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EX-32.1 - 906 CERT CEO - Mindesta Inc.ex32_1.htm
EX-32.2 - 906 CERT CFO - Mindesta Inc.ex32_2.htm
EX-31.2 - 302 CERT CFO - Mindesta Inc.ex31_2.htm
EX-31.1 - 302 CERT CEO - Mindesta Inc.ex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended March 31, 2011

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission File Number 000-30651

INDUSTRIAL MINERALS, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

Delaware                                      11-3763974
--------------------------                    --------------------------------
(State or other jurisdiction                  (IRS Employer of incorporation or
organization)                                Identification No.)

Suite 201, 290 Picton Ave., Ottawa, Ontario, Canada K1Z 8P8
----------------------------------------
(Address of principal executive offices)

(613) 241-9959
---------------------------
(Issuer's telephone number)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
 
Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company”. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer o          Accelerated Filer o
Non-accelerated Filer   o           Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
                                 Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 
 

 

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o

Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: May 16, 2011: 177,701,614 shares.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This document contains “forward-looking statements” which reflect management’s expectations regarding the Company’s future growth, results of operations, performance and business prospects and opportunities.  Such forward-looking statements may include, but are not limited to, statements with respect to the future financial or operating performance of the Company and its projects, the future price of graphite or other metal prices, the estimation of Mineral Resources, the timing and amount of estimated future production, costs of production, capital, operating and exploration expenditures, costs and timing of the development of new deposits, costs and timing of future exploration, requirements for additional capital, government regulation of mining operations, environmental risks, reclamation expenses, title disputes or claims, limitations of insurance coverage and the timing and possible outcome of regulatory matters. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, or “believes” or variations (including negative variations) of such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others: general business, economic, competitive, political and social uncertainties; the actual results of current exploration activities; conclusions of economic evaluations; fluctuations in currency exchange rates; changes in project parameters as plans continue to be refined; changes in labor costs or other costs of production; future prices of graphite or other industrial mineral prices; possible variations of mineral grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labor disputes and other risks of the mining industry, including but not limited to environmental hazards, cave-ins, pit-wall failures, flooding, rock bursts and other acts of God or unfavorable operating conditions and losses; delays in obtaining governmental approvals or financing or in the completion of development or construction activities; actual results of reclamation activities, and other unspecified factors. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date hereof and the Company disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

CAUTIONARY STATEMENT REGARDING MINERAL RESOURCES
 
This Quarterly Report on Form 10-Q and other information released by the Company uses the terms “resources”, “measured resources”, “indicated resources” and “inferred resources”. United States investors are advised that, while such terms are recognized and required by Canadian securities laws, the SEC does not recognize them. Under United States standards, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Mineral resources that are not mineral reserves do not have demonstrated economic viability. United States investors are cautioned not to assume that all or any part of measured or indicated resources will ever be converted into reserves. Inferred resources are in addition to measured and indicated resources. Further, inferred resources have a great amount of uncertainty as to their existence and as to whether they can be mined legally or economically. It cannot be assumed that all or any part of the inferred resources will ever be upgraded to a higher category. Therefore, United States investors are also cautioned not to assume that all or any part of the inferred resources exist, or that they can be mined legally or economically. National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”) is a rule developed by the Canadian Securities Administrators, which established standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Unless otherwise indicated, all resource estimates contained in this Form 10-Q and in press releases by the Company in the past and in the future, have been or will be prepared in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy and Petroleum Classification System. The requirements of NI 43-101 are not the same as those of the SEC.
 
PART I - FINANCIAL INFORMATION

Item 1 - FINANCIAL STATEMENTS

For financial information see the financial statements and the notes thereto, attached hereto and incorporated by this reference. The financial statements have been adjusted with all adjustments which, in the opinion of management, are necessary in order to make the financial statements not misleading.

 
 

 

The financial statements have been prepared by Industrial Minerals, Inc. without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These financial statements include all the adjustments which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the audited financial statements as at December 31, 2010, included in the Company's Form 10-K.

 
 

 

Industrial Minerals, Inc.
 
(an exploration stage company)
 
Balance Sheets
 
             
   
As at
   
As at
 
   
March 31
   
December 31
 
   
2011
   
2010
 
      $       $  
   
( note 1)
   
(note 1)
 
    (unaudited)           
 Assets
 
 
         
 Current
               
Cash
    396,014       46,191  
Receivables
    151       165,854  
Due from related party (note 8)
    506,734       -  
Prepaid expenses and deposits
    10,271       174,570  
Deferred costs
    -       133,047  
Total current assets 
    913,170       519,662  
 Investments in non-consolidated affiliates (note 3)
    4,691,135       -  
 Reclamation deposit (note 6)
    -       316,218  
 Fixed assets
    -       426,396  
 Total assets
    5,604,305       1,262,276  
                 
 Liabilities
               
 Current
               
 Accounts payable and accrued liabilities
    128,130       746,695  
 Accrued interest payable
    -       -  
 Other payable
    105,000       48,016  
 Loans payable (note 7)
    -       150,000  
 Total current liabilities
    233,130       944,711  
 Asset retirement obligations (note 6)
    -       316,219  
Total liabilities
    233,130       1,260,930  
                 
Stockholders’ equity
               
Common stock 200,000,000 shares authorized, $0.0001  par value; 177,701,614 shares  issued and outstanding
    17,767       17,767  
 Additional paid-in capital
    12,228,245       12,228,245  
 Accumulated other comprehensive income
    (105,985 )     (105,985 )
 Deficit accumulated during exploration stage
    (6,768,852 )     (12,457,916 )
      5,371,175       (317,889 )
 Non-controlling interest (note 3)
    -       319,235  
Total stockholders' equity
    5,371,175       1,346  
                 
 Total liabilities and stockholders' equity
    5,604,305       1,262,276  
 See accompanying notes to financial statements
               
 
 
Approved by Board:
(signed) Gregory Bowes
(signed) Cam Birge
 
Director
Director
 
 


 
 
1

 



Industrial Minerals, Inc.
 
(an exploration stage company)
 
Statements of Operations and Retained Deficit
 
       
   
3 months ended March 31
 
   
2011
   
2010
 
      $       $  
   
(note 1)
   
(note 1)
 
   
(unaudited)
   
(unaudited)
 
General and administrative expenses
               
Professional fees
    9,548       17,212  
Royalties
    -       12,969  
Depreciation and amortization
    -       26,001  
Management fees and salaries (note 8)
    7,634       108,485  
Exploration expense
    -       719  
General and administration
    9,676       14,791  
      26,858       180,177  
                 
Loss from operations
    (26,858 )     (180,177 )
Interest and other income
    -       -  
Foreign exchange loss
    (3 )     (53,367 )
Gain on debt settlement
    -       4,359  
Net loss
    (26,860 )     (229,185 )
Net loss attributable to non-controlling interest
    -       25,974  
Gain on deconsolidation (note 2)
    6,035,839       -  
Equity loss pick-up
    (259,915 )     -  
Loss on revaluation of debt
    (60,000 )     -  
Net gain (loss) attributable to the company
    5,689,064       (203,211 )
Retained earnings (deficit) beginning of period
    (12,457,916 )     (11,359,994 )
Retained earnings (deficit) end of period
    (6,768,852 )     (11,563,205 )
                 
Net gain (loss) per share - basic and diluted
    0.03       (0.00 )
Weighted average number of common shares
outstanding – basic and diluted
    177,701,614       163,248,416  
See accompanying notes to financial statements
 
 

 
 
 
2

 

Industrial Minerals, Inc.
 
(an exploration stage company)
 
Consolidated Statements of Cash Flows
 
       
   
3 months ended March 31
 
   
2011
   
2010
 
      $       $  
   
(note 1)
   
(note 1)
 
   
(unaudited)
   
(unaudited)
 
 Cash provided by (used in)
               
 Operating activities
               
 Net gain (loss) attributable to the company
    5,689,064       (203,211 )
 Depreciation and amortization
    -       26,001  
 Stock-based compensation
    -       10,590  
 Loss on debt settlement
    -       4,359  
 Net loss attributable to non-controlling interest
            (25,974 )
 Gain on deconsolidation
    (6,035,839 )     -  
 Equity loss pick-up
    259,915       -  
 Loss on amounts due to related party
    60,000       -  
 Changes in non-cash operating working capital:
               
Prepaid expenses and deposits
    6,163       -  
Accounts payable and accrued  liabilities
    9,177       54,532  
      (11,520 )     (133,704 )
                 
 Financing activities
               
 Proceeds from issuance of notes
    -       132,922  
 Due to related party
    -       3,069  
 Net proceeds from sale of common stock of subsidiary
    -       1,789,569  
 Loan repayments
    -       (236,856 )
      -       1,688,704  
Effect of exchange rates on cash
            15,482  
                 
 Investing activities
               
  Due from related party
    (597,866 )     (6,773 )
 Proceeds from sale of investment
    1,005,400       -  
      407,534       (6,773 )
                 
 Net increase in cash
    396,014       1,563,709  
 Cash, beginning of period
    -       271,168  
 Cash, end of period
    396,014       1,834,877  
                 
 Non-cash transactions
               
 Shares issued for settlement of debt
    -       -  
                 
 Supplementary information
               
  Interest paid
    -       -  
  Income taxes paid
    -       -  
See accompanying notes to financial statement


 
 
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NOTE 1 - BASIS OF PRESENTATION

The interim financial statements of Industrial Minerals, Inc. (the “Company”), for the period ended March 31, 2011 and the notes thereto (the “Financial Statements”) have been prepared in accordance with generally accepted accounting principles for the interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, the Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of only normal accruals) considered necessary for a fair presentation have been included.

For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10K for the year ended December 31, 2010.

The Company's fiscal year-end is December 31.

For Three Months Ended March 31, 2011

The Company consolidated the results of Northern Graphite Corporation (“Northern”) in its financial statements up until December 31, 2010.  As of January 7, 2011, the Company determined that it would no longer consolidate Northern in its financial statements for the period ending March 31, 2011. Accordingly, the Company deconsolidated Northern from the financial statements effective January 7, 2011 and the financial statements for the period ending March 31, 2011 are presented on a non-consolidated basis whereas the comparative financial statements for the period ending December 31 and March 31, 2010 are presented on a consolidated basis.
 
Exchange Rates & U.S. Dollar

All assets and liabilities are translated using period-end exchange rates. Statements of operations items are translated using average exchange rates for the period. The resulting translation adjustment is recorded within accumulated other comprehensive loss, a separate component of stockholders' equity. Foreign currency transaction gains and losses are recognized in the consolidated statements of operations, including unrealized gains and losses on short-term inter-company obligations using period-end exchange rates. Unrealized gains and losses on long-term inter-company obligations are recognized within accumulated other comprehensive loss, a separate component of stockholders' equity.

Exchange gains and losses are primarily the result of fluctuations in currency rates between the U.S. dollar (the functional reporting currency) and the Canadian dollar (currency of the Company’s foreign subsidiary), as well as their effect on the dollar denominated inter-company obligations between the Company and its foreign subsidiary. All inter-company balances are revolving in nature and are not deemed to be long-term balances. For the three months ended March 31, 2011 and 2010, foreign currency losses of $3 and $53,367, respectively, were recognized.

NOTE 2 – ORGANIZATION AND ACCOUNTING POLICIES

(a)
Organization

The Company was incorporated on November 6, 1996, as Winchester Mining Corporation in the State of Delaware. On May 13, 2000, in connection with its merger with Hi-Plains Energy Corp. the Company changed its name from Winchester Mining Corporation to PNW Capital, Inc. On January 31, 2002, the Company acquired 91% of the outstanding shares of Industrial Minerals, Inc. On May 2, 2002, the Company merged the remaining 9% of Industrial Minerals, Inc. into PNW Capital, Inc. and changed its name to Industrial Minerals, Inc.  Operations are carried out through the Company’s subsidiary and principal asset, Northern Graphite Corporation (“Northern”), formerly Industrial Minerals Canada Inc. Northern owns a 100% interest in the Bissett Creek graphite property located in Renfrew County in the Province of Ontario, Canada (the “Bissett Creek Property”).As a result of a number of financings and other transactions completed in 2010, the Company’s interest is Northern was reduced from 100% to 51.2% as at December 31, 2010.  As at January 7th, 2011, the Company sold 2,000,000 shares of Northern Graphite, reducing its ownership interest to 42.51%.  Subsequent to March 31, 2011, Northern completed an initial public offering which further reduced the Company’s ownership to 31.5% (see note 9).

(b)
Accounting Policies

This summary of significant accounting policies of Industrial Minerals, Inc. is presented to assist in understanding the Company's financial statements. The Financial Statements are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the Financial Statements.


 
 
4

 


In August 2009, the FASB issued guidance on the fair value measurement of liabilities and provided clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The guidance is effective for the first reporting period, including interim periods, beginning after issuance. The Company adopted the provisions of this standard effective January 1, 2010 which did not have a material impact on the Company’s Financial Statements.

In December 2009, the FASB issued guidance changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design; and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company adopted the provisions of this standard effective January 1, 2010 which did not have a material impact on the Company’s Financial Statements.

In January 2010, the FASB issued guidance improving disclosures about fair value measurements. The guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in the ASC. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the guidance now requires:  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, the guidance clarifies the requirements of the following existing disclosures: For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the provisions of this standard on January 1, 2010 which did not have a material impact on the Financial Statements.

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SECs literature. All of the amendments in the ASU were effective upon issuance except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements position or results of operations.

(c)
Principals of Consolidation

As a result of the Company having reduced its ownership of Northern to an amount less than majority ownership as at January 7th, 2011, the Company deconsolidated its interest in Northern Graphite and has presented its ownership in Northern according to the equity method of accounting for the three months ended March 31, 2011. As a result, the interim financial statements of the Company, for the period ended March 31, 2011 and the notes thereto have been prepared on a non-consolidated basis whereas the financial statements and interim financial statements of the Company, for the periods ending December 31, 2010 and March 31, 2010 and the notes thereto have been prepared on a consolidated basis.

In June 2009, the FASB issued authoritative guidance (which was codified into ASC Topic 810, "Consolidation" with the issuance of ASU No. 2009-17) that requires a primarily qualitative analysis to determine if an enterprise is the primary beneficiary of a variable interest entity. This analysis is based on whether the enterprise has (a) the power to direct the activities of the variable interest entity that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  In addition, enterprises are required to more frequently reassess whether an entity is a
 
 
 
5

 

variable interest entity and whether the enterprise is the primary beneficiary of the variable interest entity.  In accordance with this guidance, the Company has determined that it has no obligation to absorb losses of Northern Graphite Corporation ("Northern Graphite") or the right to receive benefits from Northern that could potentially be significant to the variable interest entity and accordingly, Northern was deconsolidated in January of 2011 and is being accounted for under the equity method of accounting. The deconsolidation of Northern resulted in a decrease in assets, liabilities and noncontrolling interest as of January 1, 2011 of $1,205,663, $1,084,783 and $319,235, respectively. These changes included the deconsolidation of: (a) mine reclamation deposit totaling $316,218; (b) property, plant and equipment, net totaling $426,396; and (c) asset retirement obligation liabilities totaling $316,218.  The Company recognized a gain on its deconsolidation of $6,035,839.  The portion of this gain related to the remeasurement of retained investment in Northern related to its fair value was $4,811,588.    Fair value was determined using the share price of $0.50 received in proceeds in the Company’s sale of shares in the deconsolidation transaction with a non-related party.  Additionally, as a result of Industrial Minerals’ investment in Northern Graphite being accounted for under the equity method, an investment of $11,069,565 was recorded on January 1, 2011.

The Company accounts for non-marketable investments using the equity method of accounting if the investment gives it the ability to exercise significant influence over, but not control of, an investee. Significant influence generally exists if there is an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for additional investments and their proportionate share of earnings or losses and distributions. The Company records its share of the investee’s earnings or losses in earnings (losses) from unconsolidated entities, net of income taxes, in its consolidated statements of operations. Equity investments of less than 20% are stated at cost. The cost is not adjusted for its proportionate share of earnings or losses. The Company evaluates its equity method investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, the Company compares fair value of the investment to its carrying value to determine whether impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline to be other than temporary, the excess of the carrying value over the estimated fair value is recognized as impairment in the consolidated financial statements.

Investments in non-consolidated affiliates consist of the Company’s ownership interests in Northern Graphite Corporation.

NOTE 3 – INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

On January 7, 2011, the Company sold 2,000,000 common shares of Northern for CDN $0.50 per share and realized total proceeds of CDN$1,000,000.  After the deconsolidation of Northern resulting from this transaction, the Company used these funds to support Northern and keep work going on the Bissett Creek Property pending the completion of Northern’s initial public offering.  As the initial public offering has been completed subsequent to March 31, 2011, this funding is no longer required and all related debt has been settled (see note 9).

As at March 31, 2011, the Company owns 9,750,000 common shares of Northern which represents a 42.5% interest.  If all warrants were exercised Northern would receive an additional C$3,544,450 and the Company’s interest in Northern would be 28.6%.

Investment
$
Balance at December 31, 2010
11,069,565
Proceeds from sale of investment
(1,005,400)
Retained deficits of Northern Graphite
(11,148,954)
Gain on deconsolidation
6,035,839
Equity pickup for three months ending March 31, 2011
(259,915)
Balance at March 31, 2011
4,691,135

NOTE 4 - PRESENTATION OF INTERIM INFORMATION

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, include all normal adjustments considered necessary to present fairly the financial position as of March 31, 2011 and the results of operations and cash flows for the three month periods ended March 31, 2011 and 2010. Interim results are not necessarily indicative of results for a full year.

The financial statements and notes are presented as permitted by Form 10-Q, and do not include information included in the Company's audited consolidated financial statements and notes for the year ended December 31, 2010.



 
 
6

 

NOTE 5 - COMMON STOCK OPTIONS

The Company adopted ASC 718 (formerly SFAS 123) “Stock-Based Compensation”, effective April 1, 2007. Compensation cost for the Company’s stock options have been determined in accordance with the fair value based method prescribed as ASC 718. The fair value of option grants is estimated on the date of grant utilizing the Black-Scholes option pricing model. The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model.

On September 20, 2010, the Company granted stock options to purchase 9,000,000 common shares at a price of $0.015 per share until September 20, 2015.  All options vested immediately.  The fair value of the option grant was estimated using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 220%; risk-free interest rate of 2.24%; and an expected term of 5 years.

The following table summarizes stock option activity for the 3 months ended March 31, 2011:

Equity compensation plans not approved by security
holders
Number of securities to be
issued upon exercise of
outstanding options
Weighted-average exercise
price of outstanding options
Outstanding December 31, 2010 and March 31, 2011
9,000,000
$0.015

Exercisable at March 31, 2011 - 9,000,000.

Using the Black-Scholes option pricing model, the Company had stock compensation expense for the year ending December 31, 2010 of $154,408.   No stock-based compensation expense was incurred in the three month period ended March 31, 2011.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Mine Development and Closure
 
A Mine Development and Closure Plan for Northern has been filed with, and accepted by, the Ministry of Northern Development and Mines (“MNDM”), in accordance with the MINING ACT, R.S.O. 1990, Ontario Regulation 240/00, including the standards, procedures and requirements of the Mining Code of Ontario. As the Company no longer consolidates the operations of Northern, no amount has been accounted for as a long term deposit as at March 31, 2011. A financial assurance in the amount of $316,218 was accounted for as a long term deposit as at December 31, 2010.  Northern had paid this amount to the Minister of Finance for the Province of Ontario. This financial assurance represents the estimated amount that would be required to restore the Bissett Creek Property to its original environmental state. The money pledged for this financial assurance will be returned to Northern once the MNDM is satisfied that the obligations contained in the Mine  Development and Closure Plan have been performed. Should Northern not perform its obligations contained in the Mine Development and Closure Plan the MNDM will restore the Bissett Creek Property to its original environmental state using the assurance and Northern will be responsible for any costs in excess of this amount.
 
NOTE 7 – NOTES AND LOANS PAYABLE
 
During the three months ended March 31, 2011, there were no transactions involving notes and loans payable. As the Company no longer consolidates the operations of Northern, no amount has been accounted for as a note or loan payable as at March 31, 2011.
 
NOTE 8 – RELATED PARTY TRANSACTIONS

During the 3 months ended March 31, 2011:

a) The Company and Northern entered into an intercompany revolving loan agreement whereby all amounts due from Northern to the Company would be provided under a $600,000 credit facility which is repayable in two years, unless an initial public offering of at least $3,000,000 is completed by Northern before such date.  In this case, Industrial could demand repayment immediately.  The credit facility bore interest from March 1st, 2011 at an annual rate of 7.5 per cent and was payable annually, or earlier at any time that the credit facility is repaid in full.  As at March 31, 2011, Northern had drawn $506,734 on this agreement.

b) The Company expensed management fees to directors and to companies controlled by directors of $7,634 (2010 – $47,555).

As at March 31, 2011, accounts payable and accrued liabilities included $7,634 (December 31, 2010 - $141,961) due to directors and to companies controlled by directors for professional management fees related to the services of the directors and officers.


 
 
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NOTE 9 – SUBSEQUENT EVENTS

Northern filed a preliminary prospectus on September 10, 2010 with the securities regulatory authorities in the provinces of Ontario, British Columbia and Alberta in connection with a proposed initial public offering (“IPO”) of Northern’s common shares consisting of a minimum of 2,000,000 and a maximum of 6,000,000 common shares at a price of $0.50. On April 7, 2011, Northern filed a Final Prospectus with securities regulatory authorities in the provinces of Ontario, Alberta and British Columbia and on April 18 closed the sale of 8,000,000 common shares at an issue price of CDN$0.50 per common share for gross proceeds of CDN$4,000,000. The Common Shares were conditionally approved for listing on the TSX Venture Exchange (the “TSXV”) and commenced trading on April 20, 2011 under the trading symbol “NGC”.   As a result of Northern’s IPO, the Company’s ownership of Northern was reduced to 31.5% as at April 18, 2011

Effective March 1st, 2011, the Company and Northern entered into intercompany revolving loan agreement whereby all amounts due from the Northern to the Company would be provided under a $600,000 credit facility which is repayable in two years, unless an initial public offering of at least $3,000,000 is completed by Northern before such date.  In this case, Industrial could demand repayment immediately.  The credit facility bore interest from March 1st, 2011 at an annual rate of 7.5 per cent and was payable annually, or earlier at any time that the credit facility is repaid in full. This debt and the related interest were settled as at April 26th, 2011.

On April 19, 2011 Douglas Perkins, who joined the Board of Directors effective the same date, was granted 2,250,000 options to purchase common shares at a price of $0.07 per share for a period of five years.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Unaudited

Overview
Industrial Minerals, Inc. (“IMI” or "the Company"), a Delaware Corporation, was incorporated on November 6, 1996 under the name Winchester Mining Corp. The name of the Company was changed to PNW Capital, Inc. on May 16, 2000.  In 2002, PNW Capital, Inc. acquired Industrial Minerals Incorporated, a private Nevada Corporation, and changed its name to Industrial Minerals, Inc.

The Company is an exploration stage company.  The Company’s sole asset and entire focus is its 31.5% interest in Northern Graphite Corporation (“Northern”).  Northern holds a 100% interest in a number of mineral claims and a mining lease covering a deposit of natural graphite located in Maria Township, approximately 180 miles northeast of Toronto, Ontario and near  the town of Bissett Creek (the “Bissett Creek Property”).  The Bissett Creek Property is subject to a C$20 per ton royalty on graphite concentrate produced which includes an annual advance royalty C$27,000.  A 2.5% net smelter return royalty is payable with respect to any other minerals produced from the Bissett Creek Property.

In August 2004, Northern received notice from the Ministry of Northern Development and Mines (“MNDM”) for the Province of Ontario that the Bissett Creek Property Certified Closure Plan as per Subsection 141(3)(a) of the Mining Act for the Province of Ontario was considered filed. Accordingly, Northern was authorized to begin mining graphite from the Bissett Creek Property and to produce graphite using a dry recovery process.  A small plant was built but the dry recovery process was not successful and commercial production was never achieved.  The Bissett Creek Property was put on care and maintenance in 2005.  In the latter part of 2009 and in the first quarter of 2010 Northern raised additional financing which had the effect of reducing the Company’s interest in Northern from 100% to approximately 51%.  Subsequent to the end of 2010 the Company’s interest was reduced to 31.5% as the result of it selling 2,000,000 Northern shares and of Northern completing an initial public offering of shares and becoming listed on the TSX Venture Exchange.  These transactions have enabled the Company and Northern to deal with serious debt and creditor issues and to move the Bissett Creek Property forward.  Northern initiated the environmental and mine permitting process, metallurgical testing, infill and exploration drilling and a prefeasibility study, and completed exploration and infill drilling, with the objective of being in a position to make a construction decision, subject to financing and the receipt of all regulatory approvals, in late 2011 or the first part of 2012.

From 2004 until late 2009 the Company experienced serious financial difficulties and went through many changes to the Board and management.  For the fiscal year commencing January 1, 2008, the Board of Directors was comprised of William Thomson, William Booth and Robert Dinning. Mr. Thomson, who was also Chairman of the Company, resigned on June 20, 2008 and Mr. Booth, an independent director resigned on July 9, 2008. The President of the Company, David Wodar, who was appointed July 9, 2007, resigned on June 12, 2008. He was replaced as acting President by COO Paul Cooper who also subsequently resigned.  Chris Crupi CA and Gregory Bowes, MBA, were appointed


 
 
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directors of the Company and Mr. Robert Dinning CA was appointed President and CEO on June 23, 2008. Mr. Robert Dinning CA continued as a director and was also reappointed CFO effective June 23, 2008. Mr. Dinning was originally appointed CFO and Director September 15, 2006. In May 2009, Gregory Bowes was appointed as CEO of Northern.  Robert Dinning resigned as a director and CFO of Northern effective April 1, 2010 and resigned as a director, CEO and CFO of the Company effective May 10, 2010. Miles Nagamatsu CA was appointed CFO of Northern on April 1, 2010 and Gregory Bowes was appointed CEO and CFO of the Company effective May 10, 2010.  Cam Birge was appointed a director to replace Mr. Dinning, on June 3, 2010. Chris Crupi resigned as a director effective August 18, 2010.

Under the mandate of the restructured Board of Directors, the Company significantly reduced its monthly operating expenses and focused its efforts on settling payables, reducing debt, raising financing and developing a plan to move the Bissett Creek Property forward.

On October 27, 2008, the Company engaged RBC Capital Markets (“RBC”) as exclusive financial advisor with respect to strategic options facing the Company including the potential sale of the Company, investment by a third party, and an amalgamation, arrangement, or other business transaction.  By mutual consent, the agreement was terminated in June 2009.

In the fourth quarter of 2009 Northern raised C$465,000 in a non-brokered financing with various lenders, including a director of the Company, of senior secured convertible non-interest bearing notes (the “Notes”) to keep the Company solvent and pay the costs of attempting to raise financing and take Northern public in Canada. The Notes were secured by a security interest over all of the assets of Northern, including the Bissett Creek Property.  In the first quarter of 2010 the amount of the Notes was increased to C$600,000, they were converted into units of Northern as described below, and the security interest was released.

In addition to the Note financing, the Company announced on October 28, 2009, that Northern had entered into a letter of intent to effect a business combination with Rattlesnake Ventures Inc. (“RVI”) (the “Transaction”). The Transaction would constitute the Qualifying Transaction of RVI, a Capital Pool Company, and if completed would result in Northern becoming publicly listed on the TSX Venture Exchange. The agreement with RVI was terminated effective February 8, 2010. 

In conjunction with the Transaction, the Company also signed an engagement letter with Research Capital to complete, on a best efforts basis, a financing for Northern of up to C$6,000,000.  This financing was not completed and the agreement with Research Capital was terminated in December 2009.   

In March, 2010, Northern completed a number of non-brokered private placement financings consisting of the issuance of 7,327,000 units at a price of C$0.25 per unit, each unit being comprised of one common share and one common share purchase warrant exercisable at a price of C$0.35 per share for a period of 18 months from the date upon which Northern or its successor becomes a reporting issuer in a jurisdiction of Canada. Gross proceeds were C$1,831,750. In addition, Northern had increased the capital raised through the issuance of the Notes to C$600,000 and the Notes, pursuant to their terms, automatically converted into 3,428,571 units upon the closing of the private placements at a conversion price of $0.175 per unit, each unit consisting of one common share and one common share purchase warrant exercisable at a price of C$0.245 per share for a period of 18 months from the date upon which Northern or its successor becomes a reporting issuer in a jurisdiction of Canada. It has now been determined that the expiry date of the warrants issued in the Note and private placement financings is October 7, 2012.  In addition, Northern issued 400,000 units, with the same terms, as part of debt settlement agreements with three creditors.  During 2010, Northern issued an additional 31,354 common shares to settle various claims against the Company.

On May 11, 2010, Northern entered into an agency agreement with respect to a proposed initial public offering (“IPO”) of a minimum of 2,000,000 common shares and a maximum offering of 6,000,000 common shares at an issue price of CDN$0.50 per common share for gross proceeds of CDN$1,000,000 and CDN$3,000,000 respectively.  On September 10, 2010 Northern filed a Preliminary Prospectus with securities regulatory authorities in the provinces of Ontario, Alberta and British Columbia with respect to the proposed IPO.

However, the IPO was delayed because the British Columbia Securities Commission (“BCSC”) had issued a cease trade order (“CTO”) against the Company and the TSX Venture Exchange and the Ontario Securities Commission required that the CTO be revoked before approving the prospectus relating to Northern’s IPO and the listing application.  On September 15, 2008, the BCSC had designated the Company as a reporting issuer in British Columbia under BC Instrument 51-509 Issuers Quoted in the U.S. Over-the-Counter Markets, by virtue of the fact that the Company had a director resident in British Columbia.  As a result of technical disclosure issues and the fact that the Company had not filed a Technical Report within 45 days of issuing a press release announcing a mineral resource estimate and a preliminary assessment on the Bissett Creek Property, the BCSC issued the CTO on August 18, 2009.  The CTO was not dealt with due to the Company’s financial and management issues at the time.  As the cease trade order was in effect for longer than 90 days, the Company was considered a dormant issuer in British Columbia.  The Company first made application to the BCSC to revoke the cease trade order on October 19, 2010 and this process was completed effective March 10, 2011.


 
 
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On April 18, 2011 Northern announced that it had closed its IPO and issued the maximum of 8,000,000 common shares that were qualified for distribution under its final prospectus dated April 7, 2011 at a price of CDN$0.50 per share for gross proceeds of CDN $4,000,000.  Union Securities Ltd. acted as the agent for the IPO and received a commission of $280,000 in cash (being 7% of the gross proceeds of the IPO), reimbursement of its expenses in connection with the IPO and 560,000 compensation options to purchase the same number of common shares of Northern at a price of CDN $0.50 per share until April 18, 2012.  Northern began trading on the TSX Venture Exchange as a Tier 2 Mining Issuer on April 20, 2011 under the trading symbol “NGC”.

As a result of the various financing and debt settlement transactions, as at May 12, 2011, Northern has 30,948,225 common shares outstanding as well as 11,703,571 common share purchase warrants and 2,700,000 common stock options.

Subsequent to the end of 2010, the Company sold 2,000,000 common shares of Northern for CDN $0.50 per share and realized gross proceeds of CDN $1,000,000 in order to finance both companies during the period that Northern’s IPO was delayed due to the CTO.  The Company now owns 9,750,000 common shares of Northern which represents a 31.5% interest.  However, the Company recognizes that Northern will require substantial additional capital in the future to continue the development of the Bissett Creek Project.  While the Company is optimistic such capital can be obtained, there is no assurance that it will be available or available on terms that are attractive to the Company.

Effective April 19, 2011 Douglas Perkins joined the Board of Directors and was appointed Chairman of the Audit Committee.

Nature of Operations
Effective February 22, 2011 the Company and Northern filed an amended and restated technical report with respect to the Bissett Creek Property, prepared in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”).

In 2007, the Company had retained Geostat Systems International Inc. (now SGS Canada Inc.) (“SGS”), a qualified independent consultant, to prepare a technical report, including a preliminary economic assessment, on the Bissett Creek Property in accordance with NI 43-101 (the “2007 Technical Report”).  Due to financial difficulties experienced by the Company at the time, the 2007 Technical Report was not finalized and filed with applicable Canadian securities regulatory authorities, although the Company had issued certain press releases that summarized or referred to information from the 2007 Technical Report, including with respect to a mineral resource estimate and a preliminary assessment on the Bissett Creek Property.

As part of Northern’s proposed IPO, SGS subsequently prepared an updated technical report on the Bissett Creek Property dated July 16, 2010 (the “2010 Technical Report”), including 2010 price and cost estimates, which was filed on SEDAR by Northern and the Company in September 2010.  Following a review of the 2010 Technical Report by the BCSC, the report has been amended and restated as of February 2, 2011 and has been refiled and is available for review under the SEDAR profiles of the Company and Northern at www.sedar.com.

There are no material differences between the recommendations and conclusions contained in the 2007 Technical Report and those in the original 2010 Technical Report or the amended and restated 2010 Technical Report.  As a result of comments by the BCSC, the Company added additional disclosure relating to historical drilling results, assay procedures and the conversion of double LOI assay results to LECO assay equivalents for about 20 per cent of the drill database, independent verification of the graphite prices used, and corrected areas of identified technical non-compliance with NI 43-101.  Investors and shareholders should rely only on the amended and restated 2010 Technical Report and are cautioned that they should not place undue reliance on the 2007 Technical Report or the original 2010 Technical Report.

The 2010 Technical Report was prepared by Gilbert Rousseau, P.Eng. and Claude Duplessis, P.Eng. of SGS, who are the Qualified Persons responsible for the technical information contained in this press release.  A summary of the 2010 Technical Report is as follows:

 
SGS estimated that using a 1.5% graphitic carbon cut-off and 10% mining dilution, the Bissett Creek graphite deposit contains 14,641,000 tonnes of indicated resources grading 2.24% graphitic carbon and 18,027,000 tonnes of inferred resources grading 2.21% graphitic carbon. The deposit remains open along strike to the north and south and down dip to the east. Drill holes north of the current resources, which were not used in the estimate, intersected the same style and tenor mineralization.
 
The preliminary economic assessment contemplates a conventional open pit mining operation and flotation concentrator processing 2,500 tonnes of graphite bearing rock per day to produce an average of 18,500 tonnes of large flake, high purity (+92%C) graphite concentrate per year.  Recoveries are expected to average 94% and the waste to potentially economic mineralized rock ratio averages .66 to 1 over the 45 year project life.


 
 
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Capital costs are estimated at $62.9 million assuming contract mining.  Based on an average selling price of CDN $1,700 per tonne and using a 10% discount rate, the project has a pre-tax net present value of $77.6 million and an internal rate of return of 24%.  Mineral resources are not mineral reserves and do not have demonstrated economic viability.  There are no mineral reserves on the Bissett Creek Property.
 
The project is very sensitive to changes in prices.  With a 25% increase in prices the project has a pre-tax NPV of $154.6 million and an IRR of 37%.  At 25% lower prices the project has a pre-tax NPV of less than $1M but still has a 10% IRR.
 
75% of resources expected to be processed during the first 19 years of operation are in the indicated category and Bissett Creek would have a project life of approximately 17 years based on indicated resources alone.
 
The preliminary economic assessment includes inferred mineral resources which are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves.  Furthermore, there is no certainty that the results projected in the preliminary economic assessment will be realized and actual results may vary substantially.
 
A feasibility study on the Bissett Creek deposit was completed by Kilborn Engineering Ltd., KHD, Bacon Donaldson and Associates Ltd. and Cominco Engineering Services during the 1980s including metallurgical test work, pilot plant testing and bulk sampling. Historical information is presented for informational purposes only.  It was not completed in accordance with NI 43-101 and in accordance with NI 43-101, it should not be relied upon.
 
While past work predated NI 43-101, it is the opinion of SGS that it has significant value, and in conjunction with the results of the preliminary economic assessment, enabled SGS to recommend that the Company proceed with a prefeasibility study.  As part of the prefeasibility study, past metallurgical testing should be validated, an optimized flowsheet developed and infill drilling carried out to verify the block model and increase the quality of the resource.
 
There is no guarantee that additional drilling will upgrade inferred mineral resources to a higher category and there is no guarantee that the results of the prefeasibility study will be positive or will support a decision to initiate construction.
 
The 2010 Technical Report recommends a $1.25 million work program including $250,000 for a prefeasibility study, $500,000 for permitting and $100,000 for bench scale pilot plant testing.  The Company and SGS decided not to construct an on-site pilot plant due to the extensive metallurgical work done on the Bissett Creek Property in the past.

The proposed development plan at Bissett Creek relies on standard mining and processing technologies.  Because there are no major or unusual technical or engineering challenges the Company intends to make a production decision based on the results of the prefeasibility study.  If the results of the prefeasibility study are positive, the Company will begin detailed engineering and design work, order long lead time equipment and begin site preparation work, all subject to the availability of financing.  However, as part of the detailed engineering and design process the Company plans to produce an engineered cost estimate, similar in accuracy to a full feasibility study, which will enable the Company to confirm capital costs to a greater degree of precision before proceeding with full construction.

Northern began to implement the recommended work program in July, 2010 and has completed the drilling program at a cost of approximately $450,000 and has spent approximately $65,000 on metallurgical testing, $190,000 on the prefeasibility study and $300,000 on environmental and permitting.  In addition, Northern has spent in excess of $100,000 on hydrogeological drilling and $40,000 on an airborne topographical survey and its consultants have advised that the costs to complete the prefeasibility study and the environmental and permitting work are $250,000 and $220,000 respectively.  In addition, Northern plans to spend $250,000 on a pilot plant test in September of 2011 and $250,000 on a follow up drilling program.

Since the original completion of the Technical Report in July 2010 (and prior to its revision in February 2011), the Corporation has completed the exploration and infill diamond drilling program which consisted of approximately 2,900 meters of drilling in 51 holes.  22 holes were infill holes designed to confirm the existing resource model and to upgrade inferred resources to the indicated category.  29 holes were expansion holes which were drilled with the objectives of increasing the size of the resource and demonstrating the potential for further expansion in the future with more drilling.  All 51 holes were fairly consistently mineralized with graphite.  Potentially economic mineralization was intersected in 50 holes with widths and grades similar to historical drilling on the Bissett Creek Property.  Northern has not yet received all assays from the QA/QC program which are required before the actual drilling results can be verified by an independent QP and released. This summary of drilling results is provided by the Corporation and has been approved by Don Baxter, President who is the QP responsible for its technical content.

Once the new drill results have been compiled and analysed, the Corporation intends to carry out a small infill drill program to better define any new higher grade areas that have been identified so that they can be incorporated into the mine plan in the early years of operation.  It is expected that this program will consist of approximately 30 holes with an average depth of 50 meters for a total program of 1,500 meters.  The budget for this program is $225,000.

Metallurgical testing is underway at SGS Lakefield which is designed to confirm the results of extensive testing done in the past and to develop a flowsheet for a pilot plant that will be used as a basis for confirming and optimizing the flow sheet for a commercial scale mill on the Bissett Creek Property.  Initial results from the metallurgical testing have confirmed the historical high, 90 to 95%  recoveries of graphite that have been reported from the Bissett Creek Property but final testing is not yet complete.  Northern has booked space in the pilot plant at the SGS Lakefield facility in September and the product from the pilot plant will be supplied to potential customers for testing.  The budget for the pilot plant program is $250,000.



 
 
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Northern has engaged Knight Piesold Consulting to initiate the process of amending the current Mine Closure Plan for the Bissett Creek Property and obtain the necessary approvals to begin development of the Bissett Creek Property, subject to the prefeasibility study being completed and reaching a positive conclusion.  The Company and Northern anticipate receiving such approvals by the end of 2011 or early in 2012.  SGS has been retained to perform additional metallurgical testing and complete the prefeasibility study which are scheduled for completion in the second quarter of 2011.  The objective of the Company and Northern is to be able to make a construction decision in late 2011 or early 2012, subject to financing and the receipt of all regulatory approvals.

Future Plans
The Company is currently reviewing alternatives with respect to its investment in Northern including examining the most cost and tax efficient means of distributing its Northern shares to the Company’s shareholders.  This process requires the approval of the TSX Venture Exchange and will probably require filing a registration statement in the United States.

The Company also intends to hold a shareholders meeting in the next quarter and will propose, among other things, that the Company’s common shares be consolidated on a one for 20 basis and that the name of the Company.  This will position the Company to seek a new business opportunity and raise financing related thereto.

RESULTS OF OPERATIONS
For the three months ended March 31, 2011, the Company recorded a net gain attributable to the Company of $5,689,064, or $0.03 per share, compared to a net loss of $203,211 for the three months ended March 31, 2010, or $0.00 per share.  This net gain during the three months ending March 31st, 2011 resulted as the Company recognized a gain of $6,035,839 on the deconsolidation of its investment holdings.  This gain was due to the sale of 2,000,000 shares of Northern and the resultant decline in the Company’s interest below 50% which made it necessary for the Company to change its accounting treatment for the investment. The Company had no revenues for the period ended March 31 in both 2011 and 2010 as the Company is an exploration stage company with no source of revenues.

For the three months ended March 31, 2011, expenses amounted to $26,858 compared to $180,177 for the three months ended March 31, 2010.   There were higher expenses for the three months ended March 31, 2010 as the Company consolidated the results of Northern during this period.  Management fees and salaries declined to $7,634 for the three months ended March 31, 2011 compared to $108,485 for the three months ended March 31, 2010, primarily as a result of the deconsolidation of Northern in 2011.  Included in expenses for the three months ended March 31, 2010 was $154,408 in stock compensation expense.  The Company did not record any stock-based compensation expense for the three months ended March 31, 2011.  Professional fees decreased to $9,548 in the three months ended March 31, 2011 from $17,212 in 2010, as a result of the deconsolidation of Northern.

The Company currently has no full time employees.  It currently contracts with consultants for administrative and financial services

LIQUIDITY AND CAPITAL RESOURCES
The Company had cash as at March 31, 2011 of $396,014 versus $46,191 as at December 31, 2010 due to the sale of Northern shares.  On January 2, 2011, the Company sold 2,000,000 common shares of Northern for CDN $0.50 per share and realized total proceeds of CDN$1,000,000.  As a result of this sale, the Company’s interest in Northern Graphite was reduced to 42.5%.  The Company used these funds to support Northern and keep work going on the Bissett Creek Property pending the completion of Northern’s IPO.

In 2009, Northern raised C$465,000 in a non-brokered financing with various lenders, including a director of the Company, of senior secured convertible non-interest bearing notes (the “Notes”).  A first mortgage and security interest over all of the assets of Northern, including Bissett Creek was granted to 2221862 Ontario Inc., a company incorporated and controlled by a Director of the Company and of Northern, to hold the security on behalf of the Note holders as well as to hold the proceeds from sale of the Notes in trust, and to distribute such proceeds to Northern as required to cover the costs that were to be incurred in connection with a proposed transaction with RVI and the Research Capital financing and to pay existing and future expenses which were critical and necessary to keep Northern functional and solvent and protect its assets.  In the first quarter of 2010 the principal amount of the Notes was increased to C$600,000 to provide additional working capital, the Notes were converted to units of Northern pursuant to their terms and the completion of the private placements described herein, and the security interest was released.

On February 15, 2010 a lender agreed to a settlement of C$95,000 in cash plus 160,000 units of Northern as per the private placement terms, in settlement of loans payable plus accrued interest.  On February 15, 2010, the Company settled a loan payable of $161,000 through the issuance of a $150,000 non-interest bearing note with a term of one year. Subsequent to the end of the year, the $150,000 loan was extended for one year at an interest rate of 10% and is repayable in the event that Northern completes an IPO of at least CDN $2,000,000.  In addition, the lender received a cash payment of C$35,000 on other loans due plus 140,000 units of Northern as per the private placement terms.  Another loan payable of US$105,072 (C$110,000) plus accrued interest was settled through the payment of C$125,000 (US$119,400) plus the issuance of 100,000 units of Northern as per the private placement terms.


 
 
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An outstanding loan of $385,665 was settled through the issuance of 1,091,600 shares of the Company in the second quarter of 2010.  In the second quarter the Company also agreed to settle $83,195 in payables through the issuance of 1,500,000 common shares.  These shares have not yet been issued.

In March, 2010, Northern completed a number of non-brokered private placement financings consisting of the issuance of 7,327,000 units at a price of C$0.25 per unit, each unit being comprised of one common share and one common share purchase warrant exercisable at a price of C$0.35 per share for a period of 18 months from the date upon which Northern or its successor becomes a reporting issuer in a jurisdiction of Canada. Gross proceeds were C$1,831,750. In addition, Northern had increased the capital raised through the issuance of the Notes to C$600,000 and the Notes, pursuant to their terms, automatically converted into 3,428,571 units upon the closing of the private placement at a conversion price of $0.175 per unit, each unit consisting of one common share and one common share purchase warrant exercisable at a price of C$0.245 per share for a period of 18 months from the date upon which Northern or its successor becomes a reporting issuer in a jurisdiction of Canada. In addition, Northern issued 400,000 units, with the same terms, as part of debt settlement agreements with three creditors.  In the second quarter of 2010 Northern issued an additional 31,354 common shares to settle claims against the Company.

As a result of the private placements, the conversion of the Notes and the debt settlements, Northern issued a total of 11,186,925 common shares, and 11,155,571 common share purchase warrants, and has 30,948,225 common shares outstanding as at May 12, 2011.  The Company owns 9,750,000 common shares of Northern which represents a 31.5% interest as at May 12, 2011.  If all warrants were exercised Northern would receive an additional C$3,837,393 and the Company’s interest in Northern would be 22.9% as at May 12, 2011.

As at December 31st, 2010, the Company accounted for a long-term deposit that Northern has with the Ministry of Finance for the Province of Ontario to ensure that enough funds are available to affect the proper reclamation and closure of the Bissett Creek Property. The Company's initial deposit in 2004 amounted to C$288,363 and since that time accrued interest had increased the deposit to $316,219 as at December 31, 2010.   As of March 31, 2011, the Company no longer consolidates the operations of Northern and therefore, no longer accounts for this long-term deposit.

Effective March 1st, 2011, the Company and Northern entered an intercompany revolving loan agreement whereby all amounts due from Northern to the Company would be provided under a $600,000 credit facility. It is repayable in two years, unless an IPO of at least $3,000,000 is completed by Northern before such date.  In this case, the Company could demand repayment immediately.  The credit facility bears interest from March 1st, 2011 at an annual rate of 7.5 per cent and is payable annually, or earlier at anytime that the credit facility is repaid in full. As at March 31, 2011, Northern had borrowed  $506,734 from the Company under the terms  of their intercompany revolving loan agreement. Upon Northern having completed its IPO, this debt and the related interest were settled as at April 26th, 2011.

Although the Company currently has no revenue sources, the funding raised by the Company and through the sale of shares of Northern, is sufficient to pay operating and administrative costs for the time being.   In the future, the Company will require additional funding to continue operations and there is no assurance that such financing will be available or will be available on terms acceptable to the Company or Northern.

Going Concern Consideration
The Company's auditors in their report for the year ended December 31, 2010 have expressed a concern that the Company may not be able to continue as a going concern.  The Company had a net gain attributable to the Company of $5,689,064 and a loss from operations of $26,858 for the three months ended March 31, 2011.  The Company’s net gain for this three month period included a gain on deconsolidation of $6,035,839. The Company has had recurring losses and an accumulated deficit of $6,768,852 since inception.  The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital for operating and administrative costs. However, there is a high degree of risk and many inherent uncertainties in the natural resource development industry and management cannot provide assurances that it will be successful.

As of January 7th, 2011, the Company no longer has majority ownership of Northern.  On April 18, 2011, Northern completed its IPO and closed the sale of 8,000,000 common shares at an issue price of CDN$0.50 per common share for gross proceeds of CDN$4,000,000.  As at April 26th, 2011, the intercompany revolving loan agreement between Northern and the Company was settled.  The Company is no longer raising capital for the support of Northern.  The Company believes that it will continue to be able to raise additional funds from public or private debt or equity sources to continue to operate. If the Company cannot continue as a going concern the value of the Company's assets may approach a level close to zero. Investors should be cautioned that should the Company cease to operate the Company may only recover a small fraction of the original costs of its assets should a liquidation of the Company's assets occur. The accompanying financial statements do not include any adjustments that might result if the going concern assumption is not valid.


 
 
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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

IMI is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide information under this item.

Item 4.  CONTROLS AND PROCEDURES
 
At the end of the period covered by this report, an evaluation was carried out under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13(a) – 15(e) and Rule 15(d) – 15(e) under the Exchange Act). Based on that evaluation and in light of the discussion of the material weakness discussed below in the Management’s Report on Internal Control over Financial Reporting, the CEO/CFO has concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the CEO/CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.
 
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the CEO and implemented by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The evaluation of internal controls over financial reporting includes an analysis under the COSO framework, an integrated framework for the evaluation of internal controls issued to identify the risks and control objectives related to the evaluation of the control environment by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the evaluation described above, management has concluded that the Company’s internal control over financial reporting was not effective during the quarter ended March 31, 2011. Management has determined that (i) inadequate staffing and supervision, and the resulting ability of management to override internal control systems, and (ii) the significant amount of manual intervention required in the accounting and financial reporting process are material weaknesses in the Company’s internal control over financial reporting.

This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.

Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter and the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company has been named in a lawsuit filed by Windale Properties in the amount of C$19,781. The claim is the result of termination of leased premises in Oakville, Ontario prior to the expiry of the lease. Discussions regarding settlement have taken place.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS: None.

Item 3. DEFAULTS UPON SENIOR SECURITIES: None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None.


 
 
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Item 5. OTHER INFORMATION: None.

Item 6. EXHIBITS

EXHIBIT NO.             DESCRIPTION
 
 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
 32.1 CERTIFICATION OF DISCLOSURE BY CHIEF EXECUTIVE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 32.2 CERTIFICATION OF DISCLOSURE BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
          
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  May 16, 2011    INDUSTRIAL MINERALS, INC.
 
 
            By: /s/ Gregory Bowes
                                                   President and CEO


     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Dated:  May 16, 2011    INDUSTRIAL MINERALS, INC.
 
 
            By: /s/ Gregory Bowes
               Chief Financial Officer







 
 
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