Mining technical services revenue was $8,300 for the quarter ended
September 30, 2007, compared to $3,300 for the comparable quarter of 2006, a nominal
increase. Cost of sales increased nominally. These factors resulted in a third quarter
gross loss for the segment of $1,900 compared to $3,700 for the prior year third quarter,
a nominal decreased loss.
23
In early May 2005 the technical services satellite office was closed
due to the winding down of most of the technical service contracts and completion of the
majority of the data gathering for the insidemetals.com project, but certain key staff
members have been retained. Programming is continuing for insidemetals.com and launch of
the website Information Portal occurred in August 2005. Revenues from the website have
been nominal to date.
The redirection of Whitney & Whitney, Inc. to reduce emphasis on
technical consulting services and to launch an internet information portal is brought
about by the fact that Dr. Whitney, our President, has often been the lead person in
generating new consulting contracts. Our Presidents increased responsibilities for
managing the expanding GOLDn GRO fertilizer segment and overall corporate activities
has reduced his time availability to actively participate in the consulting segment. Part
of our objective in shifting the focus of the technical services segment is to retain our
core professional staff that can provide assistance on possible future technical service
contracts as well as perform administrative duties for the GOLDn GRO fertilizer
segment, while at the same time adding a potential source of revenue that is not dependent
upon labor sales and which can be managed by a professional staff. The information portal
also better utilizes the Whitney & Whitney, Inc. library and information resources
that are already in existence. For the three months ended September 30, 2007 and 2006 we
allocated costs of approximately $60,900 and $57,600, respectively, to the development of
the web site. The site was launched in mid-August 2005 and we are now fine-tuning the
general presentation of the site, as well as improving the profiled mining company
information. We expect this level of spending to continue into at least the first quarter
of 2008. As improvements to the site are completed and information maintenance becomes
routine, we will reduce or redirect staff resources as needed. In recent months traffic
volume has expanded to a level that we believe makes it worthwhile for gold exploration
companies to begin paid advertising on the website. A program to solicit advertising
customers is being developed and is being offered to gold exploration companies. We hired
a manager of marketing and sales in October 2006. He is responsible for marketing efforts
for both the insidemetals.com website and for technical consulting services to the mining
industry.
Total segment operating expenses for the third quarter of 2007
increased $62,200, due primarily to increased sales and marketing costs related to
corporate marketing and to the insidemetals.com website discussed above.
The combination of these factors resulted in a 2007 third quarter
segment operating loss of $203,800, compared to an operating loss of $143,300 for the
third quarter of 2006, an increased operating loss of $60,500, or 42%.
Other income (expense) for the third quarter of 2007 was an expense of
$3,800 compared to no gain for the prior year third quarter, a nominal change.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $207,600 for the quarter ended September 30, 2007, compared to a
loss of $143,300 for the prior year quarter, an increased loss of $64,300, or 45%.
For the first nine months of 2007, segment revenue totaled $15,000
compared to $25,200 for the first nine months of 2006, a decrease of 41%. This is
primarily attributable to completion of a technical services project in the first quarter
2006. Gross loss for the first nine months of 2007 was $11,000, compared to a gross loss
of $4,400 for the comparable prior year period, an
24
increased gross loss of $6,600. Operating loss for the period was
$569,100 compared to an operating loss of $382,100 for the comparable 2006 period, an
increased operating loss of $187,000, or 49%.
Other income (expense) for the first nine months of 2007 was income of
$142,700 compared to income of $97,800 for the prior year period. This increase is due to
due to the sale of a membership interest in the Companys workers compensation
mutual insurance company.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $426,400 for the nine months ended September 30, 2007, compared
to a net loss of $284,300 for the prior year period, an increased loss of $142,100, or
50%.
SUMMARY
On a consolidated basis, the various changes in revenues and operating
expenses resulted in a third quarter 2007 operating loss of $873,500, compared to $583,500
for the third quarter of 2006, an increased operating loss of $290,000, or 50%. Net income
before taxes for the third quarter 2007 was $544,300 compared to a net loss before taxes
of $3,103,600 for the prior year third quarter, an improvement of $3,647,900. For the nine
month period ended September 30, 2007 the operating loss was $2,158,700 compared to
$1,591,900 for the prior year comparable period, an increased operating loss of $566,800,
or 36%. Net loss before taxes for the nine months ended September 30, 2007 was $1,159,600
compared to $3,108,800 for the prior year nine month period, a decreased loss of
$1,949,200, or 63%.
Changes in Financial Condition; Capitalization
Cash amounted to $20,300 as of September 30, 2007, compared to $27,700
as of September 30, 2006. Net cash used for operating activities was approximately
$1,592,500 for the first nine months of 2007. The cash used for operating activities
during the period was financed primarily by proceeds of $1,515,000 from the issuance of
callable secured convertible notes, less $102,100 in debt issuance costs, and sale of
investments of $348,000.
Total assets increased $185,500 during the nine months ended September
30, 2007 to $4,451,000. Current assets increased $267,900 due to increases in cash of
$20,300, accounts receivable of $124,700, and inventory of $189,500. These increases were
partially offset by a decrease in prepaid expenses of $66,700. Inventory increased
primarily due to a combination of a build-up of silver in solution resulting from greater
volume coming from the new customers discussed above. Net property and equipment decreased
$60,900 due to investment in equipment totaling $96,100, primarily costs related to an air
purification system in the refinery, which was offset by current period depreciation and
amortization. Other assets decreased $21,500 due to amortization of deferred loan fees
related to the callable secured convertible note financing.
Current liabilities decreased during the nine months ended September
30, 2007 by $95,000 and total liabilities decreased by $154,800. The decrease is primarily
due to a decrease of $424,500 in the estimated fair value of derivative instruments. The
major components of this decrease include $1,585,000 in new convertible debt borrowing,
$210,700 in accrued interest,
25
which were offset by a net decrease in estimated fair value of
derivative instruments of $1,594,200 and the conversion of $633,800 of convertible debt
into common stock. Other changes in current liabilities include increases of $296,200 in
current maturities of convertible notes and accrued interest, $42,500 in accounts payable,
$62,100 in accrued expenses, and $38,400 in accrued interest. These increases were
partially offset by decreases of $67,700 in accrued management salaries and $39,500 in
current maturities of capital lease obligations.
Liquidity and Capital Resources
During the nine months ended September 30, 2007, working capital
improved by $362,900 to a deficit balance of $9,776,700. The improvement is due primarily
to the decrease in estimated fair value of derivative instrument liabilities discussed
above.
In order to solve the Company's liquidity problems, management has
implemented a plan of financing its operations through the private placements of common
shares, convertible debt, conversion of debt to common shares, and payment of consulting
and other labor services with common shares. The Company obtained financing of $2 million
and $2.25 million in 2006 and 2005, respectively, through the issuance of callable secured
convertible debt. During the first nine months of 2007, the Company obtained $1.585
million from the issuance of callable secured convertible debt. Subsequent to September
30, 2007, the Company issued Notes for $275,000 and received net proceeds of $260,000. We
anticipate these funds will provide for our working capital needs until late November
2007. For the immediate future, the Company plans to obtain additional debt financing from
this investor group.
We are actively working to establish a longer term financing plan that
will identify capital sources for the Companys financing needs over a three to five
year period. Once this plan is established, needs for financing will be adjusted and the
plan will be extended annually.
In addition to continuing the above described efforts, development of
the technology necessary to manufacture fertilizer from photochemicals has been completed.
In March 1998 the Companys subsidiary, Itronics Metallurgical, Inc., signed a
definitive manufacturing and distribution agreement with Western
Farm Services, Inc. (WFS). The agreement gives WFS the exclusive
license and right to manufacture and market the GOLDn GRO line of fertilizer
products in the states of Arizona, California, Hawaii, Idaho, Oregon and Washington. The
agreement is for five years, with five year renewal options. In March 2003, the companies
entered the second five year term of the agreement.
In addition, to meet short term cash needs, we have negotiated a 10 day
payment period on invoices to our primary distributor, at a cost of 1% of the invoice
amount. We also periodically factor certain inventory items and receivables to help with
short term cash needs. These arrangements are with unrelated individuals, carry interest
at 2% to 3% per month, and the lenders are secured by a blanket UCC on specified inventory
items and on specified invoices. As of September 30, 2007, no factored inventory and
receivables were outstanding.
The Company is focusing on expanding GOLDn GRO fertilizer sales
and the related photochemical and silver sales necessary to achieve profitability, but
this growth is subject to a number of uncertainties, including the annual seasonal nature
of fertilizer sales related to crop cycles,
26
short term weather patterns in specific markets, the rate of
GOLDn GRO fertilizer adoption in existing and new markets, and the availability of
funding to support sales growth.
Growth Plans and Implementation
Our GOLDn GRO Fertilizer segment created the GOLDn GRO line
of liquid fertilizers. The pioneering development work is complete, many field trials have
been completed on the first products and other field trials are under way.
The Mining Technical Services segment originally provided typical
consulting services which required high level technical personnel, including our
President, devoted to each project. To reduce our dependence on our President to generate
new consulting contracts, while better utilizing our core professional staff, the division
has been reconfigured to focus most of its efforts on a global Internet Information Portal
"insidemetals.com". The information portal operates 24 hours per day 7
days per week and can be accessed anywhere in the world where computers and the Internet
are available. Anyone with access to the Internet anywhere in the world can subscribe to
the service at any time using their credit card to pay the subscription fee.
With the successful completion of the initial pioneering development
work by the GOLDn GRO Fertilizer segment, and with the launch of the
insidemetals.com information portal by the Mining Technical Services Division, we are
implementing growth plans for both divisions that are expected to drive expansion well
into the future. The status of these plans and their implementation is described for each
division.
GOLDn GRO Fertilizer Segment (Itronics Metallurgical, Inc.)
Our manufacturing plant is presently configured to produce 2.4 million
gallons of GOLDn GRO fertilizer annually (about 11,400 tons) and can be expanded to
produce 7.2 million gallons of GOLD'n GRO per year, (approximately 36,000 tons). GOLD'n
GRO fertilizer production in 2006 utilized about 5 percent of planned capacity. Planned
expansions to achieve the 36,000 ton volume include increasing both dry raw material and
liquid storage, increasing tank truck loading capacity, and automation of certain
manufacturing functions. Expansion can be achieved incrementally as fertilizer sales
continue to grow.
We have developed the following eight-part approach to growth:
1. Increase sales in the established market
segments.
2. Develop GOLD'n GRO fertilizer applications
for more crops.
3. Expand sales to new territories.
4. Expand the GOLD'n GRO specialty fertilizer
product line.
5. Complete development of and commercialize
the new glass/tile products.
6. Develop and commercialize environmentally
friendly metal leaching reagents for recovery of silver, gold, and other metals.
7. Continue facilities expansion and technology
development.
8. Acquire established companies and/or their
technologies.
Plans and status of implementing each of the growth categories is
explained in more detail in the following sections.
27
1.
Increase sales in established market segments.
We are selling into or developing applications for the three major
segments. These are:
a. Specialty Agriculture which includes Avocados, citrus, grapes, fruit
and nut trees, and vegetables.
b. Bulk Field Crops which include alfalfa, cereal grains, corn, cotton,
and soybeans.
c. The Urban Market, which includes home lawn and garden, landscape
construction and maintenance, nursery and greenhouse markets, and golf courses.
Our primary focus is to increase bulk GOLDn GRO liquid fertilizer
sales as rapidly as possible. This is being achieved by expanding sales in the Specialty
Agriculture segment and in the Bulk Field Crops segment. There are on-going small package
sales in the Urban Market, but these are small relative to the other two segments.
2.
Develop GOLD'n GRO fertilizer applications for more crops.
Based on our experience to date, it takes approximately two to five
years to develop a new fertilizer product, which includes regulatory approval. It
typically takes another two to four years to achieve market acceptance of successful
products, which includes field trials to demonstrate product effectiveness.
We are performing field trials in Idaho, Oregon, and Washington for
applications on onions, potatoes, and winter wheat. We also have begun field trials in
Rhode Island for lawn, landscape, and nursery application and have started several new
trials in California for silage corn applications.
We are marketing a GOLD'n GRO base liquid nutrition program. The
program is called the "Gallon and a Quart" or "4 to 1" program. It
calls for one gallon of GOLDn GRO base liquid for each quart of GOLD'n GRO chelated
micro-nutrient used in soil applications. Field demonstrations have shown improved
nutrition uptake and crop output under this cost effective program. Marketing of this
program is expected to produce substantial increases in the tonnage of GOLD'n GRO
fertilizer sales.
In 2006 we began contributing to an ongoing Zinc Nutrition Research
Program at Utah State University in Logan, Utah. To date, the research has demonstrated
the effectiveness of GOLDn GRO 9-0-1+7% Zinc as a chelated liquid zinc micronutrient
fertilizer for zinc deficient corn. Results include preventing visual symptoms of zinc
deficiency, significantly increased tissue concentration of zinc compared to untreated
plants, and doubled dry mass.
3.
Expand sales to new territories.
The GOLD'n GRO products are being sold in Arizona, California,
Colorado, Idaho, Nevada, Oregon, Rhode Island, Washington, and Utah, with the majority of
our sales in central California. We completed registration of select GOLDn GRO
fertilizers in Idaho, Oregon and Washington in 2005 and in Utah in 2006; sales development
is now underway. Two GOLD'n GRO products are registered in seven northeastern states and
all of the products are registered in New York and in New
28
Jersey. Based on our experience, commercial sales can be generated
approximately one to two years after introductory sales activities are initiated. We are
in the process of identifying distributors for New York and the other seven Northeastern
states. Each new geographic area developed will require the same procedural approach.
The expansion into the Northwest states of Idaho, Oregon, Washington,
and Utah is being managed by one field agronomist. The cost of maintaining that position
ranges from $120,000 to $150,000 per year. The expansion into the Northeast states is
being managed by one part time person at an annual cost of approximately $30,000. That
person is also the lead person in seeking customers for our Photochemical Silver
Concentrators. We plan to increase these spending levels in 2007, depending on sales
support requirements.
In general, expansion to new regions of the country will require at
least one field agronomist for each new region at a cost similar to that for the Northwest
region. In addition, each state has varying registration requirements for product labels
and costs of registration. Development of product labels is done internally using existing
staff. Registration fees for each state vary widely, ranging from $25 to $600 per year,
largely depending on how many products are registered in the particular state. For the
near term, we anticipate utilizing present staff and management for corporate support of
the sales efforts for both existing regions and for the new regions. For the longer term,
as we expand we will need to add corporate support personnel. In 2006 we added a Ph.D.
agronomist, to support GOLDn GRO sales efforts.
Our plan to expand sales in Urban Markets requires the consumer to
utilize fertilizer injection equipment. This equipment provides economical, easy use of
liquid fertilizers for consumer lawns and gardens. We added two types of fertilizer
injectors to our "e" store, which is our first step in this market.
Additionally, other fertilizer injectors are already available to consumers through
irrigation supply stores.
4.
Expand the GOLD'n GRO specialty fertilizer product line.
We are developing two new specialty products, a calcium plus magnesium
fertilizer named GOLDn GRO 11-0-0+5% Ca (Calcium) and a high magnesium content
fertilizer named GOLDn GRO 8-0-0+3% Mg (Magnesium), both targeting foliar and soil
application. We have registered both products in Nevada and California. Sales development
started in the second quarter of 2006.
We are developing a new category of repellent fertilizers that are
expected to be sold at higher profit margins than our other products. The GOLDn GRO
Guardian deer repellent fertilizer is an example of this type of specialty fertilizer. The
U.S. market for deer repellents is believed to exceed $50 million in annual sales.
Products currently in the market have limited effectiveness so we believe that there is a
real opportunity for a line of systemic products that are effective for several weeks
after each application. GOLD'n GRO Guardian small plot tests have shown effectiveness for
8 to 12 weeks as well as excellent wintertime effectiveness.
We acquired ownership interest in the GOLDn GRO Guardian
trademark, product rights, and the repelling product in 2005. We now own 100% of all
rights related to GOLDn GRO Guardian. Currently, this product line is strictly for
non-food plant applications.
29
Due to the repelling ingredients in GOLDn GRO Guardian, it will
need to be registered with the EPA before it can be sold to the public. We have engaged
consultants experienced in the EPA registration process and are presently working with
them to do the work needed to complete the registration. In July 2007 we completed the
first step in the registration process by completing a draft label. In October 2007 we
completed the second step of the registration process, which is to have the product tested
for safety in an independent laboratory. Results of the testing indicate the GOLDn
GRO Guardian to be of a low order of toxicity. Our consultants have advised us that a
Caution label, which is the lowest risk category that the U.S. EPA classifies, may be
required. In parallel with the registration process, we have reached agreement to enter
into a long term supply arrangement with a large foreign manufacturer of the repelling
ingredient. This ingredient also needs to be registered with the EPA. We submitted a
registration application in July 2007 and the EPA accepted the application in early August
2007. An application for registration of a GOLDn GRO Guardian product was filed in
late October 2007. Registration approval is expected to take three to four months.
We believe the users of the GOLDn GRO deer repellent fertilizer
will be upscale homeowners, commercial landscapers, and municipal facilities, and
wholesale and retail nurseries. The initial sales center will be in Rhode Island.
5.
Complete development of and commercialize glass/tile products.
In 2003, we developed and produced glass /tile products proving that
the product concept is technically viable. When the development of the glass/ceramic tile
product is complete, we will achieve the ability to recycle 100 percent of the photoliquid
materials received from customers, including waste that is generated internally during
fertilizer production. We have completed preliminary market research for the tile markets,
but expect to do much more work to develop a plan to enter this market.
6.
Develop and commercialize metal leaching reagents for recovery of
silver, gold, and other metals.
We are developing applications of our technology to extract silver from
photoliquids to the mining sector. This work is being expanded and a small pilot circuit
will be established to chemically process certain categories of silver-bearing solid
wastes. The gold mining sector currently uses cyanide and other toxic chemicals in their
leaching process. We believe it may be possible to create and adapt new non-toxic leaching
reagents and leaching procedures for processing other secondary materials and certain
types of mine generated products. Support for this belief is that photochemicals are
specifically designed to leach silver from film and a major component of photochemicals
completely detoxifies and eliminates cyanide. The specific markets for leaching reagents
in gold and silver mining is large and world wide, but has not yet been studied in detail
for market development. Our Technical Services Division maintains an extensive library and
database of mines and mining activities worldwide, which provides us ready access to
market information as we need it. Much pilot plant work, including one or more field pilot
operations, must be completed before quantitative market studies can be completed.
We plan to establish joint ventures with mining companies to research
and develop these environmentally compatible gold and silver leaching chemicals and
technology. We believe that the market for these leaching chemicals, once established,
will be much larger and less
30
seasonal than the fertilizer market and that it offers a second pathway
to large scale growth.
In September 2007, our Board of Directors approved the formation of a
subsidiary to develop and commercialize our photochemical based thiosulfate technology to
replace or neutralize cyanide in mining applications. This technology is expected to be
used for mineral extraction, including mine tailings, and reclamation of heap leach
operations. Our plan anticipates that shares in the subsidiary will be placed with private
investors. The plan will include provisions for taking the subsidiary public to provide an
exit strategy for the initial private investors.
7.
Continue facilities expansion and technology development.
As fertilizer sales volume increases, we will need to increase tank
truck loading capacity. With the introduction of additional bulk products and increased
demand for our products, load out capacity for shipment of three more bulk products is
needed. The first phase, construction of a containment area, was substantially completed
in late 2006. While we believe that we can handle expected growth in 2007 with the
existing load-out module, we hope to complete construction on the new load out equipment
during the first half of 2008, subject to the availability of financing.
In the first quarter of 2006 the Company tripled silver recovery
capacity. With this expansion, the refinery operations became large enough to require the
installation of an air purification system so that emissions from the expanded operation
could be completely controlled. Planning and permitting for this installation were
undertaken in the second and third quarters of 2006. Installation began in the fourth
quarter of 2006 and operation start up was completed in mid-March 2007.
During the first quarter 2007 GOLDn GRO fertilizer manufacturing
expanded to a level that requires an air purification system so that emissions can be
completely controlled. Work to design and permit this system is underway and is targeted
for completion in the third quarter. The schedule for installation has not yet been
established.
Both the refinery air purification system and the fertilizer
manufacturing air purification system perform the purification by wet scrubbing which
produces water containing fertilizer ingredients. Part of the expansion planning that is
now underway includes developing and implementing methods to utilize the water generated
by air purification in fertilizer manufacturing. Normal industrial air purification
systems generally produce waste which must be disposed off-site and requires payment of
disposal fees. The Companys technology is being integrated so that the scrubbing
water becomes a viable raw material for use in fertilizer manufacturing. The
Companys air purification technology has the advantage of being "zero
discharge" and is expected to be lower cost by producing a fertilizer raw material
and by not having off-site waste disposal costs.
The Company reduced work on implementing its new iron and sulfur leach
process while the refinery air purification system was being developed, installed, and
started up. The work level required to complete development, specify, and size the
equipment required for the new leach circuit was expanded early in the second quarter
2007, but with other higher priority planning and expansion activities that are underway,
the Company has revised its plan for starting up
31
this operation and now expects to have the leaching circuit completed
to where intermittent operations can begin in the first quarter of 2008.
The refinery currently produces three products; silver bullion,
silver-bearing iron matte, and glass which contains a small amount of silver. The refinery
currently has solids drying capabilities, but the iron matte and the glass, which were
formerly produced in relatively small amounts have been stored for future processing. This
years projected increase in silver output and the next refinery expansion will
increase production of iron matte and glass to levels that require expanded solids
handling capabilities which include crushing, grinding, screening, one or more solids
separation processes, liquid-solids separation, drying, and expanded storage capabilities.
In addition, the stored matte and glass when combined with on-going production have now
reached a volume that is sufficient to justify processing.
Because the solids handling requirements are not fully known at this
time, the Company is utilizing modular development to create the individual process
systems with the objective that when the actual larger scale requirements are better known
it can integrate the individual processing systems into a viable solids processing flow
sheet. The individual process systems for crushing and screening are in final stages of
specification and sizing. The Company plans to install and start up the solids screening
system during the fourth quarter of 2007 or early 2008. This system will be used initially
to process silver-bearing iron matte and is expected to generate an increase in silver
sales when implemented. The crushing system will be installed after the screening system
is operational and is expected to produce further increases in silver output. Additional
solids processing modules are being developed and will be discussed in more detail in
future quarterly reports.
8.
Acquire established companies and/or their technologies.
To enhance our operations and market presence, we intend to acquire
small established companies or their technologies. In 2005, we completed our acquisition
of the GOLDn GRO Guardian technology. Further acquisitions will depend on the
potential benefits and suitable financing.
Mining Technical Services Segment (Whitney & Whitney, Inc.)
Historically, this division provided consulting services to the mining
industry. In August 2005, we launched an Information Portal on the Internet. This division
has a two-part approach to growth:
- Continue to provide consulting services.
- "e-commerce" Internet Information
Portal-"insidemetals.com".
Plans and status of implementing each of the growth categories is
explained in more detail in the following sections.
a.
Continue to provide consulting services
We intend to continue a low level effort to solicit and perform
technical services for mining companies and other businesses or government agencies that
have mineral interests or minerals related responsibilities.
32
b.
"e-commerce" Internet Information
Portal-"insidemetals.com".
In August 2005, we launched the website "insidemetals.com,"
an Information Portal targeting the companies and individuals interested in the mining and
precious metals industry. The website is beginning to generate revenue by charging a
subscription fee for monthly access to the site and by selling advertising to gold
exploration companies. Currently, the site contains an array of information about gold and
companies in the gold industry. We intend to add information on other mineral sectors
gradually.
We anticipate that mining company professionals, all government
agencies with minerals related responsibilities, financial industry investment
professionals, and individual investors who have an interest in investing in mining
companies but who have limited mineral industry knowledge will benefit from this
Information Portal. The market scope for this service is global and is accessible with a
"click of a mouse" in all countries of the world through the Internet. Whitney
& Whitney, Inc. has contacts throughout the world and expects that the good will
generated over a period of more than 25 years will provide market support for this
service.
In recent months, traffic volume on the website has expanded to a level
that we believe is sufficient to make it worthwhile for gold exploration companies to
begin paid advertising on the website. A program to solicit advertising customers is being
developed and is being offered to gold exploration companies beginning in the first
quarter of 2007. To assist with the sales development program of the website, we hired a
manager of marketing and sales in October 2006. He is responsible for marketing efforts
for both the insidemetals.com website and for technical consulting services to the mining
industry.
In September 2007, our Board of Directors approved the formation of a
subsidiary to acquire multi-mineral properties and strategic small specialty companies
that are in early stage or commercial operation. These subsidiaries have not been formed
to date. These can be combined to form a larger operating company that will utilize our
advanced environmentally compatible technologies to mine, extract, and sell mineral and
metal products from multi-mineral properties. Our plan anticipates that shares in the
subsidiary will be placed with private investors. The plan will include provisions for
taking the subsidiary public to provide an exit strategy for the initial private
investors.
Item 3. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our principal executive and financial officer
and principal accounting officer of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our
principal executive and financial officer and principal accounting officer concluded that
our disclosure controls and procedures are effective to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the
Commission's rules and forms.
33
(b)
Changes in internal controls.
There was no change in our
internal controls or in other factors that could affect these controls during our last
fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2007 we have accrued for liabilities, including
interest, of $539,954 which relate to various lawsuits and claims for the collection of
the funds due. These include 8 leases totaling $367,127 (reflected in Capital Lease
Obligations) plus $58,635 in additional interest (reflected in Accrued Interest) and one
trade payable totaling $85,801 (reflected in Accounts Payable) plus $28,391 in additional
interest (reflected in Accrued Interest). The leases are individually secured by specified
equipment.
The accrued interest noted above was recorded based on our assessment
of three cases that are seeking $251,522, which we believe are probable. The creditors
have received judgments in these cases, but have taken no further collection action. We
will continue to accrue interest until these cases are settled or paid in full.
We have two cases, that originally sought $171,853, that we deem to
have a remote possibility of incurring an additional unrecorded loss. We have negotiated
payment agreements on these cases and, as of September 30, 2007, the recorded liability
for these cases was $163,897. We are current in our payments under the respective
settlement agreements.
Successful settlement of the above claims is dependent on future
financing.
We may become involved in a lawsuit or legal proceeding at any time in
the ordinary course of business. Litigation is subject to inherent uncertainties, and an
unexpected result may arise that may adversely affect our business. Certain lawsuits have
been filed against us for collection of funds due that are delinquent, as described above.
We are not aware of any additional legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities:
In July 2007 we issued an aggregate of 10,000,000 shares of common
stock valued at $151,000 to Wakabayashi Fund, LLC. for corporate marketing services to be
performed in 2007.
In August 2007, we issued an aggregate of 78,947 shares of common stock
valued at $1,500 to John W. Whitney, our President, as compensation for services performed
on our behalf in his capacity as a director of our Company for the second quarter of 2007.
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In August 2007, we issued an aggregate of 75,000 shares of common stock
valued at $6,000 to Duane H. Rasmussen, our Vice President, as compensation for services
performed on our behalf in his capacity as Vice President of our Company for periods in
2003 and prior.
In August 2007, we issued an aggregate of 30,000 shares of common stock
valued at $570 to two of our employees as compensation for services performed on our
behalf in their capacity as employees of our Company for the second quarter of 2007.
In August 2007, we issued an aggregate of 900,000 shares of common
stock valued at $9,000 to Cervelle Group, LLC for corporate marketing services to be
performed in 2007.
In September 2007, we issued an aggregate of 23,272,722 common shares
to four accredited investors upon the conversion of $60,509 in callable secured
convertible notes.
In September 2007, we issued an aggregate of 23,272,722 common shares
to four accredited investors upon the conversion of $58,182 in callable secured
convertible notes.
In September 2007, we issued an aggregate of 23,272,722 common shares
to four accredited investors upon the conversion of $44,218 in callable secured
convertible notes.
On September 28, 2007 John W. Whitney, our President, converted $18,500
in short term loans into 5 million common shares.
We issued options to purchase an aggregate of 9,000 shares of common
stock to Michael C. Horsley, our Controller, on August 1, 2007. The options are
exercisable at $0.15 per share and expire three years after grant.
We issued options to purchase an aggregate of 37,000 shares of common
stock to four of our employees in August 2007. The options are exercisable at $0.15 to
$0.20 per share and expire in three to ten years from grant.
In August 2007, the Company entered into a Securities Purchase
Agreement with three accredited investors (the "Investors") for an aggregate
amount of (i) $250,000 in secured convertible notes, and (ii) warrants to purchase
20,000,000 shares of the Companys common stock (the "Financing"). The
Company anticipates that the proceeds of the Financing will be used to advance its eight
part business plan which was summarized in its press release issued by the Company on June
3, 2005. The Financing will provide working capital to expand GOLDn GRO fertilizer
sales, EPA registration of the GOLDn GRO Guardian deer repellant fertilizer, certain
capital improvements to expand production capacity, and payment of existing debt
obligations.
The Financing was completed in one closing. The closing consisted of
gross proceeds of $250,000, less financing costs of $25,000, for net proceeds of $225,000.
The Investors received three year convertible notes (the
"Notes") bearing simple interest at 8% per annum. The Notes are convertible into
the Companys common stock at a price equal to the lesser of (i) $0.10 or (ii) 55% of
the average of the lowest 3 trading prices during the 20 trading day period ending one
trading day before the conversion date. In addition, we granted
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the Investors a further security interest in substantially all of our
assets, including the assets of our wholly owned subsidiaries, and intellectual property.
The parties entered into a Registration Rights Agreement whereby we are
required to file a registration statement with the Securities and Exchange Commission
within 180 days of closing, registering the common stock underlying the secured
convertible notes and the warrants. If the registration statement is not declared
effective within 180 days from the date of closing, we are required to pay liquidated
damages to the investors. In the event that we breach any representation or warranty in
the Securities Purchase Agreement, we may be required to pay liquidated damages in shares
or cash, at our election, equal to two percent of the outstanding principal amount of the
secured convertible notes per month plus accrued and unpaid interest.
The Investors received seven year warrants to purchase a total of
20,000,000 common shares of the Company at a purchase price of $0.0014 per share.
Other than under these Agreements and under certain specified
circumstances, should we issue shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in dilution of the
selling stockholder's position.
The Investors have agreed to restrict their ability to convert their
secured convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.9% of the then issued
and outstanding shares of common stock.
In addition to the above terms, the Company has agreed to restructure
the current and all previous unpaid Callable Secured Convertible Notes ("the
Notes") by increasing the discount on the conversion price from 45% to 50%, such that
the conversion price is 50% of the average of the lowest 3 trading prices during the 20
trading day period ending one trading day before the conversion date, instead of the 55%
as stated in the Notes and related Securities Purchase Agreements. This amendment to the
various Notes and Securities Purchase Agreements will take effect when all of the
remaining available common shares from the current registration statement under Form SB-2
are issued to the Noteholders upon conversion of a portion of the Notes. This occurred
near the end of August 2007