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AMNL > SEC Filings for AMNL > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for APPLIED MINERALS, INC.


7-Nov-2013

Quarterly Report


ITEM 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.

Overview
Applied Minerals, Inc. is a leading global producer of halloysite clay that can be used in the development of advanced polymer, catalytic, environmental remediation, and controlled release applications. The Company operates the Dragon Mine located in Juab County, Utah. We believe that we possess the only measured resource of halloysite clay in the Western Hemisphere large enough, and of high enough purity, to supply commercial-sized application demand.
Halloysite is an aluminosilicate clay that forms naturally occurring nanotubes. Traditionally, halloysite has been used in markets such as technical ceramics and catalytic applications. The Company has identified niche applications that benefit from the tubular morphology of its halloysite. These applications include carriers of active ingredients in paints, coatings and building materials, environmental remediation, agricultural applications and high-performance additives and fillers for plastic composites.

Since January 1, 2009, we have sold $296,658 of halloysite clay to companies using it in the testing and production of various applications. We have three grades of halloysite products, the difference among them being the percentage of halloysite contained in each. We also differentiate our halloysite products based on color. At times, we surface treat our product to achieve certain performance characteristics required by customers' products. We believe that a number of potential customers are at various stages of the commercialization process. The Company currently markets its line of halloysite-based products under the DragoniteTM name. In addition to halloysite, the Dragon Mine also contains iron ore, including geothite and hematite. Pricing of our iron ore-related products is based on a variety of factors, including, but not limited to, the different grades of product and the application markets to which we are marketing our iron-ore related products.

Our financial statements contain significant net losses, which result primarily from our investment in the development of our Dragon Mine, including drilling and laying the foundation for commercialization of our various products. We have expended resources on mining staff, mining equipment and supplies, geologists, consultants, sample testing and corporate infrastructure to guide us into full production. We are considered an exploration-stage company under SEC Industry Guide 7 since we have not demonstrated the existence of proven or probable reserves at our Dragon Mine. Furthermore, because we have not produced a significant amount of revenues to date, we are considered an exploration stage company for U.S. GAAP. Accordingly, as required by the SEC guidelines and U.S. GAAP for companies in the exploratory stage, substantially all of our investment in our Dragon Mine to date has been expensed and, therefore, does not appear as assets on our condensed consolidated balance sheet. We expect to expense additional exploration expenditures in 2013 related to the Dragon Mine.

Our characterization as an exploration stage company and the required classification of exploration expenditures as an operating expense rather than as a capital expenditure has caused us to report larger net losses in 2013 and 2012 than if we had capitalized the expenditures as development costs.
Additionally, we will not have a corresponding depletion, depreciation or amortization expense for these costs in the future since they are expensed as incurred rather than capitalized. In comparison to other mining companies that capitalize development expenditures because they have exited the exploration stage, we may report lesser profits, or greater losses, as a result of this ongoing exploration, which will be expensed instead of capitalized for accounting purposes. We will not exit the exploration stage until such time that we demonstrate the existence of proven or probable reserves that meet the SEC guidelines.

Recent Business Developments

· In October 2013, the Company announced that it entered into a development agreement with OPF Enterprises, LLC ("OPF"), a leading ceramic consulting firm that focuses on ceramic materials and process development, to formulate a range of ceramic-based proppants to market to oil and gas drillers in shale formations in close proximity to the Company's Utah-based Dragon Mine.

· In August 2013, the Company announced that it successfully raised $10,500,000 of financing through the private placement of 10% Mandatorily Convertible PIK Notes due 2023 ("Notes"). The Notes have a strike price of $1.40 per share and convert into 7,500,000 shares of the common stock of Applied Minerals, Inc.

· In June 2013, the Company sold its first 10 tons of iron oxide to a leading specialty chemicals company for use in the absorption and catalyst market, which illustrates our entrance into the iron oxide industry.

· In June 2013, the Company entered into a Memorandum of Understanding ("MOU") to form an agreement with Mitsui Plastics, Inc. to market, sell, and distribute its Dragonite™ Halloysite Clay and Iron Oxide globally.

· During the second and third quarters of 2013, the Company made some key personnel changes, including the addition of a new Head of Iron Oxide Business Unit; addition of a new Chief Technology Officer; and the appointment of a leading technology executive and management consultant to its Technical Advisory Board. In addition, the Company appointed Mario Concha, former president of the Chemical Division of Georgia Pacific, Inc., to its Board of Directors. The appointment of Mr. Concha expands the Board to five directors and the number of independent directors to three.

· In January 2013, the Company sold, in a privately negotiated transaction, 3,756,757 shares of its common stock at $1.48 per share for gross proceeds of $5,560,000. No broker was used and no commission was paid as part of this transaction.


Table of Contents
Critical Accounting Policies and Estimates

The following accounting policies have been identified by management as policies critical to the Company's financial reporting:

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. In these financial statements, assets and liabilities involve extensive reliance on management's estimates. Actual results could differ from those estimates.

Fair Value
The fair value of the Company's financial instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). For financial assets and liabilities that are periodically re-measured to fair value, the Company discloses a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1 - quoted prices in active markets for identical assets and liabilities Level 2 - observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 - significant unobservable inputs

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

                                                Fair value measurement using inputs                           Carrying amount
                                                                                                      September 30,       December 31,
                                      Level 1                 Level 2                 Level 3             2013                2012

Financial instruments:
Warrant derivative                                     $           1,095,000                         $     1,095,000     $    1,945,000
PIK Note derivative                                    $           2,670,000                         $     2,670,000                 --

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 approximate their fair value of the respective assets and liabilities at September 30, 2013 and December 31, 2012 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, the carrying value of notes payable approximate fair value. Further, due to the recent placement of the PIK Notes, fair value of the Notes approximates $10,500,000 at September 30, 2013. For the Company's warrant and PIK note derivative liabilities, fair value was estimated using a Binomial Lattice Model using the following assumptions:

Warrant derivative liability                                      Fair Value Measurements
                                                                        Using Inputs
                                                        September 30, 2013         December 31, 2012

Market price and estimated fair value of stock         $               1.09       $              1.54
Exercise price                                         $               1.93       $              2.00
Term (years)                                                           3.23                         4
Dividend yield                                         $                 --       $                --
Expected volatility                                                   77.34 %                    83.3 %
Risk-free interest rate                                                0.73 %                    0.54 %



PIK Note derivative liability                                       Fair Value Measurements
                                                                          Using Inputs
                                                         September 30, 2013            December 31, 2012

Market price and estimated fair value of stock         $                 1.09                          --
Exercise price                                         $                 1.40                          --
Term (years)                                                             9.83                          --
Dividend yield                                         $                   --                          --
Expected volatility                                                     77.34 %                        --
Risk-free interest rate                                                  2.63 %                        --

Impairment of Long-Lived Assets
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.

Mining Exploration and Development Costs Land and mining property are carried at cost. The Company expenses prospecting and mining exploration costs. At the point when a property is determined to have proven and probable reserves, subsequent development costs are capitalized.
When these properties are developed and operations commence, capitalized costs will be charged to operations using the units-of-production method over proven and probable reserves. Upon abandonment or sale of a mineral property, all capitalized costs relating to the specific property are written off in the period abandoned or sold and a gain or loss is recognized. For all periods through September 30, 2013, all costs associated with the Company's mines, excluding original acquisition cost, have been expensed as the Company remains an exploration stage company.


Table of Contents
Provision for Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the temporary difference between the financial reporting basis and tax basis of our assets and liabilities. Deferred tax benefits result principally from certain tax carryover benefits and from recording certain expenses in the financial statements that are not currently deductible for tax purposes and from differences between the tax and book basis of assets and deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities result principally from deductions recorded for tax purposes in excess of that recorded in the financial statements or income for financial statement purposes in excess of the amount for tax purposes. The effect of changes in tax rates is recognized in the period the rate change is enacted.

Stock Options and Warrants
The Company follows ASC 718 (Stock Compensation) and 505-50 (Equity-Based Payments to Non-Employees), which provide guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period. With respect to equity based payments to non-employees, we determine the fair value of the stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. During the quarter ended September 30, 2013 the Company employed the simplified method to determine the expected term for any options granted because the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The Company previously utilized the contractual term as the expected term because the Company believed that general exercise would not have been imminent until the culmination of the contractual term as it was in pre-commercial stages of development and marketing of its minerals.


Table of Contents
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Results of Operations

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,                      Variance
                                        2013             2012            Amount            %

REVENUES                            $      6,773     $        666     $      6,107           917 %

OPERATING EXPENSES:
Production costs                             579            1,530             (951 )         (62 %)
Exploration costs                      1,175,430        1,046,986          128,444            12 %
General and administrative             2,002,890        1,301,705          701,185            54 %
Depreciation expense                      78,864           73,619            5,245             7 %
Total Operating Expenses               3,257,763        2,423,840          833,923            34 %

Operating Loss                        (3,250,990 )     (2,423,174 )       (827,816 )          34 %

OTHER INCOME (EXPENSE):
Interest expense, net, including
amortization of deferred
financing cost and debt discount        (212,830 )         (5,134 )       (207,696 )        4046 %
Gain (loss) on revaluation of
warrant derivative                       200,000          (90,000 )        290,000          (322 %)
Gain on revaluation of stock
awards                                    10,000            5,000            5,000           100 %
Loss on revaluation of PIK note
derivative                              (615,000 )             --         (615,000 )           0 %
Other income (expense)                      (279 )         (4,643 )          4,364           (94 %)
Total Other Income (Expense)            (618,109 )        (94,777 )       (523,332 )         552 %

Net Loss                            $ (3,869,099 )   $ (2,517,951 )   $ (1,351,148 )          54 %

Revenue generated during the three months ended September 30, 2013 was $6,773, compared to $666 of revenue generated during the same period in 2012. Quarterly revenues may be unpredictable as we are in various stages of product development and production trials with potential customers. We believe that a number of these potential customers are at various stages of the commercialization process and there are positive indications (but no assurances) that such potential customers may commercialize the use of our halloysite and/or iron ore.

Total operating expenses for the three months ending September 30, 2013 were $3,257,763 compared to $2,423,840 of operating expenses incurred during the same period in 2012, an increase of $833,923 or 34%. The increase was due primarily to a $128,444, or 12%, increase in exploration costs and a $701,185, or 54%, increase in general and administrative expense.

Exploration costs incurred during the three months ended September 30, 2013 were $1,175,430 compared to $1,046,986 of exploration costs incurred during the same period in 2012, an increase of $128,444, or 12%. Our exploration costs are related to the continued exploration activities at our Dragon Mine property and the mineralogical analysis of the material mined from the property. The primary driver of the increase in exploration costs mainly related to increased R&D expenditures relating to formulation of ceramic-based proppants, as discussed in Recent Business Developments; an increase in miner wages and benefits from the previous year; and the additions of a new R&D Manager, Office Manager and five mining employees in 2013.

General and administrative expenses incurred during the three months ended September 30, 2013 totaled $2,002,890 compared to $1,301,705 of expense incurred during the same period in 2012, an increase of $701,185 or 54%. The increase was driven primarily by a $645,808 increase in noncash stock compensation expense due to certain management equity grants in November 2012; a $25,144 increase in travel due to increased trips to the mine and industry conferences; and the remaining increase was due primarily to an increase in healthcare and business insurance.

Net Loss for the three-month period ending September 30, 2013 was $3,869,099 compared to a loss of $2,517,951 incurred during the same period in 2012, an increase of $1,351,148 or 54%. The increase in the Net Loss was primarily due to a $701,185 increase in General & Administrative expenses, mainly related to noncash stock compensation; a $523,332 increase in Other Expense, mainly due to a noncash, valuation loss of a PIK Note derivative; and a $128,444 increase in Exploration Costs, as described above.


Table of Contents
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Results of Operations

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,                      Variance
                                        2013             2012            Amount            %
REVENUES                            $     44,737     $    152,296     $   (107,559 )         (71 %)

OPERATING (INCOME) EXPENSES:
Production costs                          18,986           83,124          (64,138 )         (77 %)
Exploration costs                      3,418,696        2,568,509          850,187            33 %
General and administrative             5,978,976        4,605,925        1,373,051            30 %
Depreciation expense                     236,552          199,856           36,696            18 %
Total Operating Expenses               9,653,210        7,457,414        2,195,796            29 %

Net Operating Loss                    (9,608,473 )     (7,305,118 )     (2,303,355 )          32 %

OTHER INCOME (EXPENSE):
Interest expense, net, including
amortization of deferred
financing cost and debt discount        (226,454 )        (11,205 )       (215,249 )        1921 %
Gain on revaluation of warrant
derivative                               850,000        1,440,000         (590,000 )         (41 %)
Gain (loss) on revaluation of
stock awards                              45,000           (3,000 )         48,000         (1600 %)
Loss on revaluation of PIK note
derivative                              (615,000 )             --         (615,000 )           0 %
Other income (expense)                     2,052           (8,847 )         10,899          (123 %)
Total Other Income (Expense)              55,598        1,416,948       (1,361,350 )         (96 %)

Net Loss                            $ (9,552,875 )   $ (5,888,170 )   $ (3,664,705 )          62 %

Revenue generated during the nine months ended September 30, 2013 was $44,737, compared to $152,296 of revenue generated during the same period in 2012.
Quarterly revenues may be unpredictable as we are in various stages of product development and production trials with potential customers. We believe that a number of potential customers are at various stages of the commercialization process and there are positive indications (but no assurances) that such potential customers may commercialize the use of our halloysite or iron ore.

Total operating expenses for the nine months ending September 30, 2013 were $9,653,210 compared to $7,457,414 of expenses incurred during the same period in 2012, an increase of $2,195,796 or 29%. The increase was due primarily to a $850,187, or 33%, increase in exploration expense and a $1,373,051, or 30%, increase in general and administrative expense.

Exploration costs incurred during the nine months ended September 30, 2013 were $3,418,696 compared to $2,568,509 of costs incurred during the same period in 2012, an increase of $850,187 or 33%. The majority of our exploration expenses during the nine month period were related to the continued exploration activities at our Dragon Mine property and the mineralogical analysis of the material mined from the property. The primary drivers of the increase in exploration costs included a $250,096, or 35%, increase in mine employee wages due to the hiring of a new Research & Development Manager; an increase in the number of miners in 2013, and a higher wage rate instituted during the second half of 2012; a $241,778 increase in contract labor as we engaged a third party drilling company related to the exploration of other minerals during the first quarter of 2013; a $158,749, or 42%, increase in geological consulting and expenditures relating to mineral characterization; and a $182,665, or 137%, in contract testing of clay and iron drill samples and testing in the proppant arena.

General and administrative expenses incurred during the nine months ended September 30, 2013 totaled $5,978,976 compared to $4,605,925 of expense incurred during the same period in 2012, an increase of $1,373,051 or 30%. The largest component of the variance was an increase in noncash stock compensation expense of $1,719,555 mainly due to equity options granted by the Board to certain members of management in November 2012, followed by increases in health and Directors and Officers insurance expense of $131,407; an increase in legal services expense of $31,325 relating to patent work performed; $40,353 of increased travel expense for increased trips to the mine; and an increase in corporate rent of $25,604 as the Company moved its corporate office to accommodate additional employees. The increase in general and administrative expense was partially offset by a $612,700 decline in employee and consultant compensation expense resulting from a $750,000 bonus paid to management during the first quarter of 2012, partially offset by increases in compensation and benefits related to the hiring of a new CFO.

Net Loss for the nine month period ended September 30, 2013 was $9,552,875 compared to a loss of $5,888,170 incurred during the same period in 2012, an increase of $3,664,705 or 62%. The increase in the Net Loss was due to a $1,361,350 decrease in Other Income, primarily from a noncash revaluation of warrants and PIK Notes, a $107,559 decrease in revenue, and a $2,195,796 increase in operating expenses, as described above.


Table of Contents
LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred material recurring losses from operations while in the process of developing and commercializing halloysite clay and iron oxide. At September 30, 2013, we had a total accumulated deficit of $58,311,321. For the nine months ended September 30, 2013 and 2012, we sustained net losses from exploration stage of $9,552,875 and $5,888,170, respectively. From December 2008 through June 2013, our activities have been financed primarily through the sale of convertible debt and equity securities. During the first quarter of 2013, the Company raised $5,560,000 of cash proceeds through the sale of common stock, and in August 2013, the Company raised $10,500,000 of financing through the private placement of 10% Mandatorily Convertible PIK Notes due 2023. We believe that we have sufficient resources to fund operations for the next 12 months and are continuing to evaluate our strategic direction aimed at achieving profitability and positive cash flow.

Cash used in operating activities during the nine months ended September 30, 2013 was $6,238,464 compared to $5,196,791 of cash used during the same period in 2012. The $1,041,673 increase in cash used during the period was due primarily to a higher net loss realized during the nine months ended September 30, 2013 as the Company added key corporate and mining personnel, conducted additional drilling operations and conducted various testing and research relating to the commercialization of its halloysite clay, as discussed in Results of Operations.

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