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.

During the three months ended March 31, 2014 and 2013, the Company recognized $725,000 and $495,000, respectively, of other income resulting from the decrease in the fair value of the warrant liability. As described in Note 4, this reduction mainly resulted from a lower stock price and a change in the volatility utilized by the Company.

Outstanding Stock Warrants

A summary of the status of the warrants outstanding and exercisable at March 31, 2014 is presented below:

		Warrants Outstanding and Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$	0.75		139,340	1.50 years	$	0.75
$	0.78		213,402	1.84 years	$	0.78
$	0.80		124,481	1.75 years	$	0.80
$	1.00		212,000	1.41 years	$	1.00
$	1.15		461,340	7.08 years	$	1.15
$	1.93		5,000,000	2.73 years	$	1.93
$	2.00		54,367	2.34 years	$	2.00
			6,204,930	2.93 years	$	1.75

No warrants have been issued since 2011 and no warrants vested in 2013 or 2014; accordingly, no compensation expense has been recorded during 2013 and 2014. The intrinsic value of the outstanding warrants at March 31, 2014 was $0.

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.

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 the three months ended March 31, 2014 and 2013 were as follows:

	2014	2013
Dividend Yield	0%	0%
Expected Life	5.2 years	5 - 10 years
Expected Volatility	58%	83%
Risk Free Interest Rate	1.60%	0.88%-1.66%

A summary of the status and changes of the options granted under stock option plans and other agreements for the first quarter of 2014 is as follows:

	March 31, 2014
			Weighted
			Average
	Shares		Exercise Price

Outstanding at beginning of period		15,878,116	$	1.03
Issued		200,000		0.83
Exercised		--		--
Forfeited		--		--
Outstanding at end of period		16,078,116	$	1.03

During the three months ended March 31, 2014, the Company granted 200,000 options to purchase the Company’s common stock with a weighted average exercise price of $0.83. All options granted during the period vest quarterly starting on March 31, 2014 and ending on December 31, 2014.

A summary of the status of the options outstanding at March 31, 2014 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	4.69 years	$	0.70		7,358,277	$	0.70
	3,405,134	7.44 years	$	0.83		3,255,134	$	0.83
	60,000	2.25 years	$	1.00		60,000	$	1.00
	300,000	9.39 years	$	1.10		--		--
	300,000	9.24 years	$	1.15		58,333	$	1.15
	100,000	3.84 years	$	1.24		100,000	$	1.24
	115,000	6.99 years	$	1.35		106,667	$	1.35
	125,000	3.84 years	$	1.45		125,000	$	1.45
	330,000	7.70 years	$	1.55		221,667	$	1.55
	7,645	3.84 years	$	1.58		7,645	$	1.58
	3,077,060	8.65 years	$	1.66		3,077,060	$	1.66
	900,000	7.39 years	$	1.90		775,000	$	1.90
	16,078,116	6.41 years	$	1.03		15,144,783	$	1.01

At March 31, 2014, the total compensation expense of $699,639 for unvested options is to be recognized over the next 18 months on a weighted average basis.

Compensation expense of $214,850 has been recognized for vesting of options for the three months ended March 31, 2014. The aggregate intrinsic value of the outstanding options as March 31, 2014 was $147,166.