NOTE 10 – OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

Derivative Instruments - Warrants

The Company issued 5,000,000 warrants (“Samlyn warrants”) in connection with the December 22, 2011 private placement of 10,000,000 shares of common stock. The strike price of these warrants was $2.00 per share at the date of grant. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary antidilution provisions the notes contain a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of the Company's common stock or securities exercisable, convertible or exchangeable for the Company's common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants (based on observable inputs) was recorded as a liability in the balance sheet until they are exercised or expire or are otherwise extinguished. During the first quarter of 2013, the Company issued 3,756,757 shares of its common stock for gross proceeds of $5,560,000, which triggered a down-round adjustment of $0.03 from $2.00 to $1.97 in the strike price of the Samlyn warrants at that time. As discussed in Note 8, during August 2013, the Company issued $10,500,000 of 10% mandatorily convertible PIK Notes due 2023 ("Notes") in a private placement, which triggered a down-round adjustment of $0.04 from $1.97 to $1.93 in the strike price of the Samlyn warrants.

The proceeds from the private placement were allocated between the Common Shares and the Warrants issued in connection with the private placement based upon their estimated fair values as of the closing date at December 22, 2011, resulting in the aggregate amount of $6,420,000 to the Stockholders' Equity and $3,580,000 to the warrant derivative. During 2011, the Company recognized $225,000 of other income resulting from the decrease in the fair value of the warrant liability. During 2012, the Company began using a binomial lattice model to value its warrant derivative liability. Based on the value estimated using the lattice model, a reclassification was recorded as of January 1, 2012 to increase Stockholder's Equity by $780,000 and decrease the warrant derivative liability by the same amount representing the decrease in fair value of the warrant at date of issuance. This adjustment was not considered by management to be material to the 2011 financial statements. In subsequent periods, the liability has fluctuated based on the fair value. During 2013 and 2012, the Company recorded other income of $995,000 and $630,000, respectively.

Outstanding Stock Warrants

A summary of the status of the warrants outstanding and exercisable at December 31, 2013 is presented below:

		Warrants Outstanding and Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$	0.75		139,340	1.75 years	$	0.75
$	0.78		213,402	2.09 years	$	0.78
$	0.80		124,481	2.00 years	$	0.80
$	1.00		212,000	1.66 years	$	1.00
$	1.15		461,340	7.33 years	$	1.15
$	1.93		5,000,000	2.98 years	$	1.93
$	2.00		54,367	2.59 years	$	2.00
			6,204,930	3.18 years	$	1.75

No warrants were issued during 2012 or 2013. During the year ended December 31, 2011, the Company granted 5,853,590 warrants to purchase the Company’s common stock with an average exercise price of $1.77, including 5,000,000 warrants issued on December 22, 2011 described above. The intrinsic value of the outstanding warrants at December 31, 2013 was $175,602. Compensation expense of $0, $210,067, and $415,143 have been recognized for the vesting of warrants in the accompanying consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011, respectively.

Excluding the 5,000,000 warrants with the down round provisions discussed above, the fair value of each of the Company’s stock warrant awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company’s common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award.

Outstanding Stock Options

On November 20, 2012, the shareholders of the Company approved the adoption of the Applied Minerals, Inc. 2012 Long-Term Incentive Plan (“LTIP”) and the Short-Term Incentive Plan (“STIP”) and the performance criteria used in setting performance goals for awards intended to be performance-based. Under the LTIP, 8,900,000 shares are authorized for issuance. The STIP does not refer to a particular number of shares under the LTIP, but would use the shares authorized in the LTIP for issuance under the STIP. The CEO, the CFO, and named executive officers, and directors, among others are eligible to participate in the LTIP and STIP. Prior to the adoption of the LTIP and STIP, stock options were granted under individual arrangements between the Company and the grantees, and approved by the Board of Directors.

The fair value of each of the Company's stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury Bond on the date the award is granted with a maturity equal to the expected term of the award.

The significant assumptions relating to the valuation of the Company's options issued for 2013 and 2012 were as follows:

	2013			2012
Dividend Yield		0	%		0	%
Expected Life	5-6 years			5-10 years
Expected Volatility		63.5%- 89.5	%		84.8% – 90.5	%
Risk Free Interest Rate		0.88%- 1.90	%		0.72% - 1.74	%

A summary of the status and changes of the options granted under stock option plans and other agreements for 2013 and 2012 is as follows:

	December 31, 2013					December 31, 2012
				Weighted					Weighted
				Average					Average
	Shares			Exercise Price		Shares			Exercise Price

Outstanding at beginning of period		15,455,471		$	1.04		11,598,411		$	0.83
Issued		760,867			1.19		3,932,060		$	1.64
Exercised		--			--		(75,000	)	$	0.67
Forfeited		(338,222	)	$	1.73		--			--
Outstanding at end of period		15,878,116		$	1.03		15,455,471		$	1.04

During the year ended December 31, 2013, the Company granted 760,867 options to purchase the Company’s common stock with a weighted average exercise price of $1.19. Of the 760,867 options granted, the options vest immediately or monthly as follows:

	Vesting Information
Shares	Frequency	Begin Date	End Date
45,867	Monthly	02/01/2013	04/10/2013 (a)
50,000	Monthly	05/30/2013	05/29/2014
65,000	Immediately	05/29/2013	05/29/2013
300,000	Annually	09/09/2013	09/08/2016
300,000	Monthly	08/01/2013	07/31/2016

(a) 38,222 options were forfeited during 2013.

A summary of the status of the options outstanding at December 31, 2013 is presented below:

Options Outstanding					Options Exercisable
		Weighted	Weighted				Weighted
		Average	Average				Average
Number		Remaining	Exercise		Number		Exercise
Outstanding		Contractual Life	Price		Exercisable		Price

	7,358,277	4.94 years	$	0.70		7,358,277	$	0.70
	3,205,134	7.53 years	$	0.83		3,205,134	$	0.83
	60,000	2.50 years	$	1.00		60,000	$	1.00
	300,000	9.64 years	$	1.10		--		--
	300,000	9.48 years	$	1.15		33,333	$	1.15
	100,000	4.09 years	$	1.24		100,000	$	1.24
	115,000	7.24 years	$	1.35		94,167	$	1.35
	125,000	4.09 years	$	1.45		125,000	$	1.45
	330,000	7.95 years	$	1.55		196,667	$	1.55
	7,645	4.09 years	$	1.58		7,645	$	1.58
	3,077,060	8.89 years	$	1.66		2,826,672	$	1.66
	900,000	7.64 years	$	1.90		700,000	$	1.90
	15,878,116	6.61 years	$	1.03		14,706,895	$	1.00

Compensation expense of $4,707,381, $2,314,154, and $2,181,394 has been recognized for the vested options for the years ended December 31, 2013, 2012 and 2011, respectively. The aggregate intrinsic value of the outstanding options at December 31, 2013 was $3,814,697. At December 31, 2013, $834,221 of unamortized compensation expense for unvested options is expected to be recognized over the next 116 months on a weighted average basis.