As part of the sale the Company agreed to pay waiver fees of $375,000 to the majority holders of each of its Series A PIK Notes and Series 2023 Notes.
The $750,000 in PIK Note waiver fees is included as other expense in the Company’s Consolidated Statements of Operations. Additionally, to provide the necessary waivers related to the sale of the Iron Oxide Assets, the majority holders of the each of the Series A PIK Notes and Series 2023 Notes required that directors Mario Concha, Robert Betz, John Levy and Geoffrey Scott relinquish approximately $1.9 million of accrued and unpaid fees and related compensation owed to them as of August 2022.
Directors Concha, Betz, Levy and Scott all agreed to relinquish their fees and related compensation, which are included as a capital contribution in the Company’s Consolidated Statements of Equity.
ining Operations Agreement and Milling Operations Agreement
I
n conjunction with
entering into the sale of the Iron Oxide Assets, the Company entered into a Mining Operations Agreement
with
BMCO
and a Milling Operations Agreement
with
BMI.
Under the
terms of the
Mining Operations Agreement,
AMI will be required to extract, haul, store and prepare for processing the
i
ron
o
xide
m
inerals (“Mining”) for BMCO. BMCO will reimburse AMI for all direct Mining costs and pay AMI 10% of the labor costs included in the Mining costs as a fee. AMI will have direct oversight over all Mining activities including the activities of contract labor that may be utilized for Mining. The Mining Operations Agreement will require AMI to make available to BMCO iron mining equipment owned by AMI. Under the Mining Operations Agreement, BMCO will pay AMI, depending on the sale price, either 20% or 25% of the gross profit of any sales of crushed, screened or milled iron to four Qualified Customers that have been developed by AMI.
Under the terms of the Milling Operations
Agreement,
AMI will be required to mill, package and prepare for shipping (“Milling”) the iron oxide minerals for BMI. BMI will reimburse AMI for any costs it incurs directly related to Milling of iron oxide minerals for BMI. BMI will also pay AMI 10% of the labor costs included in the Milling costs as a fee. AMI will have direct oversight over all Milling activities including the activities of any contract labor that may be utilized for Milling. As part of the Milling Operations Agreement, BMI will agree to allow AMI to utilize any excess capacity of the Mill. BMI and AMI will each pay its share of the maintenance expense of the Mill based on the volume of minerals each processes through the Mill. AMI will maintain ownership of the laboratory equipment located in the Mill and allow BMI to use the equipment for a fee.
Settlement with Mining Services Contractor
In March 2022, the Company entered into a Settlement Letter with a former contractor for an amount equal to $200,000. Under the terms of the Settlement Letter, the Company agreed to (i) make ten consecutive monthly cash payments of $10,000 to the former contractor beginning in April 2022 and (ii) issue 4,444,444 restricted shares of common stock to the former contractor. If the weighted average trading price of the shares of the Company’s common stock over the five trading days immediately preceding October 1, 2022 (“WATP”) was less than $0.0225 per share, the Company agreed, at its option, to (a) issue to the former contractor a number of shares of common stock equal to ((4,444,444 x (0.0225 – WATP)) / (0.9 x WATP)) or (b) make a cash payment to the former contractor equal to ((4,444,444 x (0.0225 – WATP)).
Prior to the close of the sale of the iron oxide assets, the contractor filed a lien on the Dragon Mine property related to amounts owed under the March 2022 settlement agreement. In July 2022, the Company and the contractor entered into a final settlement agreement under which, upon the close of the sale of the iron oxide, the Company paid the contractor $49,732 in cash and issued to the contractor an additional 17,777,777 restricted shares of common stock. In total the Company paid the contractor $111,111 in cash and issued to the contractor 22,222,221 restricted shares of common stock.
On December 22, 2017, the Company and Continental Mineral Claims, Inc. (“CMC”) entered into an Exploration Agreement with Option to Purchase (“Agreement”). The Company granted to CMC the exclusive right and option to enter upon and conduct mineral exploration activities (the “Exploration License”) for Metallic Minerals on the Company’s Dragon Mine minesite in Utah (the “Mining Claims”). Metallic Minerals are defined to include minerals with a high specific gravity and metallic luster, such as gold, silver, lead, copper, zinc, molybdenum, titanium, tungsten, uranium, tin, iron, etc., but shall exclude any such Metallic Minerals that are intermingled within any economically-recoverable, non-metallic mineral deposits located at or above an elevation of 5,590 feet above sea level. Non-metallic minerals include clay and iron oxide, the minerals mined by the Company. The Company believes that all economic recoverable non-metallic mineral deposits are well above 5,590 feet above sea level. The Exploration License is for a period of ten years.
In consideration of the Exploration License CMC paid the Company $350,000 upon the execution of the agreement and paid it $150,000 on the first anniversary of the Exploration License in December 2018. CMC will pay the Company $250,000 on or before each subsequent anniversary during the Exploration License term following the first anniversary of the Effective Date of this Agreement unless the Exploration License is terminated earlier by CMC by exercising the option or failing to make the required payment for the Exploration License.
On March 25, 2020, the Company and Tintic Copper and Gold, Inc. (CMC’s successor) (“Tintic”) agreed to lower the exercise price of the Option to $1,050,000 and Tintic immediately exercised the Option. The Company also provided Tintic with a Right of First Offer, which expires on December 21, 2027 and can be extended to December 21, 2032 for $250,000.
Upon the exercise of the option, the Company retained the all rights and title to (1) the surface interest (with exception of those rights associated with the Metallic Rights), and (2) all non-metallic minerals (expressly including all industrial minerals including clays and iron oxides).
Upon the exercise of the option the Company retained protections against unreasonable interference of its current and future mining operations by CMC. CMC may not do anything that may, at the Company’s determination, adversely impact the Company’s Mining Operations. “Mining Operations” shall mean the activities incident to mineral extraction, permitting, and any operations by CMC or the Company relating to the removal of minerals, respectively, that are or may reasonably be conducted on the Mining Claims, including the exploration for, and development, active mining, removing, producing and selling of any minerals, including the Metallic Minerals. The Agreement states that the parties understand that the Company is willing to enter into the Agreement only if it is assured that CMC will not have any right to unreasonably interfere with the Company’s current mining operations and possible future Mining Operations on the Mining Claims.
Impact of COVID–19 Pandemic on Financial Statements
In December 2019, a novel strain of COVID-19 was reported in China. Since then, COVID-19 has spread globally, to include Canada, the United States and several European countries. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Since then, many countries around the world imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses.
Concentration of Credit Risk
Cash balances, accounts receivable and derivative financial instruments are financial instruments potentially subject to credit risk. Cash and cash equivalents are maintained in bank deposit accounts, which, at times, may exceed the federally insured limits. Management periodically reviews and assesses the financial condition of the banks to mitigate the risk of loss.
For the nine months ended September 30, 2022 and 2021, revenues from the Company’s largest customer
s (each representing 10% or more of total
accounted for 68% and 67% of total revenues, respectively. As of September 30, 2022 and 2021, amounts owed from these customers comprised 90% and 98% of accounts receivable, respectively.
Trade receivables are reported at outstanding principal amounts, net of an allowance for doubtful accounts.
Management evaluates the collectability of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and financial condition, as well as current and projected economic and market conditions, in determining the amount of the allowance. Receivable balances are written off when management determines that the balance is uncollectable. No allowance was required at September 30, 2022 and December 31, 2021.
Property and equipment are carried at cost net of accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or the life of the lease, whichever is shorter, as follows:
| | | |
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Building and Building Improvements | | | | |
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Office and shop furniture and equipment | | | | |
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Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of long-lived assets to determine whether current events or circumstances warrant adjustment to such carrying amounts. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying amount. If this comparison indicates that there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. Considerable management judgment is necessary to estimate the fair value of assets. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value, less cost to sell. The Company has determined that there was no impairment of its long-lived assets as of September 30, 2022 and 2021.
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 contractual arrangements with the Company’s customers. The Company’s revenue recognition policies are established in accordance with the Revenue Recognition topics of ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
During the nine months ended September 30, 2022, the Company issued additional Series A Notes of $449,384 in lieu of cash interest payments. The carrying value of the Series A Notes payable as of September 30, 2022 was $30,004,470.
The amortized debt discount expensed during the three months ended September 30, 2022 was $106,575.
As of September 30, 2022, the Company was in compliance with the covenants of the Series A Notes.
As of September 30, 2022, Geoffrey Scott, a director of the Company owned $4,642,137 of principal of the Series A Notes.
Series 2023 Notes (Amended)
In August 2013, the Company received $10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash.
The Series 2023 Notes convert into the Company’s common stock at a conversion price of $0.59 per share, which is subject to customary anti-dilution adjustments; the holders may convert the Series 2023 Notes at any time. The Series 2023 Notes are mandatorily convertible after one year when the weighted average trading price of a share of the common stock for the preceding ten trading days is in excess of the conversion price. The Series 2023 Notes contain customary representations and warranties and several covenants. The proceeds are being used for general corporate purposes. No broker was used and no commission was paid in connection with the sale of the Series 2023 Notes.
These Series 2023 Notes 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 anti-dilution provisions the notes contain a down-round provision whereby the conversion 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 for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of $2,055,000 (based on observable inputs using a Monte Carlo model) was bifurcated from the Series 2023 Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series 2023 Notes. The debt discount is being amortized using the effective interest method over the 10-year term of the Series 2023 Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Series 2023 Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings.
During the nine months ended September 30, 2022, the Company issued additional PIK Notes of $537,390 in lieu of cash interest payments. The carrying value of the Series 2023 Notes Payable was $18,294,121 as September 30, 2022.
As of September 30, 2022, the Company was in compliance with the covenants of the Series 2023 Notes.
NOTE 8 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue 10,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share.
At September 30, 2022 and December 31, 2021, 78,000 and 262,000 shares of Series B Preferred Stock were issued and outstanding, respectively.
On May 3, 2022, 78,000 shares of Series B Preferred Stock were issued at a stated price of $1.00 per share for cash proceeds of $75,000, net of $3,000 in legal fees.
At the time of issuance, the Company evaluated the nature of Series B Preferred Stock and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded a $25,947 beneficial conversion feature to additional paid in capital and amortized at the time of issuance.
On February 17, 2021, 95,000 shares of Series B Preferred Stock were issued at a stated price of $1.084 per share for cash proceeds of $100,000, net of $3,000 legal fees.
At the time of issuance, the Company evaluated the nature of Series B Preferred Stock and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded a $60,738 beneficial conversion feature to additional paid in capital and amortized at the time of issuance.
On May 24, 2021, 81,136 shares of Series B Preferred Stock were issued at a stated price of $1.084 per share for cash proceeds of $85,000, net of $3,000 in legal fees.
At the time of issuance, the Company evaluated the nature of Series B Preferred Stock and concluded it more akin to equity and recorded it as permanent equity. The Company also recorded a $51,874 beneficial conversion feature to additional paid in capital and amortized at the time of issuance.
Each share of Series B Preferred Shares will carry an annual dividend in the amount of twelve percent (12%) of the Stated Value (the “Divided Rate”), which shall be cumulative and compounded daily, payable solely upon redemption, liquidation or conversion. The Company has the right to redeem all or any portion of the shares within 180 days following the issuance day.
The Holder shall have the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following the Issuance Date, to convert all or any part of the outstanding Series B Preferred Stock into fully paid and non-assessable shares of Common Stock. The conversion price (the “Conversion Price”) shall equal the 61% multiplied by the Market Price (representing a discount rate of 39%). “Market Price” means the lowest Trading Price for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
The Company is authorized to issue 700,000,000 shares of common stock with a $0.001 par value per share.
At September 30, 2022 and December 31, 2021, 366,974,683 shares and 217,655,150 shares were issued and outstanding, respectively.
During the nine months ended September 30, 2022, (i) 20,164,153 shares of common stock were issued upon the conversion of 75,000 shares of Series B Preferred Stock issued in August 2021, (ii) 10,000,000 shares of common stock were issued as in conjunction with entering into a consulting agreement with an investor relations firm
with a fair value of $70,000
, (iii) 4,444,444 shares were issued to settle certain liabilities, (iv) 300,000 shares of common stock were issued as debt issuance cost, (v) 9,275,000 shares of common stock were issued upon the conversion of 35,000 shares of Series B Preferred Stock issued in August 2021, (vi) 23,948,635 shares of common stock issued upon the conversion of 66,000 shares of Series B Preferred Stock issued in September 2021 (v) 43,409,526 shares of common stock were issued upon the conversion of 86,000 shares of Series B Preferred Stock issued in December 2021; (vi) 20,000,000 shares of common stock were issue to BMI Minerals Company as part of its purchase of the rights to the Company’s iron oxide resource and (vii) 17,777,777 shares were issued to Provo Mining & Construction, Inc. related to a settlement of amounts owed.
During the nine months ended September 30, 2021, (i) 15,805,934 shares were issued upon the conversion of 223,000 shares of Preferred Stock, (ii) 3,836,475 shares were issued upon cashless exercised of 9,528,689 options, and (iii) 1,162,791 shares were issued in lieu of a bonus payment of $58,140
NOTE 9 – OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK
Outstanding Stock Warrants
A summary of the status and changes of the warrants issued for the nine months ended September 30, 2022:
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Outstanding at December 31, 2021 | | | | | | | | |
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At September 30, 2022 the intrinsic value of the outstanding warrants was $16,290.
In August 2022 the Company granted a financial advisory firm warrants to purchase 9.86 million shares of common stock at $0.005 per share and 1 million shares of
common
stock at $0.001 per share. The financial advisory firm provided, among other things, capital introduction services to the Company. The warrants were issued with a 5-year term
and vested immediately
. The Black Scholes fair value of the warrants on the grant date totaled $31,056.
I
TEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.
Applied Minerals, Inc. is focused primarily on (i) the development, marketing and sale of halloysite clay-based DRAGONITE™ line of products for use in advanced applications such as, but not limited to, reinforcement additives for polymer composites, flame retardant additives for polymers, catalysts, controlled release carriers, strength reinforcement additives for cement, concrete, mortars and grouts, advanced ceramics, rheology additives for drilling fluids, environmental remediation media, and carriers of agricultural agents. Halloysite is an aluminosilicate with a tubular structure that provides functionality for a number of applications.
The Company owns the Dragon Mine, which has significant deposits of high-quality halloysite clay and iron oxide. The 267-acre property is located in southwestern Utah and its resource was mined for halloysite on a large-scale, commercial basis between 1949 and 1976 for use as a petroleum cracking catalyst. The mine was idle until 2001 when the Company leased it to initially develop its halloysite resource for advanced, high-value applications. We purchased 100% of the property in 2005. After further geological characterization of the mine, the Company identified a high-purity, natural iron oxide resource that it has commercialized to supply certain pigmentary and technical markets. In August 2022 the Company sold the rights to its iron oxide resource as well as title to its Hosokawa Alpine table roller mill and related building.
The Company owns a mineral processing facility with a capacity of 5,000 - 10,000 tons tons per annum depending on the grade of clay mineral its produces. Furthermore, the Company has use of any unused capacity available on the Alpine Hosokawa table roller mill sold to a third-party in August 2022.
The Company currently sells its DRAGONITE product as a binder molecular sieve applications, as a nucleating agent for resin applications and as a binder for ceramic applications. The Company is working with current and prospective customers, which are in the latter stages of commercializing new products that will utilize DRAGONITE as a functional additive.
In August 2022, the Company received a $1,150,000 U.S. DOE STTR Phase II award to develop a process that produces halloysite-derived porous silicon for use as anode material
Applied Minerals is a publicly traded company incorporated in the state of Delaware. The common stock trades on the OTC market under the symbol AMNL.
Critical Accounting Policies and Estimates
A complete discussion of our critical accounting policies and estimates is included in our Form 10-K for the year ended December 31, 2021. There have been no material changes in our critical accounting policies and estimates during the nine-month period ended September 30, 2022 compared to the disclosures on Form 10-K for the year ended December 31, 2021.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
| | Three Months Ended September 30, | | | | |
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General and administrative | | | | | | | | | | | | | | | | |
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Interest expense, net (including amortization of deferred financing cost and debt discount) | | | | | | | | | | | | | | | | |
Gain on sale of iron oxide assets | | | | | | | - | | | | | | | | 100 | % |
Other income (expense) , net | | | | | | | | | | | | | | | | |
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Total Other Income (Expense) | | | | | | | | | | | | | | | | |
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Revenue for the three months ended September 30, 2022 totaled $111,688, a decrease of $249,127 or 69%, compared to the same period in 2021. The decrease was driven primarily by a $301,833 decline in sales of AMIRON iron oxide, partially offset by an increase of $53,906 in sales of DRAGONITE halloysite clay.
Sales of AMIRON iron oxide during the period totaled $1,200, a decrease of 100% when compared to the same period in 2021. The decrease was due to t
he expiration in December 2021 of a supply agreement with a producer of cement. Sales of DRAGONITE halloysite clay totaled $110,488 during the period, an increase of 91% when compared to the same period in 2021. During the period the Company increased its sales of DRAGONITE to current customers and a number of new customers.
Total operating expenses for the three months ended September 30, 2022 totaled $498,068, a reduction of 46% when compared to the same period in 2021. The reduction was driven primarily by a $294,102 decline in production costs and a 101,656 decline in general and administrative expense.
Production costs include those operating expenses which management believes are directly related to the mining and processing of the Company’s halloysite minerals, which result in the production of its AMIRON and DRAGONITE products for commercial sale. Production costs include, but are not limited to, wages and benefits of employees who mine material and who work in the Company’s milling operations, energy costs associated with the operation of the Company’s two mills, the cost of mining and milling supplies and the cost of the maintenance and repair of the Company’s mining and milling equipment. Wages and energy are the two largest components of the Company’s production costs.
Production costs incurred during the three months ended September 30, 2022 were $140,123, a decrease of 68% when compared to the same period in 2021.
The decrease was driven primarily by a reduction in contract labor, wage and mining materials related expenses associated with the expiration in December 2021 of a contract to supply iron to a producer of cement.
Exploration costs include operating expenses incurred at the Dragon Mine that are not directly related to production activities. Exploration costs incurred during the three months ended September 30, 2022 were $16,098, a decrease of 66% when compared to the same period in 2021.
General and administrative expenses incurred during the three months ended September 30, 2022 totaled $341,847, a 23% decrease when compared to the same period in 2021. The decrease was driven primarily by a decrease in wages and related employee expense due to a reduction in the number of employees, decline in director expense due to a decline in the number of directors and a decline in equity-linked compensation expense. Approximately $66,700 of general and administrative expense was related to the Company’s STTR DOE Phase I award and was reimbursed by the DOE during the period and recorded as other income. Approximately $96,000 of general and administrative expense was paid to a financial advisor for capital raising and related services. The Company does not expect to incur a similar expense in the future.
Operating loss incurred during the three months ended September 30, 2022 was $386,378, a 32% decrease when compared to the same period in 2021. The decrease was driven by a $427,526 decline in total operating expenses, partially offset by a $249,127 decline in revenue.
Total other income was $577,267 for the three months ended September 30, 2022 compared to total other expense of $454,271 in same period in 2021. The $1,031,538 decrease in total other expense was due primarily to a $1,938,000 gain on the sale of the Company’s
rights to its iron oxide resource as well as title to its Hosokawa Alpine table roller mill and related building (“iron oxide assets”),
partially offset by a (i) decrease in other income of $737,108 of which $750,000 was the payment of a PIK Note waiver fee related to the sale of the iron oxide assets and (ii) a $169,354 increase in interest expense due to an increase in the outstanding principal balance of the Company’s PIK Notes when compared to the same period in 2021.
Net income for the three-month period ending September 30, 2022 was $190,887, compared to a net loss of $1,019,050 during the same period in 2021. The decrease in net loss was due primarily to the $1,938,000 gain realized on the sale of the iron oxide assets, partially offset by the $737,108 decline in other income.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
| | Nine Months Ended September 30, | | | | |
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General and administrative | | | | | | | | | | | | | | | | |
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Interest expense, net (including amortization of deferred financing cost and debt discount) | | | | | | | | | | | | | | | | |
Gain on forgiveness of PPP loan | | | | | | | | | | | | | | | | |
Gain on sale of iron oxide assets | | | | | | | - | | | | | | | | (100 | )% |
Other income (expense) , net | | | | | | | | | | | | | | | | |
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Total Other Income Expense | | | | ) | | | | | | | | | | | | |
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Revenue for the nine months ended September 30, 2022 totaled $295,838, a decrease of 73% when compared to the same period in 2021. The decrease was driven primarily by a $714,562 decrease in the sale of AMIRON iron oxide and a $89,798 decrease in the sale of DRAGONITE halloysite clay.
Sales of AMIRON iron oxide during the period totaled $19,330, a decrease of 97% when compared to the same period in 2021. The decrease in sales of AMIRON was due to t
he expiration in December 2021 of a supply agreement with a producer of cement. Sales of DRAGONITE halloysite clay totaled $276,508 during the period, a decrease of 25% when compared to the same period in 2021. The decline in sales of DRAGONITE was due, large part, to the absence of purchases for field trials by certain customers that occurred during the same period in 2021.
Total operating expenses for the nine months ended September 30, 2022 totaled $1,800,482, a decrease of 34% when compared to the same period in 2021. The decrease was driven by a 66% decline in production costs and 13% decline in general and administrative expense, partially offset by a 51% increase in exploration costs.
Production costs include those operating expenses which management believes are directly related to the mining and processing of the Company’s iron oxide and halloysite minerals, which result in the production of its AMIRON and DRAGONITE products for commercial sale. Production costs include, but are not limited to, wages and benefits of employees who mine material and who work in the Company’s milling operations, energy costs associated with the operation of the Company’s two mills, the cost of mining and milling supplies and the cost of the maintenance and repair of the Company’s mining and milling equipment. Wages and energy are the two largest components of the Company’s production costs.
Production costs incurred during the nine months ended September 30, 2022 were $415,418, a decrease of 66%, compared to the same period in 2021. The decrease was
driven primarily by a reduction in contract labor, wage and mining materials related expenses associated with the expiration in December 2021 of a contract to supply iron to a producer of cement.
Production expense during the period included $39,500 related to a settlement with a contract miner entered into in March 2022.
Exploration costs include operating expenses incurred at the Dragon Mine that are not directly related to production activities. Exploration costs incurred during the nine months ended September 30, 2022 were $266,111, a 51%, increase compared to the same period in 2021. The increase was driven primarily by a $200,000 charge related to a settlement agreement with a contract miner entered into in March 2022.
General and administrative expenses incurred during the nine months ended September 30, 2022 totaled $1,082,953, a decline of 13%, when compared to the same period in 2021. The decrease was driven primarily by a decline in wages and related employee expense due to a reduction in the number of employees, decline in director expense due to a decline in the number of directors and a decline in equity-linked compensation expense. Approximately $80,000 of general and administrative expense during the period was related to the Company’s STTR DOE Phase I award and was reimbursed by the DOE during the period and recorded as other income. Approximately $96,000 of general and administrative expense was paid to a financial advisor for capital raising and related services. The Company does not expect to incur a similar expense in the future.
Operating loss incurred during the nine months ended September 30, 2022 was $1,504,644, an 8% decrease when compared to the same period in 2021. The decline was driven primarily by a $863,932 decrease in production costs and a $162,022 decrease in general and administrative expense, offset by a $90,396 increase in exploration costs when compared to the same period in 2021.
Total other expense for the nine months ended September 30, 2022 was $193,930, compared to total other expense of $1,064,141 during the same period in 2021. The $870,211 decrease in total other expense was due primarily to a $1,938,000 gain on the sale of the Company’s iron oxide assets in August 2022, partially offset by (i) a $650,044 decrease in other income $750,000 of which is a PIK Note waiver paid in conjunction with the sale of the Company’s iron oxide assets, (ii) the absence of a $223,000 gain related to the forgiveness of a Payroll Protection Program loan and (iii) a $194,670 increase in interest expense due to an increase in the outstanding principal balance of the Company’s PIK Notes when compared to the same period in 2021
Net loss for the nine months ending September 30, 2022 was $1,698,574 a decline of $1,001,627 when compared to the same period in 2021. The decrease in net loss was due primarily to a decrease in total other expense of $870,211 and a decrease in operating loss of $131,416.
LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered recurring losses from operations and currently a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management believes that in order for the Company to meet its obligations arising from normal business operations through November 29, 2023 that the Company may be required (i) to raise additional capital either in the form of a private placement of common stock or debt and/or (ii) generate additional sales of its products that will generate sufficient operating profit and cash flows to fund operations. Without additional capital or additional sales of its products, the Company’s ability to continue to operate may be limited.
Based on the Company’s current cash usage expectations, management believes it may not have sufficient liquidity to fund its operations through November 29, 2023. Further, management cannot provide any assurance that it is probable that the Company will be successful in accomplishing any of its plans to raise debt or equity financing or generate additional product sales. Collectively these factors raise substantial doubt regarding the Company’s ability to continue as going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.
Cash used in operating activities during the nine months ended September 30, 2022 was $1,439,791 compared to $973,832 of cash used during the same period in 2021. Cash used by operations during the nine months ended September 30, 2022, before accounting for the changes in operating assets and liabilities, was $1,795,510 compared to $1,280,194 during the same period in 2021. The primary reason for the increase was the $750,000 paid as a waiver fee to the majority holders of the Company’s Series A and Series 2023 PIK Notes related to the sale of the Company’s iron oxide assets. Cash generated from the change in operating assets and liabilities during the nine months ended September 30, 2022 was $355,720 compared to $306,362 during the same period in 2021.
Cash used by investing activities during the nine months ended September 30, 2022 was $1,988,000 compared to $0 during the same period in 2021. The $1,988,000 increase was due to $1,938,000 of net proceeds generated from the sale of the Company’s iron oxide assets and $50,000 of proceeds generated from the sale of obsolete equipment.
Cash provided by financing activities during the nine months ended September 30, 2022 was $107,366 compared to $510,362 used during the same period in 2021. The $402,966 decrease in cash provided during the period was due primarily to a $310,000 reduction in proceeds from a private placement of Series B Preferred Stock during the current period, the absence of $264,472 of proceeds from a Paycheck Protection Program loan and principal payments of approximately $91,000 which did not occur during the same period in 2021, partially offset by $200,000 in proceeds from the issuance of notes payable, $42,000 of net proceeds from the issuance of shares of common stock and a reduction of approximately $20,000 of insurance financing payments.
Total assets at September 30, 2022 were $1,674,068 compared to $1,177,821 at December 31, 2021, an increase of $396,247 due primarily to an increase in the Company’s cash and accounts receivable, partially offset by a reduction in prepaid expenses. Total liabilities were $51,373,272 compared to $51,578,703 at December 31, 2021, a decrease of $205,431 due to a reduction in accrued liabilities, partially offset by an increase in the balance of the Company’s PIK Notes.
ISSUANCE OF CONVERTIBLE DEBT
For information with respect to issuance of convertible debt, see Note 7 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonable likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
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TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no exposure to fluctuations in interest rates, foreign currencies, or other factors.
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TEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were, as of the end of the fiscal quarter covered by this quarterly report, ineffective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the nine months ended September 30, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Notwithstanding the existence of these material weaknesses in our internal control over financial reporting, the management believes that the consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
PART II. OTHER INFORMATION
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TEM 1. LEGAL PROCEEDINGS
As of the date of this report, there is no pending or threatened litigation. We may become involved in or subject to, routine litigation, claims, disputes, proceedings and investigations in the ordinary course of business, could have a material adverse effect on our financial condition, cash flows or results of operations.
Except for the below, there were no additions or material changes to the Company’s risk factors disclosed in Item 1A of Part I in the Company’s 2021 Annual Report on Form 10-K.
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TEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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TEM 3. DEFAULTS UPON SENIOR SECURITIES
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TEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and this Item is included in Exhibit 95 to this Form 10-Q.
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TEM 5. OTHER INFORMATION
The following exhibits are included in this report:
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| | XBRL Taxonomy Extension Schema |
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| | XBRL Taxonomy Extension Calculation |
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| | XBRL Taxonomy Extension Definition |
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| | XBRL Taxonomy Extension Labels |
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| | XBRL Taxonomy Extension Presentation |
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| | Information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
