s
LOC position is described in Note 4.
On
February 11, 2015, the Company issued an unsecured promissory note (the “Note”) to Tina Gregerson Family Properties,
LLC, an entity controlled by a former director of the Company. The Note for up to $750,000 was provided in tranches. Maturity
of each tranche is one year from the date of receipt. Interest accrues at 8% per annum on each tranche. Under the terms of the
Note, the Company received $477,500. At June 30, 2020 and December 31, 2019, there is $201,132 and $182,084 interest accrued.
This Note is in default.
On
April 17, 2020, the Company and Sustainable Metal Solutions, LLC (“SMS”), an affiliate of GPR, agreed to form a joint
venture styled Esmeralda Renewal Energy Zone (“EREZ”). The Company has agreed to contribute the solar energy rights
attributable to its 1,083 acres to EREZ in exchange for SMS’s agreement to develop, manage and underwrite the EREZ venture.
NOTE
8 – EARNINGS (LOSS) PER SHARE
Basic
net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted average number of
common shares outstanding during the periods presented. Diluted net loss per common share is determined using the weighted average
number of common shares outstanding during the periods presented, adjusted for the dilutive effect of common stock equivalents,
consisting of shares that might be issued upon exercise of options, warrants and conversion of convertible debt. In periods where
losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.
At
June 30, 2020 the weighted average shares from stock options of 25,723,777, warrants of -0-, and Convertible Promissory note shares
of 3,224,532, and at December 31, 2019 the weighted average shares from stock options of 32,576,223 warrants of 4,865,640 and
Convertible Promissory note shares of 650,869 were excluded from the diluted weighted average common share calculation due to
the antidilutive effect such shares would have on net loss per common share.
NOTE
9 – SUBSEQUENT EVENTS
During
August 2020, options on 1,500,000 shares and warrants on 2,632,920 shares were exercised at the reduced price, based upon market
conditions, of $0.023 per share resulting in proceeds of $95,057 which will be used to maintain the Company’s reporting
requirements. The modification of these warrants and options resulted in a loss on modification of $115,722.