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DISCONTINUED OPERATIONS AND PREFERRED STOCK ISSUANCE | 9 Months Ended
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Sep. 30, 2016
Discontinued Operations and Disposal Groups [Abstract] |
DISCONTINUED OPERATIONS AND PREFERRED STOCK ISSUANCE |
5. | DISCONTINUED OPERATIONS AND PREFERRED STOCK ISSUANCE
Disposition of Mining Segment In February 2006, the Company reacquired the Mt. Emmons molybdenum mining properties (the “Property”). From the time of the Company’s reacquisition of the Property until its transfer as described below, the Company did not conduct any extractive mining operations at the Property and was obligated under existing permits to operate a water treatment plant (“WTP”) and to incur holding costs associated with the retention of the mining properties, which resulted in aggregate annual expenses of approximately $3,000 during each of the three years in the period ended December 31, 2015. The market price for molybdenum oxide was approximately $11 per pound during 2013 and 2014 with a decrease to approximately $5 per pound by the fourth quarter of 2015. In light of the considerable ongoing costs related to the Property and the deteriorating market for molybdenum, during 2015 the Company began to explore the viability of alternative structures to the development of the Property that could result in a sharing or elimination of the ongoing costs and liabilities. In February 2016, the Company decided to dispose of the Property rather than continuing the Company’s long-term development strategy whereby the Company entered into the following agreements:
| A. | An Acquisition Agreement (the “Acquisition Agreement”) was entered into with Mt. Emmons Mining Company, a subsidiary of Freeport-McMoRan Inc. (“MEM”), whereby MEM acquired the Property which consists of the Mt. Emmons mine site located in Gunnison County, Colorado, including the Keystone Mine, the WTP and other related properties. Under the Acquisition Agreement, MEM replaced the Company as the permittee and operator of the WTP and will discharge the obligation of the Company to operate the WTP from and after the closing in accordance with the applicable permits issued by the Colorado Department of Public Health and Environment. The Company did not receive any cash consideration for the disposition; the sole consideration for the transfer was that MEM assumed the Company’s obligations to operate the WTP and to pay the future mine holding costs for portions of the Property that it desires to retain.
As a result of the February 2016 disposition of the Property, the Company determined that an impairment charge of $22,620 was required to be recorded in the fourth quarter of 2015 and the disposal of the Company’s mining segment was reported as discontinued operations in the Company’s financial statements. Presented below are the assets and liabilities associated with the Company’s mining segment as of September 30, 2016 and December 31, 2015:
|  | 2016 |  |  | 2015 |
Assets retained by the Company: |  |  |  |  |  |  |  |
Performance bonds and refundable deposits |  | $ | 135 |  |  | $ | 114 |
Net assets conveyed to Purchaser: |  |  |  |  |  |  |  |
Undeveloped mining claims |  |  | - |  |  |  | 21,942 |
Mining equipment |  |  | - |  |  |  | 1,774 |
Less accumulated depreciation of mining equipment |  |  | - |  |  |  | (892 | )
Less write-down due to impairment |  |  | - |  |  |  | (22,620 | )
Net book value of assets conveyed |  |  | - |  |  |  | 204 |
Total assets of discontinued operations |  | $ | 135 |  |  | $ | 318 |
Asset retirement obligations assumed by Purchaser |  | $ | - |  |  | $ | 204 |
| B. | Concurrent with entry into the Acquisition Agreement and as additional consideration for MEM to accept transfer of the Property, the Company entered into a Series A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”) with MEM, whereby the Company issued 50,000 shares of newly designated Series A Convertible Preferred Stock (the “Preferred Stock”) to MEM in exchange for (i) MEM accepting the transfer of the Property and replacing the Company as the permittee and operator of the WTP, and (ii) the payment of approximately $1 to the Company. The Series A Purchase Agreement contains customary representations and warranties on the part of the Company. As contemplated by the Acquisition Agreement and the Series A Purchase Agreement and as approved by the Company’s Board of Directors, the Company filed with the Secretary of State of the State of Wyoming Articles of Amendment containing a Certificate of Designations with respect to the Preferred Stock (the “Certificate of Designations”). Pursuant to the Certificate of Designations, the Company designated 50,000 shares of its authorized preferred stock as Series A Convertible Preferred Stock. The Preferred Stock accrues dividends at a rate of 12.25% per annum of the Adjusted Liquidation Preference (as defined); such dividends are not payable in cash but are accrued and compounded quarterly in arrears on the first business day of the succeeding calendar quarter. At issuance, the aggregate fair value of the Preferred Stock was $2,000 based on the initial liquidation preference of $40 per share. The “Adjusted Liquidation Preference” is initially $40 per share of Preferred Stock, with increases each quarter by the accrued quarterly dividend. The Preferred Stock is senior to other classes or series of shares of the Company with respect to dividend rights and rights upon liquidation. No dividend or distribution will be declared or paid on junior stock, including the Company’s common stock, (1) unless approved by the holders of Preferred Stock and (2) unless and until a like dividend has been declared and paid on the Preferred Stock on an as-converted basis.
At the option of the holder, each share of Preferred Stock was initially convertible into approximately 13.33 shares of the Company’s $0.01 par value common stock (the “Conversion Rate”) for an aggregate of 666,667 shares of common stock. The Conversion Rate is subject to anti-dilution adjustments for stock splits, stock dividends, certain reorganization events, and to price-based anti-dilution protections if the Company subsequently issues shares for less than 90% of fair value on the date of issuance. Each share of Preferred Stock will be convertible into a number of shares of common stock equal to the ratio of the initial conversion value to the conversion value as adjusted for accumulated dividends multiplied by the Conversion Rate. In no event will the aggregate number of shares of common stock issued upon conversion be greater than approximately 793,000 shares. The Preferred Stock will generally not vote with the Company’s common stock on an as-converted basis on matters put before the Company’s shareholders. The holders of the Preferred Stock have the right to approve specified matters as set forth in the Certificate of Designations and have the right to require the Company to repurchase the Preferred Stock in connection with a change of control. However, the Company’s Board of Directors has the ability to prevent any change of control that could trigger a redemption obligation related to the Preferred Stock. During the first quarter of 2016, the Company recorded the fair value of the Preferred Stock based on the initial liquidation preference of $2,000. Since the cash consideration paid by MEM for the Preferred Stock was $1, the Company recorded a charge to discontinued operations of approximately $1,999 associated with the issuance. This charge represents additional consideration to induce MEM to assume the Company’s previous obligations to operate the WTP. As of September 30, 2016, the aggregate Adjusted Liquidation Preference was $2,097 which was convertible into 699,004 shares of common stock, and accrued dividends not yet included in the Adjusted Liquidation Preference amounted to $66.
| C. | Concurrent with entry into the Acquisition Agreement and the Series A Purchase Agreement, the Company and MEM entered into an Investor Rights Agreement, which provides MEM with the rights to certain information and Board observer rights. MEM has agreed that it, along with its affiliates, will not acquire more than 16.86% of the Company’s issued and outstanding shares of common stock. In addition, MEM has the right to request registration of the shares of common stock issuable upon conversion of the Preferred Stock under the Securities Act of 1933, as amended.
Results of Operations for Discontinued Operations The results of operations of the discontinued mining operations are presented separately in the accompanying financial statements for all periods presented. Presented below are the components for the three and nine months ended September 30, 2016 and 2015:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30: |  |  | September 30: |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
Issuance of preferred stock to induce disposition |  | $ | - |  |  | $ | - |  |  | $ | (1,999 | ) |  | $ | - |
Operating expenses of mining segment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Water treatment plant |  |  | - |  |  |  | (470 | ) |  |  | (256 | ) |  |  | (1,383 | )
Mine property holding costs |  |  | - |  |  |  | (365 | ) |  |  | (117 | ) |  |  | (912 | )
Depreciation of mine equipment |  |  | - |  |  |  | (30 | ) |  |  | - |  |  |  | (90 | )
Professional fees related to disposition |  |  | - |  |  |  | - |  |  |  | (76 | ) |  |  | - |
Total results for discontinued operations |  | $ | - |  |  | $ | (865 | ) |  | $ | (2,448 | ) |  | $ | (2,385 | )

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