The following management discussion and analysis of financial condition and
results of operations should be read in connection with the accompanying
unaudited condensed financial statements and related notes thereto included
elsewhere in this report and the audited consolidated financial statements and
notes thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 2020, as filed with the SEC on January 26, 2021.
Cautionary Notice Regarding Forward Looking Statements
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the "Special
Note Regarding Forward-Looking Statements" appearing at the beginning of this
Quarterly Report.
The information contained in this Item 2 contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may materially differ from those projected in the forward-looking statements as
a result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual results
will not be different from expectations expressed in this report.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated,
the terms "Company," "we," "us," and "our" refer to Standard Metals Processing,
Inc. and our wholly owned subsidiary, Aurielle Enterprises Inc. ("AE"), and AE's
wholly owned subsidiaries Tonopah Custom Processing, Inc. ("TCP") and Tonopah
Resources, Inc. ("TR"). Unless otherwise specified, all dollar amounts are
expressed in United States dollars.
Corporate History
We were incorporated in the State of Colorado on July 10, 1985 and re-domiciled
in Nevada in March 2013. In 2011, we closed a series of transactions, whereby we
acquired certain assets of Shea Mining & Milling, LLC, which assets include
land, buildings, a dormant milling facility, abandoned milling equipment, water
permits, mine tailings, mine dumps and the assignment of a note payable, a lease
and a contract agreement with permits. We completed the Shea Exchange Agreement
in order to offer toll milling services of precious minerals. Toll milling 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 gold, silver,
and platinum group metals. Custom milling and refining can include many
different processes to extract 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.
Overview of the Company
We have an office in Gadsden, Alabama and, through a subsidiary, a property in
Tonopah, Nevada. Our business plan is to purchase equipment and build 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. We are required to obtain several permits
before we can begin construction of a small-scale mineral processing facility
and the required additional buildings to conduct permitted processing toll
milling activities and commence operations.
11
Water Pollution Control Permit with Nevada Department of Environmental
Protection
Through the Company's wholly owned subsidiary, TCP, a Water Pollution Control
Permit ("WPCP") Application was filed with the Nevada Department of
Environmental Protection ("NDEP") Bureau of Mines and Mining Reclamation
("BMMR") for the approval of the permits necessary for a small-scale mineral
processing facility planned for the Tonopah property. The plant will perform
laboratory testing, pilot testing, and custom processing of precious metal ores
and concentrates from mining industry clients. Processing of ore materials will
employ standard mineral processing techniques including gravity concentration,
froth flotation and chemical leaching and carbon stripping.
The WPCP must be approved prior to commencing the planned construction of our
processing plant in Tonopah, Nevada.
In connection with our WPCP application, NDEP suggested that we take the
following actions: (i) retain a Nevada Certified Environmental Manager ("CEM"),
(ii) perform Meteoric Profile II water testing on ground water directly below
the mill as well as surrounding wells located off site, and (iii) determine
baseline values of water using the Meteoric Profile II results. NDEP regulations
require that the Company delay any new construction planned for "metal
extraction" until after the permits are in place.
Advanced Surveying & Professional Services, a Professional Land Surveyor
("PLS"), completed surveys and testing of the Tonopah property required for the
application of our required permits. After completion of the survey, it was
determined the property is 1,186 acres. The scope of work the PLS completed
includes: (i) setting a total of 19 permanent monuments at angle points along
lines, (ii) setting eight permanent monuments locating US Hwy 95, (iii)
recording a professional map indicating longitude and latitude for all corners,
and (iv) providing a digital map accessible in Auto Cad software.
Site Preparation
We have completed the initial grading of specific designated areas on the 40
undisturbed acres of land including clearing all vegetation, removing of all
scrap metal, and the excavation of the building pad for preparation of our
planned new 21,875 square foot processing plant and have completed the removal
of all the extra and unnecessary materials and old equipment that has
accumulated on the land. We have also refurbished a trailer that will act as our
construction office.
Business Plan
The Company is reexamining its next steps for developing a processing facility.
In an effort to move the Company's business plan forward, the Company may
evaluate opportunities to acquire, license, or joint venture with other parties
involved in toll milling, processing, or mining related activities, which may
include GPR and its affiliated entities including, but not limited to,
Sustainable Metal Solutions, LLC ("SMS"), NovaMetallix, Inc. ("NMX"), Remedy
Environmental LLC, and Black Bear Natural Resources, LTD.
On March 27, 2020, the Company engaged NMX, a subsidiary of SMS, to conduct a
study of the quantity and quality of our historic mine tailings, and the
economic feasibility of processing them to reclaim their residual content of
valuable metals. NMX, a firm comprised of highly qualified mining, geological
and metallurgical engineering professionals, is the leading force in the rapidly
developing field of sustainable metals. NMX has agreed to conduct the study of
the Company's tailings at GPR's cost and expense in exchange for the exclusive
right to process the tailings should their economic assessment prove
positive. The terms of such processing to be mutually agreed upon in the future
based on the results of the assessment.
On April 17, 2020, the Company and SMS, agreed to form a joint venture styled
Esmeralda Renewal Energy Zone, LLC ("EREZ"). The Company has agreed to
contribute the solar energy rights attributable to its 1,087 acres to EREZ in
exchange for SMS's agreement to develop, manage and underwrite the EREZ venture.
Products and Services
We plan to establish ourselves as a custom processing and permitted toll milling
service provider. Our business plan is to build a facility on our Tonopah
property, which includes an analytical lab, pyrometallurgical, and
hydrometallurgical recovery plant.
12
The Company's intention is to become a full service permitted custom toll
milling and processing company that facilitates the extraction of precious and
strategic minerals from mined material. The Company is in the process of
obtaining the permits needed for construction and operation of our permitted
custom processing toll milling facility with state-of-the-art equipment capable
of processing gold, silver, and platinum metal groups. Many junior miners do not
have the capital or the ability to permit a processing facility, yet they have a
large supply of mined material that requires milling be performed. It is often
cost prohibitive or impractical for these mine operators to send their materials
to processing mills owned by the large mining companies, or to other customers
sorely needing milling and processing services.
While Nevada has a historic role as a mining center with good proximate geology
and ample mined product, very little custom processing toll milling capacity
remains in the state. During the last several decades, other processing
facilities have been shuttered due to high costs of regulations and the vertical
integration of milling within large mining companies leaving junior miners with
few options for local milling services. As a result, we are in a unique position
among processing facilities because we are capable of true permitted custom
processing. We have the only ball mill located within a custom toll milling
facility within 300 miles allowing us to serve miners in the western United
States, Canada, Mexico, and Central America.
Many junior miners are undercapitalized, have limited access to capital markets
and have a large supply of mined material that requires milling be performed.
Many large mining companies reserve their milling capacity for their inventory,
which does not make providing third party services worthwhile. This provides the
Company with an opportunity to provide these potential customers with dearly
needed milling and processing services. Some of our mining customers will be
able to take their tailings (the material left over after the desired minerals
have been extracted) from the material they deposited with the Company and put
it back in the exact same mines those tailings initially came from. Thereby
eliminating the need for the Company to store or dispose of their voluminous
remains.
Results of Operation
Comparison of Three and Nine Months Ended September 30, 2021, to Three and Nine
Months Ended September 30, 2020
Revenues
We had no revenues from any operations for the three and nine months ended
September 30, 2021, and 2020. Furthermore, we do not anticipate any significant
future revenue until we have sufficiently funded construction and begin
operations.
General and Administrative Expenses
General and administrative expenses were $101,090 and $595,415 for the three and
nine months ended September 30, 2021, respectively, compared to $106,058 and
$222,862, respectively for the same periods in 2020. The increases for the three
and nine months ended September 30, 2021, were principally the result of
increased engineering and development expenses associated with evaluating future
uses of the Company's property. During the three and nine months ended September
30, 2020, the $106,058 and $222,862 totals related principally to continuance of
nominal accounting, legal, and office expenses consistent with modest funding.
We anticipate that operating expenses will increase for fiscal 2021 as we
continue to assess the Company's future.
Other Income and Expenses
We receive monthly lease payments of from American Tower Corporation for a
cellular tower located on our Tonopah land. As such Other Income for the three
and nine months ended September 30, 2021, was $2,098 and $6,296, respectively,
compared to $2,099 and $6,296, respectively, for the same periods in 2020.
Additionally, the Company periodically reviews outstanding claims that have not
been satisfactorily resolved. In some instances, these claims remain outstanding
beyond their statutory limit on collection and are written off. Gain on
derecognition of debt for the three and nine months ended September 30, 2021,
was $2,421, and $29,353, respectively, compared to $0 and $115,424, respectively
for the same periods in 2020.
13
Interest expense for the three and nine months ended September 30, 2021, was
$175,197 and $509,449, respectively, compared to $157,493 and $362,357,
respectively for the same periods in 2020. The increases in 2021, are consistent
with the higher level of borrowings during 2021.
Liquidity and Capital Resources
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual and operating needs as they arise. We have funded our operations and
satisfied our capital requirements through increases in convertible debt
pursuant to our LOC during the three and nine months ended September 30, 2021,
and 2020. We do not anticipate generating sufficient net positive cash flows
from our operations to fund the next twelve months. We had a working capital
deficit of $11,239,169 at September 30, 2021. Cash was $2,120 at September 30,
2021, as compared to cash of $1,199 at December 31, 2020.
Our cash reserves will not be sufficient to meet our operational needs and thus,
we need to raise additional capital to pay for our operational expenses and
provide for capital expenditures. Our basic operational expenses are currently
estimated at approximately $120,000 per month. Above the basic operational
expenses, we estimate that we need approximately $10,000,000 to begin limited
toll milling operations. If we are not able to raise additional working capital,
we may have to cease operations altogether.
Recent Financings
On March 16, 2020, the Company executed a Line of Credit ("LOC") with GPR, a
related party, evidenced by a convertible promissory note. On July 12, 2021 the
LOC availability was increased from $2,500,000 to $5,000,000; its maturity
extended from March 16, 2023 to March 16, 2025; GPR's right to increase the LOC
by another $1,000,000 and extend two additional years was increased to
$5,000,000 with an extension for an additional five years, and GPR agreed to
forebear exercising its foreclosure rights under its defaulted Senior Secured
Note and accrued interest of $3,647,532 at June 30, 2021 until December 31,
2021. In exchange for the foregoing accommodations the Company revised GPR's
price at which the LOC can be converted to common stock from $2.00 to $1.65 per
share. Disclosure of the common share equivalent of GPR's LOC and accrued
interest has been revised accordingly.
The LOC bears interest at 10% per annum and is secured by the real and personal
property and pledged securities GPR already has under lien. The LOC is for
funding operating expenses critical to the Company's redirection and all
requests for funds may be approved or disapproved in GPR's sole discretion.
During the three and nine months ended September 30, 2021, GPR advanced $490,255
and $580,828, respectively, to pay directly on the Company's behalf, certain
administrative costs as well as engineering and development expenses to assess
the future uses of the Company's real property. During the three and nine months
ended September 30, 2020, GPR advanced $84,643 and $190,665, respectively, which
it used to pay directly certain of the Company's providers of administrative
expenses. The advances were made by GPR, a related party, pursuant to the terms
of the LOC.
Going Concern
The condensed consolidated financial statements contained in this quarterly
report on Form 10-Q have been prepared assuming that the Company will continue
as a going concern. The Company has accumulated losses from inception through
the period ended September 30, 2021, of $105,419,617, and a working capital
deficit of $11,239,169, as well as negative cash flows from operating
activities. Presently, the Company does not have sufficient cash resources to
meet its debt obligations in the twelve months following the date of this
filing. In addition, virtually all the Company's assets are encumbered or
pledged under senior secured debt owned by GPR, a related party, in the
aggregate amount of $5,441,750, including interest of $1,834,638 at September
30, 2021. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management is in the process of evaluating various
financing alternatives to finance its capital requirements, as well as for
general and administrative expenses. These alternatives include raising funds
through public or private equity markets and either through institutional or
retail investors. Although there is no assurance that the Company will be
successful with its fund-raising initiatives, management believes that the
Company will be able to secure the necessary financing providing it is
successful in resolving its liabilities and other claims with its unsecured
creditors and GPR's assistance.
14
The consolidated financial statements do not include any adjustments that may be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to obtain
additional financing as may be required and ultimately to attain profitability.
If the Company raises additional funds through the issuance of equity, the
percentage ownership of current shareholders would likely be reduced, and such
securities might have rights, preferences or privileges senior to the rights,
preferences, and privileges of the Company's 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
would significantly and materially restrict its future. If the Company is unable
to resolve the claims of its unsecured creditors, the Company may have to cease
operations.
Working Capital Deficiency
September 30, December 31,
2021 2020
Current assets $ 2,120 $ 36,646
Current liabilities 11,241,289 10,206,600
Working capital deficiency $ (11,239,169 ) $ (10,169,954 )
The balance and components of current assets are consistent between periods. The
increase in current liabilities is primarily due to accrual of interest on
settlement of lawsuits, creditor claims, and notes due related parties.
Cash Flows
Nine Months Ended
September 30,
2021 2020
Net cash provided by (used in) operating activities $ 921 $ (11,129 )
Net cash provided by financing activities
--- 11,500
Increase (Decrease) in cash $ 921 $ 371
Operating Activities
Net cash provided (used) by operating activities was $921 and $(11,129) for the
nine months ended September 30, 2021 and 2020, respectively. Cash was provided
by operating activities during both periods primarily due to payments advanced
under the LOC for operating expenses offset by net changes in accrued
liabilities.
Financing Activities
For the nine months ended September 30, 2021, and 2020, net cash provided (used)
by financing activities was $921 and $(11,129), respectively.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2021, we did not engage in any
off-balance sheet arrangements as defined in item 303(a)(4) of the SEC's
Regulation S-K.
Effects of Inflation
We do not believe that inflation has had a material impact on our business,
revenues or operating results during the periods presented.
15
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our
financial statements included herein for the nine months ended September 30,
2021, and in the notes to our audited consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2020. We
believe that the accounting policies below are critical for one to fully
understand and evaluate our financial condition and results of operations.
Impairment of Long-lived Assets
We review our property and mining and mineral rights subject to amortization and
other long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset class may not be
recoverable. Indicators of potential impairment include: an adverse change in
legal factors or in the business climate that could affect the value of the
asset; an adverse change in the extent or manner in which the asset is used or
is expected to be used, or in its physical condition; and current or forecasted
operating or cash flow losses that demonstrate continuing losses associated with
the use of the asset. If indicators of impairment are present, the asset is
tested for recoverability by comparing the carrying value of the asset to the
related estimated undiscounted future cash flows expected to be derived from the
asset. If the expected cash flows are less than the carrying value of the asset,
then the asset is considered to be impaired and its carrying value is written
down to fair value, based on the related estimated discounted cash flows. During
the prior year, however, we decided to combine the carrying value of our mining
and mineral assets as they are inseparable and depend upon each other in value
creation. There were no impairment charges in the nine months ended September
30, 2021. See Note 3.
Recent Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes-Simplifying the
Accounting for Income Taxes ("ASU 2019-12"). Among other items, the amendments
in ASU 2019-12 simplify the accounting treatment of tax law changes and
year-to-date losses in interim periods. An entity generally recognizes the
effects of a change in tax law in the period of enactment, however, there is an
exception for tax laws with delayed effective dates. Under current guidance, an
entity may not adjust its annual effective tax rate for a tax law change until
the period in which the law is effective. This exception was removed under ASU
2019-12, thereby providing that all effects of a tax law change are recognized
in the period of enactment, including adjustment of the estimated annual
effective tax rate. Regarding year-to-date losses in interim periods, an entity
is required to estimate its annual effective tax rate for the full fiscal year
at the end of each interim period and use that rate to calculate its income
taxes on a year-to-date basis. However, current guidance provides an exception
that when a loss in an interim period exceeds the anticipated loss for the year,
the income tax benefit is limited to the amount that would be recognized if the
year-to-date loss were the anticipated loss for the full year. ASU 2019-12
removes this exception and provides that, in this situation, an entity would
compute its income tax benefit at each interim period based on its estimated
annual effective tax rate. ASU 2019-l2 is effective for fiscal years beginning
after December 15, 2020, including interim periods within those annual periods
Early adoption is permitted. The Company is currently evaluating the effect that
this update will have on its consolidated financial statements and related
disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13") and also issued subsequent amendments to the initial guidance: ASU
2018-19, ASU 2019-04, and ASU 2019-05 (collectively, "Topic 326"). Topic 326
requires measurement and recognition of expected credit losses for financial
assets held. The Company will be required to adopt this ASU for financial years
beginning after December 15, 2022, including interim periods within those fiscal
years. The adoption of topic 326 is not expected to have a material effect on
the Company's consolidated financial statements and financial statement
disclosures.
During the nine months ended September 30, 2021, 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.
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