Applied Minerals Inc (AMNL)

[Pennypicks]

Almi Update on filings Form 10-Q/A for ATLAS MINING CO

http://finance.yahoo.com/q/sec?s=almi.pk
--------------------------------------------------------------------------------

15-Jul-2009

Quarterly Report



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We operate a contract mining business, Atlas Fausett Contracting, and own a mineral resource, the Dragon Mine, located in Eureka Utah. Historically our primary source of revenue was generated by contract mining operations. On December 31, 2008 we discontinued our contract mining efforts due to economic conditions and the decision to concentrate our efforts on the commercialization of the halloysite clay deposit at the Dragon Mine.

Property Exploration

We intend to continue focus on commercializing the Dragon Mine. We do not intend to seek out and acquire other properties.

In August 2001, we acquired the Dragon Mine in Juab, Utah and began our clay exploration. Our exploration and development expenses for the three month period ending June 30, 2007 and 2006 were $ 922,270 and $ 1,123,211 , respectively, on the halloysite clay project.

The activities at our Dragon Mine property, located in Juab County, Utah, were suspended in October 2007 when previous management determined that both a resource survey and an appropriate processing facility were needed before the property could be successfully commercialized. In 2008, a geological consulting firm was hired by us to both carry out a detailed geological review of the property and develop an appropriate method by which to process the mineral resource. This work is ongoing as of the date of this report. Beginning in 2009, we began processing material from the mine and distributing samples to potential customers as part of a preliminary marketing program. The geological consulting firm referred to above has sub-contracted with a firm with expertise in the development of mineral processing to identify an appropriate processing system for the Company. Any subsequent reference to a geological consulting firm may be assumed to include the firm currently being contracted to identify the processing system.

Management believes that the clay resource found at the Dragon Mine property possesses, among other things, certain structural and mineralogical characteristics that may possibly add functionality to applications such as, but not limited to, the controlled release of biological and chemical agents, polymer-related strengtheners and fire retardants, oil field drilling minerals, catalyst carriers, filtration technologies, hydrogen storage for fuel cells and cosmetics. For certain of the aforementioned applications, management believes the Dragon Mine resource has the potential to serve as a more effective alternative to the materials upon which these current technologies are established. Other above-mentioned applications are being developed to specifically utilize the structural characteristics of the clay resource.

The Dragon Mine property contains halloysite, kaolinite, alunite and other minerals located underground and in waste piles that are the result of previous mining operations. The geological resource survey being conducted on the Dragon Mine has involved the assessment of approximately 10,000 feet of borehole drill cores and the analysis of samples taken from the five waste piles located at the mine site. The survey has included X-ray diffraction analysis to determine the levels of halloysite, kaolinite and other minerals found in the resource. Initial studies have indicated that conventional processing may be used to separate the halloysite and kaolinite fractions from alunite and other minerals found in the Dragon Mine resource. The geology of the deposit shows alterations of feldspar identified along side the presence of monzanite, halloysite and kaolinite. Purer halloysite found at the mine has been identified along side the presence of iron ore. The morphology of the halloysite identified at the Dragon Mine, as determined by Scanning Electron Microscopy ("SEM") analysis, demonstrates the existence of both lath-like and tubular formations. The kaolinite present at the Dragon Mine has been determined to possess a highly crystalline structure.

NaturalNano, Inc. (OTC: NNAN), in conjunction with Cascade Engineering and it's subsidiary, Noble Polymers, has developed Pleximer ?, a halloysite nanotube concentrate used to create stronger, lighter, environmentally friendlier and lower-cost polymer-based nanocomposites. According to NaturalNano's 2008 annual report, Pleximer ? is being marketed to the global nanocomposites market that, in the estimation of BCC Research, is expected to grow from $273 million in 2005 to $4.0 billion by 2015. According to BCC Research, clay-based nanocomposites are expected to represent 47% of the nanocomposites market by 2010. The U.S. Department of the Navy, represented by the Naval Research Lab (NRL"), has patented a technology that provides for the controlled release of active agents using inorganic tubules such as halloysite clay. The U.S. Navy's technology has been licensed by at least two companies that are developing controlled-release applications for the fields of electromagnetic shielding/strength enhancement, cosmetics, fragrances, agriculture, ink and paper, electronics, fabrics and textiles, local drug delivery and mold-resistant building products. The U.S. Navy has also patented a technology that permits a controlled release of an active agent as an anti-scaling treatment for environments such as oil wells.



--------------------------------------------------------------------------------

As of the date of this report, a study is being conducted to identify the applications for which the Dragon Mine resource may provide functionality. Processed clay samples have been distributed to potential customers who have requested halloysite and/or halloysite-kaolinite mixtures. A number of advanced applications to which the Company plans to market its resource are currently using plate-like structured clays that must undergo expensive exfoliation process to achieve proper functionality. The tubular morphology of the Dragon Mine resource does not require such an exfoliation process to achieve similar or, in many instances, greater functionality. Management, therefore, believes that it may be able to deliver its processed mineral to market at price points lower than those of competing clays, without sacrificing performance.

In addition to certain advanced applications previously mentioned, we believe the Dragon Mine resource may also be marketed to certain established, low-tech applications such as, but not limited to, fine porcelain, bone china, high-performance advanced technical ceramics, paint fillers, suspension agents, animal feed, cement hardeners, and food and pharmaceutical additives. Markets, such as fine porcelain and bone china, would likely require the Dragon Mine clay resource be processed for increased brightness and reduced presence of titanium whereas applications, such as a cement hardener, would require a relatively unprocessed version of the Dragon Mine resource. Management, as part of its overall business strategy, will continually assess the economic feasibility of pursuing potential markets.

Management believes that both existing and potential applications that utilize the Dragon Mine resource will require varying grades of clay to satisfy the unique technical requirements of each application. Some applications may require pure halloysite, composed of tubular and/or lath-shaped particles while other applications may require a grade of clay consisting of a specific halloysite-kaolinite ratio. The determination of the appropriate grade of clay will likely require significant technical cooperation between the Company and the developer of the related application. As previously mentioned, the Company has hired a consulting firm to identify a processing system capable of producing the grades of clay required by potential applications. The identification of such a system is ongoing.

In 2009, the Company entered into a development agreement with Yuri M. Lvov, Ph.D., a professor of chemistry at Louisiana Tech University and the T.C. Pipes Eminent Endowed Chair on Micro and Nanosystems at the Institute for Micromanufacturing (LaTech). The scope of the agreement includes, among other things, the development of halloysite in an anti-corrosion paint application in addition to the development of other emerging applications.



--------------------------------------------------------------------------------

RESULTS OF OPERATIONS

Revenues for the three month period ended June 30, 2007 were $2,158,250 and $767, 119 for the same period ending June 30, 2006, or an increase of 177%
. Revenues for the six month period ended June 30, 2007 were $4,160,520 and $1,101,829 for the same period ended June 30, 2006, or an increase of 277% . The main difference was caused by the increase in contracting revenues for both periods in 2007 as compared to the previous year. The increase in contracting revenues was driven by an increase in the number of contracts worked on during the quarter versus the same period in 2006. During the three and six months ended June 30, 2007, the contract mining segment worked on three contracts versus one contract during the same periods in 2006.

Gross profit for the three month period ended June 30, 2007 was $ 913,601 compared to $ 213,033 for the same period ended June 30, 2006, a n increase of 329% . Gross profit for the six month period ended June 30, 2007 was $1, 845 , 157 compared to $ 336 , 525 for the same period ended June 30, 2006, or an increase of 449 %. This was due to the increased revenues for the periods ended June 30, 2007 over the same periods ended June 30, 2006. The increase in contracting revenues and gross profit was driven by an increase in the number of contracts worked on during the quarter versus the same period in 2006. During the three and six months ended June 30, 2007, the contract mining segment worked on three contracts versus one contract during the same periods in 2006.

Total operating expenses for the three month period ended June 30, 2007 were $
785 , 148 compared to $ 823 , 954 for the same period ending June 30, 2006, or a de crease of 5 %. Total operating expenses for the six month period ended June 30, 2007 were $ 2 , 017 , 327 compared to $1, 948 , 750 for the same period ended June 30, 2006. The increase is primarily attributed to the increase in mining production costs.

Our net profit (loss) for the three month period ended June 30, 2007 was $ 116 , 328 compared to ($ 617 , 510 ) for the same period ended June 30, 2006, or an increase of $ 733 , 838 ( 119 %). For the six month period ended June 30, 2007, net loss was $ 179 , 955 compared to $1, 607 , 871 for the same period ending June 30, 2006, or a decrease of 89 %. The increase realized during the three and six months ended June 30, 2007 is due to a significant increase in contract mining revenues, coupled with a reduction in the cost of performing contract mining services.

LIQUIDITY AND CAPITAL RESOURCES

Through December 31, 2006, our activities had been financed primarily through the sale of equity securities and borrowings, coupled with revenues from contract mining . During the six month period ended June 30, 2007, our activities have been primarily financed through contract mining activities, and sales of equity securities. For the three month periods and the six month periods ended June 30, 2007 and June 30, 2006, contract mining accounted for 100% of the revenue. Our current asset and debt structure is explained below.

Our total assets as of June 30, 2007 were $6, 626 , 635 compared to $4, 109 , 451 as of December 31, 2006, or an increase of $2, 517 , 184 . For the six month period ended June 30, 2007, the Company has increased its current assets by $1,
632 , 488 , and increased its fixed assets by $898,708 through acquisitions of additional mining equipment and vehicles.



--------------------------------------------------------------------------------

Total liabilities were $1, 042 , 565 as of June 30, 2007, compared to $ 881 , 858 as of December 31, 2006. The Company acquired mining equipment during the period ended June 30, 2007 to facilitate increased contract mining activities. The following debts are still outstanding:

? A note payable for equipment due in monthly installments of $2, 875 , including interest of 5 .75%, with a balance of $ 24,767 .

? A note payable for equipment due in monthly installments of $1,605, including interest of 17.00 %, with a balance of $36,434.

? A lease payable for equipment due in monthly installments of $676, including interest of 0.99 %, with a balance of $8,068.

? A lease payable for equipment due in annual installments of $15,573, including interest of 8.59 %, with a balance of $61,225.

? A lease payable for equipment due in monthly installments of $479, including interest of 0 .19 %, with a balance of $12,945.

? A lease payable for a vehicle due in monthly installments of $688, including interest of 7. 49 %, with a balance of $ 20,481 .

? A lease payable for equipment due in monthly installments of $3,518, including interest of 18.05 %, with a balance of $120, 999 .

? A lease payable for equipment due in monthly installments of $1,075, including interest of 0%, with a balance of $ 34,412 .

? A lease payable for equipment due in monthly installments of $1,632, including interest of 3%, with a balance of $88,019.

? A note payable to an insurance company for insurance premiums with a balance of $2,801 , including interest at 8.60% and maturing in July 2007 .

? A capital lease payable for equipment due in monthly installments of $2,144, including interest of 19.00%, with a balance of $20,422

? A capital lease payable for equipment due in monthly installments of $1,715, including interest of 11.48% with a balance of $13,906

? Current liabilities including accounts payable and accrued expenses due as of June 30, 2007 were $ 598,128 and are the result of daily operations and accrued taxes. We also carry a liability of $50, 414 to the minority interest in a subsidiary.

Our principal sources of cash flow during the first six months of 2007 was from contracting activities which provided an average of $693,420 per month for the six month period ended June 30, 2007, and averaged $183,638 per month for the same period in 2006. In addition, we rely on our credit facilities and public or private sales of equity for additional cash flow.

Cash flow from financing activities for the six month period ended June 30, 2007 was $ 1 , 897 , 501 compared to $ 772,813 for the same period in 2006, a difference of $1, 124 , 688 . The major factor for the difference was receipt of proceeds from issuance of common stock in January 2007.

The Company used $ 794 , 409 from investing activities for the six month period ended June 30, 2007, compared to using $ 452 , 384 in the same period in 2006, a difference of $ 342 , 025 . This was attributed to purchases of more equipment in the period ended June 30, 2007 compared to the same period in 2006.



--------------------------------------------------------------------------------

Cash flows provided by (used by) operating activities for the six month period ended June 30, 2007 was $ 190 , 816 compared to ($1, 492 , 548 ) for the same period in 2006, a difference of $1, 683 , 364 . In the six month period in 2007, we had net income after income taxes, as compared to a net loss after income taxes for the same period ended in 2006.

OFF-BALANCE SHEET ARRANGEMENTS

There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonable likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.


RESTATEMENT OF PRIOR FINANCIAL INFORMATION AND RESULTS OF THE INVESTIGATION
Background
On October 9, 2007 the Company filed a report on Form 8-K with the Securities and Exchange Commission for the purpose of making certain disclosures and attaching a press release. The 8-K and the press release indicated that the Company's chief executive officer and chief financial officer determined that it would be necessary to restate the Company's audited consolidated financial statements and other financial information. The 8-K stated "the determination to restate resulted from recent discussions with a customer and the subsequent discovery that the Company had not properly accounted for cash received in 2004 as a deposit for the sale of halloysite clay from the Company's Dragon Mine. The deposit was improperly recorded as revenue for the year ended December 31, 2004."

The 8-K also that other areas of accounting uncertainty had been identified.

On November 9, 2007 Mark Kockler was hired as Vice President and Chief Operating Officer. Later in November 2007 Robert Dumont resigned as CEO, President and a Director, John Gaensbauer resigned as Executive Vice President and Barbara Suveg resigned as Chief Financial Officer. In December 2007 Mr. Kockler resigned and William T. Jacobson, Chairman of the Board of Directors who had resigned as CEO and President in July 2007, was appointed interim CEO and President. On January 7, 2008 Jack Harvey resigned as a director. On January 11, 2008 John Levy and Morris D. Weiss were appointed directors. At that time the Board of Directors consisted of Messrs. Jacobson, Levy, Weiss and Ronald Price who was president of the Company's subsidiary, Nano Clay and Technologies, Inc.

The Special Committee
On January 11, 2008 the Board of Directors formed a Special Committee (initially consisting of Mr. Levy but later Mr. Weiss was added to the Committee) and directed it to (i) review and investigate the conduct of the Company's prior management and any issues arising therefrom and (ii) review and evaluate the Company's business, financial condition, assets, strategy, prospects and management and recommend to the Board of Directors various alternatives to improve the Company's performance and prospects.

On August 20, 2008 the Special Committee presented its findings and recommendations to the Board of Directors concerning the investigation of the conduct of the prior management of the Company and related issues. After consideration the Board has adopted such findings and recommendations as its own.

The Investigative Team
The Special Committee was assisted in the investigation by outside independent legal counsel, Blank Rome LLP ("Blank Rome") and independent accountants, Heiskell, MacGillivray & Associates, retained by Blank Rome (the Special Committee and its advisors are referred to collectively as the "Investigative Team").



--------------------------------------------------------------------------------

Scope of the Investigation
The Investigative Team reviewed and investigated, among other things, (i) certain of the Company's prior issuances of equity securities and issues related thereto, (ii) the treatment for financial reporting purposes of $250,000 received by the Company in connection with a 2004 transaction involving NaturalNano, Inc., as more fully described in Note 7, (iii) the Company's accounting for fixed assets and long-term liabilities and (iv) certain public statements made by the Company regarding the Dragon Mine.

The Investigative Team's review included a broad and extensive document review including the Company's stock compensation plans, stock transfer records, minutes of the board meetings, press releases and public filings, accounting and banking books and records and e-mails and related attachments of the Company's current and certain former employees, officers and directors. The Investigative Team also conducted interviews of the Company's current and certain former officers, directors, employees and advisors who appeared to have knowledge of the issues being investigated. Three of the Company's former officers and two of the Company's former consultants declined to be interviewed. The Company placed no limitations on the investigation and cooperated with the investigation, providing requested documents and data and, where possible, making management and the Company's employees available for interviews.

Findings of the Special Committee

The findings of the Special Committee include the following:
? During the period beginning in 2002 and ending in early 2006, approximately 30 million shares of Common Stock were issued in violation of the federal securities laws, including the registration provisions of Section 5 of the Securities Act of 1933. The violations involved (a) misuse of SEC Registration Form S-8, a short form registration form for compensatory issuances to certain officers, directors, employees and consultants (approximately 16 million shares were issued under Form S-8), (b) transfer of 9.9 million shares to related parties and affiliates that were purportedly sold under our Registration Statement on SEC Registration Form SB-2 and subsequent resales without compliance with the plan of distribution contained in the Company's SB-2, and (c) grants of at least 2.8 million shares purportedly made pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act. These issuances are discussed in more detail in the following three paragraphs.

? Between 2002 and 2006 we issued approximately 16 million shares of our common stock that were purportedly issued under our registration statements on Form S-8. A review of these issuances revealed that approximately 14.6 million of these shares, with an aggregate market value of approximately $3.6 million (based upon the closing sale price per share on the apparent dates of issuance) were issued to individuals and entities that were ineligible to receive shares registered on Form S-8 because, among other reasons, these individuals or entities provided us with capital raising or stock promotion services and/or did not provide any bona fide consulting services to us. In addition, some such issuances and other issuances also may have been in excess of the number of shares we had registered on Form S-8 at the time of issuance. Many of the shares were issued in violation of the Atlas' 2002 Consultant Stock Plan. Certain shares were issued to family members of our then CEO, Mr. Jacobson, and such transactions appear to have been, among other things, director conflict of interest transactions which did not receive proper approval from the Board of Directors. Moreover, the values given to the S-8 stock for financial reporting purposes in many cases appear to have been less than market value of the stock on the apparent dates of issuance.

? In 2003 we registered for sale on SEC Registration Form SB-2 ten million shares of Common Stock at a fixed price of $.10 per share on a self-underwritten basis. Purportedly to avoid filing a post-effective amendment to update the disclosure in the registration statement, we issued 9.9 million shares to related parties and affiliates. In 2003 and 2004, these shares were provided to third parties for resale and resales were apparently made at times when the market price was greater than $.10. Only after such resales did we ultimately receive cash payments in the aggregate of approximately $805,000 for these shares, which is less than the $990,000 that would be expected.



--------------------------------------------------------------------------------

? In 2003 we issued 2.8 million restricted shares for supposed services purportedly in reliance on the private placement exemption from registration set forth in Section 4(2) of the Securities Act. However, we did not determine whether the recipients satisfied a condition of the exemption (that is, whether the recipients took the shares with the intent to resell only pursuant to an effective registration statement or an exemption from registration). In some cases we instructed our transfer agent to transfer these shares prior to the applicable holding period under Rule 144 that is an exemption from registration. 1.4 million of these shares were issued to a family member of Mr. Jacobson and this transaction appears to have been, among other things, a director conflict of interest transaction, which did not receive proper authorization from the Board of Directors.

? The Special Committee also determined that we did not properly record compensation expenses associated with the vesting of certain stock options granted to our former officers.

? The Special Committee has determined that Mr. Jacobson was primarily responsible for the securities law violations set forth above.

? The Special Committee also discovered transactions between us and our wholly- or partly-owned subsidiaries or related entities, including stock issuances to those entities that violated Section 5 of the Securities Act and inter-company loans with those entities that appear to have been conflict-of-interest transactions entered into without proper corporate authorization or business purpose.

? The Special Committee has determined that the accounting treatment of the $250,000 received from NaturalNano as revenue in 2004 was incorrect. However, the Special Committee has also determined that the treatment of such funds as proposed in the October 9, 2007 Press Release was also incorrect. The Special Committee believes that, during the two-year term of the contract, the $250,000 should have been treated as a deposit and, after the expiration of the contract in 2006, the entire $250,000 should have been recognized as revenue.

? The Special Committee determined that in 2004 Mr. Jacobson received options to purchase 3.5 million shares of Atlas common stock in violation of our existing stock option plans and that had an exercise price below market price at the date of the grant. We did not properly account for the compensation expenses related to the grant.

? The Special Committee found no evidence of accounting irregularities with respect to fixed asset ownership and long-term liabilities.

? Our internal controls over financial reporting and disclosure controls contained material weaknesses which led to inadequate and inaccurate disclosures.

? There were inaccurate statements in press releases released by us including a press release dated November 28, 2006 that contained inaccurate statements regarding the production capabilities and activities at the Dragon Mine.

Restatements
In the Company's report on Form 8-K filed on October 9, 2007, the Company stated that the Company had concluded that its audited consolidated financial statements and other financial information at and for the fiscal years ended December 31, 2004, 2005, and 2006 could no longer be relied upon based on the accounting for the 2004 sale of halloysite clay to NaturalNano. The Special Committee determined on August 20, 2008 that the financial statements for all periods beginning in 2002 through the second quarter of 2007 may not be reliable.

In addition to the NaturalNano matter, the Board has determined that expenses recorded in 2002 through 2006 relating to the value of certain issuances of equity stock and the compensation expenses associated with the vesting of certain stock options granted to officers of the Company were not properly recorded on the financial statements. The Special Committee determined that during the two-year term of the NaturalNano contract, the $250,000 should have been treated as a deposit but after the expiration of the contract in 2006 the entire $250,000 should have been recognized. The financial statements for the year ended December 31, 2006 and the quarters ended March 31 and June 30, 2006 and 2007 and September 30, 2006 will be restated.

Report to the SEC
The Special Committee has reported its findings to the staff of the SEC and has advised the staff that the Company intends to cooperate with any investigation that the SEC may commence.



--------------------------------------------------------------------------------

Changes Already Made
In reporting to the Board and the SEC, the Special Committee noted that many changes have already occurred at the Company including:
? In June 2008 Mr. Jacobson resigned as an officer and director.