Certain statements in this Quarterly Report on Form 10-Q, or the Report, are "forward-looking statements." These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of
Searchlight Minerals Corp., a Nevadacorporation (referred to in this Report as "we," "us," "our" or "registrant") and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors that are discussed under the section entitled "Risk Factors," in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2013. The following discussion and analysis summarizes our plan of operation for the next twelve months, our results of operations for the three month period ended March 31, 2014and changes in our financial condition from our year ended December 31, 2013. The following discussion should be read in conjunction with the Management's Discussion and Analysis or Plan of Operation included in our Annual Report on Form 10-K for the year ended December 31, 2013. Executive Overview
We are an exploration stage company engaged in a slag reprocessing project and the acquisition and exploration of mineral properties. Our business is presently focused on our two mineral projects: (i) the
Clarkdale Slag Project, located in Clarkdale, Arizona, which is a reclamation project to recover precious and base metals from the reprocessing of slag produced from the smelting of copper ore mined at the United Verde Copper Minein Jerome, Arizona; and (ii) the Searchlight Gold Project, which involves exploration for precious metals on mining claims near Searchlight, Nevada. Clarkdale Slag ProjectSince our involvement in the Clarkdale Slag Project, our goal has been to demonstrate the economic feasibility of the project by determining a commercially viable method to extract precious and base metals from the slag material. We believe that in order to demonstrate this, we must successfully operate four major steps of our production process: crushing and grinding, leaching, continuous process operation, and extraction of gold from solution. Our Production Process
1. Crushing and Grinding. The first step of our production process involves
grinding the slag material from rock-size chunks into sand-size grains
(minus-20 mesh size). Because of the high iron content and the
glassy/siliceous nature of the slag material, grinding the slag material
creates significant wear on grinding equipment. Batch testing with various
grinders produced significant wear on the equipment to render them unviable
for a continuous production facility.
2 In 2010 we tested high pressure grinding rolls (HPGR) to grind the slag material at the facility in
Germanyof the leading manufacturer of HPGR's. HPGR's are commonly used in the mining industry to crush ore and have shown an ability to withstand very hard and abrasive ores. The results from these tests showed that grinding our slag material on a continuous basis did not produce wear on the equipment beyond the expected levels. When we tested the HPGR-ground slag in our autoclave process, results showed liberation of gold, which our technical team believes is due to the micro-fractures imparted to the slag during the HPGR grinding process. The technical team also believes that the high pressures that exist in the autoclave (see autoclave discussion in 2. below) environment are able to drive the leach solution into the micro-fracture cracks created in the slag material by the HPGR crusher, thereby dissolving the gold without having to employ a more expensive process to grind the slag material to a much finer particle size.
We believe that the HPGR is a viable grinder for our production process because it appears to have solved our grinding equipment wear issue and the HPGR produces ground slag from which gold can be leached into solution in an autoclave process.
2. Leaching. The second step of our production process involves leaching gold
from the ground slag material. Our original open-vessel ambient leach process
leached gold into solution during our initial pilot tests. However, during our
scale-up to a larger pilot size we discovered that the high levels of iron and
silica that were leached into solution produced a pregnant leach solution
("PLS") that became gelatinous over time. We tried numerous methods to remedy
this issue. However, it was determined that, with the high levels of iron and
silica in solution, the extraction of the gold from the PLS was not
commercially feasible. Hence, we concluded that this open-vessel leach process
was not viable for a production facility. In 2010, we turned our efforts to the autoclave process. Autoclaving, a proven technology that is widely used within the mining industry, is a chemical leach process that utilizes elevated temperature and pressure in a closed autoclave system to extract precious and base metals from the slag material. Our independent consultant,
Arrakis Inc.("Arrakis") has performed over 200 batch autoclave tests under various leach protocols and grind sizes. Arrakis' test results have consistently leached approximately 0.5 ounces per ton ("opt") of gold into solution. In addition, these results indicate that autoclaving does not dissolve the levels of iron and silica into solution as did the ambient leach. We believe that autoclaving will improve our ability to recover gold from solution and thus improve process technical feasibility. The operating conditions identified by Arrakis thus far are mild to moderate compared with most current autoclaves and are anticipated to result in lower capital, operating and maintenance costs. During the third quarter of 2011, we received the results of testing from an independent engineering firm in Chilewhereby a number of batch autoclave tests, under various metallurgical conditions using both pressure oxidation ("POX") and pressure oxidative leach ("POL") testing methodologies were completed. The optimized POX tests produced slightly less than or equal to 0.5 opt gold and the optimized POL tests produced 0.5 opt gold or slightly greater. Moreover, the test results reaffirm that autoclaving does not dissolve the levels of iron and silica into solution as did the ambient leach. Additionally, since the POL method involves fewer process steps resulting in lower operating costs, and appeared to consistently place higher grades of gold into solution, this process was likely to be superior to the POX method in achieving better results. 3 The Chilean engineering firm noted that the refractory Clarkdaleslag was difficult to consistently analyze and suggested that further work be done to validate analytical methods and determine the most accurate method. Our consultant, Arrakis, previously had noted this analytical problem and decided to use an analytical method developed in the 1980's, Atomic Absorption Spectroscopy/Inductively Coupled Plasma Optical Emission Spectroscopy ("AAS/ICP-OES"), to manually correct gold in solution values by determining the amount of interferences caused by other metals present in the leach solutions and manually adjusting the gold in solution values. We believe that the POL autoclave method is a viable leach method for our production process because it leaches higher quantities of gold into solution from our slag material and results in much lower levels of iron and silica in solution than other methods, thus improving process technical feasibility.
3. Continuous Operation. The third step in our production process involves being
able to perform the leaching step in a larger continuous operation. While lab
and bench-scale testing provides critical data for the overall development of
a process, economic feasibility can only be achieved if the process can be performed in a continuous operation. During the second quarter of 2012, we received the results of tests conducted by an independent Australian metallurgical testing firm whereby they conducted autoclave tests under various conditions, using the POL method in a four-compartment, 25-liter autoclave. The completion of a continuous 14 hour test with 100% mechanical availability (i.e. no "down time") demonstrates the ability of a pilot autoclave to process the
Clarkdaleslag material on a continuous basis. The pilot multi-compartment autoclave is routinely used to simulate operating performance in a full-scale commercial autoclave as part
of a bankable feasibility study.
In addition, the PLS that was produced from the 14 hour continuous run was analyzed by the Australian testing firm. Analysis using the AAS/ICP-OES method resulted in approximately 0.2 - 0.6 opt of gold extracted into solution. The 0.2 opt was achieved during the startup of the test run. After making adjustments to the pH, volume of the leach solution and other process parameters, the higher 0.6 opt was obtained toward the completion of the test. Our independent technical consultants believe we can replicate these higher test results in future test runs. The Australian testing firm also noted the existence of analytical difficulties previously reported by our independent consultants and us. We have been advised that the results of this test work is largely based on the analysis carried out on gold solutions emanating from the tests, by AAS/ICP-OES. Analysis of gold in solution by this method is not in agreement with fire assays analysis and both methods are prone to analytical difficulties due to the refractory nature of the slag. A different analytical method was used by the Australian testing firm, the Inductively Coupled Plasma Mass Spectroscopy, or ICPMS. Fire assay (performed by the Australian testing firm), as well as Neutron Activation (performed by an independent third party consulting agency), were also used to perform analyses of the raw slag. All of the above methods indicated different quantities of gold in the slag, but at values substantially below the results achieved by AAS/ICP-OES method. Consequently, Arrakis continues to refine the analytical techniques used to measure gold in solution. We believe that the POL autoclave method in a large multi-compartment autoclave has shown to be viable for our production process because it can operate on a continuous basis and leaches higher levels of gold and much lower levels of iron and silica into solution than other methods. The results from POL autoclaving testing were comparable to previous bench-scale tests performed by Arrakis and the Chilean engineering firm. 4
4. Extraction. The fourth and final step in our production process involves being
able to extract and recover metallic gold from PLS. Economic feasibility can
only be achieved if a commercially viable method of metallic gold recovery is
determined. In addition, the recovery of metallic gold will not only define
the most cost-effective method of such recovery, but will also provide a
better definition to the total process system mass balance and help reduce any
discrepancy in analytical tests. Recovery of gold beads provides the ability
to determine more accurately the amount of gold that was recovered from leach
solution. Simple weighing of the gold bead and having the weight of the
initial slag sample used to provide the bead gives a more accurate
determination of an extractable gold grade in the slag sample. In this effort,
we and our consultants are continuing to perform tests to recover gold from
solution, using carbon, ion exchange resin technologies, or other commonly
used methods of extracting gold from solution. We have engaged Arrakis to assemble a multinational project team to specifically determine the most efficient method of extracting gold from solution. Arrakis has performed in excess of 63 ion exchange tests in an attempt to determine the optimal method for extracting gold from solution, using a variety of resins and carbons. In addition, Arrakis has performed nano-filtration tests using membrane technology in conjunction with the ion exchange tests to enhance ion exchange results. Arrakis has also conducted electro-winning tests, to determine the best way to remove gold from solution. Results from these alternative methods of extracting gold from solution have resulted in removing up to 10% of the gold from solution using resins and up to 40% of the gold from solution using the electro-winning method. These results were obtained by assaying of dore beads produced by the various testing techniques noted. As larger volumes of POL leach solutions are generated via the pilot autoclave, and testing optimized, larger dore beads will be produced and analysis will become much simpler. We have also engaged an independent firm to examine the viability of using membrane technology to remove small quantities of unwanted elements from the PLS prior to loading the gold on to resin or carbon. This process may further enhance gold recovery and increase gold loading rates onto the resin or carbon. As larger volumes of POL leach solution are generated and resin tests are fine-tuned, we expect our gold recovery values to improve. We will continue with our test work in order to better determine the method that best optimizes our gold recovery on a consistent basis. To provide additional PLS which is necessary to expedite the gold recovery tests and commercial viability of the project, we have acquired a large batch titanium autoclave (approximately 500 liter capacity). A total of nine tests have been conducted in the pilot autoclave. The initial tests were designed to examine the structural integrity and functionality of the autoclave, its components, control and support systems. Subsequent tests were designed in an effort to mimic the mechanical and chemical operating conditions achieved with previous tests in the 6-liter bench autoclave, which yielded approximately 0.4 to 0.5 opt of gold in solution. As the tests progressed, several mechanical and chemical issues were identified which indicated that the pilot autoclave was operating under less than optimum conditions, resulting in low gold extraction values. As these issues were identified, modifications were undertaken to the autoclave in order to help achieve the desired operating conditions. Significant delays occurred due to specialty alloy parts having to be ordered and in some cases custom made. During this time, additional bench-scale autoclave tests were performed in order to modify and optimize the chlorine chemistry for the pilot autoclave. The ninth pilot autoclave test demonstrated that 0.42 opt gold was leached into solution from the slag sample containing 0.48 opt gold, which represents an estimated gold recovery of 87.5%. While past test work had relied upon 'wet chemistry' electronic determination, these latest results were determined by analyzing gold metal extracted by standard fire assay techniques. 5 Solution values were determined by evaporating the PLS and fire assaying the residual solids to produce a gold bead in hand. Likewise, the finely ground slag going into the large pilot autoclave and the leached residue after the test were also fire assayed and the resultant gold beads were used to calculate gold grades and leach efficiency. This is the second autoclave test that has verified the gold grade of the slag by fire assay. Electrowinning tests are currently underway to recover gold as metal from the PLS. The greater quantity of PLS able to be generated with the large batch autoclave allows the use of multiple resins and multiple stages to more closely model a full-scale commercial system and optimize recovery of gold from solution. We also continue to examine other methods of extracting gold from solution in an effort to determine the most cost-effective and efficient method of recovering gold. Recently, we have been performing tests whereby the slag material is pretreated prior to processing it in the autoclave. Recent test work indicates that pretreatment, by melting the slag at high temperature, aids in the recovery of the gold from solution derived from the autoclave. We believe that the high temperature process aids in breaking down the refractory coating on the gold particles that are subsequently put into solution after the autoclaving of the slag material and also separates out the iron that makes up approximately one third of the untreated slag material. The heat treated slag material, after the removal of the iron is, for ease of reference, hereinafter referred to as glass. This processed glass material contains the gold and, because of the heat treatment process, is now easily and readily assayed by standard fire assay techniques. It is anticipated that incorporating this additional step into our flow chart renders process optimization testing much easier and will allow this phase of the development program to be concluded more quickly.
Technical achievements considered to be a major breakthrough
In the past few months the precise nature of the gold contained in the
Clarkdaleslag has been determined. Test work done with high resolution microscopes - a Scanning Electron Microscope ("SEM") and a Transmission Electron Microscope ("TEM") - have photographed and measured the gold contained within sulfides and further encapsulated by a highly refractory silicate very resistant to thermal and chemical attack. This explains the difficulty in fire assaying the gold or using ambient temperature strong reagent leaching. Further, the gold is present as colloids (very small particles) less than 100 nm in size which is 1,000 times less than the width of a human hair. [This microscopic size is in the range of most of the gold contained within the Carlin Trend in Nevada- one of North America'srichest gold deposits that went undetected for decades due to the small "invisible" gold particles. The Carlin Trend material was also very difficult to assay and process until the true nature and deportment of the gold was determined.] The temperature required to break the silicate coating of the Clarkdaleslag material exceeds standard fire assay temperature which is why the gold is not captured in the lead collector used in a standard fire assay. Specialized grinding using High Pressure Grinding Rolls ("HPGR") and high temperature leaching used in the current proposed process flow diagram aid in breaking this coating, oxidizing the sulfide, and converting the gold from a colloid to a charged ionic form in solution. Testing using this process thus far has verified the prior test results achieved and reported by us of gold grades between 0.4 to 0.6 ounces per ton (average). The processed material being derived from the heat treated slag is also much easier to be analyzed using standard analytical techniques. Small autoclave tests conducted on the glass from the heat treatment have produced up to an 85% extraction of gold into the pregnant leach solution ("PLS") solution. 6 The PLS solutions have been treated with ion exchange resin to remove the gold from solution. Fire assays of the gold impregnated resin indicate up to a 60% extraction of the gold from the PLS into gold fire assay beads (gold in hand). While not yet optimized, this is a significant improvement over previous attempts to capture the gold as metal by ion exchange resin. All of these tests thus far have been limited to a small 6 liter test autoclave. To provide more definitive process results, we have purchased (and expects delivery within 2 weeks) a much larger heat treating unit, to produce sufficient treated slag to allow running the larger 900 liter pilot autoclave. This will provide a sufficient volume of PLS for a final determination of recoverable gold by ion exchange resin, as well as, allowing the testing of other methods of gold removal from solution to determine the method allowing optimal recovery of gold from solution. Other positive developments
In addition to the breakthrough discussed above, as a byproduct of this new process, the high temperatures produce a high quality iron product grading 75 to 85% iron content in a pelletized form. The high quality of the iron and its pellet size form make it a readily marketable product for sale to the
China, Korea, or Indiamarkets. We believe that further optimization testing will result in greater than 90% iron as achievable and will secure a premium price selling either into the scrap iron or pig iron market. Test work is underway to maximize iron content while maintaining gold recovery. The existing railroad spur on the Clarkdale Project Site connects to a major railroad for low cost transportation to a seaport or domestic market. It is believed that this pre-treatment process may pay for itself or provide a net cash flow from the sale of the iron. To examine the efficacy of this concept, we have engaged Samuel Engineering of Denver, Coloradoto perform a preliminary assessment and marketing study. This study has been concluded and suggests that a marketable higher grade iron product could be made and sold as a byproduct to generate net cash flow or reduce the overall costs of producing gold. Toward this end we have commenced contacting commercial iron producers for expressions of interest.
This pilot scale test work should provide sufficient process definition for a project feasibility study to be completed, allowing management to seek the financing to move forward to commercialization of the
We believe this latest breakthrough has moved the project much closer to commercialization as well as potentially providing extra unanticipated revenue through the sale of iron. The gold results set forth in this report have not yet been optimized, however, since we have been able to remove the iron as a saleable byproduct through the additional step discussed, even at the current results, if repeatable, the project would be commercial. We are looking forward to final definition of the process flow diagram and moving ahead to the bankable study to allow the project to move to a commercial status.
Searchlight Gold ProjectSince 2005, we have maintained an ongoing exploration program on our Searchlight Gold Projectand have contracted with Arrakis, an unaffiliated mining and environmental firm, to perform a number of metallurgical tests on surface and bulk samples taken from the project site under strict chain-of-custody protocols. In 2007, results from these tests validated the presence of gold on the project site, and identified reliable and consistent metallurgical protocols for the analysis and extraction of gold, such as microwave digestion and autoclave leaching. Autoclave methods typically carry high capital and operating costs on large scale projects, however, we were encouraged by these results and intend to continue to explore their applicability to the Searchlight Gold Project. 7
February 11, 2010, we received final approval of our Plan of Operations from the BLM, which allows us to conduct an 18-hole drill program on our project area. However, in an effort to conserve our cash and resources, we have decided to postpone further exploration on our Searchlight Gold Projectuntil we are better able to determine the feasibility of our Clarkdale Slag Project. Once we have decided to resume our exploration program, work on the project site will be limited to the scope within the Plan of Operations. To perform any additional drilling or mining on the project, we would be required to submit a new application to the BLM for approval prior to the commencement of any such additional activities. Critical Accounting Policies Use of estimates - The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Significant areas requiring estimates and assumptions include the valuation of stock-based compensation and derivative liabilities, impairment analysis of long-lived assets, and realizability of deferred tax assets. Actual results could differ from those estimates. Mineral properties - Costs of acquiring mineral properties are capitalized upon acquisition. Exploration costs and costs to maintain mineral properties are expensed as incurred while the project is in the exploration stage. Development costs and costs to maintain mineral properties are capitalized as incurred while the property is in the development stage. When a property reaches the production stage, the related capitalized costs are amortized using the units-of-production method over the proven and probable reserves. Mineral exploration and development costs - Exploration expenditures incurred prior to entering the development stage are expensed and included in "Mineral exploration and evaluation expenses." Capitalized interest cost- We capitalize interest cost related to acquisition, development and construction of property and equipment which is designed as integral parts of the manufacturing process of the project. The capitalized interest is recorded as part of the asset it relates to and will be amortized over the asset's useful life once production commences. Property and Equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is principally provided on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 39 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operating expenses. Impairment of long-lived assets- We review and evaluate our long-lived assets for impairment at each balance sheet date due to our planned exploration stage losses and document such impairment testing. Mineral properties in the exploration stage are monitored for impairment based on factors such as our continued right to explore the property, exploration reports, drill results, technical reports and continued plans to fund exploration programs on the property. The tests for long-lived assets in the exploration, development or producing stage that would have a value beyond proven and probable reserves would be monitored for impairment based on factors such as current market value of the mineral property and results of exploration, future asset utilization, business climate, mineral prices and future undiscounted cash flows expected to result from the use of the related assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net undiscounted cash flows expected to be generated by the asset, including evaluating its reserves beyond proven and probable amounts. 8 Our policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable either by impairment or by abandonment of the property. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds its fair value. To date, no such impairments have been identified. Stock-based compensation - Stock-based compensation awards are recognized in the consolidated financial statements based on the grant date fair value of the award which is estimated using the Binomial Lattice option pricing model. We believe that this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for the actual exercise behavior of option holders. The compensation cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock. The fair value of performance-based stock option grants is determined on their grant date through the use of the Binomial Lattice option pricing model. The total value of the award is recognized over the requisite service period only if management has determined that achievement of the performance condition is probable. The requisite service period is based on management's estimate of when the performance condition will be met. Changes in the requisite service period or the estimated probability of achievement can materially affect the amount of stock-based compensation recognized in the financial statements. We account for stock options issued to non-employees based on the estimated fair value of the awards using the Binomial Lattice option pricing model. The measurement of stock-based compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in our consolidated statements of operations during the period the related services are rendered. Derivative warrant liability- We have certain warrants with anti-dilution provisions, including provisions for the adjustment to the exercise price and to the number of warrants granted if we issue common stock or common stock equivalents at a price less than the exercise price. We determined that these warrants were not afforded equity classification because they embody risks not clearly and closely related to the host contract. Accordingly, the warrants are treated as a derivative liability and are carried at fair value. We calculate the fair value of the derivative liability using the Binomial Lattice model, a Level 3 input. The change in fair value of the derivative liability is classified in other income (expense) in the consolidated statement of operations. We generally do not use derivative financial instruments to hedge exposures to cash flow, market or foreign currency risks. The Company is not exposed to significant interest or credit risk arising from these financial instruments. Convertible notes - derivative liabilities - We evaluate the embedded features of convertible notes to determine if they are required to be bifurcated and recorded as a derivative liability. If more than one feature is required to be bifurcated, the features are accounted for as a single compound derivative. The fair value of the compound derivative is recorded as a derivative liability and a debt discount. The carrying value of the convertible notes was recorded on the issuance date at its original value less the fair value of the compound derivative. The derivative liability is measured at fair value on a recurring basis with changes reported in other income (expense). Fair value is determined using a model which incorporates estimated probabilities and inputs calculated by both the Binomial Lattice model and present values. The debt discount is amortized to non-cash interest expense using the effective interest method over the life of the notes. If a conversion of the underlying note occurs, a proportionate share of the unamortized amount is immediately expensed. 9 Income taxes - We follow the liability method of accounting for income taxes. This method recognizes certain temporary differences between the financial reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset as measured by the statutory tax rates in effect. The effect of a change in tax rates is recognized in operations in the period that includes the enactment date. We record a valuation allowance against any portion of those deferred income tax assets when we believe, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. For acquired properties that do not constitute a business, a deferred income tax liability is recorded on GAAP basis over income tax basis using statutory federal and state rates. The resulting estimated future income tax liability associated with the temporary difference between the acquisition consideration and the tax basis is computed in accordance with Accounting Standards Codification ("ASC") 740-10-25-51, Acquired Temporary Differences in Certain Purchase Transactions that are Not Accounted for as Business Combinations, and is reflected as an increase to the total purchase price which is then applied to the underlying acquired assets in the absence of there being a goodwill component associated with the acquisition transactions. Results of Operations The following table illustrates a summary of our results of operations for the periods set forth below: Three Months Ended March 31, Percent Increase/ 2014 2013 (Decrease) Revenue $ - $ - n/a Operating expenses (1,711,069 ) (1,754,185 ) (2.5 )% Other income (expense) 76,383 221,329 (65.5 )% Income tax benefit 723,387 596,627 21.2 % Net loss $ (911,299 ) $ (936,229 )(2.7 )% Revenue. We are currently in the exploration stage of our business, and have not earned any revenues from our planned mineral operations to date. We did not generate any revenues from inception in 2000 through the three months ended March 31, 2014. We do not anticipate earning revenues from our planned mineral operations until such time as we enter into commercial production of the Clarkdale Slag Project, the Searchlight Gold Projector other mineral properties we may acquire from time to time, and of which there are no assurances. Operating Expenses. The major components of our operating expenses are outlined in the table below: 10 Three Months Ended March 31, Percent Increase/ 2014 2013 (Decrease)
Mineral exploration and evaluation expenses
3.9 % Mineral exploration and evaluation expenses - related party 79,376 59,365 33.7 % Administrative - Clarkdale site 20,036 41,355 (51.6 )% General and administrative 590,672 684,275 (13.7 )% General and administrative - related party 51,468 58,556 (12.1 )% Depreciation 378,825 342,107 10.7 % Total operating expenses
$ 1,711,069 $ 1,754,185
(2.5 )% Three month period ended
March 31, 2014and 2013. Operating expenses decreased to $1,711,069during the three month period ended March 31, 2014from $1,754,185during the three month period ended March 31, 2013as further discussed below. Mineral exploration and evaluation expenses increased to $590,692during the three month period ended March 31, 2014from $568,527during the three month period ended March 31, 2013. The increase is attributed to more time spent by technical staff on the technical program in 2014. Mineral exploration and evaluation expenses - related party increased to $79,376during the three month period ended March 31, 2014from $59,365during the three month period ended March 31, 2013. The increase is due to NMC providing additional metallurgical consulting services in 2014. Administrative - Clarkdalesite expenses decreased to $20,036during the three month period ended March 31, 2014from $41,355for the three month period ended March 31, 2013. Administrative costs at the Clarkdalesite decreased due to a further reduction of certain consulting fees in 2014. General and administrative expenses decreased to $590,672during the three month period ended March 31, 2014from $684,275during the three month period ended March 31, 2013. The decrease was primarily due to less stock based compensation expense. Additionally, we incurred greater auditing fees in 2013 as a result of changing auditors.
General and administrative - related party decreased to
$51,468during the three month period ended March 31, 2014from $58,556during the three month period ended March 31, 2013for accounting support services to Cupit, Milligan, Ogden & Williams, CPAs, an affiliate of Melvin L. Williams, our Chief Financial Officer. These accounting support services included bookkeeping input for the Clarkdalefacility, assistance in preparing working papers for quarterly and annual reporting, and preparation of federal and state tax filings. We incurred more accounting support expense in 2013 as a result of changing auditors. These expenses do not include any fees for Mr. Williams'time in directly supervising the support staff. Mr. Williams'compensation has been provided in the form of salary. The direct benefit to Mr. Williamswas $16,774and $22,837of the above fees for the three month periods ended March 31, 2014and 2013, respectively. Depreciation expense increased to $378,825during the three month period ended March 31, 2014from $342,107during the three month period ended March 31, 2013. The increase was due to placing the autoclave into service during the third
quarter of 2013. 11 Other Income and Expenses Three month period ended
March 31, 2014and 2013. Total other income (expense) amounted to $76,383during the three month period ended March 31, 2014compared to $221,329during the three month period ended March 31, 2013. The change in total other income (expense) primarily resulted from $129,997of interest expense incurred during the three month period ended March 31, 2014related to the issuance of convertible notes on September 18, 2013. Additionally, we recognized less gain on the change in fair values of our derivative liabilities for the three month period ended March 31, 2014compared to 2013. Income Tax Benefit Three month period ended March 31, 2014and 2013. Income tax benefit increased to $723,387for the three month period ended March 31, 2014from $596,627during the three month period ended March 31, 2013. The increase in benefit was due to an increased loss for the period after permanent differences and a reduction in valuation allowance related to state net operating losses. Net Loss Three month period ended March 31, 2014and 2013. The aforementioned factors resulted in a net loss of $911,299, or $0.01per common share, for the three month period ended March 31, 2014, as compared to a net loss of $936,229, or $0.01per common share, for the three month period ended March 31, 2013.
We had cumulative state net operating losses of approximately
Liquidity and Capital Resources
Historically, we have financed our operations primarily through the sale of common stock and other convertible equity securities. No financing transactions occurred during the first quarter of 2014. During the year ended
December 31, 2013, we completed the following issuance of convertible notes: On September 18, 2013, we completed a private placement (the "Offering") of secured convertible notes (the "Notes") to certain investors (collectively, the "Purchasers"), resulting in aggregate gross proceeds to us of $4,000,000.We intend to use the proceeds from the Offering for general working capital purposes. We did not pay any commissions or brokers fees in connection with
the Offering. In connection with the Offering, we entered into certain agreements, including a Secured Convertible Note Purchase Agreement (the "Purchase Agreement"), a Registration Rights Agreement (the "Registration Rights Agreement") and a Pledge and Security Agreement (the "Security Agreement"), each dated
September 18, 2013, with the Purchasers (the Purchase Agreement, Registration Rights Agreement and Security Agreement, together with all exhibits, schedules and other documents attached thereto, are collectively referred to herein as the "Transaction Documents"). Our two wholly-owned subsidiaries, Clarkdale Metals Corp.and Clarkdale Minerals, LLC, agreed to guarantee the obligations underlying the Notes. We and our subsidiaries granted a first priority lien in all of our assets pursuant to the terms of the Security Agreement. The Bank of Utahhas agreed to act as the collateral agent under the Security Agreement. 12 Luxor Capital Group, LPand certain of its associates and affiliates (collectively, "Luxor") purchased $2,600,000of the Notes in the Offering. Luxor and certain other funds managed by Luxor are principal stockholders of the Company. Michael Conboy, one of our directors, currently serves as Luxor's Director of Research. In addition, Martin Oring, one of our directors, and our Chief Executive Officer and President, and certain affiliates and relatives of Mr. Oring, purchased $310,000of Notes. The Notes were issued in reliance on exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of Regulation D thereunder. The Notes contain the following terms and conditions: The Notes are due five (5) years from the date of issuance. However, the Note holders have a put option with respect to the Notes, on the second anniversary of the issuance date and every six (6) months thereafter, at par plus accrued and unpaid interest. The Notes may not be prepaid without the consent of the holders of the majority-in-interest of the Notes. The Notes have customary provisions relating to events of default.
Interest on the Notes accrues at a rate of 7% per annum, which will be payable in cash semi-annually. On
Following and during the continuance of an event of default, the Notes will bear interest at a rate per annum equal to the rate otherwise applicable thereto, plus an additional 2% per annum. Each Note is convertible at any time while the Note is outstanding, at the option of the holder, into shares of our common stock, at
$0.40per share. The Notes have customary anti-dilution provisions, including, without limitation, provisions for the adjustment to the exercise price based on certain stock dividends and stock splits. In addition, the conversion price of the Notes may require adjustment upon the issuance of equity securities (including the issuance of debt convertible into equity) by us at prices below the then existing conversion price, subject to certain exempt issuances which will not result in an adjustment to the exercise price. The Notes are secured by a first priority lien on all of our assets and our two subsidiaries in favor of the Purchasers. However, we have the right to cause defeasance of the liens and to reduce the interest rate on the Notes to 4% per annum, if, at any time, we deposit additional collateral and other agreements, satisfactory to the holders of the majority-in-interest of the Notes, with
the collateral agent.
We have agreed to not incur any (a) additional secured indebtedness, or (b) indebtedness of any kind (unsecured or secured) with a maturity of less than 5 years from the issuance date of the Notes, in each case, without the written consent of the holders of the majority-in-interest of the Notes, except for purposes of defeasance or trade payables in the ordinary course of business. Working Capital The following is a summary of our working capital at
March 31, 2014and December 31, 2013: Percent March 31, 2014 December 31, 2013 Increase/(Decrease) Current Assets $ 825,350$ 2,203,427 (62.5 )% Current Liabilities (639,835 ) (613,806 ) 4.2 % Working Capital $ 185,515$ 1,589,621 (88.3 )%
The change in our working capital was attributable to continued net losses, equipment purchases, interest payments on our convertible note and recurring scheduled payments on our long term liabilities. Cash was
$716,461as of March 31, 2014, as compared to $2,065,824as of December 31, 2013. 13 Cash Flows The following is a summary of our sources and uses of cash for the periods set forth below: Three Months Ended March 31, Percent 2014 2013
Cash Flows Used in Operating Activities
(9.2 )% Cash Flows Used in Investing Activities (24,763 ) (70,104 ) (64.7 )% Cash Flows Used in Financing Activities (90,000 ) (90,000 ) n/a Net Change in Cash During Period
$ (1,349,363 ) $ (1,520,220 )(11.2 )% Net Cash Used in Operating Activities. Net cash used in operating activities decreased to $1,234,600during the three month period ended March 31, 2014from $1,360,116during the three month period ended March 31, 2013. The decrease was due primarily to the increase in accounts payable. Net Cash Used in Investing Activities. Net cash used in investing activities decreased to $24,763during the three month period ended March 31, 2014, as compared to $70,104during the three month period ended March 31, 2013. The decrease was due to less equipment purchases and restoration work on an on-site building during 2014. Net Cash Used by Financing Activities. Net cash used in financing activities was $90,000during both the three month periods ended March 31, 2014and 2013. In both quarters, financing activities were limited to normal recurring payments on our long term debt.
We have not attained profitable operations and are dependent upon obtaining financing to pursue our plan of operation. Our ability to achieve and maintain profitability and positive cash flow will be dependent upon, among other things:
· our ability to locate a profitable mineral property;
· positive results from our feasibility studies on the
Clarkdale Slag Project;
· positive results from the operation of our initial test module on the
Slag Project; and
· our ability to generate revenues.
We may not generate sufficient revenues from our proposed business plan in the future to achieve profitable operations. As of
March 31, 2014, we had an accumulated deficit of $37,803,505. As of March 31, 2014, we had working capital of $185,515, compared to working capital of $1,589,621as of December 31, 2013. If we are not able to achieve profitable operations at some point in the future, we eventually will have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion plans. In addition, our losses may increase in the future as we expand our business plan. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders' equity. If we are unable to achieve profitability, the market value of our common stock will decline and there would be a material adverse effect on our financial condition. 14 Our exploration and evaluation plan calls for significant expenses in connection with the Clarkdale Slag Project. For the next twelve months, our management anticipates that the minimum cash requirements for funding our proposed testing and feasibility programs and our continued operations will be approximately $7,300,000. As of April 30, 2014, we had cash reserves in the amount of approximately $410,000. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our testing and feasibility programs and operating overhead during the next twelve months and we will require additional financing in order to fund these activities. As of March 31, 2014, our financial statements and this report do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern. A decision on allocating additional funds for Phase II of the Clarkdale Slag Projectwill be forthcoming if and once the feasibility study is completed and analyzed. The Phase II work program is expected to include the preparation of a bankable feasibility study, engineering and design of the full-scale production facility and planning for the construction of an Industrial Collector Roadpursuant to an agreement with the Town of Clarkdale, Arizona. We estimate that our monthly expenses will increase substantially once we enter Phase II of the project and therefore, we may require the necessary funding to fulfill this anticipated work program. If the actual costs are significantly greater than anticipated, if we proceed with our exploration, testing and construction activities beyond what we currently have planned, or if we experience unforeseen delays during our activities during 2014, we will need to obtain additional financing. There are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us. Obtaining additional financing is subject to a number of factors, including the market prices for base and precious metals. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of current stockholders will be reduced and these securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends. For these reasons, our financial statements filed herewith include a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.
Off-Balance Sheet Arrangements
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board("FASB") that are adopted by us, as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards did not or will not have a material impact on our consolidated financial statements upon adoption. 15 In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"), which provides guidance on the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years (and interim periods within those years) beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company adopted ASU 2013-11 during the first quarter of 2014. The adoption of this standard did not affect our financial condition or results of operation.