Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - CTT PHARMACEUTICAL HOLDINGS, INC. | exhibit32-1.htm |
EX-31.1 - EXHIBIT 31.1 - CTT PHARMACEUTICAL HOLDINGS, INC. | exhibit31-1.htm |
EX-32.1 - EXHIBIT 32.2 - CTT PHARMACEUTICAL HOLDINGS, INC. | exhibit32-2.htm |
EX-31.2 - EXHIBIT 31.2 - CTT PHARMACEUTICAL HOLDINGS, INC. | exhibit31-2.htm |
EXCEL - IDEA: XBRL DOCUMENT - CTT PHARMACEUTICAL HOLDINGS, INC. | Financial_Report.xls |
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 June 30, 2011
OR
[ ] 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
MINDESTA 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 [ ]
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 [ ] 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 [ ] | Accelerated Filer [ ] |
Non-accelerated Filer [ ] | 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 [ ] 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 [ ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: August 10, 2011: 8,885,081 shares.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This document contains forward-looking statements which reflect managements expectations regarding the Companys 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 for the three and six month periods ended June 30, 2011 (the Financial Statements), 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 Mindesta 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. The 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. The 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.
Mindesta Inc.
(an exploration stage company)
Balance Sheets
|
As at | As at | ||||
|
June 30 | December 31 | ||||
|
2011 | 2010 | ||||
|
$ | $ | ||||
|
( note 1 | ) | (note 1 | ) | ||
Assets |
(unaudited) | |||||
Current |
||||||
Cash |
862,347 | 46,191 | ||||
Receivables |
151 | 165,854 | ||||
Due from related party (note 8) |
43,767 | - | ||||
Prepaid expenses and deposits |
3,944 | 174,570 | ||||
Deferred costs |
- | 133,047 | ||||
Total current assets |
910,209 | 519,662 | ||||
Investment in non-consolidated affiliate (note 3) |
4,013,658 | - | ||||
Reclamation deposit (note 6) |
- | 316,218 | ||||
Fixed assets |
- | 426,396 | ||||
Total assets |
4,923,867 | 1,262,276 | ||||
|
||||||
Liabilities |
||||||
Current |
||||||
Accounts payable and accrued liabilities |
400,865 | 746,696 | ||||
Accrued interest payable |
- | - | ||||
Other payable |
75,000 | 48,016 | ||||
Loans payable (note 7) |
- | 150,000 | ||||
Total current liabilities |
475,865 | 944,712 | ||||
Asset retirement obligations (note 6) |
- | 316,218 | ||||
Total liabilities |
475,865 | 1,260,930 | ||||
|
||||||
Stockholders equity |
||||||
Common stock 200,000,000 shares authorized, $0.0001 par value; 8,885,081 shares issued and outstanding (note 5) |
17,767 | 17,767 | ||||
Additional paid-in capital |
12,383,641 | 12,228,245 | ||||
Accumulated other comprehensive income |
(105,985 | ) | (105,985 | ) | ||
Deficit accumulated during exploration stage |
(7,847,421 | ) | (12,457,916 | ) | ||
|
4,448,002 | (317,889 | ) | |||
Non-controlling interest (note 3) |
- | 319,235 | ||||
Total stockholders' equity |
4,448,002 | 1,346 | ||||
|
||||||
Total liabilities and stockholders' equity |
4,923,867 | 1,262,276 |
See accompanying notes to financial statements
Approved by Board: | (signed) Gregory Bowes | (signed) Cam Birge |
Director | Director |
F4
Mindesta Inc.
(an exploration stage company)
Statements of Operations and Retained Deficit
|
3 months ended June 30 | 6 months ended June 30 | ||||||||||
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
$ | $ | $ | $ | ||||||||
|
(note 1 | ) | (note 1 | ) | ||||||||
|
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||
General and administrative expenses |
||||||||||||
Professional fees |
61,584 | 34,275 | 71,132 | 51,617 | ||||||||
Royalties |
- | - | - | 13,048 | ||||||||
Depreciation and amortization |
- | 24,512 | - | 50,510 | ||||||||
Management fees and salaries (note 8) |
161,629 | 90,495 | 169,264 | 202,174 | ||||||||
Exploration expense |
- | 167,610 | - | 167,610 | ||||||||
General and administration |
213,556 | 68,735 | 223,232 | 80,841 | ||||||||
|
436,769 | 385,627 | 463,628 | 565,800 | ||||||||
|
||||||||||||
Loss from operations |
(436,769 | ) | (385,627 | ) | (463,628 | ) | (565,800 | ) | ||||
Interest and other income |
5,700 | 1,125 | 5,700 | - | ||||||||
Foreign exchange loss |
(22 | ) | - | (24 | ) | (52,201 | ) | |||||
Gain on debt settlement |
- | 381,791 | - | 409,375 | ||||||||
Net loss |
(431,091 | ) | (2,711 | ) | (457,952 | ) | (208,626 | ) | ||||
Net loss attributable to non-controlling interest |
- | 1,328 | - | 30,359 | ||||||||
Gain on deconsolidation (note 2) |
- | - | 6,035,839 | - | ||||||||
Equity loss pick-up |
(677,477 | ) | - | (937,392 | ) | - | ||||||
Gain (loss) on revaluation of debt |
30,000 | - | (30,000 | ) | - | |||||||
Net gain (loss) attributable to the company |
(1,078,568 | ) | (1,383 | ) | 4,610,495 | (178,267 | ) | |||||
Retained earnings (deficit) beginning of period |
(6,768,853 | ) | (11,379,410 | ) | (12,457,916 | ) | (11,202,126 | ) | ||||
Retained earnings (deficit) end of period |
(7,847,421 | ) | (11,380,793 | ) | (7,847,421 | ) | (11,380,393 | ) | ||||
|
||||||||||||
Net gain (loss) per share - basic |
(0.12 | ) | (0.00 | ) | 0.52 | (0.02 | ) | |||||
Weighted average number of common shares outstanding basic (note 5) |
8,885,081 | 8,301,805 | 8,885,081 | 8,232,498 | ||||||||
Net gain (loss) per share fully diluted |
(0.12 | ) | (0.00 | ) | 0.49 | (0.02 | ) | |||||
Weighted average number of common shares outstanding fully diluted (note 5) |
8,885,081 | 8,301,805 | 9,379,832 | 8,232,498 |
See accompanying notes to financial statements
F5
Mindesta Inc.
(an exploration stage company)
Consolidated Statements of Cash Flows
|
3 months ended June 30 | 6 months ended June 30 | ||||||||||
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
$ | $ | $ | $ | ||||||||
|
(note 1 | ) | (note 1 | ) | ||||||||
|
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||
Cash provided by (used in) |
||||||||||||
Operating activities |
||||||||||||
Net gain (loss) attributable to the company |
(1,078,568 | ) | (1,383 | ) | 4,610,495 | (178,267 | ) | |||||
Depreciation and amortization |
- | 24,512 | - | 50,510 | ||||||||
Stock-based compensation |
155,396 | 10,590 | 155,396 | 21,180 | ||||||||
Gain on debt settlement |
- | (381,791 | ) | - | (409,375 | ) | ||||||
Net loss attributable to non-controlling interest |
- | (1,328 | ) | - | (30,359 | ) | ||||||
Gain on deconsolidation |
- | - | (6,035,839 | ) | - | |||||||
Equity loss pick-up |
677,477 | - | 937,392 | - | ||||||||
(Gain) loss on amounts due to related party |
(30,000 | ) | - | 30,000 | - | |||||||
Changes in non-cash operating working capital: |
||||||||||||
Receivables |
462,966 | (14,362 | ) | 121,937 | (21,135 | ) | ||||||
Prepaid expenses and deposits |
6,327 | (89,047 | ) | 170,626 | (89,047 | ) | ||||||
Accounts payable and accrued liabilities |
272,735 | 163,260 | (345,830 | ) | 213,967 | |||||||
|
466,333 | (289,549 | ) | (355,823 | ) | (442,526 | ) | |||||
Financing activities |
||||||||||||
Proceeds from issuance of notes |
- | - | - | 132,922 | ||||||||
Due to related party |
- | (191,411 | ) | - | (188,342 | ) | ||||||
Change in notes payable |
- | - | (150,000 | ) | - | |||||||
Net proceeds from sale of common stock of subsidiary |
- | - | - | 1,789,569 | ||||||||
Loan repayments |
- | - | - | (236,856 | ) | |||||||
|
- | (191,411 | ) | (150,000 | ) | 1,497,293 | ||||||
Effect of exchange rates on cash |
- | (29,032 | ) | (1,050 | ) | |||||||
Investing activities |
||||||||||||
Due from related party |
- | - | (3,017 | ) | - | |||||||
Change in investments |
- | - | 319,596 | - | ||||||||
Proceeds from the sale of shares of subsidiary |
- | - | 1,005,400 | - | ||||||||
|
- | - | 1,321,979 | - | ||||||||
|
||||||||||||
Net increase (decrease) in cash |
466,333 | (509,992 | ) | 816,156 | 1,053,717 | |||||||
Cash, beginning of period |
396,014 | 1,834,877 | 46,191 | 271,168 | ||||||||
Cash, end of period |
862,347 | 1,324,885 | 862,347 | 1,324,885 | ||||||||
|
||||||||||||
Non-cash transactions |
||||||||||||
Shares issued for settlement of debt |
- | - | - | |||||||||
|
||||||||||||
Supplementary information |
||||||||||||
Interest paid |
- | - | - | |||||||||
Income taxes paid |
- | - | - |
See accompanying notes to financial statements
F6
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements of Mindesta Inc. (the Company and formerly Industrial Minerals, Inc.), for the three and six month periods ended June 30, 2011 and the notes thereto (the Financial Statements) have been prepared in accordance with generally accepted accounting principles for 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 Six Months Ended June 30, 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 June 30, 2011 are presented on a non-consolidated basis whereas the comparative financial statements for the periods ending December 31 and June 30, 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 Companys 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 six months ended June 30, 2011 and 2010, foreign currency losses of $24 and $52,201, 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 have been carried out through the Companys 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 Companys interest is Northern was reduced from 100% to 51.2% as at December 31, 2010. On January 7th, 2011, the Company sold 2,000,000 shares of Northern and on April 18, 2011, Northern completed an initial public offering which reduced the Companys ownership to 30.9% as at June 30, 2011. Effective July 26, 2011, the Company changed its name to Mindesta Inc. and consolidated its stock on a 20:1 basis.
(b) Accounting Policies
This summary of significant accounting policies of Mindesta 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.
F7
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 Companys 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 entitys purpose and design; and the reporting entitys ability to direct the activities of the other entity that most significantly impact the other entitys 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 entitys financial statements. The guidance is effective at the start of a reporting entitys 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 Companys 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 FASBs 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 and has presented its ownership in Northern according to the equity method of accounting for the six months ended June 30, 2011. The interim Financial Statements of the Company, for the period ended June 30, 2011 and the notes thereto have therefore 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 June 30, 2010 and the notes thereto have been prepared on a consolidated basis.
F8
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 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 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 non-controlling 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 Companys sale of shares in the deconsolidation transaction with a non-related party. Additionally, as a result of Industrial Minerals investment in Northern 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 investees 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 managements 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 Companys ownership interest in Northern Graphite Corporation.
NOTE 3 INVESTMENT IN NON-CONSOLIDATED AFFILIATE
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 Northerns 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 June 30, 2011, the Company owns 9,750,000 common shares of Northern which represents a 30.9% interest. If all warrants were exercised Northern would receive an additional C$3,617,153and the Companys interest in Northern would be 22.9% .
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 six months ending June 30, 2011 | (937,392 | ) | |
Balance at June 30, 2011 | 4,013,658 |
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 June 30, 2011 and the results of operations and cash flows for the three and six month periods ended June 30, 2011 and 2010. Interim results are not necessarily indicative of results for a full year.
F9
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.
NOTE 5 STOCKHOLDERS EQUITY
A. COMMON STOCK OPTIONS
The Company adopted ASC 718 (formerly SFAS 123) Stock-Based Compensation, effective April 1, 2007. Compensation cost for the Companys 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 July 26, 2011, the Company consolidated its common stock on a 20:1 basis. All common stock numbers and stock option numbers have been restated to reflect the consolidation.
On September 20, 2010, the Company granted stock options to purchase 450,000 common shares at a price of $0.30 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.
On April 19, 2011, the Company granted stock options to purchase 112,500 common shares at a price of $1.40 per share until April 19, 2016. 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 2.09%; and an expected term of 5 years.
The following table summarizes stock option activity for the 6 months ended June 30, 2011:
Number of securities to be | ||||||
Equity compensation plans not approved by security | issued upon exercise of | Weighted-average exercise | ||||
holders | outstanding options | price of outstanding options | ||||
Outstanding December 31, 2010 | 450,000 | $ | 0.30 | |||
Issued | 112,500 | $ | 1.40 | |||
Outstanding at June 30, 2011 | 562,500 | $ | 0.52 |
Exercisable at June 30, 2011 562,500.
Using the Black-Scholes option pricing model, the Company had stock compensation expense for the year ending December 31, 2010 of $154,408. Stock-based compensation expense of $155,396 was incurred in the six month period ended June 30, 2011.
B. COMMON STOCK
The number of common shares outstanding for June 30, 2011 and December 31, 2010, before and after giving effect to the 20:1 stock consolidation was as follows:
Before giving effect to the | After giving effect to the 20:1 | |||||
As at: | 20:1 consolidation | consolidation | ||||
June 30, 2011 | 177,701,620 | 8,885,081 | ||||
December 31, 2010 | 177,701,620 | 8,885,081 |
The basic weighted average number of common shares outstanding before and after giving effect to the 20:1 stock consolidation was as follows:
Before giving effect to the | After giving effect to the 20:1 | |||||
For the three months ended: | 20:1 consolidation | consolidation | ||||
June 30, 2011 | 177,701,614 | 8,885,081 | ||||
June 30, 2010 | 166,036,100 | 8,301,805 | ||||
For the six months ended: | ||||||
June 30, 2011 | 177,701,614 | 8,885,081 | ||||
June 30, 2010 | 164,649,959 | 8,232,498 |
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The fully-diluted weighted average number of common shares outstanding before and after giving effect to the 20:1 stock consolidation was as follows:
Before giving effect to the | After giving effect to the 20:1 | |||||
For the three months ended: | 20:1 consolidation | consolidation | ||||
June 30, 2011 | 177,701,614 | 8,885,081 | ||||
June 30, 2010 | 166,036,100 | 8,301,805 | ||||
For the six months ended: | ||||||
June 30, 2011 | 187,596,640 | 9,379,832 | ||||
June 30, 2010 | 164,649,959 | 8,232,498 |
For the three months ended June 30, 2011, and for the three and six month periods ending June 30, 2010 the inclusion of common stock equivalents in the calculation of the weighted average number of shares is anti-dilutive.
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 June 30, 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 six months ended June 30, 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 June 30, 2011.
NOTE 8 RELATED PARTY TRANSACTIONS
During the six months ended June 30, 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. The debt of $697,768 and the related interest of $2,822 were settled as at April 26th, 2011.
b) The Company expensed management fees to directors and to companies controlled by directors of $13,867 (2010 $202,174).
As at June 30, 2011, accounts payable and accrued liabilities included $nil (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.
NOTE 9 SUBSEQUENT EVENT
Effective July 26, 2011, the Company adopted the new name of Mindesta Inc.. The Company was formerly known as Industrial Minerals, Inc. and traded under OTCBB: IDSM. In conjunction with this action, the Company consolidated its stock on a 20:1 basis. The Company has applied for a new ticker symbol and in the interim will be trading under the ticker symbol IDSMD for approximately 20 business days.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Unaudited
Overview
Mindesta Inc. (Mindesta 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. Effective July 26, 2011, the Company adopted the new name of Mindesta Inc.. In conjunction with this action, the Company consolidated its stock on a 20:1 basis.
The Company is an exploration stage company. The Companys sole asset and entire focus is its 30.9% 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.
The Bissett Creek Property was on care and maintenance from 2005 to 2010. In the latter part of 2009 and in the first quarter of 2010 Northern raised its own financing which had the effect of reducing the Companys interest in Northern from 100% to approximately 51%. The Companys interest has since been reduced to 30.9% 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 the serious debt and creditor issues that existed in 2009 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 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 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. On April 19, 2011, Douglas Perkins joined the Board of Directors and was appointed Chairman of the Audit Committee.
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.
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 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.
F12
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 Northerns 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 Companys 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.
In January of 2011, 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 Northerns IPO was delayed due to the CTO.
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.
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.
Nature of Operations
Effective February 22, 2011 the Company and Northern filed an amended and restated technical report with respect to the Bissett Creek Project, prepared in accordance with Canadian National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101).
Northerns sole focus is the potential development of the Bissett Creek Project. Northern has no other properties or rights to acquire other properties. Northern expects to complete a full bankable feasibility study (FS) for the Bissett Creek Project by the end of 2011. The FS will include metallurgical testing and a new resource estimate based on recent drilling. The environmental and mine permitting process is expected to be completed early in 2012 at which time Northern will be in a position to begin construction of a mine on the Bissett Creek Project, subject to positive results from the FS and the availability of capital to build a mine.
Don Baxter P.Eng is Northerns qualified person as that term is defined within National Instrument 43-101 and is responsible for and supervises all technical aspects of the Bissett Creek Project and the disclosure related thereto.
F13
The Bissett Creek Project
Northern holds a 100% interest in the Bissett Creek Project, which contains large crystal graphite flakes in a graphitic gneiss deposit that is approximately 15 km from the Trans-Canada Highway (Highway 17) and 53 kilometres east of Mattawa, Ontario, Canada. The Bissett Creek Project is located in the United Townships of Head, Clara and Maria, in the County of Renfrew, Province of Ontario, approximately 300 km north-northeast of Toronto, Canada.
The Bissett Creek Project consists of a Mining Lease, being Ontario mining lease number 106693 issued in 1993 for 21 years covering 564.6 hectares, and Mining Claims, covering 2,424 hectares for a total land coverage of 2,989 hectares with the well explored area being less than 100 hectares.
Royalties on the Bissett Creek Project include an annual advance payment of $27,000 to the three original prospectors that discovered the deposit which will be credited against a royalty of $20 per ton of concentrate on net sales once the mine is operational, and a 2.5% NSR on any other minerals derived from the Bissett Creek Property.
The Bissett Creek Project was extensively explored in the 1980s and over 8,400 metres of drilling was carried out. A full feasibility study was completed, including the calculation of a proven and probable reserve, but the Bissett Creek Project was not developed due to a subsequent decline in graphite prices. The feasibility study and reserve estimate pre-date NI 43-101 and are non-compliant. While historical information is presented for information purposes only and cannot be relied upon from a regulatory perspective, it represents a substantial body of work that has a great deal value in the FS process. The price of graphite has almost tripled since 2005 due to the ongoing industrialization of emerging economies which has led to demand growth in traditional steel and automotive markets. In addition, lithium-ion batteries, fuel cells and new nuclear technologies are all large users of graphite and have the potential to create substantial additional demand growth in the future. As a result, there is renewed interest in graphite projects.
In May 2007, the Company retained SGS Canada Inc., formerly and then named Systèmes Geostat International Inc. (SGS), to prepare a NI 43-101 compliant technical report on the Bissett Creek Project. In 2010 SGS updated their 2007 work and produced a technical report (the Technical Report) entitled Technical Report Preliminary Economic Assessment on the Bissett Creek Graphite Property of Industrial Minerals, Inc. & Northern Graphite Corporation dated July 16, 2010 and revised February 2, 2011. It was prepared by Gilbert Rousseau P.Eng and Claude Duplessis P.Eng of SGS, each of whom is an independent Qualified Person pursuant to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101). The Technical Report is available under the Companys profile at www.sedar.com.
Prospective investors should be aware that certain historical technical disclosure regarding the Bissett Creek Project by Industrial did not comply with NI 43-101 and should not be relied upon. Prospective investors should rely only on the information contained in the Companys Annual Information Form and the Technical Report.
Mineral Resource Estimate
The current resource estimate on the Bissett Creek Project is based on approximately 8,400m of drilling in 242 holes completed during the 1980s and six confirmation holes drilled in 2007.
Bissett Creek Project - Classified resources for public disclosure (Compliant to National Instrument 43-101)
Indicated Resources* | Inferred Resources* | |||||||
Graphitic | Graphitic | |||||||
% Graphitic | Carbon | Carbon | In Situ | |||||
Carbon | Tonnage | LOI** | LECO** | In Situ Graphite | Tonnage | LOI** | LECO** | Graphite |
Cut-Off | metric | % | % | (metric tonnes) | metric | % | % | (metric tonnes) |
1.5 | 14,641,000 | 3.19 | 2.24 | 327,700 | 18,027,000 | 3.19 | 2.21 | 397,900 |
Notes: Undiluted, Rounded numbers, & Specific Gravity 2.63 tonnes per cubic meter.
* Mineral Resources are not Mineral Reserves and they do not
have demonstrated economic viability.
** LOI is an assay technique
that measures the total carbon content of a sample. LECO is an assay technique
that measures the graphitic carbon content of a sample.
The base case above, represents resources above a 1.5% cut-off. Because the average selling price of the graphite was assumed to be $1,700 per tonne, the in situ cut-off is about $25.50 per tonne, which is suitable for open pit operations. The effective cut-off used in the preliminary assessment is 1.58% .
F14
The preliminary assessment in the Technical Report covers the technical and financial aspects of the Bissett Creek Project, including the construction and operation of milling facilities capable of processing 870,000 tonnes per year of graphite bearing rock. Annual production should be in the range of 18,500 tonnes of graphitic flakes, spread more or less in the three following size ranges: 30% +35mesh, 40% -35 to +48 mesh and 30% -48 mesh.
SGS’s conclusion is that development of the Bissett Creek deposit appears to be economically attractive. A discount rate of 10% yields a NPV of approximately $77.6 million, and a corresponding projected IRR of approximately 24% before taxes based on a $62.9 million capital expenditure requirement. The payback period in the base case is six years.
This preliminary assessment is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves. As well, there is no certainty that the results of this preliminary assessment will be realized by Northern.
Exploration and Development
Northern began to implement the recommended work program in the Technical Report in July, 2010 and has completed a 2,900m drilling program at a cost of approximately $536,000 and has spent approximately $166,262 on metallurgical testing, $264,000 on the pre-feasibility study and $450,000 on environmental and permitting. In addition, Northern has spent in excess of $200,000 on hydrogeological drilling, an airborne topographical survey and a geophysical survey. Over the next 12 months the Company expects to spend approximately $2 million to complete the FS, environmental and mine permitting work, and a pilot plant test to refine the flowsheet and provide test product for potential customers.
The exploration and infill diamond drilling program, which consisted of approximately 2,900 meters of drilling in 51 holes, was completed in the fall of 2010 and results were released in 2011. Twenty two holes were infill holes designed to confirm the existing resource model and to upgrade inferred resources to the indicated category. Twenty nine holes were expansion holes which were drilled with the objectives of increasing the size of the resource and demonstrating the scalable nature of the deposit. The drill program met or exceeded all expectations.
All 51 holes intersected widespread graphite mineralization with 50 of the 51 holes containing widths and graphitic carbon grades similar to those within the current resource model. It was demonstrated that large flake, high purity graphite mineralization exists near surface in an area that is now over one square kilometer in size and it remains open along strike to the north and south, and down dip to the east. The Bissett Creek graphite deposit has a flat lying, tabular nature with good continuity between drill holes. As a result, there is a relatively high degree of confidence that the resource size can be increased with additional drilling and that future production could be scaled to much higher levels to meet anticipated demand from Li ion batteries and other rapidly growing applications. 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 Project. Initial results from the metallurgical testing have confirmed the historical high, 90 to 95% recoveries of graphite that have been reported but final testing is not yet complete. Northern has booked space in the pilot plant at the SGS Lakefield facility in September. The product from the pilot plant will also be supplied to potential customers for testing. Northern has retained G Mining to complete the FS which will include a new resource calculation that incorporates the recent drilling. Consultants that were working on a PFS will continue to fulfill their mandate as part of the FS. SGS Canada Inc. - Geostat is preparing a new resource calculation and mine plan, SGS Mineral Services (Lakefield) is confirming previous metallurgical work and finalizing the mill flow sheet, Knight Piesold Ltd. is completing environmental and mine permitting and designing the tailings facility, and Met-Chem Canada Inc. is responsible for mill layout and design.
Recent Developments
On June 21, 2011, the Company announced that the prefeasibility study that was underway on its Bissett Creek graphite project would be upgraded to a full bankable Feasibility Study. The FS is scheduled for completion before the end of 2011 and the Company expects to complete the permitting process in the first quarter of 2012 at which time Northern will be in a position to commence construction of the mine, subject to positive results from the FS and to financing.
Future Plans
The Company continues to work on a plan to enable its shareholders to participate directly in the success of Northern by developing a mechanism whereby most of the 9,750,000 common shares of Northern owned by the Company (the “Shares”) would effectively be distributed to shareholders. In accordance with Canadian National Policy 46-201, the Shares were placed in escrow in connection with the Northern’s Initial Public Offering (“IPO”). 10% of the Shares were released immediately on completion of the IPO and the balance of the Shares are to be released in six tranches of 15% each over 36 months. The Shares can be released from escrow to permit the Company to distribute the Shares to its shareholders, subject to the prior approval of the TSXV, which the Company is in the process of seeking. If the Company does not have a plan in place to distribute the Shares by the time they are released from escrow, the Company is in the process of investigating a plan to establish a trust-like arrangement whereby approximately 9,250,000 Shares will be held in trust on behalf of the Company’s shareholders and distributed if such plan is implemented. If any of these shares are sold by the Company, the proceeds would be paid out as a cash dividend to the Company’s shareholders. Any plan to effectively distribute the Shares raises a number of legal, regulatory and taxation issues which must be considered and which the Company is in the process of investigating. In particular, any such plan is conditional upon complying with applicable United States securities laws, which the Company is currently reviewing with legal counsel.
F15
RESULTS OF OPERATIONS
For the six months ended June 30, 2011, the Company recorded a net gain attributable to the Company of $4,610,495, or $0.52 per share, compared to a net loss of $178,267 for the six months ended June 30, 2010, or $0.02 per share. This net gain during the six months ending June 30, 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 June 30 in both 2011 and 2010 as the Company is an exploration stage company with no source of revenues.
For the six months ended June 30, 2011, expenses amounted to $463,628 compared to $565,800 for the six months ended June 30, 2010. There were higher expenses for the six months ended June 30, 2010 as the Company consolidated the results of Northern during this period. These higher expenses were partially offset by the Company accruing $167,500 of expenses during the six months ended June 30, 2011 for potential penalties related to the filing of prior year tax reporting. Management fees and salaries declined to $169,264 for the six months ended June 30, 2011 compared to $202,174 for the six months ended June 30, 2010, primarily as a result of the deconsolidation of Northern in 2011. Management fees and salaries for the six months ended June 30, 2011 included stock-based compensation of $155,396, compared to $21,180 for the six months ended June 30, 2010. Professional fees increased to $71,132 in the six months ended June 30, 2011 from $51,617 in 2010 as a result of additional fees related to the Company’s Annual General Meeting.
The Company currently has no full time employees and contracts with consultants for administrative and financial services.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash as at June 30, 2011 of $862,347 versus $46,191 as at December 31, 2010 due to the sale of Northern shares and the repayment by Northern of the intercompany revolving loan during the six month period ending June 30, 2011. 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. 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 and the first quarter of 2010 Northern raised C$600,000 in a non-brokered financing with various lenders, including a director of the Company, of senior secured convertible non-interest bearing notes (the “Notes”). In the first quarter of 2010 the Notes were converted to units of Northern pursuant to their terms and the completion of the private placements described herein, and all security interests were 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. 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. In February of 2011, 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. Following Northern’s IPO, Northern repaid this loan with its related interest in April of 2011. 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.
An outstanding loan of $385,665 was settled through the issuance of 54,580 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 75,000 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. At that time, 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.
F16
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 31,583,205 common shares outstanding as at August 10, 2011. The Company owns 9,750,000 common shares of Northern which represents a 30.9% interest as at August 10, 2011. If all warrants were exercised Northern would receive an additional C$3,617,153and the Company’s interest in Northern would be 22.9% as at 10, 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 was 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.
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 $4,610,495 and a loss from operations of $463,628 for the six months ended June 30, 2011. The Company’s net gain for this six month period included a gain on deconsolidation of $6,035,839. The Company has had recurring losses and an accumulated deficit of $7,847,421 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 had 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.
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.
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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 June 30, 2011. Management has determined that (i) the 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.
The Company has been named in a lawsuit filed by Larry Van Tol, a former CEO, in the amount of $60,000 and legal fees. The claim is for amounts owed for past services. The Company intends to defend this action.
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.
Item 5. OTHER INFORMATION: None.
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Item 6. EXHIBITS
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: August 10, 2011 | MINDESTA 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: August 10, 2011 | MINDESTA INC. |
By: /s/ Gregory Bowes | |
Gregory Bowes, Chief Financial Officer |
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