Note 10 - Options and Warrants to Purchase Common Stock

9 Months Ended

Sep. 30, 2014

Options And Warrants To Purchase Common Stock [Abstract]

Options And Warrants To Purchase Common Stock [Text Block]

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 September 30, 2014 and 2013, the Company recognized $114,000 and $200,000 of income, respectively, of Other Income (Expense) resulting from the changes in the fair value of the warrant liability. During the nine months ended September 30, 2014 and 2013, the Company recognized $814,000 and $850,000 of 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 September 30, 2014 is presented below:

Exercise Price	Number Outstanding		Weighted Average Contractual Life
$ 0.75		139,340		1.00
$ 0.78		213,402		1.34
$ 0.80		124,481		1.25
$ 1.00		212,000		0.91
$ 1.15		461,340		6.58
$ 1.93		5,000,000		2.23
$ 2.00		54,367		1.84
$ 1.75		6,204,930		2.43

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 September 30, 2014 was $0 as the exercise prices exceeded the market price of the Company's common stock at September 30, 2014. 

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, 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 term equal to the expected term of the award.

The significant assumptions relating to the valuation of the Company's options issued for the nine months ended September 30, 2014 and 2013 were as follows:

	2014		2013
Dividend Yield		0%		0%
Expected Life (years)		5-6		5-10
Expected Volatility		55.70%		63.47-83%
Risk Free Interest Rate		1.71-1.90%		0.88-2.57%

A summary of the status and changes of the options granted under stock option plans and other agreements for the nine months ended September 30, 2014 is as follows:

			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at December 31, 2013		15,878,116	$	1.03
Issued		1,175,000		0.84
Exercised		--		--
Forfeited		--		--
Outstanding at September 30, 2014		17,053,116	$	1.02

During the nine months ended September 30, 2014, the Company granted 1,175,000 options to purchase the Company’s common stock with a weighted average exercise price of $0.84. Of the 1,175,000 options granted during 2014, 200,000 options vest quarterly starting on March 31, 2014 and ending on December 31, 2014; 375,000 options granted during the second quarter immediately vested on June 9, 2014; and 600,000 options granted on June 9, 2014 vest monthly over a three-year period.

A summary of the status of the options outstanding at September 30, 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		4.19	$	0.70		7,358,277	$	0.70
	3,405,134		6.94	$	0.83		3,355,134	$	0.83
	975,000		9.70	$	0.84		441,667	$	0.84
	60,000		1.75	$	1.00		60,000	$	1.00
	300,000		8.89	$	1.10		100,000	$	1.10
	300,000		8.74	$	1.15		108,333	$	1.15
	100,000		3.34	$	1.24		100,000	$	1.24
	115,000		6.49	$	1.35		115,000	$	1.35
	125,000		3.34	$	1.45		125,000	$	1.45
	330,000		7.20	$	1.55		271,667	$	1.55
	7,645		3.34	$	1.58		7,645	$	1.58
	3,077,060		8.15	$	1.66		3,077,060	$	1.66
	900,000		6.89	$	1.90		900,000	$	1.90
	17,053,116		6.13	$	1.02		16,019,783	$	1.02

At September 30, 2014, the total compensation expense of $585,978 for unvested options is to be recognized over the next 1.95 years on a weighted average basis.

Compensation expense of $168,315 and $754,383 has been recognized for vesting of options for the three and nine months ended September 30, 2014, respectively. The aggregate intrinsic value of the outstanding options as September 30, 2014 was $110,374.