NOTE

–

BASIS OF REPORTING AND

SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited 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

nine

months ended

September 30, 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

September 30, 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Applied Minerals, Inc. and its inactive subsidiary in northern Idaho.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. In these condensed consolidated financial statements, the PIK Note derivative liability, stock compensation and

the assessment of the possible impairment of long-lived assets involve extensive reliance on management’s estimates. Actual results could differ from those estimates.

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		September 30, 2017		December 31, 2016

Financial instruments:
Series 2023 PIK Note Derivative	$	-0-	$	-0-	$	68,041	$	68,041	$	142,909
Series A PIK Note Derivative	$	-0-	$	-0-	$	1,074,133	$	1,074,133	$	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
Additions related to the i ssuance of PIK Notes		31,990
Net unrealized gains included in net (loss)		(1,066,368	)

Balance at September 30, 2017	$	1,142,174

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

September 30, 2017

and Decemb

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

$31,809,504

and

$23,361,553,

respectively, at

September 30, 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
	September 30, 2017			December 31, 2016

Market price and estimated fair value of stock	$	0.04		$	0.12
Exercise price	$	1.14		$	1.28
Term (years)		5.83			6.58
Dividend yield	$	-0-		$	-0-
Expected volatility		107.7	%		86.2	%
Risk-free interest rate		2.02	%		2.18	%

Series A PIK Note derivative liability	Fair Value Measurements
	Using Inputs
	September 30, 2017			December 31, 2016

Market price and estimated fair value of stock	$	0.04		$	0.12
Exercise price	$	0.66		$	0.83
Term (years)		5.83			6.58
Dividend yield	$	-0-		$	-0-
Expected volatility		107.7	%		86.2	%
Risk-free interest rate		2.02	%		2.18	%

Per share data

Loss per share for the

three

months ended

September 30, 2017

and

2016,

respectively, is calculated based on

118,862,734

and

108,482,042

weighted average outstanding shares of common stock.

Loss per share for the

nine

months ended

September 30, 2017

and

2016,

respectively, is calculated based on

112,094,593

and

101,231,559

weighted average outstanding shares of common stock.

September 30, 2017

and

2016,

respectively, the Company had outst

anding options and warrants to purchase

31,898,352

and

25,314,940

shares of Company common stock, and had notes payable which were convertible into

52,075,593

and

38,676,232

shares, respectively, of the Company common stock,

none

of which were included in the diluted computation as their effect would be anti-dilutive.

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

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 the quarter ended

March 31, 2017

had

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 guidance on revenue recognition, which provides a single, comprehensive revenue recognition model for all contracts with customers and superseded most existing revenue recognition guidance. The main principle under this guidance is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers. This guidance is effective for interim and annual reporting periods beginning after

January 1, 2018.

The Company will adopt the new standard in the

first

quarter of

2018.

The cumulative effect of the initial adoption will be reflected as an adjustment to the opening balance of retained earnings as of the date of the application of the guidance.

The Company will finalize its assessment in the

fourth

quarter of

2017.

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.

The Company is currently evaluating the effect this ASU will have on its consolidated financial statement and disclosures.

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.