NOTE

–

BASIS OF REPORTING AND

SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Applied Minerals, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, these interim unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the financial position of the Company and the results of its operations and cash flows for the periods presented. The results of operations for the

three

months ended

March

31,

2017

are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the financial statements and related disclosures for the year ended

December

31,

2016,

included in the Annual Report of Applied Minerals, Inc. on Form

-K filed with the SEC on

March

31,

2017.

The accompanying interim unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes. As of

March

31,

2017,

the Company’s significant accounting policies and estimates remain unchanged from those detailed in the Company’s Annual Report on Form

-K for the year ended

December

31,

2016.

Exploration-Stage Company

From

1997

through

2008,

the Company’s sole source of revenue and income was derived from its contract mining business through which it provided shaft sinking, underground mine development and mine labor services. At

December

31,

2008,

the Company discontinued its contract mining efforts due to economic conditions and the desire to concentrate its efforts on the commercialization of the halloysite clay deposit at the Dragon Mine. Effective

January

2009,

the Company was, and still is, classified as an exploration company as the existence of proven or probable reserves have not been demonstrated and no significant revenue has been earned from the mine. Under the SEC’s Industry Guide

a mining company is considered an exploration stage company until it has declared mineral reserves determined in accordance with the guide and staff interpretations thereof.

Fair Value

ASC Topic

820,

Fair Value Measurement and Disclosures

, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of

three

levels:

Level

– Quoted prices in active markets for identical assets and liabilities;

Level

– Inputs other than level

one

inputs that are either directly or indirectly observable; and

Level

– Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair value measurement using inputs						Carrying amount
	Level 1		Level 2		Level 3		March 31, 2017		December 31, 2016

Financial instruments:
Series 2023 PIK Note Derivative	$	-0-	$	-0-	$	92,341	$	92,341	$	142,909
Series A PIK Note Derivative	$	-0-	$	-0-	$	1,191,134	$	1,191,134	$	2,033,643

The following table summarizes the activity for financial instruments at fair value using Level

inputs:

Balance at December 31, 2016	$	2,176,552
Issuance of additional Series 2023 Notes		2,647
Net unrealized gain included in operations		(895,724	)

Balance at March 31, 2017	$	1,283,475

The recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, receivables, other current assets, and accounts payable and accrued expenses approximates the fair value at

March

31,

2017

and

December

31,

2016

based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company for loans with similar terms, and the remaining short-term period outstanding, the carrying value of notes payable other than PIK Notes approximates fair value. Estimated fair value of the PIK Notes Payable approximate

$24,209,090

and

$23,

361,553,

respectively, at

March

31,

2017

and

December

31,

2016.

For the Company's PIK Note derivative liabilities, Level

fair value hierarchy was estimated using a Monte Carlo Model using the following assumptions:

Series 2023 PIK Note derivative liability	Fair Value Measurements
	Using Inputs
	March 31, 2017			December 31, 2016

Market price and estimated fair value of stock	$	0.08		$	0.12
Exercise price	$	1.28		$	1.28
Term (years)		6.33			6.58
Dividend yield	$	- 0 -		$	- 0 -
Expected volatility		86.5	%		86.2	%
Risk-free interest rate		2.11	%		2.18	%

Series A PIK Note derivative liability	Fair Value Measurements
	Using Inputs
	March 31, 2017			December 31, 2016

Market price and estimated fair value of stock	$	0.08		$	0.12
Exercise price	$	0.83		$	0.83
Term (years)		6.33			6.58
Dividend yield	$	- 0 -		$	- 0 -
Expected volatility		86.5	%		86.2	%
Risk-free interest rate		2.11	%		2.18	%

Revenue Recognition

Revenue includes sales of halloysite clay and iron oxide, and is recognized when title passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Product pricing is determined based on related contractual arrangements with the Company’s customers.

Per share data

Loss per share for the

three

months ended

March

31,

2017

and

2016,

respectively, is calculated based on

108,613,549

and

97,243,610

weighted average outstanding shares of common stock.

March

31,

2017

and

2016,

respectively, the Company had outstanding options and warrants to purchase

25,022,102

and

19,230,012

shares of the Company’s common stock, respectively, and had notes payable which were convertible into

40,677,826

and

33,639,466

shares of the Company’s common stock, respectively, none of which were included in the diluted computation as their effect would be anti-dilutive.

Environmental Matters

Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are expensed. Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated.

Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs. These amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by The Environmental Protection Agency or other organizations. Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. Recoveries are evaluated separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated liability.

Based upon management’s current assessment of its environmental responsibilities, it does

not

believe that any reclamation or remediation liability exists at

March

31,

2017.

Comparative information

We have reclassified certain prior year information to conform with the current year’s presentation.

Recent Accounting Pronouncements

Recently Adopted

November

2015,

FASB issued Accounting Standards Update

2015

17,

Income Taxes (Topic

740):

Balance Sheet Classification of Deferred Taxes. Accounting Standards Update

2015

simplifies current guidance and requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. Accounting Standards Update

2015

can be applied either prospectively or retrospectively and is effective for periods beginning after

December

15,

2016,

with early adoption permitted. The new guidance which was adopted in the quarter ended

March

31,

2017

had no effect on its financial statements and related disclosures.

March

2016,

the FASB issued ASU

2016

09,

“Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions. Under this amended guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement in the period in which the awards vest or are exercised. In the statement of cash flows, excess tax benefits will be classified with other income tax cash flows in operating activities. The amended guidance also gives the option to make a policy election to account for forfeitures as they occur and increases the threshold for awards that are partially settled in cash to qualify for equity classification. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2016,

with early adoption permitted. The new guidance which was adopted in eh quarter ended

March

31,

2017

had no effect on the financial statements. In accordance with ASU

2016

09,

the Company has made the accounting policy election to continue to estimate forfeitures.

Not Yet Adopted

May

2014,

the FASB issued new accounting guidance, Accounting Standards Update No.

2014

09,

Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single

five

-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. Accounting Standards Update No.

2014

is effective for annual reporting periods beginning after

December

15,

2017,

including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of the standard. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements.

February

2016,

the FASB issued ASU

2016

(“Topic

842”)

new accounting guidance for leases, which supersedes previous lease guidance. Under this guidance, for all leases with terms in excess of

one

year, including operating leases, the Company will be required to recognize on its balance sheet a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially similar to previous guidance. Additionally, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. The Company is currently evaluating the impact of this guidance on its consolidated financial statements. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2018,

with early adoption permitted.

June

2016,

the FASB issued ASU

2016

13,

“Financial Instruments-Credit Losses (Topic

326):

Measurement of Credit Losses on Financial

Instruments,” which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. The amendments in this ASU are effective for fiscal years beginning after

December

15,

2020,

including interim periods within those fiscal years. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.

August

2016,

FASB issued ASU

2016

15,

“Classification of Certain Cash Receipts and Cash Payments,” amended guidance which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The new guidance is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for interim and annual periods beginning after

December

15,

2017,

with early adoption permitted.

January

2017,

the FASB issued ASU

2017

01,

“Business Combinations: Clarifying the Definition of a Business,” which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after

December

15,

2017,

with early adoption permitted.