As filed with the Securities and Exchange Commission on September 5, 2008April 26, 2012
File No: 333-149413
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SMG INDIUM RESOURCES LTD.
(Exact Name of Registrant as Specified in Its Charter)
 | | | ||
| Delaware | 1090 | 51-0662991 | ||
| (State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
41 University Drive, Suite 400
100 Park AvenueNewtown, Pennsylvania 18940New York, New York 10017(215) 809-6953(212) 984-0635
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
Alan Benjamin, CEO
Ailon Z. Grushkin, PresidentNew York, New York 10017
41 University Drive, Suite 400
Newtown, Pennsylvania 18940
(215) 809-6953
(212) 984-0635(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
| | |
Barry I. Grossman, Esq.
David Selengut, Esq.
Ellenoff Grossman & Schole LLP
150 East 42nd Street
New York, New York 10017
(212) 370-1300
(212) 370-7889 — Facsimile
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
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| Large accelerated filer | Accelerated filer | Non-accelerated filer | ||||||
| (Do not check if a smaller reporting company) | Smaller reporting companyx | |||||||
CALCULATION OF REGISTRATION FEE
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| Title of Each Class of Securities to Be Registered | Amount to Be Registered(1) | Proposed Maximum Offering Price per Unit(1) | Proposed Maximum Aggregate Offering Unit(1) | Amount of Registration Fee | ||||||||||||
| Units, each consisting of one share of Common Stock, $.001 par value, and one Warrant(2) | 12,650,000 Units | $ | 5.00 | $ | 63,250,000 | $ | 2,485.73 | |||||||||
| Shares of Common Stock included as part of the Units(2) | 12,650,000 Shares | — | — | — | (3) | |||||||||||
| Warrants included as part of the Units(2) | 12,650,000 Warrants | — | — | — | (3) | |||||||||||
| Shares of Common Stock underlying the Warrants included in the Units(4) | 12,650,000 Shares | $ | 6.00 | $ | 75,900,000 | $ | 2,982.87 | |||||||||
| Representative's Unit Purchase Option | 1 | $ | 100 | $ | 100 | — | (3) | |||||||||
| Units underlying the Representative's Unit Purchase Option (“Representative's Units”)(4) | 550,000 Units | $ | 5.50 | $ | 3,025,000 | $ | 118.88 | |||||||||
| Shares of Common Stock included as part of the Representative's Units(4) | 550,000 Shares | — | — | — | (3) | |||||||||||
| Warrants included as part of the Representative's Units(4) | 550,000 Warrants | — | — | — | (3) | |||||||||||
| Shares of Common Stock underlying the Warrants included in the Representative's Units(4) | 550,000 Shares | $ | 6.60 | $ | 3,630,000 | $ | 142.66 | |||||||||
| Total | $ | 145,805,100 | $ | 5,730.14 | (5) | |||||||||||
| Title of Each Class of Securities to Be Registered | Amount to Be Registered (1) | Proposed Maximum Offering Price per Share | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee | ||||||||||||
| Common Stock Par Value $.001 Per Share | 2,000,000 | (2) | $ | 3.055 | (3) | $ | 6,110,000 | $ | 700.21 | |||||||
| Common Stock Par Value $.001 Per Share | 6,998,101 | (4) | $ | (4) | $ | (4) | $ | (4) | ||||||||
| Total | $ | 6,110,000 | $ | 700.21 | ||||||||||||
| (1) | In addition to the shares set forth in the table, pursuant to Rule 416 under the Securities Act of 1933, as amended, the number of shares of common stock registered hereby shall include an indeterminate number of additional shares of common stock that may be issuable as a result of anti-dilution adjustments. |
| (2) | Represents shares of common stock sold and issued to investors in a private placement for a total of 2,000,000 shares. |
| (3) | Estimated solely for the purpose of |
| (4) |
The registrantRegistrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrantRegistrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This registration statement contains a prospectus to be used in connection with the potential resale by certain selling stockholders of 2,000,000 shares of common stock sold and issued to investors in a private placement offering on January 5, 2012.
On May 5, 2011, the Registrant closed an initial public offering of units, consisting of shares of common stock and warrants to purchase shares of common stock. Pursuant to Rule 429 of the Securities Act of 1933, as amended, the prospectus which is a part of this registration statement is a combined prospectus and includes all of the information currently required in a prospectus relating to 6,998,101 shares of common stock issuable upon exercise of warrants issued in connection with the Registrant’s initial public offering, which were included in Registration Statement No. 333-165930. This registration statement also constitutes a Post-Effective Amendment to Registration Statement No. 333-165930.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
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| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, DATED |
SMG INDIUM RESOURCES LTD.
11,000,000 Units
2,000,000 Shares of Common Stock
This is an initial public offeringprospectus relates to the sale or other disposition of our securities. Each unit has an offering price2,000,000 shares of $5.00 and consists of:
Each warrant entitles the holdersecurities named in this prospectus, referred to purchase one shareas selling stockholders throughout this prospectus. This prospectus may be used by the selling stockholders named herein to resell, from time to time, any shares of our common stock at aincluded herein. For information about the selling stockholders, see the section entitled: “Selling Stockholders” onpage 67.
Our common stock is quoted on the OTC Bulletin Board under the symbol “SMGI.” The last reported sale price of $6.00. Each warrantour common stock as reported on the OTC Bulletin Board on April 20, 2012 was $3.055 per share.
The selling stockholders may offer their shares of common stock from time to time through public or private transactions, on or off the OTC Bulletin Board at prevailing market prices, at prices related to the prevailing market prices, at fixed prices that may be changed, or at privately negotiated prices. We will become exercisable upon the effectivenessnot receive any of the registration statement, and will expire on , 2011[three yearsproceeds from the effective datesale of the registration statement],shares of common stock by the selling stockholders, but will receive proceeds related to the exercise of warrants held by the warrant holders. Usual and customary or earlier upon redemption.specifically negotiated brokerage fees or commissions may be paid by the selling stockholders.
We have granted Maxim Group LLC
The selling stockholders and Canaccord Adams Inc.,intermediaries through whom such securities are sold may be deemed “underwriters” within the representativesmeaning of the underwriters, a 45-day optionSecurities Act of 1933, as amended, with respect to purchase upthe securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to 1,650,000 additional units solely to cover over-allotments, if any (over and abovedistribute their common stock.
Brokers or dealers effecting transactions in the 11,000,000 units referred to above).
There is presently no public market for our units, common stock or warrants. We have applied for eachshares should confirm the registration of these securities under the securities laws of the units, common stock and warrants to be listed onstates in which transactions occur or the American Stock Exchange under the symbols ITD.U, ITD and ITD.WS, respectively, and we anticipate that the units will trade on the American Stock Exchange promptly after the effective dateexistence of the registration statement. Initially, only the units will trade. Each of the common stock and warrants may trade separately beginning on the 90th day after the effective date of the registration statement unless the representatives of the underwriters determine that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general and the trading pattern of, and demand for, our securities in particular. We cannot assure you, however, that anyapplicable exemptions from such securities will continue to be listed on the American Stock Exchange. In no event will the representatives of the underwriters permit separate trading of the common stock and warrants until the business day following the earlier to occur of the expiration of the underwriters’ over-allotment option or its exercise in full.registration.
We will enter into a Management Services Agreement with Specialty Metals Group Advisors LLC (“Manager”) prior to the consummation of this offering. As of the date of this prospectus, neither we nor our Manager described herein has purchased indium. The price of indium is volatile. In the past six years, the price of indium has ranged from as low as $70 per kilogram to as high as $1,070 per kilogram. On September 2, 2008, the price of indium was quoted by Metal Bulletin on Bloomberg LP at $500 per kilogram.
Investing in our securitiescommon stock involves a high degree of risk. SeeYou should carefully consider the matters discussed under the section entitled “Risk Factors” beginning onpage65 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.prospectus.
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| Per Share | Total Proceeds | |||||||
| Public offering price | $ | 5.00 | $ | 55,000,000 | ||||
| Underwriting discounts and commissions(1) | $ | 0.25 | $ | 2,750,000 | ||||
| Proceeds to us (before expenses)(2) | $ | 4.75 | $ | 52,250,000 | ||||
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We are offering the units for sale on a firm-commitment basis. The underwriters expect to deliver our securities to investors in the offering on or about [•], 2008.
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The date of this prospectusis September __, 2008April 26, 2012.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have not and the underwriters have not, authorized anyone to provide you with information different information. We are not, and the underwriters are not, making an offer of these securitiesfrom or in any state where the offer is not permitted. You should not assumeaddition to that the information contained in this prospectus is accurate asprospectus. Our business, financial conditions, results of any date other thanoperations and prospects may have changed since the date on the front of this prospectus.
TABLE OF CONTENTS
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| Prospectus Summary | 1 | |
| Risk Factors | 5 | |
| Use of Proceeds | 21 | |
| Dividend Policy | 21 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
| Business | 31 | |
| Directors, Executive Officers and Corporate Governance | 50 | |
| Executive Compensation | 54 | |
| Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder | 61 | |
| Certain Relationships and Related Party Transactions | 62 | |
| Description of Capital Securities | 64 | |
| Selling Stockholders | 67 | |
| Plan of Distribution | 68 | |
| Legal Matters | 69 | |
| Experts | 69 | |
| Where You Can Find Additional Information | 69 | |
| Index to Financial Statements | 71 |
For investors outside the United States: Neither we nor any of the underwritersWe have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
Industry and Market Data:In this prospectus, we rely on and refer to information and statistics regarding our industry. We obtained this statistical, market and other industry data and forecasts from publicly available information. While we believe that the statistical data, market data and other industry data and forecasts used throughout this prospectus from publicly available information.are reliable, we have not independently verified the data.
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PROSPECTUS SUMMARY
This summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read the entire prospectus carefully, including the information under “Risk Factors” and our financial statements and the related notes included in this prospectus, before investing. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.
Unless otherwise stated in this prospectus, prospectus:
| • | references to “we,” “us” or “our company” refer to SMG Indium Resources Ltd.; |
| • | the term “Manager” refers to Specialty Metals Group Advisors LLC; |
| • | the term “Management Services Agreement”(“MSA”) refers to that certain Amended and Restated Management Services Agreement entered into between us and the Manager, dated as of May 10, 2011, regarding the management of our company, filed as Exhibit to Amendment No. 5 to Form S-1 on March 10, 2011; |
| • | the term “2009 Private Placement” refers to a private placement, which closed on January 8, 2010, in which we sold an aggregate of 1,163,600 units to 61 accredited investors, each unit consisting of (i) one share of Class A common stock, par value $.001 per share, and (ii) one warrant to purchase one share of common stock at an exercise price of $5.75 per share, for net proceeds of approximately $5.6 million. Under the terms of the 2009 Private Placement, upon consummation of the initial public offering, the Class A common stock automatically converted into 1,635,551 shares of our common stock and we issued 471,951 additional warrants to such investors; |
| • | the term “2012 Private Placement” refers to a private placement, which closed on January 5, 2012, in which we sold an aggregate of 2,000,000 shares of common stock to 2 accredited investors, for net proceeds of approximately $7.5 million: and |
| • | the term NMV refers to our net market value, as defined in the MSA, determined by multiplying the number of kilograms of our indium holdings by the last spot price for indium published by Metal Bulletin PLC posted on Bloomberg L.P., plus cash and any other assets, less any and all of our outstanding payables, indebtedness and any other liabilities. |
Overview
We are a corporation established pursuant to the laws of Delaware on January 7, 2008. On April 2, 2008, we changed our name from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. In addition, unlessWe operate a single-segment business whose primary business purpose is to purchase and stockpile indium, a specialty metal that is being increasingly used as a raw material in a wide variety of consumer electronics manufacturing applications. Effective with the quarter ended June 30, 2011 we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option.are considered an operating company and are no longer considered a development stage company.
Unless otherwise stated in this prospectus, references to “Manager” refer to Specialty Metals Group Advisors LLC and references to “Management Services Agreement” refer to that certain agreement to be entered into between us and the Manager prior to the consummation of this offering regarding the management of our company.
Overview
SMG Indium Resources Ltd. wasWe were formed to purchase and stockpile the metal indium. Our strategy is to achieve long-term appreciation in the value of our indium stockpile, and not to actively speculate with regard to short-term fluctuations in indium prices. We plan to achieve long-term appreciation in the value of our indium stockpile primarily through price appreciation of the physical metal. While it is not our current intention to do so in the short term, at our discretion, we may subsequently lend or sell some or all of our indium stockpile based on market conditions. Although the price of indium has declined substantially sincefrom its high in March 2005, it is our belief that the long-term industry prospects for indium are attractive and over time the price of the metal will appreciate. Price appreciation of the metal indium held in our stockpile is critical for us to maintain our NMV and for investors to receive a return on their investment.However, there is no assurance that the price of indium or the value of our securities will increase over time. To our knowledge, therethis is currently is no way forthe only investment that allows potential stockholders to participate in the price appreciation of indium unless they takeother than physical delivery of the metal themselves.itself. Our structure provides an easya simple and efficient mechanism by which a potentialpublic stockholder may benefit from the appreciation in the price of indium.indium, if any. Our indium will be physically stored in third-party facilities. Our Manager will use its best effort to fully insure the stockpile. There will be no custodial services provided by the third party storage facilities that we contract with. Our shareholders willstockholders have the ability to effectively purchase an interest in indium in a manner that does not directly include the risks associated with ownership of companies that explore for, mine and process indium. Our common shares represent an indirect interest in the physical indium we own.
All of the indium we purchase and own is, and will be, insured and physically stored in reputable, adequately capitalized and insured third-party warehouses or storage facilities located in the United States, Canada, the Netherlands and/or the United Kingdom. These third party facilities provide storage and safeguard of our indium inventory, insurance, handle the transfer of our indium inventory in and out of the facility, visual inspections, spot checks, facilitate independent third-party random assays, confirmation of deliveries to supplier packing lists, and reporting of transfers of inventory to us.
We intendutilize and expect to continue to utilize facilities that meet our requirements that are either (i) located closest in proximity to our indium suppliers in order to reduce transportation fees or (ii) facilities located closest in proximity to our corporate headquarters or satellite offices in order to facilitate our ability to inspect our inventory and reduce future corporate expenses associated with travel. We believe there are numerous third-party storage facilities that provide more than adequate services that meet our criteria, which eliminates the need for hiring a custodian. From inception until March 31, 2012, our Manager, Specialty Metals Group Advisors LLC, which is a related party, purchased on our behalf approximately 39.5 metric tons (“mt”) of indium, which is currently stored in an insured, secure facility in New York owned and operated by Brink’s Global Services U.S.A., Inc. (‘‘Brink’s’’), a bonded warehouse. In addition, as of March 31, 2012, we have agreements to purchase approximately 3.0 mt of indium at an average price of approximately $525 per kilogram. We expect to take delivery of this metal within 60 days. We expect our chief executive officer or our chief operating officer to inspect the facilities. The facilities are visited at least 85.0%once per year for inspection. We may insure the warehouse contents above and beyond a bonded warehouse to guarantee we will not sustain a loss in the event of an unforeseen catastrophe or we deem the net proceedswarehouse company’s insurance inadequate.
Our expenses will be required to be satisfied by cash on hand that is not set aside for the purchase of this offeringindium. Cash on hand that is not set aside to purchase andindium is expected to be sufficient to satisfy our operating expenses for approximately three years. Our annual cash operating expenses, including management fees, are estimated to be approximately $1.4 million. We may subsequently lend or sell some, or all, of our indium stockpile indium.
Pursuant to the Management Services Agreement,cover our Manager is entitledoperating expenses. Alternatively, we may seek to a 2.0% management fee per annum based onraise additional capital to cover our net market value (“NMV”) as compensation for services rendered onoperating expenses through potentially dilutive equity offerings or debt financing. Our stockpile of indium may decrease over time due to sales of indium necessary to pay our behalf. There may not be a correlation between our NMV,annual operating expenses. Without increases in the price of indium andsufficient to compensate for such decreases, our stock price.NMV may also decline. Our stockpile of indium may also decrease over time due to sales of indium against purchases of common shares that are priced lower than our NMV per common share. In such instances, our NMV per common share would rise.
All of our indium transactions are negotiated by our Manager, a related party. Our Manager is paid a 2.0% per annum fee based on our NMV as compensation for these services. The NMV shall be determined for each share of our common stock by multiplying the number of kilograms of our indium holdings by the last spot price for indium published by Metal Bulletin PLC posted on Bloomberg L.P. for the month,, plus cash and any other assets, less any and all of our outstanding payables, indebtedness and any other liabilities, divided by our total number of outstanding shares of our common stock. Theliabilities. Our Manager is entitled to receive the 2.0% management fee regardless of its ability to successfully purchase and stockpile the metal indium. Our officers and directorshave limited experience in stockpiling the metal indium, although our chief executive officer has experience purchasing, selling, storing and lending precious metals, base metals, non-exchange traded metals, and illiquid metals. Our Manager:
On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet (Singapore) Limited (SGX-ST: Unionmet), a manufacturer
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Unionmet (Singapore) Limited, has expressed an interest to the representatives of the underwriters in purchasing up to 200,000 units as part of this offering.
Our business model is designed to capture the long-term appreciation of the price of indium. Over the last five years, thespot price of indium, has appreciated 163.2% (32.6% annually)our NMV and the quantity of indium held in inventory on a bi-weekly basis.
Metal Bulletin’s bi-weekly indium price quotation is posted on our website,www.smg-indium.com. If for any reason, Metal Bulletin’s bi-weekly indium price quotation is not available, other independent indium quotation providers are available including Platt’s Metals Week, Metal-Pages Ltd., Asian Metal Ltd. and Metal Prices. Within two business days of any change in inventory held, the quantity of indium will be published on our website.
We are not legally prohibited from $190pursuing other business strategies pursuant to our certificate of incorporation, as amended, or any other corporate document. If based on market conditions our Manager determines that it may be in our best interest to expand our lending and/or selling activities beyond what is necessary to cover operating expensesor if the Manager determines that we should begin actively speculating on short-term fluctuations in indium prices or pursue strategic transactions with other companies operating in the indium market including the Federal Government, the Manager will be required to obtain the approval of our board of directors to adopt such a strategic change in our business directive. Additionally, we will promptly notify stockholders of any such modifications to our stated business plan. Presently, our operations are limited to purchasing, stockpiling, lending and selling only the metal indium.
Previous Financings
In 2010, we completed the 2009 Private Placement that resulted in net proceeds of approximately $5.6 million. With the capital raised through the 2009 Private Placement, we began purchasing and stockpiling indium. In May 2011, we completed an Initial Public Offering (“IPO”) of an aggregate of 5,084,750 units at $5.00 per kilogram in September 2003unit and raised aggregate net proceeds of approximately $24.0 million including the partial exercise of the underwriters’ overallotment option. Each IPO unit consisted of one share of the Company’s common stock and one redeemable common stock purchase warrant. Each warrant entitles the holder to $500 per kilogram in September 2008. Overpurchase from the last ten years, theCompany one share of common stock at an exercise price of $5.75 per share commencing with the effective date of the registration statement and expiring on May 4, 2016. Of the total raised in the IPO, 85% of the net proceeds, or approximately$20.4 million, was committed to be used to purchase and stockpile indium has appreciated 104.1% (10.4% annually) from $245 per kilogram in September 1998and 15% of the net proceeds, or approximately$3.6 million, is used for general working capital to $500 per kilogram in September 2008. Over the last fifteen years, the pricefund operations. As of March 31, 2012, we have purchased or committed to purchase a sufficient quantity of indium has appreciated 203.0% (13.5% annually) from $165 per kilogram in September 1993 to $500 per kilogram in September 2008. Over the last twenty-five years, the price of indium has appreciated 385.4% (15.4% annually) from $103 per kilogram in 1983satisfy our commitment to $500 per kilogram in September 2008. Over the last fifty years, the price of indium has appreciated 594.4% (11.9% annually) from $72 per kilogram in 1958 to $500 per kilogram in September 2008.
Assuming we are able to utilize 85.0%use 85% of the net proceeds of this offeringthe IPO for the purchase of indium.
Effective August 4, 2011, the units sold in the IPO were eligible to purchasebe separated and in addition to the stockpileunits trading under the ticker symbol SMGIU.OB, the common stock and the warrants trade separately under the ticker symbols SMGI.OB and SMGIW.OB, respectively.
On January 5, 2012, we closed a private placement (“2012 Private Placement”) of indiuman aggregate of 2.0 million shares of our common stock at $500$3.75 per kilogram, theshare to two accredited investors, Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., for an aggregate purchase price of indium would need to increase approximately 12.4% within 12 months to offset$7.5 million. Raging Capital Management, LLC is the reduction ingeneral partner of Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., respectively, and collectively, the entities represent our NMV associated with the initial offering expenseslargest stockholder(s). Such entities are affiliated and controlled by William C. Martin, our director and member of $3,725,812 and annual operating expenses of $1,675,000. The price of indium would need to increase approximately 16.2% within 24 months or 8.1% on average per annum to offset the reduction in our NMV due to the expenses listed above. The price of indium would need to increase approximately 20.1% within 36 months or 6.7% per annum to offset the reduction in our NMV due to the expenses listed above.
Indium is an essential raw material for a number of consumer electronics applications. The primary commercial application of indium is in coatings for the flat panel display (“FPD”) industry and in the Liquid Crystal Display industry (“LCD”) on electronic devices such as television sets, computers, cell phones and digital cameras. Indium is also increasingly being used as an important raw material in the solar energy industry where it is mainly used for high-efficiency photovoltaic cells in the form of thin-film photovoltaics. Other uses of Indium are in electrical components, alloys and solders. Information regarding the indium industry’s largest producers and users is limited and not readily available to the public. Furthermore, we are not aware of the type of information, if any, regarding the indium market other indium market participants may possess. Our inability to access this information places us at a potential relative competitive disadvantage to the other market participants who may have access to such information.
We were incorporated pursuant to the laws of Delaware on January 7, 2008. On April 2, 2008, we changed our name fromManager, Specialty Metals Group Indium Corp.Advisors LLC. We intend to SMG Indium Resources Ltd. use 85% of the gross proceeds, or approximately $6.4 million, from such transaction to purchase and stockpile the metal indium and 15% of the gross proceeds, or approximately $1.1 million, for general corporate purposes.
Our principal office is located at 41 University Drive, Suite 400, Newtown, Pennsylvania 18940.100 Park Avenue, New York, New York 10017.
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THE OFFERING
| Issuer | SMG Indium Resources Ltd. 100 Park Avenue New York, New York 10017 | |
| Securities offered by Selling Stockholders |
| Additional Registration |
| Trading Market | The | |
| Common Stock outstanding (as of April 18, 2012) | 8,832,301 shares (1) | |
| Use of Proceeds | We will |
| Plan of Distribution | The selling stockholders, and their pledges, donees and transferees or other successors in interest, may from time to time offer and sell, separately or together, some or all of the |
| Risk Factors |
(1) Unless otherwise stated in this prospectus, information in this prospectus:
3
4
Unless otherwise indicated, the information in this prospectus:
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Summary Financial Data
The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented.
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| June 30, 2008 | ||||||||
| Actual | Pro Forma | |||||||
| Balance Sheet Data: | ||||||||
| Cash | $ | 50,936 | $ | 7,691,440 | ||||
| Funds available for indium purchases | $ | 0 | $ | 43,584,825 | ||||
| Total assets | $ | 258,779 | $ | 51,276,265 | ||||
| Total liabilities | $ | 256,702 | $ | 0 | ||||
| Stockholders’ equity | $ | 2,077 | $ | 51,276,265 | ||||
The “pro forma” information gives effect to the sale of the 11,000,000 units we are offering at an initial offering price of $5.00 per unit (other than pursuant to the underwriters’ over-allotment option), including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of the accrued and other liabilities to be made.
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RISK FACTORS
Investing in our securities involves a high degree of risk. YouBefore purchasing our common stock, you should carefully consider the following risk factors and allas well as other information contained in this prospectus before making a decision to invest inProspectus, including our units.financial statements and the related notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditionscondition or results of operating may beoperations could materially and adversely affected. In that event,case, the trading price of our securities could decline, and you couldmay lose allsome or partall of your investment.
Risks Specific to
Factors That May Affect Our Business
and Results of Operations
We have an unproven business model and it is uncertain whether the purchase, lending andor sale of indium will generate sufficient revenues for us to survive.sustain operations.
Our model for conducting business and generating revenues is still new and unproven. Our business model dependsunrestricted, available for general corporate purposes, cash balance at December 31, 2011 was $3.5 million. Subsequent to December 31, 2011, we raised $7.5 million in the 2012 Private Placement of which we intend to use $6.4 million to purchase and stockpile indium and $1.1 million unrestricted cash for general corporate purposes. We estimate that our unrestricted cash balance at March 31, 2012 will sustain our operations through at least 2014. After such time, our ability to support ongoing annual cash operating expenses may depend upon our ability to either raise capital or our ability to generate revenue streams from the purchasing, lending and selling indium. ItHowever, it is uncertain whether we will be able to raise additional capital or that the purchase, lending and sale of indium can generatecangenerate sufficient revenues for us to survive. Accordingly, we are not certain that our business model will be viable or that we can sustain revenue growth or be profitable.viable.
We address a new market which may not develop as we predict or in a way that will justify our purchase of indium.
There is no public market for the sale of indium. Since indium is primarily a byproduct of zinc mining, the supply does not necessarily vary directly with market price. PrimaryCurrently, increases in primary indium production have been correlated to increases only if zinc miners increasein zinc production. We may not, and our Manager may not, be able to acquire indium, or once acquired, lend or sell indium for a number of years. The pool of potential purchasers and sellers is limited and each transaction may require the negotiation of specific provisions. Accordingly, a purchase or sell cycle may take several years to complete. In addition, the supply of indium is limited. World refinery production of indium was estimated at 500 metric tons in 2005, 580 metric tonsby the U.S. Geological Survey or USGS to have increased from 582 mt in 2006 to 640 mt in 2011. The total size of the primary indium market was approximately $446 million in 2011 based on the USGS’s estimated production figure and 510 metric tonsMetal Bulletin’s average price for indium of $696.28 per kilogram in 2007. Displaybank,2011 as posted on Bloomberg L.P. As of March 31, 2012, we took delivery of and contracted to take delivery of a display market research institute, expects the total salessufficient quantity of indium to be approximately $533 million in 2007. Based on the spot indium price of $500 per kilogram on September 2, 2008, we would needfulfill our commitment to purchase approximately 87.2 metric tons to utilize 85.0%spend 85% of the net proceeds from our IPO to purchase indium. Further, we intend to use approximately $6.4 million of this offering.the proceeds from the 2012 Private Placement of our common stock to purchase additional indium. We may experience additional difficulties purchasing indium in the event that we are a significant buyer. The inability to purchase and sell on a timely basis in sufficient quantities could have a material adverse effect on the share price of our common stock.
Information regarding the indium market is not readily available.
Information regarding the indium industry’s largest producers and users, including data regarding exclusive long-term purchase or supply agreements, is limited and not readily available and there is no data provided by industry participants with regards to exclusive long-term purchase or supply agreements. In addition, we are not aware of the type of information, if any, regarding the indium market other market participants may possess. Ouravailable. Such inability to access this information places us at a potential relative competitive disadvantage, to other market participants who may have access to such information. Thiswhich may adversely affect our ability to purchase and stockpile indium in a timely manner as well as the ability for investors to assess indium industry dynamics, our competition and various other risks we face.indium.
Indium industry producers and users do not supplypublicly disclose sufficient information to determine with certainty the largest producers and users of indium. Canadian based, Teck Cominco Ltd., is known in the indium industry to be one of the world’s largest suppliers of primary indium. Zhuzho Smelter Group Co., Ltd. was granted the largest government indium export quota in China for 29 metric tons in 2008. Japanese based, Dowa Mining Company Ltd., is known to be the world’s largest indium recycler. In addition, company specificcompany-specific indium usage is not information revealedthat is typically publicly disclosed by industry participants. However, it is known in the industry that Japan uses the largest amount of indium for the production of FPDs. This makes it difficult for investors to assess indium industry dynamics, our competition, and various other risks we face.
Industry producers, recyclers, secondary fabs, and end users do not reveal industry data quantifying the amount of indium purchased or sold under long-term exclusive supply contracts. If long-term exclusive contracts exist, this may hinder our ability to procure sufficient quantities of indium onAs a timely basis or even at
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all. Since information regarding the indium market is not readily availableresult, we may not be able to determine if certain suppliers have long-term supply contracts with other parties, which may adversely affect our ability to obtain indium from such supplier. The lack of industry information could hinder our ability to purchase and stockpile indium.
In addition, we are not aware of any additional information, if any, regarding the indium market or the type of market information other industry producers, purchasers, suppliers and other market participants may possess. Our inability to access this information, if any, places us at a potential relative competitive disadvantage to other market participants who may have access to such information. This may adversely affect our ability to purchase and stockpile indium.
Investors may face difficulty accessing the quoted price for indium on a daily weekly or monthly basis, which may negatively impact investor'san investor’s ability to assess the value of their investment.
Indium's
Indium’s market price per kilogram is infrequently quoted and investors may have to pay for subscriptions to various data service providers to access such information. InvestorsMetal Bulletin PLC, as posted on Bloomberg L.P., publishes the spot price of indium on a bi-weekly basis. We post on our website Metal Bulletin’s published spot price of indium on a bi-weekly basis as well. Therefore, stockholders will not be able to access an updated spot price on a daily basis. Accordingly, investors in our common stock may not be able to readily access information regarding the current market price for indium prior to making their initialan investment decision.
The lack of a recognized indium commodity exchange may negatively impact an investor's ability to assess the value of their investment.
Indium is not traded on any recognized commodity exchange. As such, direct hedging of the prices for future purchases cannot be undertaken. We do not currently have any long-term supply contracts with indium suppliers, so prices will vary with each transaction and the individual bids and offers received. Prices will vary based on the supply and demand for indium. There are no recognized futures or forwards market for indium. The pool of potential purchasers and sellers of indium is limited and each transaction may require the negotiation of specific provisions. Accordingly, a purchase or sale cycle may take several months to complete. In addition, the supply of indium is limited and we may experience additional difficulties purchasing indium in the event we are a significant buyer. The lack of a standardized indium exchange affects our ability to purchase and sell indium on a timely basis and could have a material adverse effect on the price of our securities.
In late April 2011, Metal-Pages.com, a subscription based metals information service provider, reported that the Kunming Fanya Non-ferrous Metals Exchange opened in China. Metal-Pages.com indicated that the exchange began trading silver and indium in standard lots of 100 grams. Based on indium closing price of $695 per kilogram on March 30, 2011, the Fanya Exchange's standard lot size of 100 grams is the equivalent of $69.50. Our average indium purchase order typically ranges from 500 kilograms to 2000 kilograms. This is approximately 5,000 to 20,000 times larger than the 100 gram standard lot size for indium on the Fanya Exchange. In mid-May 2011, Metal-Pages.com reported that physical delivery has not progressed smoothly on the Fanya Exchange. We have not been able to verify the veracity of these statements or if the Fanya Exchange is indeed a legitimate exchange and there is very little information available with regards to the Kunming Fanya Non-ferrous Metals Exchange. Based on the limited information available, it does not appear that the Fanya Exchange is large enough to satisfy the needs of regular indium industry market participants which may negatively impact an investor’s ability to assess the value of their investment.
We expect to rely on a limited number of potential suppliers and purchasers of indium.indium, which could affect our ability to buy and sell indium in a timely manner and negatively influence market prices.
The indium market is illiquid and considered small compared to the markets for base metals. There are a limited amountnumber of suppliers and purchasers of indium. If new companies are formed to purchase and stockpile indium, this would adversely affect our ability to procure sufficient quantities of indium on a timely basis or even at all.
Relying on a limited number of potential suppliers of indium and potential customers who purchase indium could (1) make it difficult to buy and sell indium in a timely manner, (2) negatively influence market prices by potentially having to sell indium to cover our operating expenses, or (3) drive up market prices if we are a large purchaser of indium and there is an indium shortage. The limited numberAs of industry participants could result in our inabilityMarch 31, 2012, we have purchased and contracted to fulfill our business plan described in this prospectus. Other than with Unionmet,purchase an aggregate of 42.5 mt of indium using seven regular indium suppliers at an average price of $623 per kilogram. Except for purchasing from these suppliers, we have had limited discussion with other potential suppliers of indium and no other contracts or negotiations have been entered into with any other suppliers or purchasers of indium, and we cannot be certain that we will be able to meetpurchase inventory in a timely manner or at favorable prices to purchase indium.
One of our required purchasesprincipal stockholders controls a substantial interest in us and thus may influence certain actions requiring a stockholder vote.
William C. Martin, a member of indium.our board of directors and, through an entity he controls, a member of our Manager, beneficially owns approximately 45.0% of our common stock with voting rights through wholly owned entities Raging Capital Fund L.P, Raging Capital Fund Q.P., L.P and his Individual Retirement Account. Mr. Martin, through his wholly owned entities is also the Selling Stockholder. This percentage ownership does not take into consideration the exercise of any stock options and warrants controlled by William C. Martin either individually or through Raging Capital Management LLC. Mr. Martin is able to influence the outcome of all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and he will have significant influence over our management and policies. The interests of Mr. Martin and our stockholders’ interests may not always align and taking actions which require stockholder approval, such as selling the company, may be more difficult to accomplish.
The substitution of other materials for indium may decrease demand for indium and adversely affect the price of indium and, thus, our stock price.
Indium has substitutes in many, perhaps most, of its uses. Silicon has largely replaced indium in transistors. Gallium can be used in some applications as a substitute for indium in several alloys. In glass-coatingglass- coating applications, silver-zinc oxides or tin-oxides can be used. Zinc-tin oxides can be used in LCDs. AnotherLCDs’. Other possible substitutesubstitutes for indium glass coating isare transparent carbon nanotubes.nanotubes and graphene. Indium phosphide can be substituted by gallium arsenide in solar cells and in many semiconductor applications. Hafnium can replace indium alloys in nuclear reactor control rods. The substitutions of such materials for indium may decrease the overall demand for indium, thereby lowering the price forof indium and our common stock.
It will take time to acquire our supply of indium and during such time the price of indium will fluctuate.
It may take us several years to purchase our stockpile of indium. The price we pay for 99.97% purity indium and or higher grade indium ingots will fluctuate with the spot price of indium. We will therefore not be able to purchase indium all at one price and our future purchases will be subject to price fluctuations.
Our operating results are subject to fluctuation in the price of indium, and other expenses.which is subject to macroeconomic conditions that are largely outside of our control.
Our activities almost entirely will involve purchasing and stockpiling the metal indium. Therefore, the principal factors affecting the price of our securities are factors which affect the price of indium and are thus beyond our control. We may engage in lending transactions involvingor sell portions of our indium stockpile if we need additional capital to cover annual operating expenses, so the value of our securities will depend upon, and typically fluctuate with, fluctuations in the price of indium. The market
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prices of indium are affected by rates of reclaiming and recycling of indium, rates of production of indium from mining, demand from end users of indium and indium-tin-oxide, and may be affected by a variety of unpredictable international economic, monetary and political considerations.
Macroeconomic considerations that may affect the price of indium include expectations of future rates of inflation, the strength of, and confidence in, the U.S. dollar, the currency in which the price of indium is generally quoted, and other currencies, interest rates and global or regional economic events. In addition to changes in production costs, shifts in political and economic conditions affecting indium producing countries may have a direct impact on their sales of indium. The fluctuation of the prices of indium is illustrated by the following table, which sets forth, for the periods indicated, the highs and lows of the spot price for indium:
| | | | | | | | | | Spot Indium Prices(1) 99.99% Purity (U.S.$/KG) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Spot Indium Prices(1) 99.97% Purity (U.S.$/KG) | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Spot | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| High | 190 | 130 | 110 | 330 | 910 | 1070 | 1025 | 750 | 730 | 330 | 910 | 1070 | 1025 | 750 | 730 | 530 | 650 | 870 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Low | 110 | 90 | 70 | 80 | 305 | 800 | 680 | 510 | 440 | 80 | 305 | 800 | 680 | 510 | 350 | 300 | 480 | 525 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Source: Metal Bulletin PLC from Bloomberg L.P.
The price of indium has declined substantially since it peaked in March 2005. The price for indium has declined 53.2%48.6% from its high of $1,070 per kilogram in March 2005 to $500$550 per kilogram as of September 2, 2008.April 18, 2012. If we began operations in March 2005, and we purchased our stockpile at peak prices, the value of our stockpile would have decreased by more than 53.2%48.6% in approximately threeseven years.
There are additional supply and one half years.demand factors that could influence indium price volatility that could adversely impact our NMV.
Our activities primarily involve purchasing and stockpiling indium. The value of our securities will be highly sensitive to fluctuations in the price of indium. Historically, the fluctuations in these prices have been, and will continue to be, affected by numerous factors beyond our control. Such factors include, among others: demand for products that utilize indium directly or as a key ingredient including FPDs, LCDs, touch screens, LEDs specialty solders, low e-glass, and next generation CIGS thin film photovoltaics. The supply of indium could be impacted by increased or decreased levels of zinc production and increases or decreases in indium recycling and or reclamation. Furthermore, there is the risk of indium substitution in certain applications that could impact supply and demand.
Occupational exposure to indium-tin-oxide (ITO) has been linked to severe respiratory issues and may affect future demand for indium.
Publicly available epidemiological studies confirmed case reports which associated occupational exposure to ITO with the development of severe respiratory problems. Therefore, worker exposure due to ITO's growing use in the fabrication of LCDs is of particular concern and may potentially lead to manufacturers' substituting ITO with different transparent conductive oxides and thusly reducing demand for indium.
There may be a lack of correlation between indium prices, our NMV and our stock price.price and the amount the price of indium needs to appreciate for us to achieve breakeven results in our NMV is difficult for potential investors to accurately determine because it is highly dependent upon several variables.
Given the fee structure imposedwith our Manager and our operational expenses, the trading price of our common stock as listed on the American Stock Exchange,OTC Bulletin Board, the OTCQB marketplace operated by Pink OTC Markets, Inc., or other quoted exchange, may not correlate with the trading price of indium. Assuming we are able to utilize 85.0%Regardless of the net proceedsour ability to purchase our stockpile of indium at $500 per kilogram, the price of indium would need to increase approximately 12.4% within 12 months to offset the reduction in our NMV associated with initial offering expenses of $3,725,812 and annuala timely manner, we will incur projected yearly operating expenses of $1,675,000.approximately $1.4 million. The price of indium would need to increase approximately 16.2% within 24 months or 8.1% on average per annumappreciate substantially to offset the reduction in our NMV due to the expenses listed above. The pricepercentage increase required cannot be accurately determined at this time. It is highly dependent upon various variable factors including, but not limited to, the exact number of kilograms of indium would needpurchased, the average price paid and the amount of time it takes for us to increase approximately 20.1% within 36 months or 6.7% on average per annumfully spend 85% of the gross proceeds from the 2012 Private Placement to offsetcomplete the reduction inbuildup of our NMV due to the expenses listed above.indium stockpile. As a result, there may be a lack of correlation between the trading price of indium, our NMV and our stock price.
There may be a lack of investment liquidity in our shares because we are not a mutual fund, a closed end fund, a trust company, an ETF or an ETN.
We are not a mutual fund, a closed end fund, a trust company, an exchange traded fund ("ETF") or an exchange traded note ("ETN") and our shares are not quoted on a national exchange. Therefore an investment in our common shares is not redeemable, not redeemable for our indium and liquidity may be limited. Furthermore, management currently controls the majority of our common shares, which are subject to lock-up requirements and Rule 144 restrictions, which serves to further reduce the float of common stock and its liquidity.
Our NMV is based on the price of 99.97%99.99% purity indium as quoted by Metal Bulletin and posted on Bloomberg L.P. Other information service providers may quote indium prices that differ from Metal Bulletin as posted on Bloomberg L.P., which may affect investors’ ability to determine our NMV.
Metal Bulletin quotes the price of 99.97%99.99% (known as “3N7”‘‘4N’’) purity indium in US Dollars per kilogram in Rotterdam warehouse. This iswarehouse, the universally recognized industry wide standard.standard for location and industry-wide pricing for physical metals. Other quote services may providequote the price quotations that differof indium differently from Metal Bulletin’s price as quoted on Bloomberg L.P. for a variety of reasons such as variations in purity levels, location of material and source of origin. This may affect investors’ ability to accurately determine our NMV.
99.97% purity indium (3N7) may differ in price from 99.99% purity indium (4N) or even 99.999% purity indium (5N) based on market conditions.
There is no fixed price ratio between 3N7, 4N or 5N material in the indium industry. All purchases and sales of indium are individually negotiated. Typically, in a regular indium market, balanced supply and demand, the higher the purity of the indium, the more it costs. 4N indium is slightly more expensive than 3N7.than3N7. 5N is slightly more expensive than 4N. In a declining indium market, the price of 3N7 purity indium is often quoted at an even greater discount to indium with purities of 4N or 5N. In some cases, the prices may be as much as 2%2.0% to 5%5.0% lower. Typically, when the price of indium is appreciating, there is often no difference in the price of 3N7 purity indium compared to 4N or 5N purity metal. These variations in indium prices may affect investors’ ability to accurately determine our NMV on an intra-monthly basis.NMV.
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New York Dealerdealer price quotations may differ from European price quotations and Far East price quotations due to a variety of factors, thatwhich differences may affect investors’ ability to accurately determine our NMV.
At any given time, there are varying price quotations between different regions in the world. Some factorsSomefactors that may influence price variability include regional natural disasters that may drive up the price within that certain region because a local shortage of material may develop. Often atAt times, a surplus of indium may develop in certain regions that drivesdrive down prices locally versusas compared to the rest of the world. We will report to the stockholderspublish on our website our NMV on a monthly basis.bi-weekly. These changes in market conditions could negatively affect an investors’investor’s ability to accurately determine our NMV intra-monthly.on a daily basis.
There has been no prior market for
Our securities have had limited trading since our units,IPO, the price of our unit pricesecurities may experience extreme price and volume fluctuations and any volatility in our unitsecurities price could result in claims against us.
Prior to this offering, investors could not buy or sell our units publicly.
An active public market for our units, maycommon stock or warrants has not developdeveloped or bebeen sustained after the offering. The initial public offering price will be determined by negotiations between the underwriters’ representative and us.since our IPO. The market price of our units may decline belowsecurities has declinedbelow the initial public offering price after this offering.
IPO price. The market price of our units may fluctuate significantly in response to the following factors, some of which are beyond our control:
In the past, securities class action litigation has been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.
Due to our size and the illiquid nature of the indium market, we may have a direct impact on the price of indium. Furthermore, we only intend to report our NMV on a monthly basis which may affect investors’ ability to determine our NMV on a more frequent basis.
We may have a direct impact on the price of indium. Due to our size and the illiquid nature of the indium market, we may inadvertently push prices up when deploying our cash to build our stockpile or conversely negatively impact the price of indium when and if we sell indium from our stockpile. This could have a substantial negative impact on our NMV and would be expected to cause a decrease in our stock price. Investors will also face difficulty determining our NMV on a daily basis. We only intend to report our NMV on a monthly basis. Therefore, intra-monthly fluctuations in the price of indium and the lag in the reported size of our indium stockpile may affect investors’ ability to correctly determine our NMV on a timely basis.
Approximately 50% of the world’s refined indium production is controlled by China and more than 70% of the world's reserves of indium are located in the ground in China, which may adversely affect our ability to purchase indium. If China curtails their international export quota of indium, it may affect our ability to purchase indium and could have a severe impact on world availability of indium and its price.
China controls over 50% of the world’s refined indium production.production and more than 70% of the world's indium reserves are located in the ground in China. There are a number of major producers in China, but also numerous smaller producers, relying on purchasing the concentrates, or unrefined ore, from the larger base-metal refiners. China produces approximately 250 to 350340 metric tons of indium per year. The Chinese government restricts indium’s export with taxes. In October 2007, The Ministry of Commerce issued a quota allowing China to export 240 tons of indium in 2008. On September 28, 2007, Metal Bulletin
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PLC reported that several traders and producers in China were expected to leave the indium business after Beijing awarded export permits for 168 tons of the minor metal to only 20 companies. Most of China’s indium output is exported, with domestic demand unable to sustain production. If the Chinese government reduces export quotas or ceases all of its exports of indium, it may affect the availability of indium and our ability to purchase indium in a timely manner including purchasing indium from Unionmet, and may limit us to purchasing primary indium production from countries outside of China.
We will rely on Unionmet
The Chinese government restricts indium’s export with taxes and quotas. In October 2010, the Chinese Ministry of Commerce issued a quota allowing China to supply usexport 233 metric tons of indium and if Unionmet (Singapore) Limitedin 2011, unchanged from 2010. In January 2012, China reduced their first half 2012 indium export quota by 1 metric ton compared to its first half 2011 indium export quota. Most of China’s indium output is exported, with domestic demand unable to fulfillcurrently sustain production. If the Chinese government reduces export quotas or ceases all of its obligations under the Purchase/Supply/Agency Agreement,exports of indium, it may hinderaffect the global availability of indium and our ability to purchase indium. In addition, it may cause a severe global supply shortage resulting in substantial volatility in the price of indium, in a timely manner.
On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet (Singapore) Limited where Unionmet agreed to sell a minimum of ten (10) metric tons of Unionmet’s indium to us within ten (10) months of the effectiveness of this offeringour NMV and to act as a non-exclusive agent to negotiate sales on our behalf and broker introductions with suppliers based in China. If Unionmet is unable to sell us indium under the agreement for any reason, including heightened export restrictions in China, we may not be able to purchase indium in a timely manner and may be limited to purchasing primary indium production from countries outside of China.securities.
Any disruptions in the operations of mining of Zincfor zinc and other base metals, including earthquakes or other natural disasters, would have a direct impact on the production and availability of indium, which may adversely affect our ability to purchase indium.
Indium is primarily a byproduct of zinc mining. Zinc mines and other base metal mines by their nature are subject to many operational risks and factors that are completely outside of our control and could impact our business, operating results and ability to purchase indium. These operational risks and factors include, but are not limited to:
Any cessation in production by zinc metallurgical plants or shut down of base metal smelters capable of processing indium would have a direct impact on the availability of indium, which may adversely affect our ability to purchase indium.
Indium is primarily a byproduct of zinc mining. Indium is processed in metallurgical plants that specifically smelt, refine and extract indium from zinc and other base metals. Metallurgical plants by their nature are subject to many operational risks and economic factors that are completely outside of our control and could impact our business, operating results and ability to purchase indium. In May 2008, an earthquake2010, Xstrata Plc permanently ceased operations of its copper and zinc metallurgical plants at the Kidd Metallurgical site in China completely halted ten zinc smeltersTimmins, Ontario, Canada. According to Roskill, a service provider of information on international metals and minerals markets, in Sichuan Province’s Deyang, Hanyuan and Ganzi regions, as well as in nearby southern regionsits report titled ‘‘The Economics of Shaanxi Province and Gansu Province, dueIndium, 2003,’’ the Kidd Metallurgical Division was capable of refining up to damaged facilities and power supply failures. It was estimated that 510,000 metric40 tons per year of indium. According to the USGS, Xstrata produced 11 tons of zinc smelting capacity was affected or approximately 7%refined indium at Kidd Creek in 2007 and eight tons in 2008. Although the exact volume of China’s national total. If those zinc smelters were refining indium and were shut down for one full year, itlost output is estimatedstill unclear, the American Metal Market reported on May 13, 2010 that as much as 24.8 metricXstrata confirmed the smelter produced 11.5 tons or 4.9% of primary indium production would have been lost. The lack of availabilityin 2009. Similar reductions in the supply of indium could hinder our ability to purchase and stockpile indium.
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TABLE OF CONTENTSThe smelting process used to extract indium from zinc ore and to refine indium to higher purities uses highly toxic chemicals like sulfuric acid. Heightened global environmental concerns may lead to the closure of smelters that excessively pollute the environment. The closure of smelters that extract and refine indium may affect our ability to purchase indium in a timely manner.
Technological obsolescence may reduce demand for indium, which would adversely impact our NMV and our stock price.
It is possible that the next generation TV or portable device market (PDA)(‘‘PDA’’) screens may render the use of indium-tin-oxide as obsolete. Considering 84%84.0% of indium demand currently comes from the flat panel display (FPD)FPD market, this would drastically reduce demand for indium and cause a precipitous drop in the price of indium. This would have a substantially negative impact on our NMV and our stock price.
Recycling of indium has increased in recent years which may reduce the demand for newly refined indium.
The recycling of indium has increased in recent years. The indium recycling market is now larger than primary refinery production. The U.S. Geological SurveyUSGS does not provide specific data for the recycling market but stated in their 2008 indium summary that global secondary indium production increased significantly during the past several years and now accounts for a greater share of indium production than primary production. The U.S. Geological SurveyUSGS also stated in their 2008 indium summary that this trend is expected to continue in the future and several major secondary indium producers in Japan and the Republic of Korea announced plans to further increase their recycling capacity. It is not known when the supply of recycled material from end products such as FPDs, LCDs or PDAs will re-circulate back into the recycling market, which may increase indium supply and negatively affect indium prices. If recycling activity continues to grow and becomes more efficient, this may adversely impact the price of indium and therefore the value of our stock.
We may not be able to stockpile indium in a timely manner ifbecause we cannot purchase indium from recyclers.
There is little firm data provided by any of the indium recyclers. We do not expect that we will be able to purchase any indium directly from the recycling market. Industry insiders consider the recycling market a “closed‘‘closed loop.”’’ End users (ie.(i.e., FPD manufacturers) recapture residual indium scrap from ITO in an unusable form during the manufacturing process. The end user then contracts with an indium recycler to specially reprocess and refine the scrap indium back into 3N7 minimum purity indium metal ingot. The process is extremely complex and can take in excess of 12 weeks from collection to re-fabrication back into purified usable indium. This “closed‘‘closed loop,”’’ from end user to recycler back to end user, is performed under contract and will operate to limit our purchases of indium to the primary refinery market, which is smaller than the recycled market. ThisOur inability to purchase indium from recyclers may impact our ability to stockpile indium in a timely manner.
Our stockpile of indium may decrease over time due to sales of indium necessary to pay the Company’s annual expenses. Without increases in the price of indium sufficient to compensate for such decreases, the price of our stock and our NMV may also decline.
The quantity of indium held in our stockpile may decrease over time due to sales of indium necessary to pay our annual expenses. Without increases in the price of indium sufficient to compensate for that decrease, the price of our stock and our NMV will decline. Since we do not have any income, we need to sell indium to cover our yearly operating expenses. We may also be subject to other liabilities (for example, as a result of litigation) which have not been calculated into our business plan. The only source of funds to cover those liabilities will be sales of indium held in our stockpile.
Assuming we are able to utilize 85.0% of the net proceeds to purchase its stockpile of indium at $500 per kilogram, the price of indium would need to increase approximately 12.4% within 12 months to offset the depreciation in our NMV associated with initial offering expenses of $3,725,812 and annual operating expenses of $1,675,000. The price of indium would need to increase approximately 16.2% within 24 months or 8.1% on average per annum to offset the depreciation in our NMV due to the expenses listed above. The price of indium would need to increase approximately 20.1% within 36 months or 6.7% on average per annum to offset the depreciation in our NMV due to the expenses listed above.
An increase in our annual operating expenses, or the existence of unexpected liabilities affecting us without any additional capital raising activities, will force us to sell larger amounts of our indium stockpile, and will result in a more rapid decrease in our NMV.
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Potential recessionary economic conditions may decrease demand for indium basedindium-based products and therefore adversely affect the price of indium and lower our NMV and stock price.
There is a direct correlation between the price of indium and the NMV of our company. Potential recessionary economic conditions in the United States and/or globally could result in decreased demand for the products that are manufactured using indium, such as FPDs, LCDs, LEDs and PDAs. This could cause the price of indium to drop and reduce our NMV, negatively affecting our stock price.
The Manager might have a conflict of interest insofar as the management fee to be paid by us to our Manager will increase as we sell more stock in subsequent offerings thereby increasing the NMV of the indium stockpile on which the management fee is based.
The management fee to be paid by us to the Manager is dependent on our NMV. Therefore, if we raise additional capital, we will have more cash available for the purchase of indium. In making the decision to raise additional capital and negotiate the terms of future offerings, there is a risk that the Manager may value its own interest in the management fee more than the interests of our public stockholders, resulting in a conflict of interest, which may not necessarily be resolved in the best interests of our public stockholders (including that it may be more likely that we conclude to pursue subsequent issuances of stock and increase our stockpile of indium, and therefore make an effort to increase our NMV).
We may issue additional shares of our capitalcommon stock which would reduce the equity interestresult in a dilution of our stockholders.
Our certificate of incorporation, as amended, authorizes the issuance of
We are authorized to issue up to 50,000,00040,000,000 shares of common stock, par value $0.0001$0.001 per share, and 1,000,000and1,000,000 shares of preferred stock, par value $0.0001$0.001 per share. Immediately after this offering (assuming no exercise of the underwriters’ over-allotment option),Currently there will be 26,765,000are 21,929,598 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares of common stock upon full exercise of our 6,998,101 outstanding warrants, the1,000,000 stock options reserved under our stock option plan, and 240,000 unit purchase optionoptions granted to the representatives of the underwriters options granted pursuant toin our 2008 Long-Term Incentive Compensation Plan and all of the 1,000,000 shares of preferred stock available for issuance.IPO.) Although we currently have no commitment, as of the effective date of the registration statement, we may issue a substantial number of additional shares of our common or preferred stock, or a combination of common and preferred stock, to obtain future financing. The issuance of additional shares of our common stock or any number of shares of our preferred stock:
If our NMV substantially decreases, the Manager may have an increased incentive to liquidate our stockpile and return the proceeds to the stockholders.
Pursuant to the Management Services Agreement, as amended and restated, our Manager is entitled to a 2.0% management fee per annum based on our NMV. There is a direct correlation between the management fee and our NMV. Since some members of our board of directors are also members of our Manager, our board of directors may elect to liquidate our business in the event there is a substantial reduction to our NMV in accordance with the Manager’s wishes. Such liquidation may occur at an inopportune time, when the disposition of indium could result in a loss to our stockholders.
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Our officers and directors have nolimited experience in purchasing, stockpiling, selling, storing, insuring and lending indium and our officers and directors have limited experience in purchasing, selling, storing, insuring and lending minor metals.
None of our
Our officers orand directors have only limited experience purchasing sellingstoring, and storinginsuring the metal indium. Our officers and directors have only limited experience in purchasing, selling, storing, insuring and lending minor metals. Our Chief Executive OfficerOnly our chief executive officer has experience purchasing, selling, storing, insuring and lending precious metals, minor metals, base metals, non-exchange metals and illiquid metals.metals, but not indium. As a result they may not be able to effectively manage our business.
We may lend some of the indium that we acquire and the inability of the borrower to return to us equivalent quantity and purity indium so loaned could or may have a material adverse effect on the share price of our common stock.
We
We may engage in lending indium from time to time. Wetime if we need additional capital to cover operating expenses. In such lending transaction, we will physically deliver indium to the borrower. At the end of the loan term, the borrower willis required to return an equivalent quantity and purity level of physical indium to us and pay us a fee based upon the value of the metal loaned and the time duration of the loan. If the borrower is unable to return to us an equivalent quantity and level of purity of indium, we may not be able to replacethe indium loaned from other sources at favorable prices. In such instances, we may not be able to recoup our losses through litigation and we would incur a loss which wouldcould have a material adverse effect on the share price of our common stock.
We will depend upon third parties to provide us with warehousing services, and system failures or other problems at these other companiesthird-party warehousing facilities could cause us to lose customersrevenues.
We currently and revenues.
We will initiallycontinue to store indium in secure facilities owned and operated by third partythird-party warehousing providers. If we are unable to continue to rely on third parties to provide us with these services and warehousing space in a timely fashion or if these services or warehousing space become impaired, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition or other system failures, or if we face competition for these services, or for any other reason, we would not be able, at least temporarily or at competitive prices, to store or acquire indium. We also may be unable to engage alternative warehousing services on a timely basis.basis, which could have a material adverse effect on ourbusiness.
We will not engage a custodian to safeguard the indium held in third-party storage facilities.
We have not and will not retain a custodian to oversee our indium holdings stored at third partythird-party facilities. A custodian is responsible for safekeeping of the metal and selecting direct subcustodians, if any. A custodian facilitates the transfer of the metal in and out of the trust account, allocates specific bars of metal to the trust allocated account and provides the trustee with regular reports detailing the metal transfers in and out of the trust. The custodian is also a market maker, clearer and approved weigher of such metal. The third-party storage facilities we use to store our indium provide services similar to those provided by a custodian, such as storage and safeguarding of the indium stockpile, visual inspections, spot checks, arranging and facilitating for independent third-party assays, confirmation of deliveries to supplier packing lists, and reporting of transfers and inventory status to our company and auditors. If the third partythird-party storage facilities we engage cannot adequately provide such similar services as provided by a custodian, then this could adversely affect the value, the security, the quantity and our ability to keep track of our indium holdings.
Potential additional regulation of the purchase, sale or storage of indium may adversely affect our operations and may increase our costs.
We may be affected by changes in regulatory requirements, customs, duties or other taxes regarding indium. SuchAlthough we are not currently aware of any potential changes in the regulatory requirements regarding indium, such changes could, depending on their nature, adversely affect us.
We may distribute unused proceeds of this offering tous by increasing our stockholders as a return of capitalcosts.
Our Manager and in such event our stock price may decrease in order to reflect the lower NMV of our company.
If the Manager has not, within 18 months after the closing of the offering, purchased indium in sufficient quantity to utilize at least 50% of the net proceeds of this offering that have been allocated for the purchase of indium, our board of directors will have the discretion to distribute such unused proceeds to our stockholders as a return of capital. Any such distributions will lower the amount of cash available to purchase additional indium which will, in turn, lower the NMV of our company. Such decision by our board of directors to distribute the unused proceeds to the stockholders may be based on numerous industry factors, including, but not
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limited to, (i) whether or not we have entered into any long-term supply contracts with suppliers; or (ii) other factors affecting market conditions at that time. In the event our Board determines to distribute such unused proceeds to our stockholders, there can be no assurance as to the amount of proceeds which will then be available for such distribution resulting from the fact that a portion of such proceeds will be used to pay expenses regarding this offering,contracted third-party claims, damages, liabilities and any and all other costs and expenses associated with the operation of our business.
The proceeds of our IPO will not be held in an escrow account.
The net proceeds of this offering will not be held in an escrow account. Accordingly, there is no restriction on our ability to use such funds for any corporate purpose we deem necessary to accomplish our corporate objectives as described herein. If the Manager has not, within 18 months after the closing of the offering, purchased indium in sufficient quantity to utilize at least 50% of the net proceeds of this offering that have been allocated for the purchase of indium, our board of directors will have the discretion to distribute such unused proceeds to our stockholders as a return of capital. In the event our Board determines to distribute such unused proceeds to our stockholders, there can be no assurance as to the amount of proceeds which will then be available for such distribution resulting from losses, third-party claims, damages, liabilities and any and all other costs and expenses associated with the operation of our business.
Our Managerstorage facilities it utilizes will not be responsible for conducting any chemical assays or otherhiring independent labs to perform assay tests designedon every ingot of indium delivered to us to verify that such indium meets the minimum 99.97%99.99% purity requirements referred to in our prospectus.business plan. If the indium purchased is below spec grade of 99.97%99.99% purity, the value of our indium stockpile will be worth less than stated.
Our Manager will beis responsible for conducting limitedensuring that the contracted third-party storage facilities it utilizes conducts visual inspections ofand spot checks the indium delivered to us. In addition, the facility must be capable of arranging and facilitating random assay testing to be conducted by independent third-party assayers, at our expense. Our Manager and contracted third-party storage facilities will not be responsible for conducting any chemical assays or other tests designed to verify that suchevery indium ingot delivered meets the minimum 99.97%99.99% purity requirements referred to in our prospectus.requirements. Our Manager will rely on the good faith of its suppliers to provide indium that meets our requirements. If the indium purchased is below spec grade of 99.97%99.99% purity, the value of our indium stockpile will be worth less than stated, we would therefore incur a write down, which would negatively impact the NMV of our company and harm our reputation. If indium is purchased from or loaned to a third-party supplier that is not known to be a regular industry supplier, our Manager, at its discretion, may hire, at our expense, an independent lab to perform random assay tests using glow-discharge mass spectrometry (GDMS) to verify the purity of the indium. The Manager anticipates purchasingpurchases indium with a minimum purity of 99.97% or better from regular industry suppliers.99.99%. We do not intend to brand specific companies and assayers. It is our intention to deal only with known regular industry suppliers and participants. We consider the miners, refiners, suppliers and trading houses listed in our “Competition”‘‘Competition’’ section to be a partial list of known regular indium industry suppliers. WeThe contracted third-party facilities we utilize will only use, onlyat our expense, reputable independent assayers recommended by reliable third party sources.to randomly test indium delivered to us. It is possible that theour indium stockpile will contain ingots of a purity level below 99.97%. This99.99%, which would decrease our NMV and negatively impact our share price.
We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective.
We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire and stockpile indium. We will not generate any revenues or income until, at the earliest, after lending or selling some or all of the indium that we acquire with the proceeds from this offering.
Our ability to continue as a going concern is dependent on us raising funds in this offering.
We have no present revenue and will not generate any revenue until, at the earliest, after the sale or lending of indium that we acquire with the offering proceeds. We have a limited amount of available cash and working capital. The report of our independent registered public accountants on our financial statements includes an explanatory paragraph referring to conditions that raise substantial doubt about our ability to
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continue as a going concern. The financial statements do not include any adjustments that might result from our inability to consummate this offering or our ability to continue as a going concern.
We may suffer from losses as a result of our inability to obtain insurance to cover loss or theft of our inventory.
We
We currently store and expect to continue to store our inventory at third-party warehouse facilities and will expect thatrequire the third-party facilities willto maintain an adequate level of insurance to protect us from loss due to theft, damage or other events. We may, in the alternative, seek our own insurance coverage for such potential losses. We may not be able to obtain such insurance, or that the level of coverage will keep us fully insured due tothe fluctuating value of indium. Further, the cost of such insurance may impact our operating expenses, whether obtained by us or through the third-party facility.
We may need to raise additional capital and may encounter unforeseen costs. If the terms on which the additional capital is available are unsatisfactory or if the additional capital is not available at all, we may not be able to pursue our objective and strategy.
Our expenses will beare funded from cash on hand from the proceeds from the sale of the offeringsecurities not otherwise utilized for the purchase of indium. Once such cash available has been expended,spent, we will be required to generate cash resources from the sale or lending of indium, debt incurrence or the sale of additional equity securities. Our ability to obtain additional financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance and the value of indium. We may not be successful in our efforts to arrange additional financing on terms satisfactory to us or at all. If additional financing is raised by the issuance of common stock, youstockholders may suffer additional dilution and if additional financing is raised through debt financing, it may involve significant restrictive covenants which could affect our ability to operate our business. If adequate funds are not available, or are not available on acceptable terms, we may not be able to continue our operations, grow our business or take advantage of opportunities in connection with the operation of our business.
We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders.
Subject to there being a current prospectus under the Securities Act of 1933 with respect to the common stock issuable upon exercise of the warrants, we may redeem the warrants issued as a part ofincluded in our units at any time after six months following the effective date of this prospectus in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30of30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $9.00$8.00 per share for any 20 trading days within a 30 trading30-trading day period ending three business days before we send the notice of redemption. In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offeringthe IPO and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii)or(iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. We expect most purchasers of our warrants will hold their securities through one or more intermediaries and consequently youwarrant holders are unlikely to receive notice directly from us that the warrants are being redeemed. If you failthe warrant holder fails to receive notice of redemption from a third partythird-party and yourthe warrants are redeemed for nominal value, youwarrant holders will not have recourse to us.
We are required to use our best efforts to have an effective registration statement covering the issuance of the shares of common stock underlying the warrants at the time that our warrant holders exercise their warrants. We cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants.
Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933, as amended (the “Securities Act”) relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares of common stock are qualified for sale or exempt from qualification under the
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applicable securities laws of the states in which the various holders of warrants reside. We will undertake in the underwriting agreement to be executed between us and the underwriters, and therefore will have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares of common stock underlying the warrants following completion of this offering to the extent required by federal securities laws, and we intend to comply with our undertaking. We may not be able to comply with such undertaking. In addition, we will agreeagreed to use our reasonable efforts to register the shares of common stock underlying the warrants under the blue sky laws of the states of residence of the existing warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares of common stock issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares of common stock underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock.
We depend upon our senior management and their loss or unavailability could put us at a competitive disadvantage.
We
We currently depend upon the efforts and abilities of our senior executives,executive officers, particularlyAlan Benjamin, our Chairmanchairman and Chief Executive Officer,chief executive officer, Ailon Grushkin, our President,president, and Richard Biele, our Chief Operating Officer,chief operating officer, each of whom is also a member of our Manager. The loss or unavailability of particularly the services of any of these individuals for any significant period of time would have a material adverse effect on our business, prospects, financial condition and results of operations. We expect toFurther, we have in place a key-person lifenot purchased any key- man insurance with respect tofor our executive officers and directors or any members of the loss of services of Ailon Grushkin in the amount of $1 million upon the effective date of this offering.Manager.
We will depend on our Manager and the loss of our Manager could have a material adverse impact on our business.
Our Manager may terminate the Management Services Agreement, as amended and restated, after the initial term in accordance with the terms thereof. We may not be able to readily secure similar services as those to be provided under the Management Services Agreement and our operations will therefore be adversely affected if our Management Services Agreement is terminated.
Members of our Boardboard of Directorsdirectors have not worked together as a group for a significant period of time and they each have only some or no experience as a director of a public company. As a result, they may not be able to effectively manage our business.
Our board of directors consists of threefour executive directors and twothree independent directors. NoneOnly one of our current independent directors havehas experience as a director of a public company. As a result, our board of directors will lack a history of working together as a group and currently lacks significant experience in operating a public company. The lack of shared experience and lack of significant experience of our board of directors in operating a public company could have an adverse effect on its ability to quickly and efficiently respond to problems and effectively manage our business and deal effectively with the issues surrounding the operation of a public company.
Possible conflict
Our officers and directors may allocate their time to other businesses, thereby causing conflicts of interests betweeninterest regarding the amount of time such officers and directors will devote to our directors and officersaffairs, which could affect our business.
Our officers and directors are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other commitments. Our Manager, officers and board of directors will allocate, in the aggregate, approximately 120 hours per week during the stockpiling phase of the business plan. Once the stockpiling effort is complete, the number of hours allocated by the Manger, officers and board of directors to our affairs in the aggregate will be approximately 60 hours per week. Our executive officers and directors are currently employed by other entities and are not
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obligated to devote any specific number of hours to our affairs. If other entities require them to devote more substantial amounts of time to their business and affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our operations. These conflicts may not be resolved in our favor.
Furthermore,
We have limited protections in place to prevent our Manager from competing with us, which may adversely affect our business.
We have limited protections in place to prevent our Manager from competing with our company or taking on a potential business opportunity intended for our company for itself. Pursuant to the Management Services Agreement as amended and restated, the Manager may compete with us or take a business opportunity for itself as long as the Manager does not interfere with, disrupt or attempt to disrupt any existing relationship, contractual or otherwise, between our company or our subsidiaries and any of our customers, suppliers, clients, executives, employees, vendors, licensees or business relations or other persons with whom we entered into a Purchase/Supply/Agency Agreement with Unionmetor our subsidiaries deal or in any way disparage our company to purchase a minimum of ten (10) metric tons of indium and agreed to pay Unionmet a commission for all transactions negotiated by Unionmet on our behalf or introductions brokered by Unionmet between us and other indium suppliers resulting in a transaction. The termany of the Agreement shall begin on the effectiveness of this offering and terminate one year after the effectiveness of this offering. Certain members of our Manager, officers and board of directors, Ailon Grushkin, Richard Biele and Richard Morena, directly or beneficially hold shares of Unionmet.above. As a result, such members of our Manager, officers and board of directors may experience a conflict of interest in future transactions with Unionmet and such conflict couldthis would have a negative impactmaterial adverse effect on our operations. For a discussionbusiness, prospects, financial condition and results of potential conflicts of interest that you should be aware of seeoperations if such persons were to compete with the section below entitled “Conflicts of Interest”.company.
Stockholders willdo not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940, as amended, or the protections afforded by the Commodity Exchange Act of 1936 (“(‘‘Commodity Exchange Act”Act’’ or “CEA”‘‘CEA’’).
We are not registered as an investment company under the Investment Company Act of 1940, as amended, and are not required to register under such act. Consequently, stockholders willdo not have the regulatory protections provided to investors in investment companies. We will not hold or trade in commodity futures contracts regulated by the CEA, as administered by the Commodity Futures Trading Commission.Commission (‘‘CFTC’’). Furthermore, we are not a commodity pool for purposes of the CEA, and neither we nor the Manager is subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with our securities. Consequently, stockholders willdo not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.
Geopolitical and International Risks
International and political events could adversely affect our results of operations and financial condition.
A significant portion of our revenue may be derived from non-United States operations and our indium will be warehoused at locations outside the United States, including Canada, the United Kingdom and the Netherlands, which exposes us to risks inherent in doing business in each of the countries in which we transact business. The occurrence of any of the risks described below could have a material adverse effect on our results of operations and financial condition.
Operations in countries other than the United States are subject to various risks peculiar to each country. With respect to any particular country, these risks may include:
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Income taxesWe could be subject to taxation in various jurisdictions with varying tax laws, which could adversely affect our operations.
We
We may have operations in countries other than the United States. Consequently, we could be subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-basedrevenue- based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction, as well as the significant use of estimates andassumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
Foreign exchange and currency risks could adversely affect our revenues and operating expenses.
A portion of our revenue and operating expenses may be in foreign currencies. If we choose to store indium in Canada, we may be adversely affected by fluctuations in the U.S. dollar relative to the Canadian dollar. If we choose to store indium in the United Kingdom, we may be adversely affected by fluctuations in the U.S. dollar relative to the British Pound. If we chose to store indium in the Netherlands, we may be adversely affected by fluctuations in the U.S. dollar relative to the Euro. As a result, we would be subject to significant risks, including:
We may conduct business in countries that have nontradednon-traded or “soft”‘‘soft’’ currencies which, because of their restricted or limited trading markets, may be more difficult to exchange for “hard”‘‘hard’’ currency. We may accumulate cash in soft currencies, and we may be limited in our ability to convert our profits into United States dollars or to repatriate the profits from those countries.
We
We may selectively use hedging transactions to limit our exposure to risks from doing business in foreign currencies. For those currencies that are not readily convertible, our ability to hedge our exposure would be limited because financial hedge instruments for those currencies are nonexistent or limited. Our ability tohedge would also be limited because pricing of hedging instruments, where they exist, is often volatile and not necessarily efficient.
In addition, the value of the derivative instruments could be impacted by:
Risks Related to Our Units, Common Stock and This Offering
Warrants
We do not anticipate paying cash dividends on our common stock in the foreseeable future.
We are not a mutual fund and an investment in our units shall not be redeemable. In addition, our liquidity will rely principally on our ability to lend and sell indium. Accordingly, we are unlikely to have resources to declare any dividends or make other cash distributions unless and until a determination is made to sell a portion of our indium holdings. Since our inception we have not declared any dividends and we have no current intention to declare any dividends.
Determination of the NMV of our securities will materially impact the market price of our securities.
Our reported NMV per share is based on the spot prices of indium published by Metal Bulletin as posted on Bloomberg L.P. The per share NMV shall be determined by (x) multiplying the number of kilograms of ourofour indium holdings by the last spot price for indium published by Metal Bulletin posted on Bloomberg L.P. for the month,, plus cash and any other assets, less any and all of our outstanding payables, indebtedness and any
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other liabilities.liabilities, (y) divided by our total number of outstanding shares of our common stock. Accordingly, the NMV is a market value that may not necessarily reflect the actual “realizable value”‘‘realizable value’’ upon the sale of our indium holdings. The market price of our securities is expected tomay or may not vary based on the net market value ofNMV. We post our assets.NMV on our website bi-weekly. We cannot predict whether theour common stock or units will trade above, at or below our net market value.NMV.
Currently there is no liquid market for indium. Indium is often quoted on various data service providers with a price differential in excess of $100$50 per kilogram among providers. A price posted by one data service provider may be higher or lower than the price at which we can actually sell or purchase all or part of our indium stockpile. This will makemakes it difficult for investors to determine our exact NMV and therefore the value of our stock.
If we lend our stockpile of indium, we may sustain losses and our NMV may be adversely affected.
If we lend indium under an Unconditional Sale and Purchase Agreement (“USPA”) and the borrower defaults on the sale back to us of an equivalent quantity and purity of physical indium owed, we may be negatively affected if the price of indium rises and our replacement cost is then higher. This may cause us to sustain losses or lost appreciation in the value of our indium stockpile which will negatively affect our NMV.
If an active, liquid trading market for our unitssecurities does not develop, youholder of our securities may not be able to sell yourtheir units, common stock or warrants quickly or at or above the initial offeringtheir purchase price.
Prior to this offering, there has not been a public market for our units.
An active and liquid trading markettradingmarket for our units maysecurities has not developdeveloped or be sustained following this offering. Youbeen sustained. Holders of our securities may not be able to sell yourtheir units, common stock or warrants quickly or at or above the initial offeringtheir purchase price if trading in our unitssecurities is not active. The initial public offering price may not be indicative of prices that will prevail in the trading market. See “Underwriting” for more information regarding the factors that will be considered in determining the initial public offering price.
Purchasers in this offering will experience immediate dilution in the book value of their investment.
The initial public offering price of our units is higher than the net tangible book value per share of our units immediately after this offering. Therefore, if you purchase our units in this offering, you will incur an immediate dilution of $0.38 per share (or 7.52%) in net tangible book value per unit from the price you paid, based upon the initial public offering price of $5.00 per unit. The exercise of warrants underlying the units will result in further dilution of your investment. In addition, if we raise funds by issuing additional securities, the newly issued securities may further dilute your ownership interest.
Our outstanding options, warrants and unit purchase option may have an adverse effect on the market price of common stock and make it more difficult to obtain future financing. As of April 18, 2012, we In connection with this offering,will be issuinghave outstanding warrants, options and unit purchase options to purchase up to 11,000,0007,870,600 shares of common stock issued and have agreed to sell to the representatives of the underwriters an option to purchase up to a total of 550,000 units. In addition, we have also agreed to issue up to an additional 1,650,000 warrants to purchase additional shares of common stock if the over-allotment option that we granted to the underwriters is exercised in full. In connection with the 2008 Long-Term Incentive Compensation Plan, we have agreed to issue options to purchase 45,000 shares of common stock, which will fully vest and will become exercisable only upon the completion of this offering.
outstanding. The sale or even the possibility of sale of the shares of common stock underlying the warrants and such options could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent these warrants and options are exercised, youholders may experience dilution to yourtheir holdings.
The determination for the offering price of our units is more arbitrary compared with the pricing of securities for an operating company in a particular industry.
The public offering price of the units and the terms of the warrants were negotiated between us and the representatives of the underwriters. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include:
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However, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since we have no historical operations or financial results to compare them to.
We could issue “blank check”‘‘blank check’’ preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights.
Our certificate of incorporation, as amended, authorizes the issuance of up to 1,000,000 shares of “blank check”‘‘blank check’’ preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company.
Even after
Our securities are quoted on the OTC Bulletin Board and the OTCQB, which limits the liquidity and price of our securities aremore than if our securities were to be quoted or listed on the AmericanNasdaq Stock Exchange,Market or another national exchange.
Our units, common stock and warrants trade in the Americanover-the-counter market and are quoted on the OTC Bulletin Board, a FINRA-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Exchange may delistMarket, and/or the OTCQB, a similar marketplace operated by Pink OTC Markets Inc. Quotation of our securities from quotation on its exchange, which could limit investors’ ability to make transactions inthe OTC Bulletin Board and the OTCQB limits the liquidity and price of our securities and subject us to additional trading restrictions.
We anticipate thatmore than if our securities will bewere quoted or listed on the AmericanNasdaq Stock Exchange,Market or a national exchange. Lack of liquidity limits the price at which our securities exchange, upon consummationmay be sold or whether our securities may be sold at all.
A market for our securities may cease to exist, which would adversely affect the liquidity and price of this offering. our securities.
Our securities are quoted on the OTC Bulletin Board and the OTCQB. Stockholders and prospective stockholders have only limited access to information about prior trading history on which to base their investment decision. The price of our securities may vary significantly due to our reports of operating losses, one or more potential business transactions, the filing of periodic reports with the SEC and general market and economic conditions. An active tradingmarket for our securities may never develop or, if developed, it may not be listedsustained. In addition, the price of the securities varies due to general economic conditions and if listed, may not continue toforecasts, our generalbusiness condition and the release or our financial reports. Unless a market can be listed on the American Stock Exchange in the future. If the American Stock Exchange delistsestablished or sustained, holders of our securities from trading on its exchange, we could face significant material adverse consequences, including:may be unable it sell their securities.
If penny stock regulations impose restrictions on the marketability of our common stock, the ability of our stockholders to sell shares of our common stock could be impaired.
The Securities and Exchange Commission, or the SEC has adopted regulations that generally define a “penny stock”‘‘penny stock’’ to be an equity security that has a market price of less than $5.00 per share or an exercise priceexerciseprice of less than $5.00 per share, subject to certain exceptions. Exceptions include equity securities issued by an issuer that has (i) net tangible assets of at least $2,000,000,$2 million, if such issuer has been in continuous operation for more than three years, or (ii) net tangible assets of at least $5,000,000,$5 million, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000$6 million for the preceding three
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years. Unless an exception is available, the regulations require, that prior to any transaction involving a penny stock, a risk disclosure schedule must be delivered to the buyer explaining the penny stock market and its risks.
You should be aware that, accordingAccording to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
We are aware of the abuses that have occurred in the penny stock market. We doare not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market. We will strive within the confines of practical limitations to prevent such abuses with respect to our common stock.
Provisions in our charter documents and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.
Our charter and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. As a result, at any annual meeting only a minority of the board of directors will be considered for election. Since our “staggered board” would prevent our stockholders from replacing a majority of our board of directors at any annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders.
Moreover, our board of directors has the ability to designate the terms of, and issue new series of preferred stock.
We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
21Cautionary Statement Regarding Forward-Looking Statements
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” TheseThe statements involvecontained in this prospectus that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,, and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties and other factors which maythat could cause our actual results performance, or achievements to bediffer materially different from any future results, performance, or achievements expressed or implied bythose described in the forward-looking statements.These statements appear in a number of places in this prospectus and include statements regarding the intent, belief or current expectations of SMG Indium Resources Ltd. Forward-looking statements include, but are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value of our securities, including and not limited to statements about:
Although we have sought to identify the future value of our common stock;
In some cases, you can identify forward-looking statements by termswe cannot predict whether, or to what extent, any of such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.may be realized, nor is there any assurance that we have identified all possible issues that we might face. We discuss many of these risks inthisprospectus in greater detail under the heading “Risk Factors” beginning on page 7.5. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any forward-looking statements publicly or to update the reasons actual resultscould differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
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USE OF PROCEEDS
We estimate that our netwill not receive any of the proceeds from the sale of 11,000,000 unitsthe common stock by the selling stockholders named in this offering at a price per unitprospectus. All proceeds from the sale of $5.00the common stock will be approximately $51,274,188 after deducting estimated offering expensespaid directly to the selling stockholders. We may receive proceeds from the exercise of $425,812, underwriting discounts and commissionsthe warrants. If all of $2,750,000, and a corporate finance feethe warrants exercisable for shares of $550,000, and assuming an initial public offering price of $5.00 per share. If the over-allotment option iscommon stock are exercised, in full, we estimate that ourcould receive net proceeds of up to approximately $40.2 million. The holders of the warrants are not obligated to exercise the warrants and we cannot assure that the holders of the warrants will be approximately $59,029,188.choose to exercise all or any of the warrants.
We currently intend to use the estimated net proceeds of this offering as follows:
| | | ||||||
| Approximate Allocation of Net Proceeds | Approximate Percentage of Net Proceeds | |||||||
| Purchase of Indium(1)(3) | $ | 43,583,060 | 85.0 | % | ||||
| General corporate purposes, including working capital(2)(3) | $ | 7,691,128 | 15.0 | % | ||||
| Total | $ | 51,274,188 | 100.0 | % | ||||
The allocationreceived upon exercise of the net proceeds of the offering set forth above represents our estimates based upon our current planswarrants, if any, for purchasing and assumptions regarding industrystockpiling indium, working capital and general economic conditions and our future revenues and expenditures.
Investors are cautioned, however, that expenditures may vary substantially from these estimates. Investors will be relying on the judgment of our management, who will have broad discretion regarding the application of the proceeds of this offering. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount of cash generated by our purchases and sales and the amount of competition we face. We may find it necessary or advisable to use portions of the proceeds from this offering for othercorporate purposes.
Circumstances that may give rise to a change in the use of proceeds include:
From time to time, we evaluate these and other factors and we anticipate continuing to make such evaluations to determine if the existing allocation of resources, including the proceeds of this offering, is being optimized. Pending such uses, we intend to invest the net proceeds of this offering in direct and guaranteed obligations of the United States, interest-bearing, investment-grade instruments or certificates of deposit.
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If the Manager has not, within 18 months after the closing of the offering, invested in indium at least 50% of the proceeds of the offering that have been allocated for the purchase of indium, our board of directors will have the discretion to distribute such unused proceeds to our shareholders as a return of capital. Any such distributions will be subject to applicable law. Any interest earned on the proceeds of this offering shall be utilized for general corporate and working capital expenses and shall not be distributed to shareholders in the event that the board of directors determines to distribute unused proceeds to shareholders.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the purchase of indium and expansion of our business, and we do not anticipate paying any cash dividends for the foreseeable future following this offering. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
CAPITALIZATION
Market Price and Dividend Information
Our units, common stock and warrants are quoted on the OTC Bulletin Board and/or the marketplace operated by Pink OTC Markets Inc. (“OTCQB”) under the symbols “SMGIU.OB” “SMGI.OB” and “SMGIW.OB.” The following table sets forth the capitalizationhigh and low sales prices for our units, common stock and warrants, as of June 30, 2008, both before andreported by the OTCQB since our securities began trading after giving effect to the sale of 11,000,000 units at the initial public offering price of $5.00 per unit, after deducting underwriting discounts, commissions, the corporate finance fee, and estimated offering expenses payable by us:our IPO in May 2011:
| | | ||||||
| At June 30, 2008 | ||||||||
| Actual | Pro Forma | |||||||
| Stockholder Equity: | ||||||||
| Preferred Stock, $.001 par value, 1,000,000 shares authorized; -0- shares issued and outstanding | $ | — | $ | — | ||||
| Common Stock, $.001 par value, 50,000,000 shares authorized; 90,000 shares issued and 11,090,000 to be issued and outstanding, pro-forma | 90 | 11,090 | ||||||
| Additional paid-in capital | 9,910 | 51,298,098 | ||||||
| Deficit accumulated during the development stage | (7,923 | ) | (32,923 | ) | ||||
| Total Stockholders Equity | $ | 2,077 | $ | 51,276,265 | (1) | |||
| Total Capitalization | $ | 2,077 | $ | 51,276,265 | ||||
| Units | Common Stock | Warrants | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
| Fiscal Year 2011, Quarter Ended: | ||||||||||||||||||||||||
| June 30, 2011 | $ | 5.25 | $ | 4.50 | ||||||||||||||||||||
| September 30, 2011 | $ | 5.20 | $ | 4.20 | $ | 4.50 | $ | 4.00 | $ | 0.50 | $ | 0.45 | ||||||||||||
| December 31, 2011 | $ | 4.51 | $ | 3.50 | $ | 3.95 | $ | 3.25 | (2 | ) | (2 | ) | ||||||||||||
| Fiscal Year 2012, Quarter Ended: | ||||||||||||||||||||||||
| March 31, 2012 | $ | 3.90 | $ | 3.50 | $ | 3.78 | $ | 3.20 | $ | 0.35 | $ | 0.20 | ||||||||||||
| (1) |
DILUTION
The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities by the number of outstanding shares of our common stock.
At June 30, 2008, our net tangible book value was $(205,766). After giving effect to the sale of 11,000,000 shares of common stock included in the units at an initial public offering price of $5.00 per unit, and the deduction of underwriting discounts, the corporate finance fee and estimated expenses of this offering, our pro forma net tangible book value at June 30, 2008 would have been $51,276,265 or $4.62 per share, representing an immediate increase in net tangible book value of $6.91 per share to the existing stockholders and an immediate dilution of $0.38 per share or 7.52% to new investors.
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The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units:
| | |||
| Public offering price(1) | $ | 5.00 | ||
| Net tangible book value before this offering | $ | (2.29 | ) | |
| Increase attributable to new investors | $ | 6.91 | ||
| Pro forma net tangible book value after this offering(2) | $ | 4.62 | ||
| Dilution to new investors | $ | 0.38 | ||
| (2) |
The following table sets forth information with respect to
As of April 20, 2012, the closing sales price of our existingunits, common stock and warrants on the OTC Bulletin Board was $3.50,$3.055 and $0.35, respectively. As of April 18, 2012, there were approximately265 stockholders and the new investors:of record of our common stock.
| | | | | | |||||||||||||||
| Shares Purchased | Total Consideration | Average Price Per Share | ||||||||||||||||||
| Number | Percentage | Amount | Percentage | |||||||||||||||||
| Existing stockholders | 90,000 | 0.81 | % | $ | 10,000 | .02 | % | $ | 0.111 | |||||||||||
| New investors | 11,000,000 | 99.19 | % | 55,000,000 | 99.98 | % | 5.000 | |||||||||||||
| 11,090,000 | 100.0 | % | $ | 55,010,000 | 100.0 | % | $ | 4.96 | ||||||||||||
The pro forma net tangible book value after the offering is calculated as follows:
| | |||
| Numerator: | ||||
| Net tangible book value before this offering | $ | (205,766 | ) | |
| Net proceeds from this offering(1) | $ | 51,274,188 | ||
| Offering costs paid in advance and excluded from net tangible book value before this offering | 207,843 | |||
| $ | 51,276,265 | |||
| Denominator: | ||||
| Shares of common stock outstanding prior to this offering | 90,000 | |||
| Shares of common stock included in the units offered | 11,000,000 | |||
| Total | 11,090,000 | |||
| 21 |
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TABLE OF CONTENTSManagement’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materiallyfrom those anticipated in these forwarding looking statements as a result of certain factors, including but not limited to, those which are not within our control.
Overview
We were formed under the laws of the State of Delaware on January 7, 2008. On April 2, 2008, we changed our name from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. On May 4, 2011, we amended our certificate of incorporation to provide for 40,000,000 shares of authorized common stock, par value $0.001 per share and 1,000,000 shares of authorized preferred stock, par value $0.001. In addition, we amended our corporate charter extending the life of the Company to perpetuity. We were formed to purchase and stockpile the specialty metal indium. We intend to utilize cash derived from the proceeds of offerings of our capital stock, debt, or a combination of cash, capital stock and debt, for acquiring and storing indium.
In 2010, we completed a private placement that resulted in net proceeds of approximately $5.6 million. With the capital raised through the private placement, we began purchasing and stockpiling indium. In May 2011, we completed an IPO of an aggregate of 5,084,750 units at $5.00 per unit and raised aggregate net proceeds of approximately $24.0 million including the partial exercise of the underwriters’ overallotment option. Each IPO unit consisted of one share of the Company’s common stock and one redeemable common stock purchase warrant. Each warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.75 per share commencing with the effective date of the registration statement and expiring on May 4, 2016. Of the total raised in the IPO, 85% of the net proceeds, or approximately$20.4 million, was committed to be used to purchase and stockpile indium and 15% of the net proceeds, or approximately$3.6 million, is used for general working capital to fund operations. As of March 31, 2012, we have purchased or committed to purchase a sufficient quantity of indium to satisfy our commitment to use 85% of the net proceeds of the IPO for the purchase of indium.
Effective August 4, 2011, the units sold in the IPO were eligible to be separated and in addition to the units trading under the ticker symbol SMGIU.OB, the common stock and the warrants trade separately under the ticker symbols SMGI.OB and SMGIW.OB, respectively.
On January 5, 2012, we closed a private placement, the 2012 Private Placement, of an aggregate of 2.0 million shares of our common stock at $3.75 per share to two accredited investors, Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., for an aggregate purchase price of $7.5 million. Raging Capital Management, LLC is the general partner of Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., respectively, and collectively, the entities represent our largest stockholder(s). Such entities are affiliated and controlled by William C. Martin, our director and member of our Manager, Specialty Metals Group Advisors LLC. We intend to use 85% of the gross proceeds, or approximately $6.4 million, from such transaction to purchase and stockpile the metal indium and 15% of the gross proceeds, or approximately $1.1 million, for general corporate purposes.
Our Company
We were formed to purchase and stockpile the metal indium. Our strategy is to achieve long-term appreciation in the value of our indium stockpile, and not to actively speculate with regard to short-term fluctuations in indium prices. We plan to achieve long-term appreciation in the value of our indium stockpile primarily through price appreciation of the physical metal. Although the price of indium has declined 39.2%substantially from its high in March 2005, it is our belief that the long-term industry prospects for indium are attractive and over time the price of the metal will appreciate. However, there is no assurance that the price of indium or the value of the Company’s securities will increase over time. To our knowledge, therethis is currently is no way forthe only investment that allows potential stockholders to participate in the price appreciation of indium unless they takeother than physical delivery of the metal themselves.itself. Our structure provides an easya simple and efficient mechanism by which a potential public stockholder may benefit from the appreciation in the price of indium.
Our business model is designed to capture the long-term appreciation of the price of indium. Over the last five years, the price of indium has appreciated 163.2% (32.6% annually) from $190 per kilogram in September 2003 to $500 per kilogram in September 2008. Over the last ten years, the price of indium has appreciated 104.1% (10.4% annually) from $245 per kilogram in September 1998 to $500 per kilogram in September 2008. Over the last fifteen years, the price of indium has appreciated 203.0% (13.5% annually) from $165 per kilogram in September 1993 to $500 per kilogram in September 2008. Over the last twenty-five years, the price of indium has appreciated 385.4% (15.4% annually) from $103 per kilogram in 1983 to $500 per kilogram in September 2008. Over the last fifty years, the price of indium has appreciated 594.4% (11.9% annually) from $72 per kilogram in 1958 to $500 per kilogram in September 2008.
Our indium will be insured and physically stored in third-party facilities. While it is not our current intention to do so in the short term, at our discretion, we may subsequently lend or sell some or all of our indium stockpile based on market conditions. Our shareholders willstockholders have the ability to effectively purchase an interest in indium in a manner that does not directly include the risks associated with ownership of companies that explore for, mine and process indium. Our common shares represent an indirect interest in the physical indium we will own.
All of the indium we purchase and own is, and will be, insured and physically stored in third-party warehouses or storage facilities located in the United States, Canada, and the Netherlands and/or the United Kingdom. Our Manager, Specialty Metals Group Advisors LLC, which is a related party, will negotiate storage arrangements offor our indium holdings and is required to use its best effortcommercially reasonable efforts to ensure that the indium holdings have the benefit of insurance arrangements obtained on standard industry terms.
We intend to store our indium stockpile in reputable, adequately capitalized and insured third party facilities that have the following characteristics.
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We utilize and expect to continue to utilize facilities that meet our requirements that are either (i) located closest in proximity to our indium suppliers in order to reduce transportation fees or (ii) facilities located closest in proximity to our corporate headquarters or satellite offices in order to facilitate our ability to inspect our inventory and reduce future corporate expenses associated with travel. We believe there are numerous third partythird-party storage facilities that provide more than adequate services that meet our criteria, which eliminates the need for hiring a custodian.
Initially, As of December 31, 2011, we purchased approximately 34.5 mt of indium aggregating approximately $22.3 million of indium which is currently stored in a member of senior management will be responsible forsecure insured bonded warehouse facilities’ inspection. We expect our Chief Executive Officer and or our Chief Operating Officer to inspect the facilities.facility located in New York owned by Brink’s. The facilities will be visited at least once per year for inspection. We may insure the warehouse contents above and beyond a bonded warehouse to guarantee we will not sustain a loss in the event of an unforeseen catastrophe or we deem the warehouse insurance company’s insurance inadequate.
Our expenses will be required to be satisfied by cash on hand that is not set aside for the purchase of indium. Cash on hand following completion of the offering is expected to be sufficient to satisfy our expenses for approximately 48 to 55 months. Annualthree years. Our annual cash operating expenses, including corporate taxes,management fees, are estimated to be approximately $1,675,000.$1.4 million. We may subsequently lend or sell some, or all, of our indium stockpile to cover our operating expenses. Alternatively, we may seek to raise additional capital to cover our operating expenses through potentially dilutive equity offerings or debt financing. For a detailed description of such expenses, please see “Management‘‘Management of SMG Indium Resources Ltd. - Management Services Agreement.”’’ We are a taxable United StatesU.S. corporation and are subject to federal and state taxes.
Assuming we are able to utilize 85.0% of the net proceeds of this offering to purchase the
Our stockpile of indium at $500 per kilogram,may decrease over time due to sales of indium necessary to pay our annual operating expenses. Without increases in the price of indium would needsufficient to increase approximately 12.4% within 12 months to offset the depreciation incompensate for such decreases, our NMV associated with themay also decline. Regardless of our ability to purchase indium in a timely manner, we incurred initial offering expenses of $3,725,812approximately $1.5 million and annualprojected yearly cash operating expenses of $1,675,000.approximately $1.4 million. Further, we have and expect to continue to incur, from time to time, non-cash share-based compensation expenses which are not included in the aforementioned yearly cash operating expenses. The price of indium would need to increase approximately 16.2% within 24 months or 8.1% on average per annumappreciate substantially to offset the depreciationreduction in our NMV due to the expenses listed above. The percentage increase required cannot be accurately determined at this time. It is highly dependent upon several variables including, but not limited to, the exact number of kilograms of indium purchased, the average price paid and the amount of time it takes for us to fully spend the proceeds from the 2012 private placement to complete our indium stockpile. The annual average price of indium would needincreased approximately 23.0% in 2011. It increased from $567 per kilogram in 2010 to increase approximately 20.1% within 36 months or 6.7%$696 per annum to offset the depreciationkilogram in our NMV due2011. According to the expenses listed above.USGS, the U.S. producer price for indium began the year 2011 at $570 per kilogram, increased to $690 per kilogram in April, and rose further to $785 per kilogram in May; the price remained at that level through early November. The New York dealer price range for indium began the year at $520 - $570 per kilogram and increased through early June, reaching a high of $800 - $875 per kilogram. The price then decreased to $630 - $670 per kilogram by early November before falling further to $540 - $600 per kilogram by the end of December. As a result, the price of indium has declined since the closing of our IPO in May 2011 resulting in a decline in NMV of approximately 12.6% and a write down of our indium inventory of approximately $3.3 million at December 31, 2011. The price of indium on April 18, 2012 was $550 per kilogram published by Metal Bulletin as posted on Bloomberg L.P.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles generally accepted in the United States(“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the audited financial statements and accompanying notes. Estimates are used for, but not limited to, purchasesvaluation of indium inventories, income taxes, share-based compensation and loss contingencies. Share based payment arrangement and derivative accounting to the extent it may apply with respect to any financial instruments we may issue. In addition, we will be required to review, at each reporting date, the applicability of the variable interest consolidation model prescribed under FASB Interpretation 46(R) with respect to our relationship with the Manager since it is owned by our founding stockholders. Substantial judgment applies with respect to the application of consolidation accounting.revenue recognition. Management will base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
Since the date of inception, we have not produced any revenues. Accordingly, our activities have been accounted for as those of a “Development State Company” as set forth in the Statement of Financial Standards No. 7, “Accounting for Development Stage Entities” (“SFAS No. 7”). Among the disclosures required by SFAS No. 7 are our financial statements being identified as those of a development stage company. In addition, the statements of operations and comprehensive loss, stockholders equity (deficit) and cash flows are required to disclose all activity since our date of inception.
We will continue to prepare our financial statements and related disclosures in accordance with SFAS No. 7 until such time that we have generated significant revenues and are deemed to have exited the development stage.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
ContractsWe account for the issuance of common stock purchase warrants and other free standing derivative financial instruments in accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed To, And Potentially In A Company’s Own Stock”. Based on the provisions of EITF 00-19, we classify as equity any common stock purchase contracts thatthat: (i) require physical settlement or net-share settlement or (ii) gives us a choice of net-cash settlement or settlement in ourits own shares (physical settlement or net-share settlement).settlement, and (ii) is index to our common stock. We classify as assets or liabilities any contracts thatcommon stock purchase contracts: (i) require
27
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside of our control) or, (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). or (iii) is not indexed to our common stock. We assess classification of our common stock purchase warrants and other free standing derivativesequity-classified contracts at each reporting date to determine whether a change in classification between assets and liabilities is required.
We currently have no Our outstanding free standing derivatives. Notwithstanding, we, as a matter of policy, will evaluate any common stock purchase warrantscontracts (warrants and unit purchase options) were accounted for as equity through December 31, 2011.
Employee Share-Based Payment Arrangements
We measure the cost of employee services received in exchange for an award of equity instruments (share based payments or other free standing derivatives at each reporting date to assess their proper classification using“SBP”) based on the applicable classification criteria enumerated in EITF 00-19.
A portion of our planned purchasing and stockpiling policy, whereby we enter into contracts for the future purchase of indium may expose us to fluctuations in thegrant-date fair value of these contracts duethe award. That cost is recognized over the period during which an employee is required to changesprovide service in exchange for the spot price as posted by Metal Bulletin on Bloomberg L.P., a real-time financial information services data platform. Therefore, in accordance with StatementSBP award—the requisite service period (vesting period). For SBP awards subject to performance conditions compensation is not recognized until the performance condition is probable of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the change inoccurrence. The grant-date fair value of these contracts will be currently recorded into earnings. During our initial period ending June 30, 2008, we had not yet entered into any of these contracts.
Employee Share Based Payment Arrangements
We accountshare options is estimated using the Black-Scholes-Merton option pricing model. Compensation expense for employee share based payment arrangements in accordance with the provision of SFAS 123R, “Share-Based Payments” (“SFAS 123R”). This statement is a revision of SFAS 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost thatgranted to nonemployees is measured at fair value onremeasured each period as the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations. We only recently adopted an equity incentive plan but have not yet issued any employee share-based payments and there is currently no compensation for the periods.underlying options vest.
Inventory or “Stockpile”‘‘Stockpile’’ of the Metal Indium
Our inventory or “stockpile” of the metal indium will beis recorded at cost including all associated costs of delivering the indium to the bonded storage warehouse on the date we take delivery of the physical metal. Cost is determined using the specific- identification method. The stockpile of the physical metal indium will beis classified as noncurrent as we do not expect to sell any of the indium during the next twelve months. The stockpile of the physical metal indium is carried at the lower of cost or market with cost being determined on a specific identificationspecific-identification method and market being determined as the net realizable value as computedbased the spot prices obtained from the closing spot price as posted by Metal Bulletin on Bloomberg L.P., a real timereal-time financial information services data platform, basedplatform. We will charge against earnings on an interim basis the last dayamount by which the spot price of the period. The difference betweenindium is less than cost and fair market value will be reviewed on a periodicspecific-identification basis. Increases in the spot price of indium for the same lot of indium held in inventory in later interim periods within the fiscal year are recognized in the later interim period. Increases in value recognized on an interim basis do not exceed the previously recognized diminution in value within that fiscal year. However, it should be noted that there may not be a correlation between the spot price of indium as publish by Metal Bulletin and posted on Bloomberg L.P. and the amount we may realize upon selling indium in the open market.
Further, we periodically review the indium stockpile to determine if a loss should be recognized where the utility of indium has been impaired.impaired on an other-than-temporary basis. Where such impairment is viewed as something other than temporary, we will reflect incharge against earnings the valueamount by which the fair market value is less than the cost. Realized gains (losses) from othersale transactions will be determined for income tax and for financial reporting purposes on specific identification method.a specific-identification method when incurred. At December 31, 2011, certain of lots of indium were adjusted to reflect a lower of cost or market write-down of approximately $3.3 million.
Income Taxes
We follow Statement
Income taxes are accounted under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of Financial Standards (SFAS) No. 109, “Accounting for Income Taxes” (SFAS No. 109) and FASB Interpretation No. 48, ”Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”). Under SFAS No. 109, which establishes financial accounting assumptions that affect the reported amounts ofexisting assets and liabilities and disclosure of contingentthe respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities atare measured using enacted tax rates expected to apply to taxable income in the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It establishes financial accounting assumptions that affect the reported amounts ofyears in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities and disclosure of contingent assets and liabilities ata change in tax rates is recognized in income in the dateperiod that includes the enactment date. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. A valuation allowance has been established against all of the financial statements anddeferred tax assets, as it is more likely than not that these assets will not be realized given our history of operating losses. We recognize the reported amountseffect of revenues and expenses during the reporting period. Such amounts were not material during the initial period ending June 30, 2008.
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impactonly if those positions are more likely than not of an uncertainbeing sustained. Recognized income tax position(s) on the income tax return must be recognizedpositions are measured at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing
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authority. An uncertain income tax position will not be recognized if it has lessgreater than a 50% likelihoodlikely of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accountingrealized. Changes in interim periods, disclosure and transition. Such amounts required to be recorded under Fin 48 were not material during the initial period ending June 30, 2008.
Recently Issued Accounting Pronouncements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We adopted the provisions of SFAS No. 157 at the date of our inception. The adoption of SFAS No. 157 did not have a material impact on our financial position, results of operationsrecognition or cash flows, however, this pronouncement may have an effect in the future.
In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Misstatements in Current Year Financial Statements (”SAB 108”). SAB 108 provides guidance on how the effects of the carry over or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (i) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (ii) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the filing of prior year financial statements after adoption. The cumulative effect of the correction would bemeasurement are reflected in the opening balance sheet with appropriate disclosure of the cause of the error and that error had been deemed to be immaterialperiod in the past. The adoption of this pronouncement did not have any material effects on our consolidated financial position, results of operation, or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, “(SFAS No. 159”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reportedchange in earnings The adoption of this pronouncement did not have any material effects on our consolidated financial position, results of operation, or cash flows, however, this pronouncement may have an effect in the future.judgment occurs.
In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 addresses share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified non-vested shares, (b) dividend equivalents on equity-classified non-vested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under SFAS 123R and result in an income tax deduction for the employer. A realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings are paid to employees for equity-classified non-vested shares, non-vested equity share units, and outstanding equity share options should be recognized as an increase in additional paid in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payments. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.
Revenue Recognition — Accounting for Direct Sales and Lending Transactions
We envision that our
The stockpile of indium may be used from time to time for “direct salessales” and or “lending” transactions. Under a “direct sale” transaction, we would record a gain (loss) equal to the difference between the proceeds received from the sale of indium and the indium carrying value.
We may also elect to enter into a lending transaction. In indium lending transactions, we would exchange a specified tonnage and purity of indium for cash. Title and the risks and rewards of such indium ownership
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would pass to the purchaser/counterparty in the lending transaction. We would simultaneously enter into an agreement with such counterparty in which weit would unconditionally commit to purchase and the counterparty would unconditionally commit to sell a specified tonnage and purity of indium that would be delivered to us at a fixed price and at a fixed future date in exchange for cash (the Unconditional Sale and Purchase Agreement or “USPA”). The USPA would also contain terms providing the counterparty with substantial disincentives (“penalty fees”) for non-performancenonperformance of the return of indium to the companyCompany as a means to assure our future supply of indium. While we believe that this risk would be mitigated by the penalty fee features of the USPA, it is nonetheless a risk associated with a transaction of this type. We anticipate recognizing revenuesaccounting for any USPA transaction on purchasesa combined basis (sale and salespurchase) and will evaluate whether, and in what period, revenue may be recognized based on the specific terms of indium under these arrangements in accordance APB 29 “Non-Monetary Transactions” and EITF Issue No. 04-13 “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Accordingly weany arrangements. We will disclose unconditional purchase obligations under these arrangements in accordance with SFAS 47 “Disclosure of Long Term Obligations” and, if applicable, accrue net losses on such unconditional purchase obligations in accordance with ARB 43.obligations. On March 2, 2012, we entered into a USPA where we agreed to sell 1,000 kilograms of 99.99% purity indium at a fixed price and the buyer agreed to sell back to us 1,000 kilograms of 99.99% purity indium at a fixed price that is $20 less per kilogram than we originally sold indium to the buyer.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future financial statement.
Results of Operations
We
Year 2011 compared to Year 2010
The results of operation for the years ended December 31, 2011 and 2010 are a newly formed company organized under the laws of the State of Delaware on January 7, 2008. On April 2, 2008, we changed our name from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. We were formed to acquire, store and sell the specialty metal indium. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt, or a combination of cash, capital stock and debt, in acquiring and storing indium.as follows:
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Operating Costs: | ||||||||
| Inventory-indium write-down | $ | 3,254,874 | $ | - | ||||
| Operating expenses-Manager-related party | 691,171 | - | ||||||
| Officers and directors compensation expense | 233,275 | - | ||||||
| Other operating expenses | 615,095 | 38,022 | ||||||
| Total Operating Costs | 4,794,415 | 38,022 | ||||||
| Other expense (income): | ||||||||
| Interest expense - Manager-related party | 5,300 | 16,120 | ||||||
| Interest income | (27,062 | ) | - | |||||
| Net Loss | (4,772,653 | ) | (54,142 | ) | ||||
| Preferential Dividend to Class A Common Stockholders | (2,359,755 | ) | - | |||||
| Net Loss Applicable to Common Stockholders | $ | (7,132,408 | ) | $ | (54,142 | ) | ||
| Net Loss per Common Share - Basic and Diluted | $ | (1.61 | ) | $ | (0.35 | ) | ||
| Weighted Average Number of Common Shares Outstanding - Basic and Diluted | 4,443,019 | 155,000 | ||||||
Revenues
We have neither engaged in any operations nornot generated any revenues to date. Our entire activityWe do not expect to generate revenues since inception has beenour primary business plan is to preparepurchase and stockpile already mined and processed indium ingots. Notwithstanding the rise and fall of the price of indium from period to period, the value of our indium stockpile or inventory of indium, will be recorded on our balance sheet at the lower of cost or market. We will not record any revenues until such time we either sell indium from our inventory or until we lend indium.
Year ended December 31, 2011 compared to December 31, 2010 comparable period
For the year ended December 31, 2011, total operating costs were approximately $4.8 million including approximately $3.3 million for the non-cash, lower of cost or market write-down of indium inventory for specific lots of indium. Total operating costs, exclusive of the write-down for the year ended December 31, 2011 were approximately $1.5 million compared to operating expenses of approximately $38 thousand for the year ended December 31, 2010, representing an increase of approximately $1.5 million. The increase in operating expenses during 2011 was due to (1) approximately $0.7 million of expenses of the Manager, a related party, including the 2% manager fee under the MSA of approximately $0.4 million, approximately $0.1 million bonus award and non-cash compensation expense of approximately $0.2 million, and (2) director and officers’ compensation expenses of approximately $0.2 million including non-cash compensation expenses relating to options and share awards of approximately $0.1 million for the year ended December 31, 2011. Upon the closing of the IPO in May 2011, we became a public, operating company and were no longer in the development stage and have incurred operating expenses aggregating approximately $0.6 million associated with our business plan including higher storage fees for our proposed fundraising through an offeringinventory of indium, expenses, including legal and accounting fees associated with being a public company and higher franchise taxes. Based on our current business plan, we expect that our normal cash operating expenses will approximate $1.4 million over the next few years. Interest expense decreased approximately $11 thousand during the year ended December 31, 2011 and interest income increased approximately $27 thousand when compared to the year ended December 31, 2010, due to the exchange of the note payable for stock options and the increase in cash and cash equivalents available for investing, respectively.
For the year ended December 31, 2011, we reported net loss applicable to common stockholders of approximately $7.1 million (or $1.61 per basic and diluted share) as compared with a net loss for the year ended December 31, 2010 of approximately $54 thousand (or $0.35 per basic and diluted share). The increase of approximately $7.1 million for the year ended December 31, 2011 was substantially due to the non-cash preferential dividend to Class A Common Stockholders of approximately $2.4 million, the non-cash inventory write-down of approximately $3.3 million mentioned above and higher operating expenses.
We expect our monthly expenses to increase or decrease with the change in our NMV. The monthly management fee payable to our Manager, a related party, is directly correlated to our NMV, which fluctuates primarily based on the price of indium. Furthermore, our monthly storage and insurance expense is directly correlated to the quantity of indium held in inventory and to the increase or decrease in the value of our equity securities.indium stockpile. Given the fee structure with our Manager and our operational expenses, as NMV increases our expenses will increase without any additional cash to pay such expenses.
Shares
GAAP vs. Non-GAAP Disclosure
We use the term NMV throughout this report when we discuss the value of Capital Stock
our indium holdings. We were incorporateddefine the term NMV, as used in this report, as the product of multiplying the number of kilograms of indium held by us at any given point by the spot price for indium as published by the Metal Bulletin as posted on January 7, 2008, with 50,000,000 shares of authorized common stock, par value $.001Bloomberg L.P., plus cash and 1,000,000 shares of authorized preferred stock, par value $.001. Asour other assets, less any liabilities. The use of the effective dateterm NMV is a non-GAAP financial measurement. A reconciliation of the registration statement, 90,000 shares of common stock were outstanding, heldNon-GAAP NMV to the GAAP historical net book value is as follows:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S. GAAP net book value | $ | 25,064,805 | $ | 4,966,792 | ||||
| Excess of the indium spot price over GAAP net book value | 642,727 | 573,863 | ||||||
| NMV | $ | 25,707,532 | $ | 5,540,655 | ||||
The reason why the Company relies on this term is because:
| · | it is a measurement of the true value of our indium holdings at any given point and thus is a primary factor in evaluating the general liquidity of the Company should the Company ever decide to sell any or all of its indium holdings; |
| · | it provides the greatest transparency to our stockholders in evaluating how we are doing relative to the indium purchased by us when compared to the current market prices for indium as published by Metal Bulletin on Bloomberg L.P.; |
| · | to internally evaluate the performance of the Manager, a related party, who is entitled to a management fee based upon the NMV metric each month; |
| · | to provide additional disclosures about the value of our indium holdings and the potential impact that such value would have on our operating results on a true period-to-period basis in terms of the market value of such indium holdings; |
| · | it provides the most useful tool for stockholders and potential investors to evaluate how management has done in terms of the indium purchased versus the NMV at any given point; |
| · | it more readily provides a market value metric that may be useful in analyzing trends or other market conditions that a historical cost presentation might not; and |
| · | it provides a meaningful liquidity measurement for our indium stockpile. |
No assurances can be given that we could liquidate our indium holdings at the market prices published by our Manager. No shares of preferred stock are currently outstanding.Metal Bulletin as posted on Bloomberg L.P.
Liquidity and Capital Resources
Since our inception, we have incurred net losses of approximately $5.2 million and as of June 30, 2008, we had an accumulated deficit of $7,923. We have not yet achieved profitability. We also recorded an approximate $2.4 million non-cash preferential dividend to Class A Common Stockholders resulting in an accumulated deficit of approximately $7.5 million at December 31, 2011. We expect that our normal cash outlays for general and administrative expenses will continue to increase as our inventory of indium increases and, as a result, we will need to generate significant product revenues to achieve profitability. WeHowever, we do not expect to generate significant revenues over the near term or achieve profitability because our primary business plan is to purchase and stockpile already mined and processed indium ingots. As a result, we expect to continue to incur operating losses and we may never achieve profitability. Our strategy is to achieve long-term appreciation in the value of our indium stockpile and not to actively speculate with regard to short-term fluctuations in indium prices. However, there is no assurance that there will be long-term appreciation in the price of indium. In fact, the price of indium has declined since the closing of our IPO. Historically, the fluctuations in these prices have been, and will continue to be, affected by numerous factors beyond our control.
The purpose of our Company is to permit a simple and efficient mechanism by which an investor may benefit from the appreciation in the price of indium. The value of our Company is designed to track and correspond with fluctuations in the price of indium. In theory, our stock price should correlate to increases or decreases in the value of our Company, which is directly tied to fluctuations in indium prices. We will not generate any revenues until such time as we either sell indium from our inventory or lend indium. We expect our monthly expenses to increase or decrease with the change in our NMV. The monthly management fee payable to our Manager is directly correlated to our NMV, which fluctuates primarily based on the price of indium. Furthermore, our monthly storage and insurance expense is directly correlated to the quantity of indium held in inventory and to the increase or decrease in the value of our indium stockpile.
As of December 31, 2011, we have cash and cash equivalents of approximately $3.5 million and cash and cash equivalents restricted for indium purchases of approximately $2.7 million for aggregate cash and cash equivalents at December 31, 2011 of approximately $6.2 million compared to cash and cash equivalents of $0.7 million at December 31, 2010. Our primary source of funds has been from the public and private sale of equity securities. In 2009 and 2010, we received net proceeds of $5.6 million in connection with a private placement of our Class A common stock and warrants and in May 2011, we raised net proceeds of approximately $24.0 million in connection with our IPO. See Note 3 of notes to financial statements. Further, in January 2012, we raised net proceeds of $7.5 million from the 2012 Private Placement.
We estimate thatwere required to utilize 85% of the net proceeds from the saleIPO to purchase indium. As on March 31, 2012, we have purchased or committed to purchase a sufficient quantity of indium to satisfy our commitment with respect to the unitsIPO. In January 2012, we raised net proceeds of $7.5 million in this offering will be approximately $51,274,188 (or $59,029,188 if the underwriters’ over-allotment option is exercised in full).2012 Private Placement. We intend to use at least $43,583,060 (or $50,174,810 if the underwriters’ over-allotment option is exercised in full)85% of the netgross proceeds of this offering to acquire indium. Pursuant to a Management Services Agreement, we shall pay to the Manager a fee equal to 2.0% per annum of our NMV after the offering. We intend to pay such management fee from the proceeds2012 Private Placement, or approximately $6.4 million for the purchase of the offering not used to purchase indium.
On January 8, 2008, we entered into a revolving line of credit with the Manager in the aggregate amount of $300,000. The revolver will be usedindium and 15%, or approximately $1.1 million, for general corporate purposes. We have available approximately $4.5 million at March 1, 2012 available to fund the deferred offering costs to be incurred by us in connection with this offering. To date, we have borrowed $250,000 under the revolver. The revolver is unsecured and bears interest at the rate of six percent (6.0%) per annum. The loan is anticipated to be payable on the earlier of December 31, 2008 or the consummation of this offering. The loan is anticipated to be repaid out of the net proceeds of this offering.
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On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet to purchase a minimum of ten (10) metric tons of indium at a price to be determined by a formula negotiated between us and Unionmet.general corporate expenses. We will use a portion of the net proceeds of this offering to fulfill our purchase obligations under the Purchase/Supply/Agency Agreement.
Going Concern
Our ability to commence operations is contingent upon our obtaining the necessary capital resources through our proposed public offering of up to 11,000,000 Units. Our management has specific guidelines as to how the proposed public offering proceeds will be used. Specifically, 85.0% of such proceeds will be used to purchase and stockpile indium and the balance or 15.0% will be used for working capital purposes.
We had $50,936 in cash and an accumulated deficit of $(7,923). Further, after the initial public offering, we expect annual operating costs to approximate $1,675,000 comprised of $125,000 for storing and holding the indium, $75,000 for insuring the indium, $150,000 for shareholder communications and relations; initial annual Management Fee of $1,025,000 subject to fluctuations of our NMV; $150,000 for directors and officers liability insurance premiums; and $150,000 for other/administrative expenses including legal, accounting and director fees. As with the indium purchases, we expect to pay forthat these expenses and asset purchases through the offering proceeds. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
Sources of Liquidity
To date, we have financed our operations and capital expenditures by issuing revolving credit notes and selling common stock to our Manager, which is owned by our Founders. We received a $250,000 advance from our Manager as part of a $300,000 revolving credit line. Since January 7, 2008, we have received net proceeds of $10,000 from the sale of common stock. As of June 30, 2008, we had cash and cash equivalents of $50,936.
Working Capital and Capital Expenditure Needs
We believe that, upon consummation of this offering, $7,691,128 (or $8,854,378) if the underwriters’ over-allotment option is exercised in full) of the funds will be sufficient to allow us to operate for approximately at least the next 48 to 55 months.three years from December 31, 2011. Over this time period, we will use these funds for paying the annual managementrelated party Manager’s fee to the Manager for the acquisition, storage, insuring and disposition of indium on our behalf and reviewing corporate, title, environmental, and financial documents and material agreements regarding the acquisition, storage, insuring and disposition of indium on our behalf. We anticipate that we will incur annual cash expenses of approximately $1,675,000$1.4 million in the aggregate including: (i) storage and holding ofinsurance for indium – $125,000;— $0.1 million; (ii) insurance – $75,000; (iii) shareholder communications and relations and maintaining the effectiveness of our registration statement for the shares of common stock underlying our public warrants – $150,000; (iv) the annual Manager'srelated-party Manager’s fee – $1,025,000; (v)— $0.7 million; (iii) director and officer liability insurance premiums — $150,000;$0.1 million; and (vi) other/(iv) other general and administrative expenses including legal, accountingofficer and director expenses and public company costs including legal and accounting fees – $150,000.— $0.5 million. Further, we have and we expect to continue to incur, from time to time, non-cash compensation expenses, which are not included in the aforementioned normal cash operating expenses. Although we do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business over the next three years, we may need to raise additional capital if we encounter unforeseen costs. The proceeds, if any, we may receive from the exercise of outstanding options and warrants will be allocated to the purchase of additional indium and for general working capital purposes, including but not limited to the payment of our operating expenses. The exact percentage of the warrant proceeds allocated toward purchasing additional indium and the time period to purchase indium using such proceeds will be determined by the Manager, in its sole discretion.
Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, businesses, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. We currently have no plans, proposals or arrangements with respect
Discussion of Cash Flows
The Company’s cash flow activity was a follows:
| For the Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Net cash used in operating activities | $ | (21,368,940 | ) | $ | (3,455,878 | ) | ||
| Net cash used in investing activities | (1,012 | ) | - | |||||
| Net cash provided by financing activities | 24,212,343 | 544,590 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 2,842,391 | $ | (2,911,288 | ) | |||
Cash Flows Used in Operating Activities
The net cash used in operations in 2011, principally represents the usage of the restricted cash (85% of the net proceeds) from the IPO for indium purchases and cash used to any specific acquisition.
Infund the event we needoperating losses less non-cash compensation expense in 2011. Net cash used in operating activities for the year ended December 31, 2011 was approximately $21.4 million compared to raise additional capital, we may do sonet cash used in operating activities for the year ended December 31, 2010 of approximately $3.5 million. The increase of approximately $17.9 million was due primarily to approximately $2.7 million in restricted cash for indium purchases at December 31, 2011, approximately $14.2 million in increased purchases of indium in the formyear ended December 31, 2011 when compared to the purchases of equity or debt. The issuanceindium in the comparable period in 2010 and the corresponding increase in net loss less non-cash compensation charges of additional sharesapproximately $1.1 million. In addition, accounts payable and accrued expenses increased $0.2 million as a result of higher operating costs since the completion of our capital stock:IPO in 2011.
Cash Flows Used in Investing Activities
The net cash used in investing activities in 2011 related to the equity interestpurchase of equipment.
Cash Flows from Financing Activities
The net cash provided by financing activities for both 2011 and 2010 represents net proceeds received from sales of our stockholders;
Working Capital, Indium Inventory and Indium Purchase Commitments
At December 31, 2011, we had working capital of common stock if preferred stock is issued with rights senior to those afforded$3.4 million. This represents an increase of approximately $3.0 million from the working capital of approximately $0.4 million at December 31, 2010. The increase in working capital was primarily due to the holders15% of our common stock;
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Similarly, if we incur substantial debt, it could result in:
Contractual Obligations
Onoperating expenses in 2011. In January 8, 2008,2012, we entered into a Revolving Lineraised net proceeds of Credit Note with our Manager, where our Manager agreed to provide us with a revolving line of credit up to $300,000$7.5 million from the 2012 Private Placement of which $250,000 was outstanding as$1.1 million is available for working capital.
Our activity since the closing of June 30, 2008. The principal balance, including all accruedthe private placement and unpaid interest, outstanding pursuantthe IPO has been centered on purchasing indium. From inception to the Note shall become payable on the earlier of (i) December 31, 2008 or (ii)2011, the consummation of the initial public offering. The Note bears an interest rate of 6.0% per annum. In the event of default, all amounts due pursuant to the Note shall become immediately payable.
On July 11, 2008, we entered intoManager, a Purchase/Supply/Agency Agreement with Unionmet. Pursuant to the Agreement, Unionmet agreed to (i) sell a minimum of ten (10)related party, purchased on our behalf approximately 34.5 metric tons of indium to us within ten (10) monthsat an average cost of approximately $646 per kilogram. These purchases were funded from the net proceeds received in 2009 and 2010 from a private placement coupled with the May 2011 IPO net proceeds. As of December 31, 2011 and 2010, we held 34,459 and 9,182 kilograms of indium, respectively, in inventory at Brink’s. We are the named insured by Lloyds of London. As of December 31, 2011 and 2010, our aggregate cost basis for the indium was approximately $22.3 million and $4.6 million, respectively, or approximately $646 and $500 per kilogram, respectively. The majority of our indium stockpile is metal of Chinese origin with a purity level of 99.995%, or 4N5. At December 31, 2011, we recorded a $3.3 million lower of cost or market write-down as a result of the effectivenessquoted price of this offeringindium at December 31, 2011 being less than our costs for certain lots in inventory.
Since completion of the IPO and through December 31, 2011, we purchased and took delivery of an aggregate of 25,277 kilograms of indium in 17 purchase orders from five separate suppliers at an average purchase price of $699 per kilogram at a pricetotal cost of approximately $17.7 million. As of December 31, 2011, we were committed to be determined by a formula negotiated between usspend an additional $2.7 million on indium purchases to meet our commitment to spend 85% of the net proceeds from our IPO. Subsequent to December 31, 2011 and Unionmetthrough March 1, 2012, we purchased and (ii) act as a non-exclusive agent to negotiate sales on our behalf and broker introductions with supplierstook delivery of an additional 5,012 kilograms of indium based in China. We agreed tofrom three purchase a minimum of ten (10) metric tons of indium and agreed to pay a commission to Unionmet for all transactions negotiated by Unionmet on our behalf or introductions brokered by Unionmet between us and other indium suppliers resulting in a transaction. The term of the Agreement shall begin on the effectiveness of this offering and terminate one year after the effectiveness of this offering.
Certain members of our management, officers and directors, individually and as a group, retain a passive investment interest in Unionmet and do not exercise control of Unionmet. Unionmet is a publicly traded company listed on the Singapore Exchange Ltd. On July 29, 2008, Unionmet’s stock closed on the Singapore Exchange Ltd.orders at a price of 0.12 Singapore dollars or 0.08772 U.S. dollars based on the spot currency conversion rate$527 per kilogram for a total cost of 1.3680 Singapore dollars to$2.6 million. Also, through March 1, U.S. dollar. Ailon Z. Grushkin,2012, we have one outstanding purchase commitment for 2,000 kilograms of indium at a member of our Manager, and an
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officer and director of our Company personally owns 250,000 shares of Unionmet’s stock valued at approximately $21,930 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Richard Biele,$520 per kilogram for a membertotal cost of approximately $1.04 million for which we have neither taken delivery nor paid for such purchases. Such purchases and purchase commitments of indium aggregated approximately $3.6 million as of March 1, 2012 fully completing our Managercommitment to expend 85% of the net proceeds from the IPO. Since inception and through March 31, 2012, we have purchased and committed to purchase an officer and directoraggregate of our Company personally owns 50,000 shares of Unionmet’s stock valuedapproximately 42,475 kilograms at approximately $4,386 U.S. dollars based upon thean average purchase price of Unionmet’s stock$623 per kilogram.
Off-Balance-Sheet Transactions
We are not party to any off-balance-sheet transactions.
Contractual Commitments
Our major contractual obligations relate to the MSA. The MSA has an initial term of five years, with options to renew the agreement on July 29, 2008.terms mutually acceptable to each party and may be terminated by either party upon 90 days prior written notice. The A.Z.G. Capital Corp. Profit Sharing Plan, whose sole beneficiaryCompany is Mr. Grushkin, owns 595,000 shares of Unionmet’s stock valued at approximately $52,193 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Mr. Grushkin is also the Managing Member of the AZG Tangible Assets Fund LLC, which holds 2,130,000 shares of Unionmet’s stock valued at approximately $186,844 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Richard Biele, a member of our Manager,responsible for paying all costs and an officer and director of our Company, and Richard Morena, our Chief Financial Officer, are members of the AZG Tangible Assets Fund LLC and therefore beneficially own shares in Unionmet as well. Based on Unionmet having approximately 368,000,000 shares outstanding, the combined group owns 3,025,000 shares representing less than 1.0% of the total shares outstanding. Consequently, a conflict of interest may ariseexpenses incurred in connection with transactions between our company and Unionmet. We therefore adopted specific procedures to be used in connection with future transactions with Unionmet, including creating an independent committee to review and approve any and all transactions to be entered into with Unionmet. Such procedures require the approval of (i) Alan Benjamin, the remaining independent member of our Manager, Specialty Metals Group Advisors LLC and (ii) the Unionmet (Singapore) Limited Negotiation and Agreement Committee, comprised of three of our independent board members: Mark Neuhof (Chairman), P.J. Richardson, and Fred Arena.
Prior to the consummation of this offering, we will enter into a Management Services Agreement withbusiness, except those expressly assumed by the Manager. Pursuant to such agreement, the Manager will, on a monthly basis, prepare a report on the NMV of each share of our common stock, which shall be determined by multiplying the number of kilograms of indium held by or for us by the last spot price for indium published by Metal Bulletin posted on Bloomberg L.P. for the month, plus cash and any of our other assets, less any and all of our outstanding payables, indebtedness and any other liabilities, divided by the total number of outstanding shares of our common stock. Such report will be made available to us and our board of directors. We shall pay toThe Company pays the Manager a fee equal to 2.0%2% per annum, payable monthly, of its NMV beginning upon the successful completion of the IPO. Such Manager fees aggregated approximately $0.4 million during the year ended December 31, 2011.
Business
Introduction
We are a corporation established pursuant to the laws of Delaware on January 7, 2008. On April 2, 2008, we changed our NMV, which shall be paid monthly.
Disclosure Controlsname from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. We operate a single-segment business whose primary business purpose is to purchase and Procedures
A company’s internal control over financial reportingstockpile indium, a specialty metal that is being increasingly used as a process designed by, or under the supervisionraw material in a wide variety of a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. As a private company, we have designed our internal control over financial reporting to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements. As a public company, we will be required to complyconsumer electronics manufacturing applications. Effective with the internal control requirements of the Sarbanes-Oxley Act. All internal control systems,quarter ended June 30, 2011 we are considered an operating company and are no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Special Information Regarding Forward-Looking Statements
Some of the statements in this Management’s Discussion are “forward-looking statements.” These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among others, the factors set forth above under “Risk Factors.” The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar expressions identify forward-looking statements.longer considered a development stage company.
We caution investors not to place undue reliance on these forward-looking statements. We undertake no obligation to update and revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this document to reflect any future developments.
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Off Balance Sheet Transactions
We are not party to any off balance sheet transactions. We have no subsidiaries or equity ownership in any other entity. We have no guarantees or obligations other than those which arise out of normal business operations, i.e. the purchase and sale of indium, and costs of being a public company that will significantly increase our operating costs or cash requirements in the future.
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BUSINESS
Overview
We were formed to purchase and stockpile the metal indium. Our strategy is to achieve long-term appreciation in the value of our indium stockpile, and not to actively speculate with regard to short-term fluctuations in indium prices. Our indium will be insured and physically stored in third-party facilities. While it is not our current intentionWe plan to do soachieve long-term appreciation in the short term, at our discretion, we may subsequently lend or sell some or allvalue of our indium stockpile basedprimarily through price appreciation of the physical metal. Although the price of indium has declined substantially from its high in March 2005, it is our belief that the long-term industry prospects for indium are attractive and over time the price of the metal will appreciate. Price appreciation of the metal indium held in our stockpile is critical for us to maintain our NMV and for investors to receive a return on market conditions.their investment.However, there is no assurance that the price of indium or the value of our securities will increase over time. To our knowledge, this is currently the only investment that allows potential stockholders to participate in the price appreciation of indium other than physical delivery of the metal itself. Our shareholders willstructure provides a simple and efficient mechanism by which a public stockholder may benefit from the appreciation in the price of indium, if any. Our stockholders have the ability to effectively purchase an interest in indium in a manner that does not directly include the risks associated with ownership of companies that explore for, mine and process indium. Our common shares represent an indirect interest in the physical indium we own.
All of the indium we purchase and own is, and will be, insured and physically stored in reputable, adequately capitalized and insured third-party warehouses or storage facilities located in the United States, Canada, the Netherlands and/or the United Kingdom. These third party facilities provide storage and safeguard of our indium inventory, insurance, handle the transfer of our indium inventory in and out of the facility, visual inspections, spot checks, arrange and facilitate independent third-party random assays, confirmation of deliveries to supplier packing lists, and reporting of transfers of inventory to us.
We utilize and expect to continue to utilize facilities that meet our requirements that are either (i) located closest in proximity to our indium suppliers in order to reduce transportation fees or (ii) facilities located closest in proximity to our corporate headquarters or satellite offices in order to facilitate our ability to inspect our inventory and reduce future corporate expenses associated with travel. We believe there are numerous third-party storage facilities that provide more than adequate services that meet our criteria, which eliminates the need for hiring a custodian. From inception until December 31, 2011, our Manager, Specialty Metals Group Advisors LLC, which is a related party, purchased on our behalf approximately 34.5 mt of indium, which is currently stored in an insured, secure facility in New York owned and operated by Brink’s, a bonded warehouse. We expect our chief executive officer or our chief operating officer to inspect the facilities. The facilities are visited at least once per year for inspection. We may insure the warehouse contents above and beyond a bonded warehouse to guarantee we will not sustain a loss in the event of an unforeseen catastrophe or we deem the warehouse company’s insurance inadequate.
Our expenses will be required to be satisfied by cash on hand that is not set aside for the purchase of indium. Cash on hand that is not set aside to purchase indium is expected to be sufficient to satisfy our operating expenses for approximately three years. Our annual cash operating expenses, including management fees, are estimated to be approximately $1.4 million. We may subsequently lend or sell some, or all, of our indium stockpile to cover our operating expenses. Alternatively, we may seek to raise additional capital to cover our operating expenses through potentially dilutive equity offerings or debt financing. Our stockpile of indium may decrease over time due to sales of indium necessary to pay our annual operating expenses. Without increases in the price of indium sufficient to compensate for such decreases, our net market value (“NMV”) may also decline. Our stockpile of indium may also decrease over time due to sales of indium against purchases of common shares that are priced lower than our NMV per common share. In such instances, our NMV per common share would rise.
All of our indium transactions will beare negotiated by our Manager.Manager, a related party. Our Manager will beis paid a 2.0% per annum fee based on our NMV as compensation for these services. The NMV shall be determined by (x) multiplying the number of kilograms of our indium holdings by the last spot price for indium published by Metal Bulletin PLC posted on Bloomberg L.P., plus cash and any other assets, less any and all of our outstanding payables, indebtedness and any other liabilities, (y) divided by our total number of outstanding shares of our common stock. Our Manager is entitled to receive the 2.0% management fee regardless of its ability to successfully purchase and stockpile the metal indium. None of ourOur officers or directors haveand directorshave limited experience in stockpiling the metal indium, although our Chief Executive Officerchief executive officer has experience purchasing, selling, storing and lending precious metals, base metals, minor metals, non-exchange traded metals, and illiquid metals. Our Manager:
Our expenses will be required to be satisfied by cash on hand that is not set aside forwebsite the purchase of indium. Cash on hand following completion of the offering is expected to be sufficient to satisfy our expenses for approximately 48 to 55 months. Annual expenses, including corporate taxes, are estimated to be approximately $1,675,000. For a detailed description of such expenses please see “Management Services Agreement”. We are a taxable United States corporation and are subject to federal and state taxes.
Our objective is to purchase and stockpile the metal indium. Potential stockholders will only receive a return on their investment if our acquired indium stockpile increases in value more than we expend on operating expenses. Price appreciation of the metal indium is critical for investors to receive a return on their investment.
On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet. Unionmet is a leading manufacturer and supplierspot price of indium, ingots underour NMV and the “Intai” brand name in the PRC. Unionmet is headquartered in Singapore and maintains production and research and development divisions strategically
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located in Liuzhou, Guangxi, PRC. Unionmet is listed on the Singapore Exchange Ltd. Pursuant to the Agreement, Unionmet agreed to (i) sell a minimum of ten (10) metric tons of Unionmet’s indium to us within ten (10) months of the effectiveness of this offering at a price to be determined by a formula negotiated between us and Unionmet and (ii) act as a non-exclusive agent to negotiate sales on our behalf and broker introductions with suppliers of indium based in China. We agreed to purchase the ten (10) metric tons of indium and agreed to pay Unionmet a commission for all transactions negotiated by Unionmet on our behalf or introductions brokered by Unionmet between us and other indium suppliers resulting in a transaction. The term of the Agreement shall begin on the effectiveness of this offering and terminate one year after the effectiveness of this offering. We agreed with Unionmet to negotiate the commissions on each specific transaction where Unionmet acts as our non-exclusive agent in China. The exact commissions payable to Unionmet per transaction have not yet been determined and will depend on a litany of variables specific to each transaction, including and not limited to: (a) U.S. dollar value of the transaction, (b) quantity of indium purchased, (c) purity of the material, (d) date or dates of shipment or shipments, (e) terms of payment, (f) Unionmet’s particular roleheld in each specific transaction, i.e., the commission will vary dependinginventory on whether Unionmet introduces us to the third party supplier and we negotiate the terms of the transaction or if Unionmet negotiates the particulars of the transaction with the third party suppliera bi-weekly basis.
Metal Bulletin’s bi-weekly indium price quotation is posted on our behalfwebsite,www.smg-indium.com. If for any reason, Metal Bulletin’s bi-weekly indium price quotation is not available, other independent indium quotation providers are available including Platt’s Metals Week, Metal-Pages Ltd., Asian Metal Ltd. and (g) other conditions (if applicable). We will not pay a commission to Unionmet on their own proprietary “Intai” brand name indium ingots that we purchase directly from them. There are no standard commissions withinMetal Prices. Within two business days of any change in inventory held, the indium industry. We do not intend to rely principally upon Unionmet to secure suppliesquantity of indium during the initial stockpiling phaseis published on our website.
We are not legally prohibited from pursuing other business strategies pursuant to our certificate of our operations.
Certain members of our Managers and our officers and directors, Ailon Grushkin, Richard Biele and Richard Morena, directlyincorporation, as amended, or beneficially hold shares in Unionmet. Consequently, a conflict of interest may arise in connection with transactions between our company and Unionmet. We therefore adopted specific procedures to be used in connection with future transactions with Unionmet, including creating an independent committee to review and approve any and all transactions to be entered into with Unionmet. Such procedures require the approval of (i) Alan Benjamin, the remaining independent member of our Manager, Specialty Metals Group Advisors LLC and (ii) the Unionmet (Singapore) Limited Negotiation and Agreement Committee, comprised of three of our independent board members: Mark Neuhof (Chairman), PJ Richardson, and Fred Arena. See “Contractual Obligations” for a further discussion regarding procedures used in connection with future transactions with Unionmet.
Assuming we are able to utilize 85.0% of the net proceeds of this offering to purchase the stockpile of indium at $500 per kilogram, the price of indium would need to increase approximately 12.4% within 12 months to offset the depreciation in our NMV associated with the initial offering expenses of $3,725,812 and annual operating expenses of $1,675,000. The price of indium would need to increase approximately 16.2% within 24 months or 8.1% on average per annum to offset the depreciation in our NMV due to the expenses listed above. The price of indium would need to increase approximately 20.1% within 36 months or 6.7% per annum to offset the depreciation in our NMV due to the expenses listed above.
Our business model is designed to capture the long-term appreciation of the price of indium. Over the last five years, the price of indium has appreciated 163.2% (32.6% annually) from $190 per kilogram in September 2003 to $500 per kilogram in September 2008. Over the last ten years, the price of indium has appreciated 104.1% (10.4% annually) from $245 per kilogram in September 1998 to $500 per kilogram in September 2008. Over the last fifteen years, the price of indium has appreciated 203.0% (13.5% annually) from $165 per kilogram in September 1993 to $500 per kilogram in September 2008. Over the last twenty-five years, the price of indium has appreciated 385.4% (15.4% annually) from $103 per kilogram in 1983 to $500 per kilogram in September 2008. Over the last fifty years, the price of indium has appreciated 594.4% (11.9% annually) from $72 per kilogram in 1958 to $500 per kilogram in September 2008.
Basedother corporate document. If based on market conditions we may seek to lend or sell indium. If there is a shortage of indium in the market place, we may decideour Manager determines that it ismay be in our best interest to lend expand our lending and/or sell indium directly to industry suppliers and or end users. For example, if our supplierselling activities beyond what is a miner, and such miners do not have a sufficient amount of indium in inventory to sell to an end user, we may lend or sell to the miner indium from our stockpile. Furthermore, if we need additional capitalnecessary to cover annual operating expensesor if the Manager determines that we may lendshould begin actively speculating on short-term fluctuations in indium prices or sellpursue strategic transactions with other companies operating in the indium frommarket including the Federal Government, the Manager will be required to obtain the approval of our stockpileboard of directors to coveradopt such operating expenses. Deciding on whethera strategic change in our business directive. Additionally, we will promptly notify stockholders of any such modifications to lend or sell in these instances can
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only be determined by a careful analysis of each option and its particular benefit to us at that particular point in time. Market conditions will dictate which option we would elect to pursue. We do not intend to change our stated strategy. Ourbusiness plan. Presently, our operations are limited to purchasing, stockpiling, lending and selling only the metal indium.
Suppliers
We have and intend to stockpile already mined and processed indium ingots with a minimum purity level of 99.99%, known as 4N or four nines grade. Based on common industry knowledge and our established indium industry relationships, we can determine which companies are regular indium industry suppliers. We consider companies granted indium export licenses from the Chinese government as regular indium industry suppliers. We consider companies like Teck Cominco Ltd.Resources Limited., Falconbridge,Xstrata Plc, Indium Corporation of America, Umicore Indium Products Co. Ltd., and Aim Specialty Materials as regular industry suppliers because they are all well known within the industry and have well established reputations. We consider metal trading houses listed in our “Competition” section‘‘Competition’’section like Traxys North America LLC, Glencore International AG, Wogen PLC, MCP Metal Specialties,5N Plus Inc., etc. that have years and in some cases, decades of experience within the industry as regular indium industry suppliers. We intend to use subjective criteria to determine whom we plan to do business with and for competitive reasons we do not disclose specifically which companies we intend to do business with other than Unionmet.business. Currently, an established regular indium industry designated supplier list does not exist. We consider the miners, refiners, suppliers
Strategy and trading houses listed in our “Competition” sectionPolicies
Through December 31, 2011, we purchased approximately 34.5 metric tons of indium. As of March 31, 2012, we have either taken delivery of or contracted to be a partial listtake delivery of known regularapproximately an additional 8 metric tons of99.99% purity indium industry suppliers.
We intend to stockpile indium with a minimum purity level of 99.97% known as 3N7 or standard grade. We expect that our stockpile will also contain higher grade indium ingots such as, but not limited to, 4N (99.99% purity) and 5N (99.999% purity) material. The specific purity of the actual metal is very important to each of indium’s specific applications. The purity of the indium used in alloys is typically 2N material. Thin-film coatings such as Indium-Tin-Oxide (ITO) use 4N8 purity indium. Therefore, refiners and suppliers will upgrade 3N7 material to 4N8 for use in ITO production via a basic electro-refining process dissolving the indium in hydrochloric acid and plating out the purified indium. In its purest form, 6N and 7N, indium is used in smaller quantities for research and development and as the raw material used to make Indium Phosphide (InP), Indium Arsenide (InAs) and Gallium Indium Arsenide (GaInAs). Preparation of 6N high-purity indium is also done by a method of physical-chemical purification and electro-refining. While the purity of the metal is important to each of its applications, the(at an average price of the higher purity indium is not considered significant relative$524 per kilogram) to the industry standard gradefully meet our commitment of 3N7. Manufacturers typically customize the purity of the indium to its customer’s specific needs and charge a small fee to convert standard grade into its higher purity forms.
Once the portion of the offering proceeds to be held as cash is exhausted, we have several options. We may physically sell indium from our stockpile to cover our annual operating expenses, which are projected at $1,675,000. We may lend indium from our stockpile to generate sufficient income to cover our annual operating expenses. Alternatively, we may access the private or public equity markets to raise additional capital to either cover our annual operating expenses and or purchase additional indium. We may choose to do a combination of the three listed options to generate or raise sufficient capital to cover our annual operating expenses.
Strategy and Policies
We based our business model projections on having approximately $43.6 million available from the proceeds of the IPO (85.0%utilizing 85% of the net proceeds after expenses)from our initial public offering (“IPO”) to purchase approximately 87.2 metric tons of 99.97% purity indium paying an average price of $500 per kilogram for indium. Based on projected expenses, cash remaining from the offering should be able to sustain operations for 48 to 55 months, without our needing to sell or lend any indium from our stockpile. If the price of indium rises prior to our being able to purchase our stockpile of indium, we would purchase fewer tons of indium to expend the 85.0% of the net proceeds of the offering. This in turn would result in lower storage fees for fewer tons of indium held in our stockpile and higher values for our stockpile could result in higher annual management fees. If the price of indium decreases, we may purchase additional indium and our storage fees would increase accordingly and lower values for our stockpile could result in lower management fees, either shortening or lengthening how long our cash on hand may last. Our business model is premised on the long-term appreciation in the value of our indium stockpile.
In order to facilitate our business plan, over the next 36 months, our Manager may elect to purchase indium under long-term supply contracts. Information regarding how much and whatthe percentage of the total
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indium supply is currently under long-term contracts is not known. This may hinder our ability to enter into long-term supply contracts with industry suppliers, purchase and stockpile indium, and fulfill our business plan in a timely manner.
Our ability to complete our business plan could be adversely affected by the substantial competition we face in the marketplace. There are a substantial number of manufacturers that require indium for the production of FPDs, LCDsflat panel displays (“FPDs”), liquid crystal display (“LCDs”), personal digital assistant (“PDAs”), light emitting diodes (“LEDs”) and PDAs.copper indium gallium selenide (“CIGS”) thin film photovoltaics. We expect to compete with themmanufacturers for purchase of the primary indium supply. The fact that many of these companies have more substantial resources than us and have established relationships with indium industry suppliers may prove to be detrimental to our ability to consummate our business plan.
We may face direct competition from market participants in purchasing our stockpile of indium. There are no other companies, known to us, that have a business model solely dedicated to the purchasing and stockpiling of indium. However, we would have to potentially compete with miners, refiners, suppliers, end-users,end- users, traders and other market participants in purchasing indium from suppliers. The companies listed in the “Competition”the‘‘Competition’’ section are a partial list of companies that are well known indium industry participants that either mine, refine, use, and or trade indium. These companies would be considered indirect competition.
In addition, we are not aware of any additional information, if any, regarding the indium market, or the type of market information other industry producers, purchasers, suppliers and other market participants may possess. Our inability to access this information, if any, places us at a potential relative competitive disadvantage to other market participants who may have access to such information. This may adversely affect our ability to purchase and stockpile indium.
We do not expect to purchase indium from the recycling market. After extensive discussions with indium industry participants, we determined that it is not feasible for us to buy directly from the recycling companies. Recycling scrap indium into 3N7 or higher purity metal ingot is extremely complex and time consuming. Typically, end users (ie.(i.e. FPD manufacturers) establish contracts directly with the recyclers. Pursuant to such contracts, the end user supplies the recycler with scrap indium and the recycler specially processes, refines,and then returns the purified recaptured indium to the end user. Recyclers cannotTypically, recyclers do not sell the recycled indium to anyone else other than the end user who supplied the scrap indium. Industry insiders consider the recycling market a “closed loop”.
‘‘closed loop.’’ End users and recyclers do not disclose the particulars of their relationships and contracts. This inaccessibility will limit us to the primary indium market. The primary market is smaller than the recycling market and may affect our ability to purchase enougha sufficient quantity of indium to meet our business plan’s objectives in a timely manner.
Furthermore, Chinese export restrictions may serve to further reduce our access to more than 50% of the world’s primary indium production. In May 2008, an earthquake in China completely halted ten zinc smelters in Sichuan Province’s Deyang, Hanyuan and Ganzi regions, as well as in nearby southern regions of Shaanxi Province and Gansu Province, due to damaged facilities and power supply failures. It was estimated that 510,000 metric tons of zinc smelting capacity was affected or approximately 7% of China’s national total. If those zinc smelters were refining indium and were shut down for one full year, it is estimated that as much as 24.8 metric tons or 4.9% of primary indium production would have been lost. The lack of availability of indium may affect our ability to spend at least 50% of the net proceeds of the offering on purchasing and stockpiling indium within the first 18 months following the completion of this offering.
In furtherance of our strategy, our board of directors will establish the following policies:
1. At least 85.0% of the net proceeds of this offering (and at least 85.0% of the net proceeds of future offerings, if any) must be used to purchase, or be held for future purchases of indium, and may only be amended by a resolution of our stockholders.
2. We may not enter into any borrowing arrangements except in strictly limited circumstances to facilitate indium purchase payments. Under such circumstances, we may enter into borrowing arrangements for which all outstanding amounts do not exceed our total assets.
3. All purchases and sales of indium shall be made by our Manager in accordance with the Management Services Agreement. In such capacity, our Manager shall use commercially reasonable efforts to purchase, lend and or sell the indium at the best prices available to it over a prudent period of time. We consider 18 months
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a prudent amount of time during which our Manager will spend at least 50% of the net proceeds of the offering allocated toward stockpiling indium. We expect that it will take us several years to build our indium stockpile. Potential stockholders purchasing our stock should be aware that the price of indium could rise prior to our ability to fully utilize the proceeds from the offering to build our stockpile. In this event, our NMV will not be directly correlated to the changes in the price of indium because we will be holding cash allocated toward purchasing indium in the future.
4. In the event that our Manager elects to purchase indium under long term contracts with an indium supplier, we shall have the funds set aside to satisfy the purchase price.
5. In the event that our Manager elects to lend or sell indium under long term contracts with an indium customer, we shall have indium set aside to satisfy the delivery commitments.
The indium market is illiquid and considered small compared to the base metals. There are a limited amountnumber of suppliers and purchasers of indium. If new companies are formed to purchase and stockpile indium, and in the event we raise additional capital to purchase more indium, this wouldmay adversely affect our ability to procure sufficient quantities of indium on a timely basis or even atall.
Indium Price Trends in 2011
The annual average price of indium increased approximately 23% in 2011. It increased from $567 per kilogram in 2010 to $696 per kilogram in 2011. According to the USGS, the U.S. producer price for indium began the 2011 year at all. It is our intention$570 per kilogram, increased to spend$690 per kilogram in April, and rose further to $785 per kilogram in May; the 85.0%price remained at that level through early November. The New York dealer price range for indium began the 2011 year at $520 - $570 per kilogram and increased through early June, reaching a high of $800 - $875 per kilogram. The price then decreased to $630 - $670 per kilogram by early November before falling further to $540 - $600 per kilogram by the net proceeds from the offering to purchase 5.7%end of the next three yearsDecember 2011. The price of global primary indium production in the first thirty-six months after the completion of this offering without disrupting the indium market. If we cannot purchase indium from China, we would need to purchase 11.2% of the rest of the world’s three year annual primary indium production to expend the proceeds from our offering. These calculations are based on the assumption that global primary indium supply remains constant at 510 metric tonsApril 18, 2012 was $550 per year and China produces 250 metric tons per year over the next thirty-six months. Although we do not anticipate purchasing indium from the recycling market, if the recyclers were willing to sell indium to us, the percentage of the world’s annual primary indium production that we would need to purchase would be reduced. If we are unable to purchase indium from China and or from recyclers, we anticipate it will most likely take several years to purchase the 87.2 tons we require to expend 85.0% of the net proceeds from the offering basedkilogram published by Metal Bulletin as posted on current prices.Bloomberg L.P.
Accounting for Direct Sales and Lending Transactions
We envision that our stockpile of indium may be used from
From time to time for “directwe may enter into ‘‘direct sales and or “lending”or‘‘lending’’ transactions. Under a “direct sale”‘‘direct sale’’ transaction, we would record as income, or loss, the difference between the proceeds received from the sale of indium and the indium carrying value.
Wevalue.We may engage in lending indium from time to time. We plantime if we need additional capital to lend in order to facilitate our relationships with suppliers and thereby build our stockpile. Occasionally, we may lend to take advantage of periodic shortages in the indium market.cover annual operating expenses. A typical loan contract would be for terms of six months or less, and in almost no circumstance would it exceed a period of one year. As lender, we will negotiate an Unconditional Sale and Purchase Agreement (“USPA”(‘‘USPA’’) with a prospective borrower. As part of the USPA, once all terms are reviewed and approved by our management team, we will physically deliver indium to the borrower.
The USPA arrangement involves us negotiating, as lender, and physically delivering
In indium lending transactions, we would exchange a pre-agreed upon quantityspecified tonnage and purity of indium for cash. Title and the risks and rewards of such indium ownership would pass to the borrower. The borrower will pay us a negotiated dollar value forpurchaser/counterparty in the value of the indium delivered. Typically thislending transaction. We would be done when market conditions favoredsimultaneously enter into an agreement with such a transaction and wecounterparty in which it would record income (loss) equal to the value of the negotiated price over (under) our carrying value of indium lent. At the same time, we would record a liability for the unconditional obligationunconditionally commit to purchase backand the counterparty would unconditionally commit to sell a pre-determined amount of indium from the borrower of like purity based upon the negotiated terms as detailed in the USPA. Such lending transaction(s) will include in the USPA a provision that the borrower return to us a like quantity and purity of indium. Failure to fulfill this return commitment will subject the borrower to a “penalty fee” thus discouraging the borrower from borrowing indium but never replenishing the indium to us. The ability of the borrower to satisfy the commitment to return the quantityspecified tonnage and purity of indium isthat would be delivered to us at a businessfixed price and at a fixed future date in exchange for cash (the USPA). The USPA would also contain terms providing the counterparty with substantial disincentives (“penalty fees”) for nonperformance of the return of indium to the Company as a means to assure our future supply of indium. While we believe that this risk that we would face in a transaction like this. However,be mitigated by the penalty fee aspect as detailed infeatures of the USPA, would partially mitigate our overall businessit is nonetheless a risk in that, the penalty fee would provide usassociated with greater flexibility in recovering indium from other sources at less than favorable prices (if applicable) if the borrower defaulted on its returna transaction of indium.this type. We anticipate recognizing gainsaccounting for any USPA transaction on a combined basis (sale and lossespurchase) and will evaluate whether, and in what period, revenue may be recognized based on purchases and salesthe specific terms of indium under these arrangements in accordance APB 29 “Non-Monetary Transactions” and EITF Issue No. 04-13 “Accounting for Purchases and Sales of Inventory with the Same Counterparty.”
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Accordingly weany arrangements. We will disclose unconditional purchase obligations under these arrangements in accordance with SFAS 47 “Disclosure of Long Term Obligations” and, if applicable, accrue net losses on such unconditional purchase obligations in accordance with ARB 43.obligations.
There is no established market lending rate for indium. The terms of the USPA contracts will stipulate that the indium returned must be of equivalent quantity and purity. An example of a loan to facilitate future purchases of indium would be made to an indium producer, to be repaid by the return of equivalent indium of the same quantity and purity along with the possible purchase of additional indium from the producer. In the event of a loan to the producer, in which we have received dollars for the indium lent, there is a risk that the producer will not return the equivalent quantity or quality indium. Our Manager will be responsible for conducting limited inspectionsFailure of the indium delivered to us. Our Manager will not be responsible for conducting any chemical assays or other tests designed to verify that such indium meets the minimum 99.97% purity requirements referred to in our prospectus. Our Manager will rely on the good faith of its suppliers to provide indium that meets our requirements. We do not intend to brand specific companies and assayers. It is our intention to deal only with known regular industry suppliers and participants. We consider the miners, refiners, suppliers and trading houses listed in our “Competition” section to be a partial list of known regular indium industry suppliers. We will use only reputable assayers recommended by reliable third party sources. Indium typically comes delivered with a certificate of analysis in sealed boxes. Our Manager, at its discretion, may hire, at our expense, an independent lab to perform random assay tests using glow-discharge mass spectrometry (GDMS) to verify the purity of the indium, if the indium loan was done with a company that is not known to be a regular indium industry supplier. Failureproducer to perform is a risk to our businessourbusiness if the price of indium appreciates and we cannot replace the loaned indium at the same or a lower price than we loaned the indium. The ability of the borrower to satisfy the commitment to return the equivalent quantity andquantityand purity of indium is a business risk that we face in a lending transaction. However, the penalty fee aspect as detailed in our USPA would somewhat mitigate our overall business risk because the penalty fee would provide funds for us to purchase indium from other sources at less than favorable prices (if applicable). Notwithstanding the foregoing, if the borrower defaults inon its obligations under the USPA, there is always the risk that we might not be able to replace the indium lent at favorable prices. In such instances, we may not be able to recoup our losses through litigation and we would assume the loss which could negatively impact our NMV.
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TABLE OF CONTENTSIndium Market Overview
INDIUM MARKET OVERVIEW
About Indium
Indium (symbol In) is a rare, very soft, silvery-white malleable metal with a bright luster. It is number 49 on the Periodic Table of Elements with an atomic weight of 114.81. Indium is chemically similar to aluminum and gallium, but more closely resembles zinc. Indium is a rare element and ranks 61st61st in abundance in the Earth’s crust at an estimated 240 parts per billion by weight. This makes it about three times more abundant than silver or mercury. Indium occurs predominantly in the zinc-sulfide ore mineral, sphalerite. Indium is produced mainly from residues generated during zinc ore processing but is also found in iron, lead, and copperandcopper ores. TheAccording to the USGS, the average indium content of zinc deposits from which it is recovered, ranges from less than 1than1 part per million to 100 parts per million. Its occurrence in nature with other base metal ores is sub-economicissub-economic for indium recovery. Pure indium in metal form is considered non-toxic by most sources.
Properties and Characteristics of Indium
Indium is very malleable and ductile and can be easily formed into a wide variety of fabrications. Another distinctive characteristic of indium is that it retains its softness at temperatures approaching absolute zero degrees, making it ideal for cryogenic (freezing or very low temperature) and vacuum application.applications. The properties of indium may be summarized as follows:
Indium is an indispensible raw material to the LCD market. Currently, a very small amount of indium is required in the fabrication of the vast majority of flat panel displays produced. This is the primary use of indium today, accounting for 84% of consumption, according to the USGS.
Source: U.S. Geological Survey 2008
Demand for indium, driven by the LCD industry, has grown rapidly in the last decade as flat panel displays have effectively driven the once dominant cathode ray tube (“CRT”) into obsolescence. Indium, in the form of indium-tin-oxide (“ITO”), creates the optically transparent electrodes that drive LCD displays on TVs, computer monitors, laptops, tablets, cell phones and other devices. Beyond a few niche applications, LCDs currently do not function without indium and, there is no practical, large scale, substitute transparent conductive oxide. According to Displaybank,investor presentations made by Corning Incorporated, one of the world's largest LCD glass manufacturers, LCD glass demand has grown from 1.2 billion square feet in 2006 to about 3.2 billion square feet in 2011 and expected to grow to 3.6 billion square feet in 2012.
 |  | |
| Source: LCD TV Association | LCD Glass Demand Source: Corning Inc. Annual Reports |
The cost of the indium contained within an LCD display, relative to the cost of the actual LCD display, is marginal, representing about 1% of the total cost of production. Therefore, industry experts believe that a sharp rise in the price of indium is unlikely to significantly reduce demand for the metal by the LCD industry.
Source: DisplaySearch website: HDTV Status and Outlook
Indium supply is constrained by global smelting capacity capable of indium extraction and production levels, as reported by USGS, has increased over the last two years after decreasing from 2006 through 2009. Indium is a minor by-product of zinc mining (and to a lesser extent, lead and tin) representing a small credit to production. The value of indium mined in 2011 was approximately $446 million, representing 1.6% of the value of the $27 billion zinc market in 2011. Currently, there are no indium mines and zinc producers do not increase zinc production for the purpose of extracting additional quantities of indium.
Source: U.S. Geological Survey, 2010
Although production scrap is reworked in the normal course of operations, it is not currently economical to recycle indium from post-consumer scrap from sources such as used LCD displays.
We believe the indium market may be in a structural deficit and that sales from unreported above ground stocks of the metal could be supplementing annual production to compensate for what otherwise would be a supply gap. Furthermore, we believe, based on information obtained from our industry contacts, that these unreported above ground stocks, primarily in China, may be in the process of being drawn down. New technology driven applications for indium are emerging in LED lights, thin-film solar PVs and high performance semiconductors. In recent government sponsored reports, the U.S. and Europe have each identified indium as a critical metal upon which important industries, including clean energy, are dependent. China, Japan and South Korea also view indium as critical to their industries and are either developing strategic stockpiles, or laying the groundwork to do so.
According to USGS, the total production of primary indium was 861 tons in 2006 and was expectedestimated to be about 1,000 tons640 mt in 2007.2011. We calculated, based on the prices Metal Bulletin reportedposted on Bloomberg L.P., that the average price for indium was $823$696.28 per kilogram in 2006.2011. Based on these figures, we determined that the total size of the primary indium market was approximately $709$446 million in 2006. Although the actual size of the indium market in 2007 has yet to be determined, Displaybank expects the total sales of indium in 2007 to be $533 million.2011. Industry information with regards to monthly sales volumes and dollar values of indium transactions is not readily available. Indium does not trade on any forwards or futures exchangeexchanges and there are no indium forwards or futures contracts.
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TABLE OF CONTENTSApplications
APPLICATIONS
Flat Panel Displays, LCDs & LCDsLEDs
Indium is an essential raw material for a number of consumer electronics applications. The primary commercial application of indium is in coatings for the flat panel display (“FPD”)FPD industry. Indium is onlymost useful when chemically processed with tin-oxide to form indium-tin-oxide (“ITO”) to allow for electrical conductivityITO, an optically transparent and optical transparency.electrically conductive material. Sputtering targets are placed in a vacuum and since ITO is conductive and optically transparent, thin layers of ITO are then applied as electrical contacts onto LCD glass; the thin, technically pristine sheets of glass which can in turn be used as Liquid Crystal Display (LCD)to produce LCDs on electronic devices like television sets, computers and mobile phones. TheIn addition to its unique combination of transparency and conductivity, ITO transparent conductor is currently popularly usedalso preferred for use in LCD technology due to its other unique qualities of low melting point, good uniformity (which is suitable for large LCDs), fast etching time and long life span. Production of ITO thin-film coatings accounted for approximately 84.0% of global indium consumption. Of the remaining 16.0% of the global indium market, other end uses include solders and alloys, 8.0%; compounds, 5.0%; electrical components and semiconductors, 2.0%; and research and other, 1.0%.
Currently, the new generation of LED backlit LCD TVs and computer monitors, as well as organic light emitting (‘‘OLED’’) TVs and displays, all use indium. LED is a semiconductor device that emits visible light or infrared radiation when an electric current is passed. The visible emission, often a high-intensity light, is useful in a whole host of applications. Most LED’s, such as blue, green and white LEDs, require indium. LEDs are a rapidly expanding market. An early use of high brightness LEDs (“HB-LEDS”) was in the automotive sector in the form of lights, dashboard lights and in traffic signals. Backlighting for TVs, computers and cell phones currently drive the bulk of LED demand. LED use in general lighting is in the early stages of adoption and is expected to be a very large market. Japanese LED light bulb sales surpassed incandescent sales in 2011.
Solar Energy Technology
Indium is increasingly being used as a crucial raw material in the solar energy industry. Copper Indium Gallium Selenide (CIGS)CIGS is a new semiconductor material comprised of copper, indium, gallium, and selenium. Its main use is for high-efficiency photovoltaic cells (CIGS cells), in the form of a thin-film photovoltaic. The thin-film photovoltaic has several advantages over traditional solar energy technologies. It is lightweight, can be applied on uneven surfaces and can be rolled up when not in use. CIGS showshows great promise in the lab in achieving high conversion efficiencies at low costs. According to the USGS, CIGS solar cells require approximately 50 metric tons of indium to produce 1 gigawatt ("GW") of solar power. We believe that over time, as manufacturing efficiencies are achieved through mass production, consumption of indium per GW of CIGS production will decrease by as much as fifty percent compared to USGS's estimate. Research is underway tounderwayto develop a low-cost manufacturing process for flexible CIGS solar cells that would yield high production throughput. We believe that flexibleFlexible CIGS solar cells are already in use in roofing materials, and we believe they could also be used in roofing materialsother building integrated photovoltaics (“BIPVs”) and in various applications in the aerospace, military and recreational industries.
Other UseUses
Indium-Tin-Oxide Applications
Indium-Tin-Oxide (ITO, or tin-doped indium oxide) is a mixture of indium (III) oxide (In2O3) and tin (IV) oxide (SnO2), typically 90% In2O3, 10% SnO2by weight. It is transparent and colorless in thin layers. In bilk form, it is yellowish to grey colored powder with a molecular weight of 277.64. It is a stable ceramic-like material, insoluble in water and volatizes at 850 degrees Celsius. ITO’s main feature is the combination of electrical conductivity and optical transparency. Thin films of ITO are most commonly deposited on surfaces by electron beam evaporation, physical vapor deposition, or a range of sputtering deposition techniques.
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Production of ITO thin-film coatings accounted for approximately 84% of global indium consumption. Of the remaining 16% of the global indium market, other end uses includeincluding solders and alloys, 8%8.0%; compounds, 5%components, 5.0%; electrical components and semiconductors, 2%2.0%; and research and other 1%1.0%.
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TABLE OF CONTENTSSupply of Indium
SUPPLY
According to the USGS, the top five indium producing countries in the world in 20072011 were China, Japan, Canada, Republic of Korea and Belgium. China’s refinery production of indium was approximately 250340 metric tons in 2007.2011. This is almost 50%approximately 53% of the annual total global refined primary production of 510 metric tons.640 mt.
According to the USGS, in 2005, the world’s primary refined production of indium increased by 25%, compared withhad been relatively flat between 2006 and 2009. Annual worldwide production in 2004. Most of the increase was attributedhad ranged between 546 mt to China, with 59% of world production in 2005 compared with 49% in 2004. Worldwide refinery production increased from 500 metric tons in 2005 to 580 metric tons in 2006.582 mt per year. Worldwide production actually decreased from 582 mt in 2006 to 510 metric tons563 mt in 2007.2007 and edged up slightly to573 mt in 2008. Worldwide production fell to 546 mt in 2009 and increased to609 mt in 2010. Worldwide annual production further increased to an estimated 640 mt in 2011.
On the supply side, a critical element will be the ability of individual countries to recycle indium contained in electronic components. Because indium is mostly a byproduct of zinc mining and smelting, it will be hard to increase primary production unless there is an increase in zinc production. During the past decades, dwindling zinc prices forced some high cost and low-grade underground zinc mines and a few older and less efficient zinc refineries to close. Zinc prices soared in 2005 and 2006 to record high levels, inlevels. In turn, according to the USGS, world mine production of zinc increased from 10 million metric tonsmt in 2006 to 10.5an estimated 11.6 million metric tonsmt in 2007.2008. The average London Metals Exchange (LME) price for zinc in July 2004 was approximately US$1,020 per ton.mt. The average LME price for zinc increased to approximately US$3,340 per tonmt by July 2006. We believe that this has increased primary indium production as well. Higher prices for indium has also resulted in increased recycling.recycling of production scrap. Despite increasing demand for indium, as with most commodities, higher prices generally leads to increases in production, therefore worldwide supply is expected to be adequate withto meet demand through increased primary production and recycling. More recently, by the end of 2007,early2009, the price of zinc plummeted from the lofty levels witnessed in 2006 and early 2007. We believe that weakWeak zinc prices may curtail theresulted in curtailed production of zinc leading to lower levels of indium recoveryzinc. This is reflected in the near future2011 USGS Zinc Report which estimates zinc production fell from 11.6 mt in 2008 to 11.2 mt in 2009. Zinc prices more than doubled from its early 2009 lows and maintained those gains in both 2010 and 2011. Consequently, zinc production increased competition for indium.to 12.0 million mt in 2010 and further increased to an estimated 12.4 million mt in 2011. Similarly, primary indium production fell from 573 mt in 2008 to 546 mt in 2009 before rebounding to 609 mt in 2011 and rising to an estimated 640 mt in 2011.
Recycling Market
The recycling of indium has increased in recent years. The indium recycling market is now larger than primary refinery production. Recycling scrap indium into 3N7 or higher purity metal ingot is extremely complex and time consuming. Typically, end users (ie. FPD manufacturers) establish contracts directlyJapan is the primary market for indium recycling, with the recyclers. Pursuantover 450 metric tons per year (“tpy”) of secondary indium production capacity, according to such contracts, the end user supplies the recycler with scrap indium and the recycler specially processes, refines, and then returns the purified recaptured indium to the end user. Recyclers cannot sell the recycled indium to anyone else other than the end user who supplied the scrap indium. Industry insiders consider the recycling market a “closed loop”.Roskill. If recycling activity continues to grow and becomes more efficient, this may serve to increase the total worldwide indium supply. In the primary indium market, an increase in the price of indium does not lead to increased indium production because it is predominantly a byproduct of zinc mining. It is believed that the market price of indium does influence the rates of reclaiming and recycling of indium. In recent years, according to a report titled Indium and Gallium Sustainability — September 2007 Update, reclaimed indium supply increased from 357 metric tons in 2005 to 503 metric tons in 2006. The same report projected total indium recycling at 650 metric tons in 2007, 802 metric tons in 2008, and 961 metric tons in 2009. In September 2007, a presentation titled “Indium: Hot, Green & Bright” prepared by AIM Specialty Materials estimated that the total supply of indium from recycling at 847 metric tons in 2007, 1101 metric tons in 2008, and 1318 metric tons in 2009. Based on what we consider the more conservative estimates, recycled indium represented 41.6% of total global indium supply in 2005, 46.4% in 2006, and 56.0% in 2007. While the primary indium supply actually decreased from 580 metric tons in 2006 to 510 metric tons in 2007, the recycling market continues to expand. The USGS does not provide specific data for the recycling market but stated that global secondary indium production increased significantly during the past several years and now accounts for a greater share of indium production than primary. The USGS also stated that this trend is expected to continue in the future and that several major secondary indium producers in Japan and the Republic of Korea announced plans to further increase their recycling capacity.
According to Umicore Indium Products, a leading U.S. manufacturer and supplier of ITO products, in some cases up to 70% of ITO can be recycled, generating a considerable source for secondary indium, attenuating the effect of reduced virgin indium production. Indium scrap is recovered from ITO, specially processed or refined and purified back to a minimum purity of 99.97%. In 2005, Sharp reported they succeeded in
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recycling indium from LCD panels. Japanese based, Dowa Mining Company Ltd. is the world’s largest secondary indium producer. In November 2005, Metal-Pages reported that Dowa Mining was expecting to expand its production capacity to recover indium from ITO scrap by 50% to 150 metric tons at its subsidiary Akita Rare Metal Co. We do not expect to have any access to material sold by indium recyclers and we will be primarily dependent on primary refined production.China
Indium's price per kilogram is infrequently quoted and investors may have to pay for subscriptions to various data service providers to access such information. We intend to make arrangements with a service provider to obtain a weekly quotation and make such information available, for free, on our website. In the event we cannot obtain permission from one of the various service providers to post their quotes, we will post a short discussion of the weekly price range of indium on our website atwww.smg-indium.com.
China
According to the USGS, China controls over 50% of the world’s refined indium production. There are a number of major producers in China, but also numerous smaller producers, relying on purchasing the concentrates from the larger base-metal refiners. China produces approximately 250 to 350340 metric tons of indium per year.
Source: U.S. Geological Survey 2012
World Refined Indium Production (Metric Tons)
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||
| China | 350 | 320 | 310 | 280 | 340 | 340 | ||||||||||||||||||
| Korea, Republic of | 50 | 50 | 75 | 70 | 70 | 100 | ||||||||||||||||||
| Japan | 55 | 60 | 65 | 67 | 70 | 70 | ||||||||||||||||||
| Canada | 50 | 50 | 45 | 40 | 67 | 65 | ||||||||||||||||||
| Belgium | 30 | 30 | 30 | 30 | 30 | 30 | ||||||||||||||||||
| Russia | 16 | 12 | 12 | 4 | n/a | n/a | ||||||||||||||||||
| France | 10 | 10 | 0 | 0 | n/a | n/a | ||||||||||||||||||
| Brazil | n/a | n/a | n/a | n/a | 5 | 5 | ||||||||||||||||||
| Peru | 6 | 6 | 6 | 25 | n/a | n/a | ||||||||||||||||||
| United States | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
| Other Countries | 15 | 25 | 25 | 30 | 27 | 30 | ||||||||||||||||||
| World Total | 582 | 563 | 568 | 546 | 609 | 640 | ||||||||||||||||||
(1) Table is taken from the U.S. Geological Survey Minerals Commodities Summaries, January 2007 through January 2012.
China is responsible for most of the increased global zinc and indium production in the last two decades. China has now become the world’s largest producer and consumer of metals and minerals. Much of China’s demand for zinc is a result of infrastructure expansion. The massive development of their mining and smelting industry strained the resources of the country and had a detrimental impact on the environment. The Chinese government responded to this adversity with a policy of replacing small, dirty and inefficient plants with large, new and efficient smelters and refineries designed to comprehensively recover by-products that would otherwise be waste. Additionally, Chinese zinc ores are uncommonly high in their indium content. As Chinese zinc output swelled to 40% of global production, the Chinese policy of comprehensive recovery resulted in a surge of indium production that we believe is unlikely to be replicated outside of China.
 |  | |
| Source: USGS and Roskill (2003, 2010) | Source: USGS |
The Chinese government restricts indium’sthe export of indium with taxes.taxes and quotas. In October 2007,December 2009, China announced it would reduce export taxes on unwrought indium, indium scrap and indium powder from the10.0% to 15.0% level in 2009 to 5.0% in 2010. In December 2011, The Ministry of Commerce issued a quota allowing China to export 240 tons139 mt of indium in 2008. On September 28, 2007, Metal Bulletin PLC reported that several traders and producers in China were expected to leave the indium business after Beijing awarded export permits for 168 tons of indium for the first half of 2012, approximately 1 mt less than the 2008 calendarlevel in 2011. In October2010, Bloomberg LP reported that the Ministry of Commerce in China announced the full year to only 20 companies. The ten licensed companies granted the largest2011 export quota for indium would remain unchanged from 2010 levels at 233 mt. No announcement has yet been made about full year 2012 export quotas were Zhuzhou Smelter Group Co., Ltd. – 29 metric tons; Liuzhou China Tin Group Co., Ltd. – 22 metric tons; Nanjing Foreign Economic & Trade Development Co., Ltd. – 18 metric tons; Nanjing Sanyou Electronic Materials Co., Ltd. – 17 metric tons; Huludao Nonferrous Metals (Group) I/E Co., Ltd. – 12 metric tons; Nanjing Germanium Co., Ltd. – 10 metric tons; Xiangten Zhengtan Nonferrous Metals Co., Ltd., – 10 metric tons; Guangxi Intai Technology Co., Ltd., a wholly owned division of Unionmet (Singapore) Ltd. – 9 metric tons; Hunan Jingshi Group – 7 metric tons; and Laibin Debang Industry and Trade Co., Ltd. – 6 metric tons. quotas.
We believe that most of China’s indium output is exported, with domestic demand currently unable to sustainabsorb production. In May 2007, China establishedReuters reported in September 2010 that China’s top zinc producer, Zhuzhou Smelter Group Co. Ltd. had agreed to sell 140 mt of indium ingot to leading Chinese metals trader Minmetal, a sister company controlled by the world’s firstChinese Government. We believe this material represents a portion of the unreported above ground stocks of indium exchange in the city of Liuzhou, in south China’s Guangxi Province, with the aim of uniting domestic indium makers. The exchange is open for two hours per day with light trading volume.discussed earlier.
Canada
The USGS estimated that in 20072011 Canada produced 50 metric tons of indium. According to the USGS, the Canadian firm, Teck Cominco Ltd., is a long-time producer and refiner65 mt of indium, as a byproduct at its facilitiesslight decrease from the 67 mt produced in Trail, British Columbia, Canada. In 2005,2010. Teck Cominco produced 41 metric tons of indium there from concentrates. Teck Cominco announced in 2005 that it was planning to increase indium production to 75 metric tons within two years. The USGS indium data sheet for 2007 does not show any increased production of indium in Canada between 2005 and 2007, but we believeResources Ltd. is the increase may show up in 2008 figures.
According to the USGS, the other majorlargest producer of indium in Canada is Falconbridge Ltd. In 2007, Falconbridge was acquired by Xstrata Plc, a diversified global mining company.Canada.
United States
The United States does not produce any primary domestic indium and relies on imports from China, Canada, Japan, Russia, and other countries. All refined indium production in the United States during 2007 came from the refining of lower grade imported indium metal and from refining scrap. Two refineries, one in New York and the other in Rhode Island, produced the majority of indium metal and indium compounds in 2007. A number of small companies produced specialty indium alloys and other indium products. Very little indium is recycled in the United States. We believe this is because there is no infrastructure for the collection of used indium-containing products.
Zinc Supply
According to CIBC World Markets Equity Research — Base Metals 2008 Outlook — December 11, 2007, CIBC World Markets adjusted their supply demand forecasts
New Production
“Critical Materials Strategy”, a 2010 U.S. Department of Energy report highlighting the availability of metals required for the zinc market in early December 2007 to account for lower U.S. demand and higher Chinese production, which we believe has pushed the zinc market
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into a small surplus in 2008. Despite the uncertain outlook for the transportation sector, which utilizes zinc, CIBC states that zinc demand for infrastructure projects remains strong, and should keep the market tight in 2008. CIBC continues to believe market expectations for the ratedevelopment of clean energy technologies identified approximately 50 mt of new zinc supplyindium production that they expect annually by 2015. The countries and respective supplies that are overstatedassumed to be coming online by 2015 are (i) Australia (15 mt per year), (ii) South America (15–20 mt per year), (iii) Brazil (15 mt per year) and believe there remains a weak pipeline of development projects for supply to keep pace with current demand levels. Further, if the “hidden” inventories and Chinese exports do not materialize, CIBC expects zinc prices to post a strong recovery. In light of the surplus in 2008 and actual price levels at the end of the year, CIBC adjusted their price forecast downward. The sharp recent decline in zinc prices appears to have reduced actual production levels.(iv) Russia (2 mt per year).
Zinc Supply
According to the USGS, total worldwide zinc production was 8.5 million metric tonsmt in 2003, 9.6 million metric tonsmt in 2004, 9.8 million metric tonsmt in 2005, 10.0 million metric tonsmt in 2006, 10.9 million mt in 2007, 11.6 million mt in 2008, 11.2 million mt in 2009, 12.0 million mt in 2010 and approximately 10.5an estimated 12.4 million metric tonsmt in 2007.2011. Yearly zinc production dwarfs the 20072011 estimated total primary refined indium productionindiumproduction figures of 510 metric tons640 mt and the more conservativelyUSGS’s 2008 estimated 650 metric tons850 mt of recycled indium. Total indium production represents less than one hundredth of one percent of total zinc production on an annualanannual basis.
Any disruptions
Zinc is a loosely amalgamated industry, with the top 10 producers accounting for only 40% and 44% respectively of mined and smelted zinc, as reported by Zincor at the July 2011 Southern African Metals Conference:
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| Source: | Zincor, 6th Southern African Metals Conference July 2011, Further credit to Brook Hunt, June 2011 | Source: | Zincor, 6th Southern African Metals Conference July 2011, Further credit to Brook Hunt, June 2011 |
Demand for Indium
Roskill, in their 2010 publication, “Global Industry Markets and Outlook”, stated that, “The use of ITO in LCDs will remain the major market for indium and will continue to drive growth in indium demand. PVs for solar applications are a newer and perhaps faster growing application, but there remain significant questions over growth rates and also the technologies involved.” They further report that the table below, “shows some forecasts produced by AIM Specialty Materials in 2010, which give a growth rate for global primary indium demand of over 15%py between 2009 and 2013. Consumption of indium in ITO applications is expected to grow at 17%py, while solar applications for indium could increase at nearly 40%py, albeit from a much smaller base level. Even if solar applications were to be removed from the forecasts due to the uncertainty surrounding them, demand for primary indium would still be forecast to grow at around 13%py.” We believe that due to structural changes in the mining of zinc could have a direct impactsolar industry that current industry-wide forecasts for growth in CIGS may be overly optimistic in both the short and intermediate term.
World: Indium demand, by application, 2009 to 2013 (t)
| Application | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||
| ITO1 | 395 | 494 | 568 | 654 | 752 | |||||||||||||||||
| Solar2 | 50 | 75 | 95 | 160 | 185 | |||||||||||||||||
| Other | 260 | 274 | 292 | 312 | 333 | |||||||||||||||||
| Total | 705 | 843 | 955 | 1,126 | 1,270 | |||||||||||||||||
Source: Brian O’Neill - AIM Specialty Materials, MMTA conference April 2010
Notes: 1) “Real” ITO demand – spent/scrap ITO targets removed from demand calculation
2) Indium demand for solar applications based on industry forecasts
[As reported in Roskill’s publication “Indium: Global Industry Markets and Outlook – 2010”]
Based on the USGS’s primary production figures and availability of primary refined indium. In May 2008, an earthquake in China completely halted ten zinc smelters in Sichuan Province’s Deyang, Hanyuan and Ganzi regions, as well as in nearby southern regions of Shaanxi Province and Gansu Province, due to damaged facilities and power supply failures. It was estimated that 510,000 metric tons of zinc smelting capacity was affected or approximately 7% of China’s national total. If those particular zinc smelters were all refining indium and were shut for one full year, perhaps as much as 24.8 metric tons or 4.9% of primary indium production could have been lost.
World Refinery Production, Reserves, and Reserve Base (Metric Tons):
| | | | | | |||||||||||||||
| Refinery Production | Reserves(3) | Reserve Base(2) | ||||||||||||||||||
| 2005 | 2006 | 2007 | ||||||||||||||||||
| China | 300 | 350 | 250 | 8,000 | 10,000 | |||||||||||||||
| Korea, Republic | — | 50 | 85 | 0 | 0 | |||||||||||||||
| Japan | 70 | 55 | 50 | 0 | 0 | |||||||||||||||
| Canada | 50 | 50 | 50 | 150 | 560 | |||||||||||||||
| Belgium | 30 | 30 | 30 | in other countries | in other countries | |||||||||||||||
| Russia | 15 | 16 | 17 | 360 | 580 | |||||||||||||||
| France | 10 | 10 | 10 | in other countries | in other countries | |||||||||||||||
| United States | 0 | 0 | 0 | 280 | 450 | |||||||||||||||
| Other Countries | 25 | 15 | 15 | 1800 | 4200 | |||||||||||||||
| Total | 500 | 580 | 510 | 11,000 | 16,000 | |||||||||||||||
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DEMAND
According to a DisplayDaily.com article published on August 1, 2007 titled “Indium You May Not See It But You Really Need It,” the demand for indium was 861 tons in 2006 and was expected to be about 1,000 tons in 2007 and may reach almost 2,000 tons by 2011. Indium is primarily produced as a by-product of zinc production. By the standardsBloomberg’s calculation of the zinc industry,average yearly price of indium is miniscule in terms of both tons and dollar volume. Four years ago indium was about $100/kg and now costs $550/kg. Recently a spike droveusing the price briefly above $1,000/kg. Althoughprices reported by Metal Bulletin on Bloomberg, the actual size of the primary indium market was $479 million in 2006, $385 million in 2007, has yet$314 million in 2008 $217 million in2009, $345 million in 2010 and an estimated $446 million in 2011. According to the USGS, global consumption of primary and secondary indium was estimated to be determined, Displaybank expects themore than 1,800 mt. This would translate into a total salesmarket size of approximately $1.25 billion based on Metal Bulletin’s average price of $696 per kilogram for indium in 2007 to be $533 million.2011.
The price ofUSGS estimates that U.S. indium has declinedconsumption was 120 mt in 2011, up substantially since it peakedfrom the 55 mt consumed in March 2005. The price for indium has declined 53.2% from its high of $1,070 per kilogram2000 and the 30 mt in March 2005 to $500 per kilogram as of September 2, 2008. If we began operations in March 2005, and we purchased1990. This supports our stockpile at peak prices, the value of our stockpile would have decreased by 53.2% in approximately three and one half years. It is possiblebelief that if we purchase the stockpile at today’s prices then the value may fall substantially. It is possible that we will not be able to sell our indium stockpile at prices higher than the price we paid for it. As recently as 2002, the price of indium was less than $100 per kilogram. If the price of indium returns to those levels, our stockpile and NMV will be substantially lower than what we paid for it.
A small amount of indium is used to make every liquid crystal display screen. This is the primary use of indium today and accounts for approximately 84% of consumption. These LCDs are key components in laptop computers, flat panel monitors and flat panel televisions. They are also used in cell phones, PDAs, digital cameras, clocks, watches, picture frames, GPS receivers, answering machines and other electronic devices. We believe many of these products arethe traditional applications utilizing indium have a long-term upward trajectory in very high demand and LCDs are being incorporated into an increasing number of devices.demand.
Source: U.S. Geological Survey
According to the USGS, about 2%indium consumption in Japan (the leading global consumer of indium) was expected to increase by 20% in 2010 from that of 2009. Dowa, a Japanese based recycler of indium,estimated that Japanese indium consumption in 2009 totaled 602 mt, with 525 mt (87%) used for the production of ITO. Primary indium consumption was 240 mt, with 70 mt (29%) from domestic producers, and the balance was imported. Secondary indium consumption was 362 mt. Primary and secondary indium consumption by the Japanese may have declined in 2011 due to the temporary disruptions at LCD and ITO production facilities caused by the March 11, 2011 earthquake and tsunami.
According to a Metal-Pages.com article published on June 17, 2010 titled ‘‘EU Warned of PotentialCritical Metal Shortage,’’ a taskforce of experts supplied a report to the European Commission on June 17,2010 warning that there is long-term potential for critical metal shortages. The experts listed 14 raw materials, including indium, as critical to the European Union due to their high relative economic importance and tohigh relative supply risk. The 14 metals and minerals were singled out of the 41 studied in total as most acutely vulnerable to shortage due to demand in Europe outstripping supply. Based on a study commissioned by the German Federal Ministry of Economics and Technology, referenced in the report, the demand for indium producedfrom emerging technologies is usedexpected to make electrical components. These are mainly usedgrow from 234 mt in infrared detectors, high speed transistors and photovoltaic devices for2006 to 1911 mt in 2030. Indium’s demand in 2030 could outstrip 2006 supply levels by 3.29 times. A December 2010 report published by the solar industry. Indium’s very low melting point and ability to conduct electricity make it an important ingredient in many low temperature solders and alloys. According to the USGS, about 13%U.S. Department of Energy entitled, “Critical Materials”, suggests that over 1500 mt of indium consumption goes to alloys, solders and compounds.could be consumed annually by 2025 for clean energy technologies alone.
Another important use of indium is in coatings applied to glass. These coatings are transparent, but reflect radiant heat through the glass. These glasses are used in aircraft windows, windows of office buildings, and doors on refrigerators and ovens. Small amounts of indium are also used for defogging agents to keep condensation from building up on aircraft and locomotive windows. We believe many of these uses have declined over the past few years because of the rise in the price of indium.
Flat Panel Displays (FPDs)
We believe the demand for indium will grow for the foreseeable future. We believe the markets for flat panel displays are strong, particularly for computer monitors, televisions, phones,lap tops, tablets and PDA’s.smartphones. We expect high rates ofthat overall growth in the LCD industry driven by the increase in average display size and growth in unit sales of LCD displays will continue to generate increased demand for indium and we expect increased consumption in this market.indium.
Indium is a key component of Indium-Tin-Oxide (ITO), the standard transparent electrode used in virtually all flat panel displays and micro displays. An electrode is needed to either drive the cell or provide electromagnetic shielding, whether the display is a liquid crystal (LC), organic light emitting diode (OLED) or plasma cell. Transparency is needed to allow the light generated or controlled to reach the outside world.
LCD TV demand has grown approximately 34% annually since 2007. According to the USGS, the indium market remainedLCD TV Association, LCD TV unit sales grew from 10 million units in deficit2005 to 105 million units in 2007 as demand for the metal, supported largely by ITO demand, continued to outpace supply. The USGS also reported2008 and an estimated 210 million units in 2011. A January 18, 2012 Metal-Pages article states that in 2007, year-on-yearglobal LCD TV shipments of LCD television panels wereare forecast to increase 47%,grow more slowly at around 10 percent in 2012 to 216-217 million units. The same article stated that most LCD panel makers, including AU Optronics, Chimei Innolux, Sharp and LCD monitorSamsung Electronics will concentrate on the production of new and very large panel sizes in 2012. Larger display panels to increase 24%. According to the USGS,consume substantially larger quantities of indium. In general, mainstream LCD devices were alsoare trending toward larger panel sizes, which require more indium per unit.
According to Touch screens also routinely use ITO in the touch subsystem as well as in the LCD TV Association, less than 10 million LCD TV sets were sold globally in 2004. By 2006, more than 40 million LCDs were sold rampingfront plane, requiring an extra layer of ITO. Apple’s iPhones and iPads are examples of capacitive touch screen technology utilizing ITO to an estimated 70 million in 2007, withoffer higher clarity and quality of the display image. NanoMarkets LC, a further estimateleading provider of 100 million units sold globally in 2008. According to Bloomberg.com, Samsung, Asia’s largest
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maker of flat-screens used in computersmarket and televisions, forecast that this year’s Beijing Olympics would propel global LCD TV sales to 98 million units. The LCD TV Association predicted that with LCD TVs getting bettertechnology research and less expensive each year that there will be 200 million units sold annually by 2012.(1) According to Aim Specialty Materials, the cost of ITO per LCD panel is insignificant. Despite indium prices exceeding $800 per kilogram in 2006, the cost of indium that is applied to a 32” LCD panel would be approximately $0.55. Even if the price of indium were to double, the indium (ITO) cost per panel would be approximately $1.00 on a product that retails for over $1,000 per unit.
Management also believes that the portable device market (PDA) also represents opportunities for growth inindustry analysis services, expects the market for indium.ITO to grow from $3.2 billion in 2009 to $10.9 billion in 2016.
LED Industry
The LED TV market has grown rapidly over the last few years, reaching nearly 60 million units in 2010 and is estimated to have captured a majority of the LCD backlit market in 2011.
Source: Veeco September 2011 Investor Presentation
The LED Lighting markets are also expected to grow rapidly over the next few years. In a KGI research report dated September 16, 2009, titled ‘‘LED Sector — Golden Decade Ahead for LED TV and LED Lighting,’’ analyst Yvonne Lu states ‘‘the growth potential of LED Lighting is huge, as at present LED accounts for only 0.5% of the global lighting market estimated at US$122 billion in 2009.’’ According to Strategies Unlimited, a research firm, and J.P. Morgan’s North America Equity Research, overall HB LED revenue growth is expected to exceed 30.0% annually from 2009 to 2013. This rapid growth will be mostly driven by LCD backlighting and the general lighting market segments. Combined, these two applications are estimated to grow at a compound annual growth rate of 83.0% between 2009 and 2013. They project that within five years, the LED market will grow from $4.9 billion in 2009 to $14.9 billion in 2013.
In September 2009, Bloomberg News reported that at a metals conference in Beijing, Feng Juncong, an analyst at Beijing Antaike Information Development Co., Ltd., the state-backed research group, stated that‘‘Indium used in LED may exceed 100 mt by 2015.’’ We believe this would represent a very large new demand driver for indium and consume a substantial portion of the world’s primary indium supply, if this projection were to become a reality.
Solar Industry
Indium is increasingly being used as a crucial raw material in the solar energy industry. According to the United States’ National Renewable Energy Laboratory, to produce 20 gigawatts of solar power by the year 2050,year2050, the United States will need 400 metric tonsmt of indium per year for the production of photovoltaic modules and systems alone. Based on the same report, the shortage of either indium or tellurium (another raw material for photovoltaic production) could result in serious bottlenecks to such growth unless such cells were made thinner or substitutes were found.
Solar cells are growing in importance and have a distinct similarity to FPDs. For example, the recently announced Sharp Gen 10 fabrication facility will be used not only for LCD panels but also for manufacturing solar cells as well. According to Insight Media Analyst, we believe that in one year, the facility is expected to be able to produce enough solar cells to produce 100 MW of power indefinitely. This is the equivalent of a medium-sized nuclear power plant.
Copper-Indium-Gallium-di-Selenide (CIGS) is a new semiconductor material comprising copper, indium, gallium, and selenium. This material is being used in the next generation of photovoltaic cells or CIGS solar cells. CIGS solar cells are not yet as efficient as crystalline silicon solar cells, however, they are expected to be substantially cheaper. As a thin-film photovoltaic (PV) technology, CIGS should have relatively low costs in scale production due to low usage of PV materials and efficient production processes. CIGS is recognized to be one of the most promising thin-film technologies given its high conversion efficiency as delivered in lab environments. We believe that onceif mass production issues are mastered by industry participants, CIGS based solar photovoltaic panels could be a large new market for the usage of indium.
Governmental
The market for solar installations based on CIGS thin-film panels will nearly double in size to $2.35 billion in 2015, as manufacturers signaled a breakout year in 2011 by taking advantage of falling production costs, improving module conversion efficiencies and increasing adoption in commercial rooftops, according to a Lux Research report titled, "Sorting through the Maze of CIGS Technologies: Who Will Cash in on the Breakout Year?."
Solar Frontier, a 100% subsidiary of Showa Shell Sekiyu K.K. completed construction of the world's first GW-scale CIS (Copper-Indium-Selenium) module factory in late 2011. The USGS reported the Showa Shell's 1,000-MW/yr solar manufacturing plant could consume 30 mt of indium per year. CIS panels are similar to CIGS panels, but may be easier and possibly cheaper to make, however, they are not as efficient at turning sunlight into power as CIGS panels. In January 2012, GTM Research, a Greentech Media company that provides market research and strategic consulting, reported that Solar Frontier shipped 577 MW of solar panels in 2011 up from 70 MW in 2010 and 46 MW in 2009.
Another notable entrant into the CIGS space is TSMC Solar, a subsidiary of Taiwan Semiconductor. According to TSMC Solar's web site, "TSMC Solar will serve the global solar market with CIGS thin-film modules manufactured in its own facilities, with production capacity reaching 1 GW in the next 3-5 years. Construction began on the first production facility in September 16, 2010 in Taichung, Taiwan. TSCM Solar plans to invest US$258 million for the first phase of the facility which is scheduled to enter commercial production in Q1 2012 and reach yearly capacity of 100MW (megawatts) in thin-film photovoltaic modules by the end of 2012. A second phase is planned for the 5.2 hectare site, which will expand production to over 700MW."
According to GTM Research, the estimated 2011 production numbers for CIGS manufacturers were as follows:
| CIGS Manufacturers | Estimated 2011 Production | |||
| • | Solar Frontier | 577 MW | ||
| • | Solibro | 95 MW | ||
| • | Mia Sole' | 60 MW | ||
| • | Avancis | 25 MW | ||
| • | Nanosolar | 20 MW | ||
| • | Global Solar | 19 MW | ||
| • | Soltecture | 14 MW | ||
Based on this data and industry information, we believe that CIGS consumed anywhere from 24 mt to 40 mt of indium in 2011. It is possible that if mass production issues are mastered by industry participants, CIGS based solar photovoltaic panels could potentially be a very large new market driving significant new demand for indium.
Government Stockpiling
In December 2008, The State Reserve Bureau of China (‘‘SRB’’) purchased 30 metric tons of indium ingots from Huludao Zinc Industry for a strategic stockpile. Most traders and producers believe that the SRB plans to continue stockpiling additional indium ingot in the future, although the exact tonnage is uncertain.
In 2006, the South Korean government announced plans to launch a stockpile of thirteen rare metals and ferroalloys. Indium was on their list. In May 2009, Platts reported that South Korea’s Public Procurement Service purchased at least 5 metric tons of indium from Korea Zinc.
In June 2009, Metal Bulletin Ltd. reported that the Japanese government plans to purchase 60 metric tons of refined indium from its own domestic companies through a public tender. In May 2009, Platts reported that a Japanese official from the Ministry of Economy, Trade and Industry stated that the Japanese government plans to stockpile indium and gallium for the first time. The Ministry has requested a 200 million Yen($2 million) supplementary budget for stockpiling, some of which would be used to purchase indium and gallium according to an official in charge of the country’s stockpiling policy. The second supplementary budget, which includes the 200 million Yen stockpiling allowance, is currently before the Parliament. There are no official reports stating whether or not the Japanese government has purchased any indium as of December 31, 2011.
Substitutes and Alternatives to Indium
In a report titled, ‘‘Indium Tin Oxide and Alternative Transparent Conductor Markets,’’ NanoMarkets expects the market for ITO substitutes to grow from $30 million in 2009 to almost $940 million in 2016. Such alternatives include other transparent conductive oxides (TCOs), carbon nanotube-based formulations, other nanomaterials, composites and metals. NanoMarkets alsoexpects the market for ITO to grow from $3.2 billion in 2009 to $10.9 billion in 2016. Based on these figures, ITO substitution is expected to grow from less than 1% of the total market in 2009 to approximately 8% of the total market in 2016. According to theUSGS, indium’s recent price volatility and various supply concerns associated with the metal have accelerated the development of ITO substitutes. Antimony tin oxide (ATO) coatings, which are deposited by an ink-jetting process, have been developed as an alternative to ITO coatings in LCDs and have been successfully annealed to LCD glass. A potential drawback to using ATO is the fact that the metal antimony and many of its compounds are toxic. Materials such as carbon nanotubes and graphene have advantages over ITO such as relative lower cost, compatibility with flexible substrates and improved performance in certain applications. Carbon nanotube coatings, applied by wet-processing techniques, have been developed as an alternative toITO coatings in flexible displays, solar cells and touch screens. ITO is considered brittle as are some other potential substitutes like aluminum-zinc-oxide. The resistive touch screen market and the flexible display market are most ripe for alternatives to ITO and other brittle TCOs that cannot stand up to repeated poking and flexing. Capacitive technology (used in screens for smartphones like Apple’s iPhone), on the other hand, offers high clarity and quality of the display image and since it does not work by poking with a stylus, the capacitive screen can more easily make use of ITO and other brittle TCOs. Graphene is another TCO developed as a substitute for ITO that works well in labs, especially for touch screens and flexible displays. Some labs actually manufacture graphene by growing it on an indium substrate. Poly (3, 4-ethylene dioxythiophene) (PEDOT) has also been developed as a substitute for ITO in flexible displays and organiclight-emitting diodes (OLED). PEDOT can be applied in a variety of ways, including spin coating, dip coating and printing techniques. Researchers have recently developed a more adhesive zinc oxide nanopowder to replace ITO in LCDs. Although graphene, carbon nanotubes, PEDOTS and the other TCOs may be viable alternatives, there remain several unknowns. It is not known if manufacturers of special materials can successfully mass produce enough of these specialty materials to supply industry, how well these new materials will perform over the long-term in consumer based products and what the opportunity cost would be to the Flat Panel Display (FPD) Industry to transition from ITO to these other alternatives. The FPD manufacturers have already spent tens of billions of dollars building fabs designed to use ITO. Lastly, the cost per kilogram of some of these alternative materials may also be volatile. As of October 21, 2011, Cheap Tubes Inc. was selling industrial grade purified 90wt% multi walled carbon nanotubes in quantities of 1 to 9 kilograms at $450 per kilogram and in quantities in excess of 100 kilograms at $385 per kilogram. According to the USGS, indium phosphide can be substituted by gallium arsenide in solar cells and in many semiconductor applications. Hafnium can replace indium in nuclear reactor control rod alloys. Potential drawbacks using gallium and hafnium as replacements for indium is the fact that both these metals are also considered expensive, have highly volatile price histories and are both byproduct metals like indium. Gallium is a byproduct of aluminum production and hafnium is a byproduct of zirconium refinement. Total annual production of gallium is smaller than annual primary indium production. According to the USGS, world primary gallium production was estimated at 106 metric tons in 2010 and world primary hafnium production statistics were not available.
Government Regulation
General Description
There are no governmental regulations which will directly impact our intended operation of purchasing and lending indium. We intend to use standard industry commercial terms recognized by industry participants in connection with the storage and shipment of indium. A representative sample of such terms areis listed below.
Purity.The recognized industry wide standard purity level is 99.97%99.99%.
Price. All purchases and sales of indium are individually negotiated. There is no fixed price ratio between 3N7, 4N or 5N material in the indium industry. Typically, in a regular indium market, balanced supply and demand, the higher the purity of the indium, the more it costs. 4N indium is slightly more expensive than 3N7. 5N is slightly more expensive than 4N. In a declining indium market, the price of 3N7 purity indium is often quoted at an even greater discount to indium with purities of 4N or 5N. In some cases, the prices may be as much as 2%2.0% to 5%5.0% lower. Typically, when the price of indium is appreciating, there is often no difference in the price of 3N7 purity indium compared to 4N or 5N purity metal.
Form.Indium Metal, 3N7 grade, Type 1 or Type 2, is received for storage in the form of ingots which have a uniform trapezoidal shape or uniform rectangular shape with square or rounded edges. The top and bottom surfaces are relatively flat and parallel.
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Surface Characteristics. Indium is a silvery white metal with a bluish cast. Surfaces of the ingot are clean and free of dirt, grease, oil, cleaning residues, etc.
Dimensions. Nominal ingot dimensions are listed below for the two types of Indium.
| | | | | ||||
| Weight | Length | Width | Height | |||||
| Type 1 | 100 tr. oz (3.11 kg) | 8.50 in./ 215.9 mm | 3.25 in./ 82.5 mm | 1.25 in./ | ||||
31.75 mm | ||||||||
| Type 2 | 10 kg | 340/345 mm (bottom/top) | 85/95 mm (bottom/top) | 45 mm | ||||
Production Lot Size.Each ingot shall be traceable to the refining lot or melt from which it was produced.
Packaging
Ingots. Ingots in a production lot shall be individually wrapped in a new, clean, transparent polyethylene bag which has a minimum thickness of 0.004 inches (4 mm). Both ends of the bag shall be closed by heat sealing.
Boxes.Each box from the supplier shall contain either a maximum of twenty 100 tr. ozoz. ingots or six 10 kg ingots with a total net weight of approximately 63 kg (2,000 tr. oz)oz.).
Marking
Ingot.Each ingot in a refining lot or melt shall be permanently marked or stamped with identification information.
Boxes. Sufficient aluminum tags shall be affixed to each box and shall be marked with identification information.
Storage
Indium ingots shall be stored indoors, in a vault or vault like area of a warehouse which has been equipped with fire prevention sprinklers. Storage identity shall be maintained by contract and production lot number as indicated on each box and in shipping instructions.
Security
Eight seals shall be affixed through holes bored in the top and bottom corners of the box to maintain the integrity of the box contents. Entry into vault areas for the purpose of shipments, inventory or qualitative maintenance inspections will be documented by use of logs and/or custodial reports.
Our Manager will be responsible for conducting limited inspections of the indium delivered to us. Our Manager will not be responsible for conducting any chemical assays or other tests designed to verify that such indium meets the 99.97% purity requirements referred to in our prospectus. Our Manager will rely on the good faith of its suppliers to provide indium that meets our requirements. Regular industry suppliers of indium mark each ingot with grade and ingot number. Boxes of ingots are marked with lot identification. Indium comes delivered with a certificate of analysis in sealed heavy duty boxes. There is a chain of authenticity that our Manager will rely upon. If the Manager purchases indium from a company that is not known to be a regular indium industry supplier, then at the Manager’s discretion, it may hire, at our expense, an independent lab to perform random assay tests using glow-discharge mass spectrometry (GDMS) to verify the purity of the indium. This would be done prior to taking delivery of the said lots. Depending on the lot size, we might take a sample of indium from random ingots to be tested for purity. This would minimize our risk in taking delivery of an entire shipment of lower grade indium. The Manager does not intend to certify known indium industry refiners. Indium in transit will be insured regardless from whom it is purchased. We anticipate that disputes or disagreements will be resolved by arbitration.Competition
Competition
Although we believe no other companies have our business model, we may have competition from miners, refiners, suppliers and traders of indium such as Huludao Zinc Industry Co. of China, Liuzhou China Tin Group, Jianxi Copper Co., Zhuzhou SmelterSmeltery Group Co., Ltd., Nanjing Foreign Economic & Trade Development Co., Ltd., Nanjing Sanyou Electronic Materials Co., Ltd., Huludao Nonferrous Metals (Group) I/E
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Co., Ltd., Nanjing Germanium Co., Ltd., Xiangten Zhengtan Nonferrous Metals Co., Ltd., Guangxi Intai Technology Co., Ltd., Hunan Jingshi Group, Laibin Debang Industry and Trade Co., Ltd., Shaoguan Huali Industrial Co., Ltd., Tianjin Indium Products Co. Ltd., Zhuzhou Keneng New Materials Co., Ltd., Teck ComincoResources Limited, Falconbridge,Xstrata Plc, Indium Corporation of America, Umicore Indium Products, Dowa Electronics Materials Co., Unionmet (Singapore) Limited, Aim Specialty Materials, Glencore International AG, Wogen PLC, RJH Trading Ltd., MCP Metal Specialties,5N Plus Inc., Hudson Metals Corporation, and Traxys Group.North America LLC. We may also have competition from end users of indium. It is our belief that the top producers of FPD’s are the largest purchasers of indium. According to an article published on June 21, 2007 in the Asia Times titled “Japan Goes Prospecting for Rare Metals,” Japan consumes 60% of global indium production in the form of indium-tin-oxide for the manufacturing of FPDs. China supplies Japan with 70% of their imports, according to the same article. Major producers of FPDs not limited to Japan and listed in alphabetical order, are AU Optronics, Chi Mei Optoelectronics, Chunghwa Picture Tubes, HannStar Display Co., Innolux, LG Phillips LCD, Quanta Display Inc., Samsung Electronics, Sharp Corp., and Sony Corp. These companies are likely competing with us for purchasing indium from industry suppliers.
Properties
We maintain our principal executive offices at c/o Richard A. Biele, 41 University Drive, Suite 400, Newtown, Pennsylvania 18940.
Employees
We have no full-time employees. Our officers willchief executive officer, president and chief operating officer provide services to us through the Manager. Our Chief Financial Officer will bechief financial officer is a part-time employee and will receiveour administrative assistant is a part-time independent contractor.
Corporate Information
Our annual reports on Form 10-K, quarterly compensationreports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of $7,500directors and an annual awardexecutive officers and any amendments to such reports filed pursuant to Section 13(a) or 15(d) of 30,000 options, subjectthe Securities Exchange Act of 1934, as amended, or the Exchange Act have been filed with the Securities and Exchange Commission, or SEC. Such reports and other information that we file with the SEC are available on our web site at http://www.smg-indium.com when such reports are available on the SEC website. Copies of this Prospectus and our reports may also be obtained without charge electronicallyor by paper by contacting Alan Benjamin, SMG Indium Resources Ltd., by calling (212) 984-0635.
The public may also read and copy the materials we file with the SEC at its Public Reference Room at100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.govthat contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. The contents of these websites are not incorporated into this filing.
Changes in Registrant’s Certifying Accountant
Prior Independent Registered Public Accounting Firm.
Effective October 21, 2011, the Audit Committee of the Board approved the replacement of Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm, which took effect October 21, 2011. Marcum’s reports on the Company’s financial statements for the years ended December 31, 2010 and 2009 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles except the Company’s audited financial statements for the fiscal years ended December 31, 2010 and 2009 contained a modification raising substantial doubt about the Company’s ability to continue as a going concern due to the consummationCompany’s ability to complete its initial public offering to raise additional funds and extend the life of this offering.the Company’s existence to perpetuity.
Legal Proceedings
There
During the Company’s two most recent fiscal years ended December 31, 2010 and 2009, and any subsequent interim period preceding Marcum’s replacement and through October 25, 2011, the filing date of the Current Report on Form 8-K, there were: (i) no “disagreements” (as such term is defined in Item 304(a)(1)(iv) of Regulation S-K) between the Company and Marcum on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Marcum, would have caused Marcum to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements of the Company for such fiscal year; and (ii) no “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K).
The Company provided Marcum with a copy of the foregoing disclosures and requested Marcum to furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of Marcum’s letter is attached as Exhibit 16.1 to the Form 8-K filed October 25, 2011.
New independent registered public accounting firm.
Effective October 21, 2011, the Audit Committee approved the engagement of KPMG LLP (“KPMG”), as the Company’s new independent registered public accounting firm for the fiscal year ending December 31, 2011.
During the Company’s two most recent fiscal years and the subsequent interim period preceding KPMG’s engagement, neither the Company nor anyone on behalf of the Company consulted KPMG regarding either: (i) The application of accounting principles to specified transactions, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and no written report or oral advice was provided to the Company that KPMG concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) Any matter that was the subject of a “disagreement” or “reportable event” (as such terms are no legal proceedings currently pendingdefined in Item 304(a)(1)(iv) or to our knowledge, threatened against us.(v) of Regulation S-K, respectively).
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MANAGEMENT
Directors, and Executive Officers
and Corporate GovernanceThe following table sets forth certain information concerning our executive officers and directors as of April 1, 2008:18, 2012:
| | | ||||||||
| Name | Age | Position | ||||||||
| Alan Benjamin | Chairman of the Board, Chief Executive Officer | |||||||||
| Ailon Z. Grushkin | President, Director | |||||||||
| Richard A. Biele | Chief Operating Officer, Secretary, Director | |||||||||
| Chief Financial Officer | ||||||||||
| P.J. (Patrick James) Richardson | Director | |||||||||
| Fred Arena | Director | |||||||||
| Mark Stephen Neuhof | Director | |||||||||
| William C. Martin | 34 | Director |
Executive Officers and Directors
Alan Benjaminhas been our Chairmanchairman of the board and Chief Executive Officerchief executive officer since inception.inception and a member of our Manager. From 2009 to 2011, Mr. Benjamin currently ownswas also a principal at MD SolarSciences, a primary skin cancer prevention company founded by Dr. Robert Friedman, a world-renown expert in melanomas and operatesother skin cancers. From 2003 to 2009, Mr. Benjamin owned and operated SMA Development Associates, LLC, a Connecticut based real estate investment company he founded in 2003.company. Prior to this, he spent thirteen years at AIGAmerican International Group (“AIG”) where he last served as Senior Vice President in charge of AIG’s global base metals businesses. Mr. Benjamin began his career at Drexel Burnham Lambert in 1983, where he started as a broker in their commodity’s department and by 1988 he was managing the Asian operations of the firm’s bullion trading activities. Drexel’s commodity trading group moved to AIG in 1990 where Mr. Benjamin founded and managed their metals and foreign exchange trading operations in Asia. From 2005 to 2009, Mr. Benjamin iswas also a Managing Member of Heritage Building Group, a contractor in the luxury residential market in Fairfield County, Connecticut. Mr. Benjamin is qualified to serve on our board of directors because of his extensive experience trading physical metals. He is a graduate of the University of Michigan with a Bachelor of Arts in history.
Ailon Z. Grushkinhas been our Presidentpresident and Directordirector since inception.inception and a member of our Manager. He is currently the Managing Member of the General Partner of both the Nano-Cap Hyper Growth Partnership L.P., a micro-cap focused hedge fund he founded in October 1996, and the Nano-Cap New Millennium Growth Fund L.P.LP., a similarmicro-cap focused hedge fund he founded in January 2000. He is also currently the Managing Member of the AZG Tangible Assets Fund LLC, a commodities based hedge fund he launched in January 2004. PriorFrom 1996 to 2011, Mr. Grushkin was also the General Partner of the Nano-Cap Hyper Growth Partnership L.P., a hedge fund he founded in 1996. From 1990 to 1996, Mr. Grushkin worked or interned at Merrill Lynch Futures Investment Partners (“MLFIP”(‘‘MLFIP’’), Thompson McKinnon Securities, Prudential Securities and Sumitomo Bank Ltd. At these firms, he held various positions including assistant commodity trader, commodity trading advisor analyst and assistant derivatives trader. At MLFIP, he helped createMr. Grushkin is qualified to serve on our board of directors because of his experience purchasing and taking delivery of minor physical metals for his own personal investment as well as his experience managing the first Discretionary Trading Advisor IndexAZG Tangible Assets Fund LLC, a fund dedicated to investing in the Managed Futures Industry.commodities and equities linked to commodities. Mr. Grushkin is a graduate of the John M. Olin School of Business at Washington University in St. Louis with a Bachelor’s of Science in Business Administration.
Richard A. Bielehas been our Chief Operating Officerchief operating officer, secretary and a director since inception.inception and, through Brack Advisors LLC, is a member of our Manager. Since 2005, Mr. Biele is currentlyhas been a Principal of Princeton Financial Partners, which owns and operates athe Newtown, Pennsylvania branch of Andrew Garrett Inc., a full service boutique Broker Dealer based in Princeton, New Jersey, servicingYork, New York. The branch services both retail and institutional investors. PriorIn addition to that,being a Registered Representative in the branch, Mr. Biele has brought in investment banking clients and assists with the non-daily management of the branch. From 2005 to 2007, Princeton Financial Partners, operated as an affiliate of S.W. Bach & Company, a FINRA regulated securities firm, from 2005 to 2007. While at the firm, Mr. Biele continued to manage his brokerage business and began trading commodities for his personal account. From August 2001 through November 2005, Mr. Biele worked as a registered representative at Kirlin Holdings Corp.Securities. From January 1998 through August 2001, Mr. Biele worked at Princeton Securities.Securities where he established investment banking relationships with other broker dealers and managed his existing clientele’s assets. Mr. Biele has had seventeen years of experience in brokerage, investment banking and mergers and acquisitions. In 2001, Mr. Biele formed Wall Street Contracting, a builderis qualified to serve on our board of luxury waterfront homesdirectors because of his extensive experience in southern New Jersey.brokerage, investment banking and mergers and acquisitions. Mr. Biele has a Bachelor’s of Science in Economics from Old Dominion University.
Richard T. MorenaMary E Paetzoldhas been our Chief Financial Officerchief financial officer since inception. Since 1996, Mr. Morena has been a part-owner and the Chief Financial Officer of Press Communications, LLC, a diversified media company that through its presently owned and prior operated properties has owned and operated radio, TV, newspaper, cable, direct mail, internet, and other media related ventures. Currently his company operates six radio stations in Central New Jersey. Mr. Morena’s responsibilities include all tax, accounting, mergers and
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acquisitions, and other financial and business support services for the company’s radio broadcasting operations. Mr. Morena has been responsible for the company’s overall strategic direction through various business acquisitions and dispositions. Prior to Mr. Morena’s work in the private sector, he worked for Price Waterhouse where he worked on a variety of audit engagements of large multinational manufacturing corporations in the Health Care, Consumer Products, Chemicals, Aerospace, Automotive and Oil and Gas Industries and a diversification of other manufacturing and service-oriented companies. Mr. MorenaJuly 2011. Ms. Paetzold is a Certified Public Accountant with over 35 years of experience with the audit, accounting, internal control and finance functions of public and private companies. From 2002 to the present, Ms. Paetzold has served as a director, chairman of the audit committee, and member of the compensation, nominating and governance committees, respectively, for Immunomedics, Inc., a publicly traded biotechnology company. From 2003 to 2011, she served as a director and chairman of the audit committee of Orthovita Inc., a publicly traded orthobiologics and biosurgery company that was acquired by Stryker Corporation in June 2011. From January 2008 to December 2008, she was an adjunct professor at the Cameron School of Business at the University of North Carolina at Wilmington. From 1994 through February 2000, she served as Vice President, Chief Financial Officer and Director (1996-1997) of Ecogen Inc, a publicly traded agricultural biotechnology company. From 1973 to 1994, Ms. Paetzold practiced with KPMG Peat Marwick, LLP, predecessor to KPMG, LLP, serving as an audit partner from 1984 to 1994. Ms. Paetzold's extensive experience serving as a Certified Public Accountant, audit partner, Chief Financial Officer and the chairman of various audit committees for publicly traded companies qualifies her to serve as the Company's Chief Financial Officer. Ms. Paetzold has a Bachelor of Arts in Mathematics from Montclair State ofUniversity and received her certification from the New Jersey andBoard of Accountancy in 1977. She is a member of the New Jersey Society of Certified Public Accountants and Thethe American Institute of Certified Public Accountants. He
William C. Martinhas been a director of our company since January 2010 and through RCM Indium, LLC is a member of our Manager. RCM Indium, LLC’s members are Raging Capital Management, LLC, Raging Capital Fund, LP and Raging Capital Fund (QP), LP. Mr. Martin is currently the Chairman and Chief Investment Officer of Raging Capital Management, LLC, a private investment partnership based in Princeton, New Jersey that was founded in 2006. As an entrepreneur, Mr. Martin has co-founded a number of financial information and media companies, including Raging Bull in 1997, Indie Research in 2002 and InsiderScore.com in 2004. Mr. Martin has invested in and/or advised a number of Internet and institutional financial services companies, including CallStreet, acquired by Factset Research Systems, Inc. (NYSE:FDS), ByteTaxi (dba: FolderShare), acquired by Microsoft, Inc. (NASDAQ: MSFT), Gerson Lehrman Group, Majestic Research, acquired by Investment Technology Group (NYSE:ITG), and Lux Research. Mr. Martin has also served on two public company boards, including, from 2000 to 2009, Bankrate, Inc., which was acquired by Apax Partners in 2009, and, from 2009 to 2010, Salary.com, Inc., which was acquired by Kenexa (NASDAQ: KNXA) in 2010. Mr. Martin is associated with many philanthropic/charitable activities that include, Little Baby Face, the American Cancer Society, the Jimmy Fund, the United Wayqualified to serve on our board of directors because of his extensive experience founding start-up companies as well as his previous and Autism Speaks. Mr. Morena while being active in all of these endeavors is especially tied to the Autism community and presently sitscurrent history serving on the New England Chapter Autism Speaks Board in Boston, MA. Mr. Morena is a graduateboard of Rutgers University and Columbia University Graduate School where he earned his Master’s Degree in Finance graduating Summa Cum Laude.directors of publicly trading companies.
Independent Non-Employee Directors
Mark Stephen Neuhofhas been a director of our company since April 2008. Mr. Neuhof has over 30 years of experience in the fields of metals trading and derivatives. Mr. Neuhof is currently a Senior Manager at Sumitomo Corporation Global Commodities Limited and is responsible for developing their base and precious metals business in the United States. Mr. Neuhof has been involved with Sumitomo Corporation since 2005, initially as a consultant advising them on their metals business worldwide and aiding them in developing various new opportunities. Concurrently,Since 2005, Mr. Neuhof washas been a principal of JEMM Development Group which investedinvests in and developeddevelops properties in New York and Connecticut. Prior to his affiliation with Sumitomo, Mr. Neuhof was employed by AIG Financial Products from 1990 to 2005 as a Managing Director in both their Wilton Connecticut and London offices. Mr. Neuhof had overall responsibility for their precious and base metals business including profit and loss, risk management as well as maintaining and developing client relationships. Prior to that, he was aaffiliated with Drexel Burnham Lambert from 1986 to 1990 (and was Vice President at Drexel Burnham Lambertfrom 1989 to 1990) and held various other positions in the currency and metals trading fields. Mr. Neuhof is qualified to serve on our board of directors because of his extensive experience trading physical metals. Mr. Neuhof is a graduate of Queens College and Saint John’s University where he earned his Masters of Business Administration.
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P.J. (Patrick James) Richardson, has been a director of our company since January 2008. Mr. Richardson is currently Chairman of the EXTOL Group, Inc., a private investment group, specializing in diagnostic technology for the Homeland Security Industry since 2005. Previously, he served as President and Chief Executive Officer of The Reeves Group, (TRG) Inc., a company he founded in 1990 and divested in January 2005. TRG was the technology leader for products used in the consequence management of WMD events of a Chemical/Biological nature. Prior to the formation of TRG, Mr. Richardson served as President & Chief Executive Officer of Racal Health & Safety, a subsidiary of Racal Electronics PLC, from 1986 to 1990 and was responsible for all North American activities for Racal Health & Safety Group, PLC, a world leader in the manufacture and distribution of respiratory protection and other personal protective equipment. Prior to joining Racal, MR.Mr. Richardson served as Director of Sales & Marketing for American Optical Corporation, Safety Products Division, from 1983 to 1984. Early in his careerFrom 1969 to 1980, he spent considerable time with The Johnson & Johnson Family of Companies. He held a series of senior level positions over ten plus years with the Johnson & Johnson organization. Mr. Richardson currently serves on the board of directors of Trailerlogic, LLC and the Board of Advisors of Evergreen Capital LLC. Mr. Richardson is qualified to serve on our Board of Directors because of his extensive experience founding, growing and managing start-up businesses since 1990. Mr. Richardson received his Bachelor of Business Administration from St. Michael’s College and has co-authored two books for Thomas Nelson Publishers.
Fred Arenahas been a director of our company since January 2008.Mr.2008. Mr. Arena is currently the Senior Vice PresidentManaging Partner and Chief Operating Officer of Asset ManagementVision Equities LLC, an east coast commercial real estate owner and developer. In his career, he has developed or overseen the asset management of over 80 million square feet of office space. In May 2006, Mr. Arena was brought in by the board of directors of American Financial Realty Trust. He is also currently the founderTrust to create an asset and President of Vision Equities LLC. Mr. Arena has served as Senior Vice President of Asset Management at American Financial Realty Trust since May of 2006management division and is a member of the company's senior management team.to help market it for sale, which was consummated in April 2008. From 1999 to 2006, Mr. Arena served as Regional Managing Director of Commercial Real Estate for one of the Goldman Sachs Whitehall Companies. Prior toFrom 1993 through 1999, Mr. Arena was Senior Vice President of Asset Management and General Manager for one of the most prestigious privately owned real estate companies in the northeast. Mr. Arena began his career with Hartz Mountain Industries in the 1980s managing a 10 million square foot commercial office portfolio. Mr. Arena serves on the board of directors of the Building Owners & Managers Association (BOMA) New Jersey and is a member of its Executive Board. He is also a member of the
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National Association of Industrial & Office Properties (NAIOP). Mr. Arena is qualified to serve on our board of directors because of his extensive experience managing a portfolio of over ten million square feet of warehouse buildings in the northeast as well as founding an asset management company that oversaw the management of warehouses. Mr. Arena received his Bachelor of Science in Business Administration and Management from Rutgers University.
Board of Directors
Board Composition
Our certificate of incorporation, as amended, and bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors. We currently have six directors. In accordance with our certificate of incorporation, as amended, and bylaws, immediately upon the closing of this offering, our board ofseven directors will bethat are divided into two classes with staggered two-year terms. At each annual meeting of stockholders commencing with the meeting in 2009,2012, the successors to the directors whose terms then expire will be elected to serve until the second annual meeting following the election. The term of office of the first class of directors, Class I, consisting of Mark Neuhof, Fred Arena and P.J. Richardson will expire at our first annual meeting of stockholders immediately following the initial classification of the board of directors.in 2012. The term of office of the second class of directors, Class II, consisting of Alan Benjamin, Richard Biele, and Ailon Z. Grushkin and William C. Martin, will expire at the second annual meeting of stockholders immediately following the initial classification of the board of directors.in 2013.
Any additional directorships resulting from an increase in the number of directors will be distributed among the two classes so that, as nearly as possible, each class will consist of one-thirdone-half of the directors.
Director Independence
Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, the board has determined that the following directors are “independent directors”‘‘independent directors’’ as defined by American Stock Exchange and Rule 10A-3 ofpromulgated under the Exchange Act: Messrs. Richardson, Neuhof and Arena.
Committees of the Board of Directors
Our board of directors currently has anthree standing committees: audit committee, a compensation committee, and a nominating and governance committee, and a compensation committee, each of which has the composition and responsibilitiesis described below. All standing committees operate under a charter that has been approved by the board. Copies of the charters of the Audit Committee, Compensation Committee and the Nominating and Governance Committee can be found on our Internet sitewww.smg-indium.com.
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Audit Committee.Our audit committeeAudit Committee is composed of P.J. RichardsonFred Arena (Chairman), Mark Neuhof and Fred Arena. Each member of our audit committee satisfies the current independence standards promulgated by the SEC and by the American Stock Exchange, as such standards apply specifically to members of audit committees.P.J. Richardson. All members of our audit committee are also financially literate under the current listing standardsindependent as defined in accordance with Section 3(a)(58)(A) of the American Stock Exchange Act. Our Audit Committee and our board of directors, respectively, each held a meeting on March 6, 2012, whereby each of the Audit Committee and the board of directors approved and adopted an Amended and Restated Audit Committee Charter. Our Audit Committee oversees our corporate accounting, financial reporting practices and the audits of the financial statements. For this purpose the Audit Committee has determined that Mr. Arena qualifies asa charter (which is reviewed annually) and performs several functions. The Audit Committee’s primary functions are:
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Compensation Committee.Our compensation committeeCompensation Committee is composed of Mr. P.J. Richardson (Chairman), Mr. Fred Arena and Mr. Fred Arena.Mark Neuhof. All are members of the compensation committee qualify asare independent under the current definition promulgated byNASDAQ Stock Market rules. Our Compensation Committee and board of directors, respectively, each held a meeting on March 6, 2012, whereby each of the American Stock Exchange.Compensation Committee and the board of directors approved and adopted an Amended and Restated Compensation Committee Charter. Our compensation committee is authorized to:committee’s primary functions are:
Nominating and Governance Committee.Our nominatingNominating and governanceGovernance committee is composed of Messrs. P.J. Richardson (Chairman), Mark Neuhof and Fred Arena. The Nominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing potential director nominees to the board of directors for consideration. All members of the nominatingNominating and governance committee qualifyCorporate Governance Committee are independent directors as independent underdefined by the current definition promulgatedrules of the NASDAQ Stock Market. Our Nominating and Corporate Governance Committee and board of directors, respectively, each held a meeting on March 6, 2012, whereby each of the Nominating and Corporate Governance Committee and the board of directors approved and adopted an Amended and Restated Nominating Committee Charter. The Nominating and Corporate Governance Committee will consider director nominees recommended by American Stock Exchange. security holders. To recommend a nominee please write to the Nominating and Corporate Governance Committee c/o Richard Biele, SMG Indium Resources Ltd., 100 Park Avenue, 16th Floor, New York, New York 10017. The Nominating and Corporate Governance Committee has established nomination criteria by which board candidates are to be evaluated. The Nominating and Corporate Governance Committee will assess all director nominees using the same criteria. During 2011, we did not pay any fees to any third parties to assist in the identification of nominees. During 2011, we did not receive any director nominee suggestions from stockholders.
Our nominating and governance committee is authorized to:committee’s primary functions are:
Unionmet (Singapore) Limited Negotiation and Agreement Committee. Our Unionmet (Singapore) Limited negotiation and agreement committee is composed of Messrs. Mark Neuhof (Chairman), P.J. Richardson and Fred Arena. All members of the Unionmet (Singapore) Limited negotiation and agreement committee qualify as independent under the current definition promulgated by the American Stock Exchange. Our Unionmet (Singapore) Limited negotiation and agreement committee is authorized to review, approve, and finalize any and all transactions between Unionmet and our company.
Corporate Code of Conduct and Ethics
We have adopted a corporate codeCode of conductConduct and ethics applicableEthics. The text of our Code of Conduct and Ethics, which applies to our directorsofficers and officers in accordance with applicable federal securities laws and the rules of American Stock Exchange.
Employment
Our Manager and our Chief Executive Officer, President, Chief Operating Officer and board of directors will allocate, in the aggregate, approximately 120 hours per week during the stockpiling phase of the business plan. Once the stockpiling effort is complete, the number of hours allocated will fall to approximately 60 hours per week. Our Chief Financial Officer will allocate approximately 10 hours per week.
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MANAGEMENT SERVICES AGREEMENT
We will enter into a Management Services Agreement with the Manager prior to the consummation of this offering. The primary responsibilities of the Manager under the Management Services Agreement will be to:
Our Manager has agreed to manage our activities in accordance with reasonable and prudent practices and may delegate, with the approvaleach member of our board of directors, is posted in the “Corporate Governance” section of our website,www.smg-indium.com. Our board of directors held a meeting on March 6, 2012, whereby each of the board of directors approved and at its own cost,adopted an Amended and Restated Code of Conduct and Ethics. We intend to satisfy 5.05 of Form 8-K regarding any amendments to, or waiver from, a provision of its duties or obligations underour Code of Conduct and Ethics by posting such information on our website,www.smg-indium.com. A copy of our Code of Conduct and Ethics is also available in print, free of charge, upon written request to 100 Park Avenue, 16th Floor, New York, New York 10017, Attn: Richard Biele.
Executive Compensation
Summary Compensation Table
The table below summarizes the Management Services Agreementcompensation paid by the Company to any third party.the CEO and other named executive officers for the fiscal years ended December 31, 2011 and 2010:
Name and principal position | Year | Salary ($) (3) (2) | Bonus ($) | Stock awards($)(1) | Option award($) (1) | Non-equity incentive plan compensation ($) | Non-qualified deferred compensation earnings ($) | All other compensation ($) (2) | Total ($) | |||||||||||||||||||||||||||
| Specialty Metals | 2011 | 0 | 100,000 | 101,420 | 97,650 | 0 | 0 | 393,201 | 692,271 | |||||||||||||||||||||||||||
| Group Advisors, | ||||||||||||||||||||||||||||||||||||
| LLC(Manager)(2) | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Alan C. Benjamin | 2011 | 0 | 15,000 | 13,830 | 32,550 | 0 | 0 | 130,384 | 191,764 | |||||||||||||||||||||||||||
| Chief Executive | ||||||||||||||||||||||||||||||||||||
| Officer (principal | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| financial officer)(2) | ||||||||||||||||||||||||||||||||||||
| Richard T. Morena | 2011 | 15,000 | 0 | 47,200 | 59,400 | 0 | 0 | 0 | 121,600 | |||||||||||||||||||||||||||
| Chief Financial | ||||||||||||||||||||||||||||||||||||
| Officer (principal | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| financial and | ||||||||||||||||||||||||||||||||||||
| accounting officer)(3) | ||||||||||||||||||||||||||||||||||||
| Mary E. Paetzold | 2011 | 25,000 | 0 | 0 | 4,025 | 0 | 0 | 0 | 29,025 | |||||||||||||||||||||||||||
| Chief Financial | ||||||||||||||||||||||||||||||||||||
| Officer (principal | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| financial and | ||||||||||||||||||||||||||||||||||||
| accounting officer)(4) | ||||||||||||||||||||||||||||||||||||
| Ailon Z. Grushkin | 2011 | 0 | 45,500 | 46,100 | 32,550 | 0 | 0 | 130,384 | 254,534 | |||||||||||||||||||||||||||
| President(2) | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Richard A. Biele | 2011 | 0 | 39,500 | 41,490 | 32,550 | 0 | 0 | 105,383 | 218,923 | |||||||||||||||||||||||||||
| Chief Operating | ||||||||||||||||||||||||||||||||||||
| Officer(2) | 2010 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| (1) | Shares awards are valued at the fair value at the grant date. Stock options are valued at a fair value in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718. For information regarding assumptions underlying the determination of grant date fair value of share and option awards in accordance with FASB ASC Topic 718, see note 3 of notes to financial statements included herein. |
| (2) | Upon the successful completion of the IPO, Specialty Metals Group Advisors LLC was granted 155,000 stock options that are exercisable at $4.50 per share, vested immediately upon the closing of the IPO and expire on November 23, 2014. In June 2011, the Company awarded a bonus of $0.1 million and 22,000 fully-vested restricted shares of common stock to Specialty Metals Group Advisors LLC resulting in non-cash compensation expense of approximately $0.1 million recorded during the year ended December 31, 2011 based on the fair value at the time of the awards of $4.61 per share. The fair value was determined based on the NMV on the date of issue since the Company’s common stock was not trading separate from the units issued in the IPO. Alan C. Benjamin, Ailon Z. Grushkin, BRACK Advisors LLC, a New Jersey limited liability company controlled by Richard A. Biele, and RCM Indium LLC each own 25.00% of the Manager. However, RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin, does not have any ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC. Alan C. Benjamin, Ailon Z. Grushkin and Richard A. Biele, through BRACK Advisors LLC each have beneficial ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC, as indicated above. |
| (3) | Upon the closing of the Company’s IPO, Mr. Morena was awarded 10,000 fully vested common shares and fully vested stock options to purchase 50,000 and 30,000 shares of the Company’s common stock at exercise prices equal to $7.50 and $4.50 per share of common stock, respectively, exercisable through May 2016. Additionally, in July 2011, Mr. Morena was awarded fully vested stock options to purchase 30,000 shares of the Company’s common stock at an exercise price of $4.75 per share expiring in July 2016. Mr. Morena was also paid cash compensation of $15 thousand in 2011. Mr. Morena resigned as chief financial officer (“CFO”) in July 2011. |
| (4) | In July 2011, the Company entered into an arrangement with its new CFO that provides for the Company to pay cash compensation of $50 thousand per year and to grant the CFO quarterly five-year options to acquire 2,500 shares of common stock up to an aggregate of 10,000 shares vesting at the date of grant and exercisable at the market value at the date of grant. In July 2011 and October 2011, the Company awarded its new CFO options to acquire 2,500 shares of common stock at $4.51 and $3.90 per share, respectively. The options vested immediately and expire on July 22, 2016 and October 23, 2016, respectively. |
All purchasescompensation awarded to directors and sales of indium will be completed by the Manager in its discretion for and on our behalf. The Manager will typically purchase or sell indium in the form of a tender for an offer to sell or buy indium, whichever the case may be. Such purchasesexecutive officers are usually in the form of a tender, which will stipulate the quantity to be purchased or sold, delivery particulars and payment particulars, but not price. Typical purchasers or sellers of indium include, but are not limited to, Huludao Zinc Industry Co. of China, Liuzhou China Tin Group, Jianxi Copper Co., Zhuzhou Smelter Group Co., Ltd., Nanjing Foreign Economic & Trade Development Co., Ltd., Nanjing Sanyou Electronic Materials Co., Ltd., Huludao Nonferrous Metals (Group) I/E Co., Ltd., Nanjing Germanium Co., Ltd., Xiangten Zhengtan Nonferrous Metals Co., Ltd., Guangxi Intai Technology Co., Ltd., Hunan Jingshi Group, Laibin Debang Industry and Trade Co., Ltd., Tianjin Indium Products Co. Ltd., Teck Cominco Limited, Falconbridge, Indium Corporation of America, Umicore Indium Products, Dowa Electronics Materials Co., Unionmet (Singapore) Limited, Aim Specialty Materials, Glencore International AG, Wogen PLC, RJH Trading Ltd., MCP Metal Specialties, Hudson Metals Corporation, Traxys Group, AU Optronics, Chi Mei Optoelectronics, Chunghwa Picture Tubes, HannStar Display Co., Innolux, LG Phillips LCD, Quanta Display Inc., Samsung Electronics, Sharp Corp., and Sony Corp. There is no public market through which these purchases and sales may occur and accordingly all such purchase and sale transactions are private. The pool of potential purchasers and sellers is limited and each transaction may require the negotiation of specific provisions. Accordingly, a purchase or sell cycle pursuant to a tender may take several months to complete. Since all purchases are confidential, we, including our Manager, may not be able to publicly disclose any vendor from which we would potentially purchase indium or any seller to which we may sell indium.
The Management Services Agreement shall have an initial term of five years (the “Initial Term”). After the Initial Term, the Management Services Agreement may be renewed on terms mutually acceptable to each party and may be terminated by either party upon the provision of 90 days prior written notice. The Management Services Agreement shall terminate immediately where a winding-up, liquidation, dissolution, bankruptcy, sale of assets, sale of business or insolvency proceeding have been commenced or are being
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contemplated by the Manager, and terminated upon our completion of any such proceeding. We may terminate the Management Services Agreement at any time if the Manager breaches any of its material obligations thereunder and such breach has not been cured within 90 days following notice thereof from us to the Manager.
On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet. Certain members of our Manager, Ailon Grushkin and Richard Biele, directly or beneficially hold shares in Unionmet. Consequently, a conflict of interest may arise in connection with transactions between our company and Unionmet. We therefore adopted specific procedures to be used in connection with future transactions with Unionmet. Such procedures require that any and all transactions to be entered into with Unionmet must be revieweddeliberated among, and approved by, (i) Alan Benjamin, the remaining independent member of our Manager,Compensation Committee and (ii) the Unionmet (Singapore) Limited Negotiation and Agreement Committee, which is comprised of independent board members that has no direct or indirect affiliation with Unionmet.
We acknowledge that our Manager shall not be responsible for any loss of opportunity whereby the value of any of our assets or the value of any particular indium, monetary or currency investment could have been increased, nor shall it be responsible for any decline in value of any of our assets unless such decline is the result of the Manager's gross negligence or willful failure to comply with express directions given by resolution of either our board of directors ordirectors. Except for our Common Shareholders.
We will be responsible for paying all costs and expenses incurred in connection with its business except those that are expressly to be borne by our Manager as set out therein. Such costs and expenses to be borne by us will include, without limitation: (i) brokerage and trading commissions; (ii) transportation costs, insurance fees and commissions, security services costs, and other charges arising upon the holding, purchase or sale of indium or our other assets; (iii) legal and audit fees; (iv) corporate finance offering costs; (v) fees payable for listings, the maintenance of listings and filings or other requirements of stock exchanges on which any of our securities are listed or quoted; (vi) the cost of printing and mailingchief financial reports and material for Common Shareholders' meetings, valuations, reporting to Common Shareholders, securities regulatory filings and any other purposes required by law; (vii) fees payable to any registrar and transfer agent of the Common Shares or our other securities; (viii) our directors' fees and expenses; (ix) the Manager's fees payable under the Management Services Agreement; and (x) all taxes (including income, capital and sales taxes).
Our estimated annual expenses are anticipated to be approximately $1,675,000 in the aggregate, include: (i) storage and holding of indium — $125,000; (ii) insurance — $75,000; (iii) shareholder communications and relations and maintaining the effectiveness of our registration statement for the shares of common stock underlying our public warrants — $150,000; (iv) the annual Manager's fee — $1,025,000; (v) director and officer, liability insurance premiums — $150,000; and (vi) other/administrative expenses including legal, accounting and director fees — $150,000.
In consideration of the Manager carrying out its duties and obligations under the terms of the Management Services Agreement, we shall pay to the Manager a fee equal to 2.0% per annum of our NMV (the “Management Fee”). We and our Manager subjectively determined that two percent per annum of our NMV is the minimum compensation required for the Manager to assume the risk involved with overseeing our Company, executing the strategy, and annual time required to be spent managing our affairs. The Management Fee shall be payable on or before the 10th day following the end of each such month. For such purposes, the NMV, a non-GAAP term, shall mean our total assets as at the valuation date, valued by multiplying the number of kilograms of indium held by or for us by the last spot price for indium published by Metal Bulletin as posted on Bloomberg L.P. for the month, plus cash and any of our other assets, less any and all of our outstanding payables, indebtedness or any other liabilities divided by the total number of outstanding common shares. Our independent board of directors will have the express authority to engage a third party for the purpose of conducting an independent valuation or audit of our assets.
Under the terms of the Management Services Agreement, the Manager shall incur no liability for any action except for its own gross negligence, willful misconduct or breach of the Management Services Agreement.
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The following table sets forth certain information concerning the membership of the Manager as of January 31, 2008:
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Please see above for the biographies of Messrs. Grushkin, Benjamin and Biele.
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EXECUTIVE COMPENSATION
Compensation for Officers and Directors
We have no employment agreements or arrangements with our Chairman and Chief Executive Officer, Mr. Benjamin, with our President, Mr. Grushkin or with our Chief Operating Officer, Mr. Biele.named executive officers. Messrs. Benjamin, Grushkin, Biele and Biele willMartin provide services on our behalf through the Manager and will beare compensated by the Manager out of the management fee to be paid by us to the Manager pursuant to the Management Services Agreement. We have an employment arrangement with Richard T. Morena,Mary E. Paetzold, our Chief Financial Officer, that upon effectiveness of the public offering,CFO, hired in July 2011, which we willhave agreed to employ Mr. Morena for a term of one year. Mr. Morena’s employment will provide foryear at an annual base salary of $30,000,$50 thousand, to be paid quarterly in installments of $7,500.$12.5 thousand.
Employment Agreements and Change
Director Compensation
We do not pay directors, who are also members of Control Arrangements
our Manager, any additional compensation for their service as a director. We have no employment agreements or arrangementsdo compensate our non-employee, independent directors for their service as a director. Below we show the compensation paid to our non-employee directors in fiscal 2011.
Fiscal 2011 Director Compensation Table
The following table shows the compensation paid to our non-employee directors for their board service during the year ended 2011:
| Change in | ||||||||||||||||||||||||||||
| Pension | ||||||||||||||||||||||||||||
| Value and | ||||||||||||||||||||||||||||
| Nonqualified | ||||||||||||||||||||||||||||
| Non-Equity | Deferred | |||||||||||||||||||||||||||
| Fees Earned or | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
| Paid in Cash (1) | Awards | Awards (2) | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
| Fred Arena | $ | 13,000 | $ | - | $ | 9,900 | $ | - | $ | - | $ | - | $ | 22,900 | ||||||||||||||
| Mark Stephen Neuhof | $ | 13,000 | $ | - | $ | 9,900 | $ | - | $ | - | $ | - | $ | 22,900 | ||||||||||||||
| P.J. (Patrick James) Richardson | $ | 13,000 | $ | - | $ | 9,900 | $ | - | $ | - | $ | - | $ | 22,900 | ||||||||||||||
| William Martin (3) | $ | - | $ | - | $ | 3,950 | $ | - | $ | - | $ | 27,050 | $ | 31,000 | ||||||||||||||
(1) See below ”Cash Compensation of Board of Directors.”
(2) Represents the aggregate grant date fair value computed in accordance with our Chairman and Chief Executive Officer, Mr. Benjamin,FASB ASC Topic 718. For information regarding assumptions underlying the determination of grant date fair value of option awards in accordance with our President, Mr. Grushkin or with our Chief Operating Officer, Mr. Biele. Messrs. Benjamin, Grushkin and Biele will provide services on our behalf through the Manager and will be compensated by the Manager outFASB ASC Topic 718, see Note 3 of the management fee to be paid by usnotes to the Manager pursuant toFinancial Statements in our Annual Report on Form 10-K for the Management Services Agreement. We have an employment arrangement with Richard T. Morena,year ended December 31, 2011.
(3) William C. Martin joined our Chief Financial Officer, that upon effectiveness of the public offering, we will employ Mr. Morena for a term of one year. Mr. Morena’s employment will provide for an annual base salary of $30,000, to be paid quarterly in installments of $7,500. Mr. Morena has been awarded stock options to purchase 30,000 shares of our common stock at an exercise price equal to $4.50 per share of our common stock, subject to completion of this offering. Mr. Morena will receive an award of 30,000 options annually thereafter on terms to be established by the board of directors orin January 2010. RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin became a member of Specialty Metals Group Advisors LLC, the Manager, in March 2011. The other compensation committeerepresents his share of the boardSpecialty Metals Group Advisors LLC other compensation noted above under Compensation of directors.Executive Officers.
Remuneration
Cash Compensation of Board of Directors
Each of the independent members of our board of directors will be paid such remuneration for their services as our board of directors may, from time to time, determine. Until otherwise determined, upon consummation of the offering, we anticipate paying each of our independent Boardboard members $10,000 per year and $1,000 per meeting attended in person (including committee meetings), reimbursement of travel expenses, and options to purchase 5,000 shares per annum of common stock pursuant to the 2008 Long-Term Incentive Compensation Plan.. We will also reimburse the members of our board of directors for out-of-pocket expenses for attending such meetings, and all directors will participate in the indemnification arrangements described under the Management Services Agreement.Agreement, as amended.
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Director Equity Compensation
On January 31, 2008, we granted, subject to the completion of the IPO, 8,333 options to purchase common stock to each of our three independent directors. The options were fully vested and exercisable at $7.50 per share, upon the completion of the IPO in May 2011 and expire in May 2016. In 2010, we agreed to grant an additional 5,000 options to purchase common stock to each of our four nonexecutive directors, contingent upon the successful completion of the IPO. These options are exercisable at $4.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016. Effective with the IPO, our non-employee, independent directors participate in our 2008 Long-Term Incentive Compensation Plan,
as amended. Directors are granted options to purchase 5,000 shares per annum of common stock pursuant to the 2008 Long-Term Incentive Compensation Plan. In connection with the commencementJune 2011, we granted 5,000 stock options to each of our initial public offering,three independent directors. The options are exercisable at $4.75 per share, vest immediately and expire in five years. William C. Martin joined our board of directors in January 2010. RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin became a member of Specialty Metals Group Advisors LLC, the Manager, in March 2011. As a result, William C. Martin no longer qualifies as an independent member of our board of directors. Because Mr. Martin was an independent director in 2010, he was granted stock options to purchase 5,000 shares of our common stock as described previously for the other independent directors in 2010.
Option Grants to Non-Employee Directors During 2011
During 2011, the following non-employee directors were granted options to purchase common stock under the 2008 Long-Term Incentive Compensation Plan:
| Number of shares Underlying Option Grants | Grant Date | Exercise Price | ||||||||||
| Fred Arena | 8,333 | 5/9/2011 | $ | 7.50 | ||||||||
| 5,000 | 5/9/2011 | $ | 4.50 | |||||||||
| 5,000 | 6/16/2011 | $ | 4.75 | |||||||||
| Mark Stephen Neuhof | 8,333 | 5/9/2011 | $ | 7.50 | ||||||||
| 5,000 | 5/9/2011 | $ | 4.50 | |||||||||
| 5,000 | 6/16/2011 | $ | 4.75 | |||||||||
| P.J.(Patrick James) Richardson | 8,333 | 5/9/2011 | $ | 7.50 | ||||||||
| 5,000 | 5/9/2011 | $ | 4.50 | |||||||||
| 5,000 | 6/16/2011 | $ | 4.75 | |||||||||
| William Martin | 5,000 | 5/9/2011 | $ | 4.50 | ||||||||
Executive Officers Outstanding Equity Awards at 2011 Fiscal Year End
The table below outstanding unexercised options, unvested stocks and equity incentive plan awards held by each of our executive officers for the year ended December 31, 2011:
| Option awards | Stock awards | |||||||||||||||||||||||||||||||||
| Name | Number of securities underlying unexercised options exercisable (#) | Number of securities underlying unexercised options unexercisable (#) | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards; Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |||||||||||||||||||||||||
| Specialty Metals | 155,000 | 0 | 0 | 4.50 | 11/23/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Group | 300,000 | 0 | 0 | 4.50 | 05/09/16 | |||||||||||||||||||||||||||||
| Advisors | ||||||||||||||||||||||||||||||||||
| LLC(1) | ||||||||||||||||||||||||||||||||||
| Alan C | 51,666 | 0 | 0 | 4.50 | 11/23/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Benjamin(1) | 100,000 | 0 | 0 | 4.50 | 5//09/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Ailon Z | 51,666 | 0 | 0 | 4.50 | 11/23/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Grushkin(1) | 100,000 | 0 | 0 | 4.50 | 5/09/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Richard A | 51,666 | 0 | 0 | 4.50 | 11/23/14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Biele(1) | 100,000 | 0 | 0 | 4.50 | 5/09/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Richard T | 50,000 | 0 | 0 | 7.50 | 5/09/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Morena(2) | 30,000 | 0 | 0 | 4.50 | 5/09/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| 30,000 | 0 | 0 | 4.75 | 6/13/16 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
| Mary E | 2,500 | 0 | 0 | 4.51 | 7/22/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Paetzold(3) | 2,500 | 0 | 0 | 3.90 | 10/23/16 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| (1) | Upon the successful completion of the IPO, Specialty Metals Group Advisors LLC was granted 155,000 stock options that are exercisable at $4.50 per share, vested immediately upon the closing of the IPO and expire on November 23, 2014. Specialty Metals Group Advisors LLC also received 150,000 stock options in connection with the exchange of 75,000 shares of common stock on the IPO closing date and an additional 150,000 stock options received in connection with the exchange of our Note Payable on the IPO closing date. These 300,000 stock options are exercisable at $4.50 per share, vest immediately and expire on May 9, 2016.Alan C. Benjamin, Ailon Z. Grushkin,BRACK Advisors LLC, an entity controlled by Richard A. Biele,and RCM Indium LLC each own 25.00% of the Manager. However, RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin, does not have any ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC. Alan C. Benjamin, Ailon Z. Grushkin and BRACK Advisors LLC, an entity whose sole member is Richard A. Biele, each have beneficial ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC, as indicated above. |
| (2) | Mr. Morena was granted fully vested, five-year stock options to purchase 50,000 and 30,000 shares of our common stock at exercise prices equal to $7.50 and $4.50 per share of common stock, respectively, upon the completion of the IPO in May 2011. Additionally, Mr. Morena was awarded fully vested, five year stock options to purchase 30,000 shares of our common stock at $4.75 per share in July 2011. |
| (3) | In July 2011, we entered into an arrangement with Mary E. Paetzold (our CFO) that provides for us to grant her quarterly five-year options to acquire 2,500 shares of common stock vesting at the date of grant and exercisable at the market value at the date of grant. In July 2011 and October 2011, we awarded her options to acquire 2,500 shares of common stock at $4.51 and $3.90 per share, respectively. The options vested immediately and expire on July 22, 2016 and October 23, 2016, respectively. |
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information with respect to our compensation plans under which equity compensation is authorized as of December 31, 2011.
| Plan Category | Number of securities to be issued upon exercise of outstanding options and rights | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| Equity compensation plans approved by security holders | 1,000,000 | $ | 4.87 | 370,001 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 1,000,000 | $ | 4.87 | 370,001 | ||||||||
2008 Long-Term Incentive Compensation Plan
In 2008, our board of directors adopted and our stockholders approved the plan in its entirety in January 2008.2008 Long-Term Incentive Compensation Plan. Under this plan, we may grant incentive stock options, non-qualified stock options restricted and unrestricted stock awards and other stock-based awards. AThe purpose of the 2008 Long-Term Incentive Compensation Plan is to provide an incentive to attract directors, officers, consultants, advisors and employees whose services are considered valuable to encourage a sense of proprietorship and to stimulate an active interest of such person in our development and financial achievements. As amended in July 2010, a maximum of 330,0001,000,000 shares of common stock has been reserved for issuance under this plan. Since inception, we have granted 5,000 options to purchase common stock to each of our three independent directors and 30,000 options to our Chief Financial Officer. The option grants will be exercisable at $4.50 per share and are exercisable subsequent to completion of this offering. The plan expires on January 31, 2018.
Our board of directors has authorized our compensation committee to administer our plan. In connection with the administration of our 2008 Long-Term Incentive Compensation Plan, the compensation committee, with respect to awards to be made to any person who is not one of our directors, will:
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WithWith respect to stock options or restricted stock awards to be made to any of our directors, theCompensation Committee will make recommendations to our board of directors as to:
Any grant of awards to any of directors under our 2008 Long-Term Incentive Compensation Plan must be approved by our board of directors.
In addition, the compensation committee will:
Types of Awards
Our board may amend our Long-Term Incentive Compensation Plan permitsat any time. However, without stockholder approval, our 2008 Long-Term Incentive Compensation Plan may not be amended in a manner that would:
Stock Options. Stock options are contractual rights entitling an optionee who has been granted a stock option to purchase a stated number of shares ofthat may be issued under our common stock at an exercise price per share determined at2008 Long-Term Incentive Compensation Plan;
Awards previously granted under our 2008 Long-Term Incentive Plan will be determined by our board of directors or the Compensation Committee at the time of the grant, but will not be less than fair market value on the date of the grant. Our board of directors or a committee of the Board will also determine the duration of each option; however, no option may be exercisable more than ten years after the date the option is granted. Within the foregoing limitations, the board of directors or committee of the Board may, in its discretion, impose limitations on exercise of all or some options granted under our Incentive Plan such as specifying minimum periods of time after grant during which options may not be exercised. Options granted underimpaired or affected by any amendment of our 2008 Long-Term Incentive Compensation Plan, will vest at rates specified inwithout the option agreement at the time of grant; however, all options granted under our Incentive Plan will vest upon the occurrence of a change of control, as defined in the Incentive Plan. Our Incentive Plan also contains provisions for our board of directors or a committeeconsent of the Board to provide in the participants’ option award agreements for accelerating the right of an individual employee to exercise his or her stock option or restricted stock award in the event of retirement or other termination of employment. No cash consideration is payable to us in exchange for the grant of options.affected grantees.
Our Incentive Plan provides that the stock options may either be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or Non-Qualified Options, which are stock options other than Incentive Stock Options within the meaning of Sections 422 of the Code. Incentive Stock Options may be granted only to our employees or employees of our subsidiaries, and must be granted at a per share option price not less than the fair market value of our common stock on the date the Incentive Stock Option is granted. In the case of an Incentive Stock Option granted to a stockholder who owns shares of our outstanding stock of all classes representing more than 10.0% of the total combined voting power of all of our outstanding stock of all classes entitled to vote in the election of directors, the per share option price must be not less than 110.0% of the fair market value of one share of our common stock on the date the Incentive Stock Option is granted and the term of such option may not exceed five years. As required by the Code, the aggregate fair market value, determined at the time an Incentive Stock Option is granted, of our common stock with respect to which Incentive Stock Options may be exercised by an optionee for the first time during any calendar year under all of our incentive stock option plans may not exceed $100,000.
The exercise price for Non-Qualified Options may not be less than the fair market value of our common stock on the date the Non-Qualified Option is granted. Non-Qualified Options are not subject to any of the restrictions described above with respect to Incentive Stock Options. The exercise price of stock options may be paid in cash, in whole shares of our common stock, in a combination of cash and our common stock, or in
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TABLE OF CONTENTSTransferability
such other form of consideration as our board of directors or the committee of the Board may determine, equal in value to the exercise price. However, only shares of our common stock which the option holder has held for at least six months on the date of the exercise may be surrendered in payment of the exercise price for the options. In no event may a stock option be exercised after the expiration of its stated term.
Stock Appreciation Rights. A stock appreciation right permits the grantee to receive an amount (in cash, common stock, or a combination thereof) equal to the number of stock appreciation rights exercised by the grantee multiplied by the excess of the fair market value of our common stock on the exercise date over the stock appreciation rights’ exercise price. Stock appreciation rights may or may not be granted in connection with the grant of an option. The exercise price of stock appreciation rights granted under the Incentive Plan will be determined by the board of directors or a committee of the Board; provided, however, that such exercise price cannot be less than the fair market value of a share of common stock on a date the stock appreciation right is granted (subject to adjustments). A stock appreciation right may be exercised in whole or in such installments and at such times as determined by the board of directors or a committee of the Board.
Restricted Stock. Restricted shares of our common stock may be granted under our Incentive Plan subject to such terms and conditions, including forfeiture and vesting provisions, and restrictions against sale, transfer or other disposition as the board of directors or a committee of the Board may determine to be appropriate at the time of making the award. In addition, the board of directors or a committee of the Board may direct that share certificates representing restricted stock be inscribed with a legend as to the restrictions on sale, transfer or other disposition, and may direct that the certificates, along with a stock power signed in blank by the grantee, be delivered to and held by us until such restrictions lapse. The board of directors or a committee of the Board, in its discretion, may provide in the award agreement for a modification or acceleration of shares of restricted stock in the event of permanent disability, retirement or other termination of employment or business relationship with the grantee.
Performance Units. The Incentive Plan permits grants of performance units, which are rights to receive cash payments equal to the difference (if any) between the fair market value of our common stock on the date of grant and its fair market value on the date of exercise of the award, except to the extent otherwise provided by the board of directors or a committee of the Board or required by law. Such awards are subject to the fulfillment of conditions that may be established by the board of directors or a committee of the Board including, without limitation, the achievement of performance targets based upon the factors described above relating to restricted stock awards.
Performance Bonus. The Incentive Plan permits grants of performance bonuses, which may be paid in cash, common stock or combination thereof as determined by the board of directors or a committee of the Board. The maximum value of performance bonus awards granted under the Incentive Plan shall be established by the compensation committee at the time of the grant. An employee’s receipt of such amount will be contingent upon achievement of performance targets during the performance period established by the compensation committee. The performance targets will be determined by the board of directors or a committee of the Board based upon the factors described above relating to restricted stock awards. Following the end of the performance period, the board of directors or a committee of the Board will determine the achievement of the performance targets for such performance period. Payment may be made within 60 days of such determination. Any payment made in shares of common stock will be based upon the fair market value of the common stock on the payment date.
Transferability
With the exception of Non-Qualified Stock Options, awards are not transferable other than by will or by the laws of descent and distribution. Non-Qualified Stock Options are transferable on a limited basis. Restricted stock awards are not transferable during the restriction period.
Change of Control Event
The 2008 Long-Term Incentive Compensation Plan provides that in the event of a change of control event the Boardboard shall have the discretion to determine whether, and to what extent to, accelerate the vesting, exercise or payment of an Award.
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Termination of Employment/Relationship
Awards granted under our 2008 Long-Term Incentive Compensation Plan that have not vested will generally terminate immediately upon the grantee’s termination of employment or business relationship with us or any of our subsidiaries for any reason other than retirement with our consent, disability or death. The board of directors or a committee of the Boardboard may determine at the time of the grant that an award agreement should contain provisions permitting the grantee to exercise the stock options for any stated period after such termination, or for any period the board of directors or a committee of the Boardboard determines to be advisable after the grantee’s employment or business relationship with us terminates by reason of retirement, disability, death or termination without cause. Incentive Stock Options will, however, terminate no more than three months after termination of the optionee’s employment, twelve months after termination of the optionee’s employment due to disability and three years after termination of the optionee’s employment due to death. The board of directors or a committee of the Boardboard may permit a deceased optionee’s stock options to be exercised by the optionee’s executor or heirs during a period acceptable to the board of directors or a committee of the board following the date of the optionee’s death but such exercise must occur prior to the expiration date of the stock option.
Dilution; Substitution
As described above, our 2008 Long-Term Incentive Compensation Plan will provide protection against substantial dilution or enlargement of the rights granted to holders of awards in the event of stock splits, recapitalizations, asset acquisitions, consolidations, reorganizations or similar transactions. New award rights may, but need not, be substituted for the awards granted under our 2008 Long-Term Incentive Compensation Plan,or our obligations with respect to awards outstanding under our 2008 Long-Term Incentive Compensation Plan may, but need not, be assumed by another corporation in connection with any asset acquisition, consolidation, acquisition, separation, reorganization, sale or distribution of assets, liquidation or like occurrence in which we are involved. In the event that our 2008 Long-Term Incentive Compensation Plan is assumed, the stock issuable withissuablewith respect to awards previously granted under our 2008 Long-Term Incentive Compensation Plan shall thereafter include the stock of the corporation granting such new option rights or assuming our obligations under the 2008 Long-Term Incentive Compensation Plan.
Amendment
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 18, 2012 for: (i) each of our directors; (ii) each of our executive officers: (iii) all of our directors and executive officers as a group; and (iv) all persons, to our knowledge, are the beneficial owners of more than five percent (5%) of the Incentive Plan
Our Board may amend our Incentive Plan at any time. However, without stockholder approval, our Incentive Plan may not be amendedoutstanding shares of common stock. Beneficial ownership is determined in a manner that would:
Except as indicated in footnotes to this table, we believe each person named in this table has sole voting and investment powerwith respect to the shares of common stock set forth opposite such person’s name. Percentage ownership is based on 8,832,301 shares of common stock outstanding on April 18, 2012.
| Number of | Percentage of | |||||||
| Name of Beneficial Owners (1)(2) | shares | common stock | ||||||
| Alan Benjamin (4)(7) | 235,890 | 2.62 | % | |||||
| Ailon Z. Grushkin (4)(8) | 369,392 | 4.07 | % | |||||
| Richard A. Biele (4)(9) | 227,834 | 2.53 | % | |||||
| Mary E. Paetzold (5) | 10,000 | * | ||||||
| William Martin (10)(14) | 5,953,740 | 55.07 | % | |||||
| P.J. (Patrick James) Richardson (6) | 32,389 | * | ||||||
| Fred Arena (6) | 18,333 | * | ||||||
| Mark Stephen Neuhof (6) | 18,333 | * | ||||||
| Specialty Metals Group Advisors LLC (3)(4)(14) | 530,000 | 5.71 | % | |||||
| Raging Capital Management LLC(11) | 5,934,684 | 54.95 | % | |||||
| Raging Capital Fund L.P.(11)(12) | 2,118,583 | 21.78 | % | |||||
| Raging Capital Fund QP, L.P.(11)(13) | 3,816,101 | 38.52 | % | |||||
| All officers and directors as a group (8 persons)(4)(5)(6) (7)(8)(9)(10) | 6,915,107 | 44.05 | % | |||||
| * | represents less than 1.0% |
| (1) | Unless otherwise indicated, the address of each person is SMG Indium Resources, Ltd.100 Park Ave., Suite 16, New York, New York 10017. |
| (2) | Unless otherwise indicated, all ownership is direct beneficial ownership. |
| (3) | Includes 455,000 shares that may be acquired upon the exercise of options to purchase common stock. |
| (4) | Messrs. Benjamin, Grushkin, and BRACK Advisors LLC, a New Jersey limited liability company, whose sole member is Richard A. Biele, may be deemed to beneficially own the shares owned by Specialty Metals Group Advisors by virtue of their respective ownership and control of Specialty Metals Group Advisors LLC. However, RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin, does not have any ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC. |
| (5) | Includes 10,000 shares that may be acquired upon the exercise of options to purchase common stock. |
| (6) | Includes 18,333 shares that may be acquired upon the exercise of options to purchase common stock granted to each of the independent directors. |
| (7) | Includes 151,666 shares that may be acquired upon the exercise of options to purchase common stock held by Specialty Metals Group Advisors LLC |
| (8) | Includes 91,363 shares and 91,363 shares that may be acquired upon the exercise of common stock purchase warrants held by the AZG Tangible Assets Fund LLC and A.Z.G. Capital Corp. Profit Sharing Plan. Ailon Z. Grushkin is the Managing Member of the Managing Member of AZG Tangible Assets Fund LLC and retains 100% equity ownership in the Managing Member. Ailon Z. Grushkin is the sole beneficiary of A.Z.G. Capital Corp. Profit Sharing Plan. Also includes 151,666 shares that may be acquired upon the exercise of options to purchase common stock held by Specialty Metals Group Advisors LLC |
(9) Includes 14,056 shares and 14,056 shares that may be issued under our Incentive Plan;
Awards previously granted under our Incentive Plan may not be impaired or affected by any amendment of our Incentive Plan, without the consent of the affected grantees.
Accounting Treatment
Under generally accepted accounting principles with respect to the financial accounting treatment of stock options used to compensate employees, upon the grant of stock options under our Incentive Plan, the fair value of the options will be measured on the date of grant and this amount will be recognized as a compensation expense ratably over the vesting period. Stock appreciation rights granted under the Incentive Plan must be settled in common stock. Therefore, stock appreciation rights granted under the Incentive Plan will receive the same accounting treatment as options. The cash we receiveacquired upon the exercise of common stock purchase warrants held by Richard A. Biele IRA and 9,000 shares held by BRACK Advisors LLC, a New Jersey limited liability company whose sole member is Richard A. Biele and 151,666 shares that may be acquired upon the exercise of options will be reflected as an increaseto purchase common stock held by Specialty Metals Group Advisors LLC.
| (10) | Includes 5,000 shares that may be acquired upon the exercise of options to purchase common stock. Includes 7,028 shares and 7,028 shares that may be acquired upon exercise of common stock purchase warrants held by William C. Martin SEP IRA, over which Mr. Martin, as a director of the Company and a member of the Manager through his control of RCM Indium LLC, has voting and investment control. Includes 3,967,542 shares and 1,967,342 shares that may be acquired by the exercise of common stock purchase warrants held by Raging Capital Fund QP, LP and Raging Capital Fund, LP. William C. Martin is the Managing Member of Raging Capital Management, LLC the General Partner of Raging Capital Fund QP, LP and Raging Capital Fund, LP. William C. Martin retains 100% equity ownership in Raging Capital Management, LLC. |
| (11) | Includes 3,967,342 shares and 1,967,342 shares that may be acquired upon the exercise of common stock purchase warrants held by Raging Capital Fund QP, LP and Raging Capital Fund, LP. Raging Capital Management, LLC is the General Partner of Raging Capital Fund QP, LP and Raging Capital Fund, LP. |
| (12) | Includes 892,958 shares that may be acquired upon the exercise of common stock purchase warrants held by Raging Capital Fund, LP |
| (13) | Includes 1,074,384 shares that may be acquired upon the exercise of common stock purchase warrants held by Raging Capital Fund QP, LP |
| (14) | RCM Indium, LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, whose sole member is William C. Martin, a member of our board of directors owns 25% of Specialty Metals Group Advisors LLC. However, RCM Indium, LLC does not have any ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC. |
Certain Relationships and Related Transactions and Director Independence
The following is a description of the transactions we have engaged in during the year ended December 31, 2011, with our capital. No additional compensation expense will be recognized atdirectors and officers and beneficial owners of more than five percent of our voting securities and their affiliates.
On February 8, 2010, we entered into a common stock for option exchange with the time stock options are exercised, although the issuanceManager where upon consummation of our IPO (which closed in May 2011), 75,000 shares of common stock owned by the Manager were automatically converted into 150,000 common stock options exercisable at $4.50 per common share until May 2016. As a result of the exchange, the Manager currently holds 75,000 shares of common stock.
On May 10, 2011, we entered into an Amended and Restated Management Services Agreement with the Manager to govern the management and operations of our company. See ‘‘Management of SMG Indium Resources Ltd. — Management Services Agreement.’’ The members of our Manager are as follows: Ailon Z. Grushkin, our president; BRACK Advisors LLC, a New Jersey limited liability company, with the sole member beingRichard A. Biele, our chief operating officer; Alan C. Benjamin, our chairman and chief executive officer and RCM Indium LLC, a Delaware limited liability company, whose members include Raging Capital Management, LLC, with the sole member being William C. Martin, our director. Specialty Metals Group Advisors LLC is managed by Ailon Z. Grushkin. Pursuant to this agreement the Manager fees during the year ended December 31, 2011 approximated $0.4 million.
On January 8, 2008, we entered into a revolving line of credit with the Manager in the aggregate amount of $0.3 million. The revolving line of credit was used to fund the deferred offering costs incurred by us in connection with our IPO. We borrowed approximately $0.3 million under the revolving line of credit. The revolving line of credit was unsecured and bore interest at the rate of 6.0% per annum. The loan wassettled upon the consummation of the Company’s IPO in May 2011. Approximately $0.3 million of principal due plus accrued and unpaid interest under such revolving line of credit was automatically converted into 150,000 five-year options to purchase shares of common stock, at an exercise may reduce basic earningsprice of $4.50 per share.
In 2008, we agreed to grant 8,333 options to purchase common stock to each of our three independent directors and 50,000 options to Richard Morena, our former CFO, contingent upon the successful completion of the IPO. In May 2011, such options were granted upon the closing of the IPO. The options are exercisable at $7.50 per share, as morevested immediately with the closing of the IPO and expire on May 9, 2016.On June 5, 2009, in connection with his work for us since inception, we awarded 5,000 shares of common stock to Mr. Morena.
In 2010, we agreed to grant an additional 5,000 options to purchase common stock to each of our four non-executive directors and 30,000 options our former chief financial officer, contingent upon the successful completion of the IPO. In May 2011, such options were granted upon the closing of the IPO. The options are exercisable at $4.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016.
On May 10, 2011 upon the closing of our IPO, we granted to the Manager155,000 five-year stock options, exercisable at $4.50 per share.In June 2011, we awarded (1) 22,000 fully-vested restricted shares of common stock to the Manager resulting in non-cash compensation expense of approximately $0.1 million based on the fair value at the time of the awards and (2) $0.1 million in a cash bonus.
In June 2011, we granted an additional 5,000 stock options to each of our three independent directors and 30,000 options to our former CFO. The options are exercisable at $4.75 per share, vest immediately and expire in five years. In July 2011 and October 2011, we awarded its new CFO options to acquire 2,500 shares of common stock at $4.51 and $3.90 per share, respectively. The options vested immediately and expire on July 22, 2016 and October 23, 2016, respectively.
We recorded non-cash officers’ and directors’ compensation expense aggregating approximately $0.1 million for the above stock options during the year ended December 31, 2011.
On March 8, 2011, RCM Indium, LLC, a Delaware limited liability company, with the members include Raging Capital Management, LLC, with the sole member being William C. Martin, our director, became a member of Specialty Metals Group Advisors LLC, our Manager. RCM Indium, LLC does not have any ownership rights to any common stock or stock options owned by or granted to Specialty Metals Group Advisors LLC. RCM Indium, LLC shares in our Manager’s compensation. Raging Capital Management, LLC and its affiliates is our largest stockholder.
On January 5, 2012, we closed a private placement of an aggregate of 2.0 million shares of our common stock would then be outstanding.
When we make a grantat $3.75 per share to two accredited investors, Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., for an aggregate purchase price of restricted stock,$7.5 million. Raging Capital Management, LLC is the fair valuegeneral partner of Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., respectively, and collectively, the entities represent the our largest stockholder(s). Such entities are affiliated and controlled by William C. Martin, our director and member of our Manager. We intends to use 85% of the restricted stock award atgross proceeds, or approximately $6.4 million, from such transaction to purchase and stockpile the date of grant will be determinedmetal indium and this amount will be recognized over the vesting period15% of the award. The fair valuegross proceeds, or approximately $1.1 million, for general corporate purposes.
We believe that all of a restricted stock award is equalthe transactions above were made on terms no less favorable to us than could have been obtained from unaffiliated third-parties. We will not engage in any transactions with our officers,principal stockholders, or affiliates involving purchasing, lending, or selling indium to or from us, except pursuant to the fair market valueterms of our common stock onManagement Services Agreement.
Traxys Projects LP, 100% owned by Traxys S.a.r.l and its wholly owned subsidiary, Traxys North America LLC, and Traxys Commodity Fund LP each invested $0.5 million in our 2009 Private Placement. This represents beneficial ownership in our Company by entities affiliated with Traxys North America LLC of15.2% prior to our IPO, 4.3% after the dateIPO, and 3.2% after the 2012 Private Placement assuming they did not purchase or sell any shares in the open market since the IPO closed. We purchased an aggregate of grant.
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Due to consideration7.2 metric tons of the accounting treatment of stock options and restricted stock awards by various regulatory bodies, it is possible that the present accounting treatment may change.
Tax Treatment
The following is a brief description of the federal income tax consequences, under existing law, with respect to awards that may be granted under our Incentive Plan.
Incentive Stock Options. An optionee will not realize any taxable income upon the grant or the exercise of an Incentive Stock Option. However, the amount by which the fair market value of the shares covered by the Incentive Stock Option (on the date of exercise) exceeds the option price paid will be an item of tax preference to which the alternative minimum tax may apply, depending on each optionee’s individual circumstances. If the optionee does not dispose of the sharesindium, approximately 78.2% of our common stock acquired by exercising an Incentive Stock Option within two years from the date of the grant of the Incentive Stock Option or within one year after the shares are transferred to the optionee, when the optionee later sells or otherwise disposes of the stock, any amount realized by the optionee in excess of the option price will be taxed as a long-term capital gain and any loss will be recognized as a long-term capital loss. We generally will not be entitled to an income tax deduction with respect to the grant or exercise of an Incentive Stock Option.
If any shares of our common stock acquired upon exercise of an Incentive Stock Option are resold or disposed of before the expiration of the prescribed holding periods, the optionee would realize ordinary income, instead of capital gain. The amount of the ordinary income realized would be equal to the lesser of (i) the excess of the fair market value of the stock on the exercise date over the option price; or (ii) in the case of a taxable sale or exchange, the amount of the gain realized. Any additional gain would be either long-term or short-term capital gain, depending on whether the applicable capital gain holding period has been satisfied. In the event of a premature disposition of shares of stock acquired by exercising an Incentive Stock Option, we would be entitled to a deduction equal to the amount of ordinary income realized by the optionee.
Non-Qualified Options. An optionee will not realize any taxable income upon the grant of a Non-Qualified Option. At the time the optionee exercises the Non-Qualified Option, the amount by which the fair market value at the time of exercise of the shares covered by the Non-Qualified Option exceeds the option price paid upon exercise will constitute ordinary income to the optionee in the year of such exercise. We will be entitled to a corresponding income tax deduction in the year of exercise equal to the ordinary income recognized by the optionee. If the optionee thereafter sells such shares, the difference between any amount realized on the sale and the fair market value of the shares at the time of exercise will be taxed to the optionee as capital gain or loss, short- or long-term depending on the length of time the stock was held by the optionee before sale.
Stock Appreciation Rights. A participant realizes no taxable income and we are not entitled to a deduction when a stock appreciation right is granted. Upon exercising a stock appreciation right, a participant will realize ordinary income in an amount equal to the fair market value of the shares received minus any amount paid for the shares, and we will be entitled to a corresponding deduction. A participant’s tax basis in the shares of common stock received upon exercise of a stock appreciation right will be equal to the fair market value of such shares on the exercise date, and the participant’s holding period for such shares will beginindium stockpile at that time. Upon sale of the shares of common stock received upon exercise of a stock appreciation right, the participant will realize short-term or long-term capital gain or loss, depending upon whether the shares have been held for more than one year. The amount of such gain or loss will be equal to the difference between the amount realized in connection with the sale of the shares, and the participant’s tax basis in such shares.
Restricted Stock Award. A recipient of restricted stock generally will not recognize any taxable income until the shares of restricted stock become freely transferable or are no longer subject to a substantial risk of forfeiture. At that time the excess of the fair market value of the restricted stock over the amount, if any, paid for the restricted stock is taxable to the recipient as ordinary income. If a recipient of restricted stock subsequently sells the shares, he or she generally will realize capital gain or loss in the year of such sale in an amount equal to the difference between the netfrom Traxys North America LLC utilizing proceeds from the sale2009 private placement in which we expended approximately $4.6 millionbetween December 2009 and the price paid for the stock, ifMarch 2010 in 21 separate purchase orders. Traxys North America LLC is an established and reputable indium supplier. We did not and do not have any plus the amount previously included in income as ordinary incomeoutstanding special agreements or arrangements with respect to such restricted shares.
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A recipient has the opportunity, within certain limits, to fix the amount and timing of the taxable income attributable to a grant of restricted stock. Section 83(b) of the Code permits a recipient of restricted stock, which is not yet required to be included in taxable income, to elect, within 30 days of the award of restricted stock, to include in income immediately the difference between the fair market value of the shares of restricted stock at the date of the award and the amount paid for the restricted stock, if any. The election permits the recipient of restricted stock to fix the amount of income that must be recognized by virtue of the restricted stock grant. We will be entitled to a deduction in the year the recipient is required (or elects) to recognize income by virtue of receipt of restricted stock, equal to the amount of taxable income recognized by the recipient.
Performance Units and Performance Bonuses. A participant realizes no taxable income and we are not entitled to a deduction when performance units or performance bonuses are awarded. When the performance units or performance bonuses vest and become payable upon the achievement of the performance objectives, the participant will realize ordinary income equal to the amount of cash received or the fair market value of the shares received minus any amount paid for the shares, and we will be entitled to a corresponding deduction. A participant’s tax basis in shares of common stock received upon payment will be equal to the fair market value of such shares when the participant receives them. Upon sale of the shares, the participant will realize short-term or long-term capital gain or loss, depending upon whether the shares have been held for more than one year at the time of sale. Such gain or loss will be equal to the difference between the amount realized upon the sale of the shares and the tax basis of the shares in the participant’s hands.
Section 162(m) of the Code. Section 162(m) of the Code precludes a public corporation from taking a deduction for annual compensation in excess of $1.0 million paid to its chief executive officerTraxys S.a.r.l or any of its four other highest-paid officers. However, compensation that qualifies under Section 162(m)subsidiaries including its wholly owned subsidiary, Traxys North America LLC.
Conflicts of the Code as “performance-based” is specifically exempt from the deduction limit. Based on Section 162(m) of the Code and the regulations thereunder, our ability to deduct compensation income generated in connection with the exercise of stock options or stock appreciation rights granted under the Incentive Plan should not be limited by Section 162(m) of the Code. Further, we believe that compensation income generated in connection with performance awards granted under the Incentive Plan should not be limited by Section 162(m) of the Code. The Incentive Plan has been designed to provide flexibility with respect to whether restricted stock awards or performance bonuses will qualify as performance-based compensation under Section 162(m) of the Code and, therefore, be exempt from the deduction limit. If the vesting restrictions relating to any such award are based solely upon the satisfaction of one of the performance goals set forth in the Incentive Plan, then we believe that the compensation expense relating to such an award will be deductible by us if the awards become vested. However, compensation expense deductions relating to such awards will be subject to the Section 162(m) deduction limitation if such awards become vested based upon any other criteria set forth in such award (such as the occurrence of a change in control or vesting based upon continued employment with us).Interest
Certain Awards Deferring or Accelerating the Receipt of Compensation. Section 409A of the Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004, imposes certain new requirements applicable to “nonqualified deferred compensation plans.” If a nonqualified deferred compensation plan subject to Section 409A fails to meet, or is not operated in accordance with, these new requirements, then all compensation deferred under the plan may become immediately taxable. Stock appreciation rights and deferred stock awards which may be granted under the plan may constitute deferred compensation subject to the Section 409A requirements. It is our intention that any award agreement governing awards subject to Section 409A will comply with these new rules.
Limitation of Directors’ Liability and Indemnification
The Delaware General Corporation Law authorizes corporations to limit or eliminate, subject to certain conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our certificate of incorporation, as amended, limits the liability of our directors to the fullest extent permitted by Delaware law.
We will have in place, upon effectiveness of this offering, director and officer liability insurance to cover liabilities our directors and officers may occur in connection with their services to us, including matters arising under the Securities Act of 1933. Our amended and restated certificate of incorporation and amended and
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restated bylaws also provide that we will indemnify any of our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal proceeding of any nature. In addition, we have entered into indemnification agreements with each of our directors and executive officers. We will repay certain expenses incurred by a director or officer in connection with any civil or criminal action or proceeding, specifically including actions by us or in our name (derivative suits). Such indemnifiable expenses include, to the maximum extent permitted by law, attorney’s fees, judgments, civil or criminal fines, settlement amounts and other expenses customarily incurred in connection with legal proceedings. A director or officer will not receive indemnification if he or she is found not to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interest.
Such limitation of liability and indemnification does not affect the availability of equitable remedies. In addition, we have been advised that in the opinion of the SEC, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.
There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
CONFLICTS OF INTEREST
Potential investors should be aware of the following potential conflicts of interest:
We have not adopted a policy that expressly prohibits our directors, officers, securityholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such parties may have an interest in certain transactions in which we are involved, and may also compete with us.
Our Manager is responsible for negotiating, purchasing and stockpiling indium on our behalf.The management fee paid by us to the Manager is dependent on our NMV. In the event we raise additional capital or conduct future offerings, there is a risk that the Manager may value its own interest in the management fee more than the interest of our public stockholders, resulting in a conflict of interest, which may not necessarily be resolved in the best interest of our public stockholders.
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In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. Inentities.In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure youThere is no assurance that any of the above mentioned conflicts will be resolved in our favor.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of the transactions we have engaged in since our formation in January 2008 with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates.
On January 7, 2008, the Manager purchased 90,000 shares of our common stock at the price of $0.111 per share. The members of the Manager are Messrs. Benjamin, Grushkin and Biele, our Chairman and Chief Executive Officer, our President, and our Chief Operating Officer, respectively.
We will enter into a Management Services Agreement with the Manager prior to the consummation of this offering pursuant to which the Manager will administer our activities. See “Management Services Agreement.”
On January 7, 2008, we agreed to reimburse our Chief Operating Officer Richard Biele or his affiliates commencing with the successful completion of this offering, for office, secretarial and related office expenses as follows: (1) $1,200 per month for rent; (2) reimbursement for up to 20% of his secretary’s salary and healthcare benefits; and (3) office expenses directly related to our operations. We will continue to reimburse our Chief Operating Officer or his affiliates for rent and other office-related expenses as set forth above.
On January 8, 2008, we entered into a revolving line of credit with the Manager in the aggregate amount of $300,000. The revolver will be used to fund the deferred offering costs to be incurred by us in connection with this offering. To date, we have borrowed $250,000 under the revolver. The revolver is unsecured and bears interest at the rate of six percent (6.0%) per annum. The loan will be payable on the earlier of December 31, 2008 or the consummation of this offering. The loan will be repaid out of the net proceeds of this offering.
On July 11, 2008, we entered into a Purchase/Supply/Agency Agreement with Unionmet. Pursuant to the Agreement, Unionmet agreed to (i) sell a minimum of ten (10) metric tons of indium to us within ten (10) months upon the effectiveness of this offering and (ii) act as a non-exclusive agent to negotiate sales on our behalf and broker introductions with suppliers based in China. In exchange, we agreed to purchase the ten (ten) metric tons of indium and agreed to pay Unionmet a commission for all transactions negotiated by Unionmet on our behalf or introductions brokered by Unionmet between us and other indium suppliers resulting in a transaction. The term of the Agreement shall begin on the effectiveness of this offering and terminate one year after the effectiveness of this offering.
Certain members of our management, officers and directors, individually and as a group, retain a passive investment interest in Unionmet and do not exercise control of Unionmet. Unionmet is a publicly traded company listed on the Singapore Exchange Ltd. On July 29, 2008, Unionmet’s stock closed on the Singapore Exchange Ltd. at a price of 0.12 Singapore dollars or 0.08772 U.S. dollars based on the spot currency conversion rate of 1.3680 Singapore dollars to 1 U.S. dollar. Ailon Z. Grushkin, a member of our Manager, and an officer and director of our Company personally owns 250,000 shares of Unionmet’s stock valued at approximately $21,930 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Richard Biele, a
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member of our Manager and an officer and director of our Company personally owns 50,000 shares of Unionmet’s stock valued at approximately $4,386 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. The A.Z.G. Capital Corp. Profit Sharing Plan, whose sole beneficiary is Mr. Grushkin, owns 595,000 shares of Unionmet’s stock valued at approximately $52,193 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Mr. Grushkin is also the Managing Member of the AZG Tangible Assets Fund LLC, which holds 2,130,000 shares of Unionmet’s stock valued at approximately $186,844 U.S. dollars based upon the price of Unionmet’s stock on July 29, 2008. Richard Biele, a member of our Manager, and an officer and director of our Company, and Richard Morena, our Chief Financial Officer, are members of the AZG Tangible Assets Fund LLC and therefore beneficially own shares in Unionmet as well. Based on Unionmet having approximately 368,000,000 shares outstanding, the combined group owns 3,025,000 shares representing less than 1.0% of the total shares outstanding.
We believe that all of the transactions above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We will not engage in any transactions with our officers, principal shareholders, or affiliates involving purchasing, lending, or selling indium to or from us, except pursuant to the terms of our Management Services Agreement.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of our common stock as of February 25, 2008 and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus (assuming none of the individuals listed purchase units in this offering), by:
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of February 25, 2008, pursuant to the exercise of options or warrants, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on 90,000 shares of common stock outstanding on June 30, 2008, and 11,090,000 shares of common stock outstanding after the completion of this offering.
Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders.
| | | | | ||||||||||||
| Common Stock | ||||||||||||||||
| Before the Offering(1)(2) | As Adjusted for the Offering(1) | |||||||||||||||
| Name and Address of Beneficial Owners(3) | Number of Shares(4) | Percentage of Common Stock | Number of Shares(4) | Percentage of Common Stock | ||||||||||||
| Specialty Metals Group Advisors LLC(5) | 90,000 | 100.0 % | 90,000 | * % | ||||||||||||
| Alan Benjamin(5) | 30,000 | 33.33 % | 30,000 | * % | ||||||||||||
| Ailon Z. Grushkin(5) | 30,000 | 33.33 % | 30,000 | * % | ||||||||||||
| Richard A. Biele(5) | 30,000 | 33.33 % | 30,000 | * % | ||||||||||||
| Richard T. Morena(6) | — | — | 30,000 | * % | ||||||||||||
| P.J. (Patrick James) Richardson(7) | — | — | 5,000 | * % | ||||||||||||
| Fred Arena(7) | — | — | 5,000 | * % | ||||||||||||
| Mark Stephen Neuhof(7) | — | — | 5,000 | *% | ||||||||||||
| All Directors and Officers as a Group (6 persons) | 90,000 | 100.0 % | 135,000 | 1.21 % | ||||||||||||
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DESCRIPTION OF SECURITIES
General
We are
Our authorized to issue 50,000,000capital stock consists of 40,000,000 shares of common stock, par value $0.001, and 1,000,000 authorized shares of preferred stock, par value $0.001.
As of the effective date of the registration statement, 90,000April 18, 2012, we had 8,832,301 shares of common stock wereissued and outstanding held by one (1) stockholder of record, our Manager. No265 stockholders, and no shares of preferred stock are currentlyissued and outstanding.
Units
Each unit consists of one share Further, there were 634,999 outstanding options to purchase shares of common stock and one warrant. Each warrant entitles the holderwarrants to purchase one share6,998,101 shares of common stock. The common stock and warrants, without any securityholder having to take any action, may begin to trade separately on the 90th day after the effective date of the registration statement unless the representatives of the underwriters informs us of its decision to allow earlier separate trading (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general and the trading pattern of, and demand for, our securities in particular), provided that in no event may the common stock and warrants be traded separately until the earlier of the expiration or exercise in full of the underwriter’s over-allotment option. Following the date the common stock and warrants are eligible to trade separately, the units will continue to be listed for trading, and any securityholder may elect to trade the common stock or warrants separately or as a unit. Even if the component parts of the units are broken apart and traded separately, the units will continue to be listed as a separate security, and any securityholder of our common stock and warrants may elect to combine them together and trade them as a unit. Securityholders will have the ability to trade our securities as units until such time as the warrants expire or are redeemed.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holdersHolders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividend payments. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. The holders of common stock have no preferences or rights of conversion, exchange, pre-emption or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation paymentsobligations.
Warrants
In connection with our 2009 Private Placement, we issued warrants in aggregate of 1,201,400 to holders of outstandingpurchase shares of preferred stock, if any.
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Preferred Stock
The preferred stock has priority over the common stock with respectstock. Investors were issued warrants to dividends and other distributions, including the distribution of assets upon liquidation. Our board of directors has the authority, without further stockholder authorization, to issue from time to timepurchase 1,163,600 shares of preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations of each series. Although we have no present plans to issue any shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rightscommon stock. Additional warrants to purchase such37,800 shares could decrease the amount of earnings and assets available for distribution to the holders of common stock could adversely affectwere issued to the rightsplacement and powers, including voting rights,selling agents. Further, in connection with the completion of theour initial public offering, we issued additional warrants to purchase 471,951 shares of common stock and could have the effectat an exercise price of delaying, deterring or preventing a change in control of us or an unsolicited acquisition proposal.
Warrants
Prior$5.75 per share to the effective date of this prospectus, there will not be any warrants currently outstanding. 2009 Private Placement investors.
Each warrant included in the units entitles the registered holder to purchase one share of our common stock at a price of $6.00$5.75 per share, subject to adjustment as discussed below, immediately upon the effectiveness of the registration statement.below. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011[three years from the effective date of the registration statement]May 5, 2016 or earlier upon redemption.
The warrants may trade separately on the 90th day after the date of this prospectus unless the representatives of the underwriters determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until the underwriters’ over-allotment option has either expired or been exercised.
We may call the warrants for redemption (including any warrants issued upon exercise of the unit purchase option) at any time after [ ], 2009[six months from the effective date of the registration statement]:November 5, 2011:
• in whole and not in part;
• at a price of $.01 per warrant;
• upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
• if, and only if, the last sale price of the common stock equals or exceeds $9.00$8.00 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders.
In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offeringthe IPO and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption.
We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a degree of liquidity to cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made.
The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the transfer agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and
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receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we
We have agreed to use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we are unable to maintain the effectiveness of such registration statement until the expiration of the warrants, and therefore are unable to deliver registered shares of common stock, the warrants may become worthless. Additionally, the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock.
No fractional shares of common stock will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
Purchase Option
We have agreed to sell to the representatives of the underwriters, for $100, an option to purchase up to a total of 550,000 units at $5.50 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus except that the warrants included in the option have an exercise price of $6.60 (110.0% of the exercise price of the warrants included in the units sold in this offering). For a more complete description of the purchase option, including the registration rights afforded to the holders of such option, see the section appearing elsewhere in this prospectus entitled “Purchase Option.”
Dividends
We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Further our ability to declare dividends may be limited to restrictive covenants if we incur any indebtedness.
Delaware Law and Certain Charter and Bylaw Provisions
The provisions of (1) Delaware law, (2) our certificate of incorporation, as amended, and (3) our bylaws could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or our best interests. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. Such provisions also may have the effect of preventing changes in our management.
Delaware Statutory Business Combinations Provision. We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporations Law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder,
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unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a “business combination” is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and, subject to certain exceptions, an “interested stockholder” is a person who, together with his or her affiliates and associates, owns (or within three years prior, did own) 15.0% or more of the corporation’s voting stock.
Classified Board of Directors. Our certificate of incorporation, as amended, provides that our board of directors will be divided into two classes as nearly equal in number as possible. Each year the stockholders will elect the members of one of the two classes to a two-year term of office. All directors elected to our classified board of directors will serve until the election and qualification of their respective successors or their earlier resignation or removal. Our board of directors is authorized to create new directorships and to fill such positions so created and is permitted to specify the class to which any such new position is assigned. The person filling such position would serve for the term applicable to that class. Our board of directors (or its remaining members, even if less than a quorum) is also empowered to fill vacancies on the board of directors occurring for any reason for the remainder of the term of the class of directors in which the vacancy occurred. Members of our board of directors may only be removed for cause. These provisions are likely to increase the time required for stockholders to change the composition of our board of directors. For example, in general, at least two annual meetings will be necessary for stockholders to effect a change in a majority of the members of our board of directors.
Advance Notice Provisions for Stockholder Proposals.For an annual or special meeting, a stockholder’s notice generally must be delivered not less than 10 days nor more than 60 days prior to the meeting.
Special Meetings of Stockholders.Stockholders. Special meetings of the stockholders may be called by our board of directors pursuant to a resolution adopted by a majority of the total number of directors, or by such persons or persons as may be authorized by the certificate of incorporation, as amended, or the by-laws.
Super-Majority Stockholder Vote required for Certain Actions. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation and bylaws, unless the corporation’s certificate of incorporation, as amended, and bylaws, as the case may be, requires a greater percentage.
Transfer Agent and Registrar
We intend to retain
Continental Stock Transfer and Trust Company asis our transfer agent and registrar for the units, common stock and warrants in connection with our public offering.
Listing
We have applied to list our
Quotation of Securities
Our units, common stock and warrants trade on the American Stock ExchangeOTC Bulletin Board under the symbols “ITD”“SMGIU”, “ITD.U”“SMGI” and “ITD.WS”
Shares of Common Stock Eligible for Future Sale
Immediately after this offering, we will have 11,090,000 shares of common stock outstanding, or 12,740,000 shares if the underwriters’ over-allotment option is exercised in full. Of these shares, the 11,000,000 shares sold in this offering, or 12,650,000 shares of common stock if the over-allotment option is exercised, will be freely tradable without restriction or further registration under the Securities Act, except for any shares of common stock purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 90,000 shares of common stock are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. None of those shares of common stock will be eligible for sale under Rule 144 until the following conditions are met:
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TABLE OF CONTENTS“SMGIW”.
at least one year has elapsed from the time we filed current Form 10 type information with the SEC reflecting our status as an entity that is not a shell company.
Rule 144
The SEC has recently adopted amendments to Rule 144 which became effective on February 15, 2008 and apply to securities acquired both before and after that date. Under these amendments, a person who has beneficially owned restricted shares or our common stock or warrants for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.SELLING STOCKHOLDERS
Persons who have beneficially owned restricted shares of our common stock or warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:
Sales under Rule 144 are also limited by manner of sale provisions, notice requirements and the availability of current public information about us.
Rule 701
In general, under Rule 701, as currently in effect, any of our employees, directors, officers, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements or other restrictions contained in Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirementsfollowing table sets forth information as of the Securities Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be soldto our knowledge, about the ownership of our common stock by persons other than “affiliates,” as defined in Rule 144, subject only to the manner of sale provisions of Rule 144selling stockholders both before and by “affiliates” under Rule 144 without compliance with its six-month minimum holding period requirement.
Lock-up Agreements
Our current officers, directors and principal shareholders have agreed, with limited exceptions, to a 12 month “lock-up” period with respect to all of their shares. Afterimmediately after the 12 month period from the date of this prospectus, these shares may be sold in the public market, subject to compliance with Rule 144. At any time without notice, the representativesoffering.
All of the underwriters may,selling stockholders received their securities in their sole discretion, release all or some of the securities subject to these lock-up agreements. Such decision to waive the lock-up restrictions may be based on market conditions, then-current stock price, the number of shares requested to be waived from the lock-up restrictions, the potential price impact of the release and other factors the selection ofprivate placements undertaken by us which are based on its sole discretion.
Notwithstanding the foregoing, if (a) during the last 17 days of the lock-up period we release earnings results or material news or a material event relating to us occurs, or (b)were closed prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period following the last day of the lock-up period, the above restrictions shall continue to apply until the expiration of the 18-day period beginning on theinitial filing date of the release of the earnings results or the occurrence of the material news or material event.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the underwriters named below have severally agreed to purchase from us on a firm commitment basis the following respective number of units at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:
| | |||
The underwriting agreement provides that the obligation of the underwriters to purchase all of the 11,000,000 units being offered to the public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial markets and the receipt of certain legal opinions, certificates and letters from us, our counsel and the independent auditors. Subject to the terms of the underwriting agreement, the underwriters will purchase all of the 11,000,000 units being offered to the public, other than those covered by the over-allotment option described below, if any of these units are purchased.
We have been advised by the representatives of the underwriters that the underwriters propose to offer the units to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $ per unit under the public offering price of $5.00 per unit. The underwriters may allow, and these dealers may re-allow, a concession of not more than $ per unit to other dealers. After the initial public offering, the representatives of the underwriters may change the offering price and other selling terms.
Over-Allotment Option
We have granted to the underwriters an option, exercisable not later than 45 days after the effective date of the registration statement, to purchase up to 1,650,000 additional units at the public offering price less the underwriting discounts and commissions set forth on the cover of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the units offered by this prospectus. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of these additional units as the number of units to be purchased by it in the above table bears to the total number of units offered by this prospectus. We will be obligated, pursuant to the option, to sell these additional units to the underwriters to the extent the option is exercised. If any additional units are purchased, the underwriters will offer the additional units on the same terms as those on which the other units are being offered hereunder.
The underwriting discounts and commissions are 5.0% of the initial public offering price. We have agreed to pay the underwriters the discounts and commissions set forth below, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment option.
Fees(1)
| | | | |||||||||
| Fee per Unit(1) | Without Exercise of Over Allotment Option | With Exercise of Over Allotment Option | ||||||||||
| Public offering price | $ | 5.00 | $ | 55,000,000 | $ | 63,250,000 | ||||||
| Discount | $ | 0.25 | $ | 2,750,000 | $ | 3,162,500 | ||||||
| Proceeds before expenses(2) | $ | 4.75 | $ | 52,250,000 | $ | 60,087,500 | ||||||
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Purchase Option
We have agreed to sell to the representatives of the underwriters, for $100, an option to purchase up to a total of 550,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus except that the warrants included in the option have an exercise price of $6.60 per share (110.0% of the exercise price of the warrants included in the units sold in the offering). This option is exercisable at $5.50 per unit, commencing one year from the effective date of the registration statement and expiring five years from the effective date of the registration statement. The option and the 550,000 units, the 550,000 shares of common stock and the 550,000 warrants underlying such units, and the 550,000 shares of common stock underlying such warrants, have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the FINRA Conduct Rules. The representatives of the underwriters will not sell, transfer, assign, pledge, or hypothecate this option or the securities underlying this option, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this option or the underlying securities for a period of 180 days from the date of this prospectus. Additionally, the option may not be sold transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180 day period) following the effective date of the registration statement except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. This option also contains a cashless exercise feature. Although the purchase option and its underlying securities have been registered on the registration statement of which this prospectus formsis a part,part. We believe that the option grants holders demandselling stockholders have sole voting and “piggy back” registration rights for periods of five and seven years, respectively, from the date of this prospectus. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the option, other than underwriting commissions incurred and payable by the holders. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the option exercise price or underlying units will not be adjusted for issuances of common stock at a price below the option exercise price.
The sale of the option will be accounted for as a cost attributable to the proposed offering. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale.
Directed Unit Program
At our request, the underwriters have reserved up to 250,000 units for sale at the initial public offering price through a directed unit program to persons who are directors, officers or employees, or who are otherwise associated with our corporate stockholder. The number of units available for sale to the public will be reduced by the number of directed units purchased by participants in the program, if any. To the extent the directed units are not purchased pursuant to the directed unit program, the units will be offered by the underwriters to the public on the same basis as all other units. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed units.
Lock-up Agreements
Our current officers, directors and principal shareholders have agreed, with limited exceptions, to a 12 month “lock-up” periodinvestment power with respect to all of their shares. After the 12 month period fromshares of common stock owned by them unless otherwise indicated.
The percent of beneficial ownership for the selling stockholders is based on 8,832,301 shares of common stock outstanding as of the date of this prospectus (without giving effect to the exercise of any options and warrants currently outstanding).
The shares of common stock being offered pursuant to this prospectus may be offered for sale from time to time during the period the registration statement of which this prospectus is a part remains effective, by or for the account of the selling stockholders. After the date of effectiveness, the selling stockholders may have sold or transferred, in transactions covered by this prospectus or in transactions exempt from the registration requirements of the Securities Act, some or all of their common stock.
Information about the selling stockholders may change over time. Any changed information will be set forth in an amendment to the registration statement or supplement to this prospectus, to the extent required by law.
| Shares Owned Prior to The Offering | Shares Offered by this | Shares Owned After the Offering(1) | ||||||||||||||||||
| Name of Selling Stockholder | Number | Percent(2) | Prospectus | Number | Percent(2) | |||||||||||||||
| Raging Capital Fund, L.P. | 1,225,625 | 13.9 | % | 332,667 | 892,958 | 10.1 | % | |||||||||||||
| Raging Capital Fund (QP), L.P. | 2,741,717 | 31.0 | % | 1,667,333 | 1,074,384 | 12.2 | % | |||||||||||||
| (1) | William C. Martin, a director of the Company and through RCM Indium LLC, a member of our Manager, is the 100% equity owner of Raging Capital Management, LLC, the General Partner of Raging Capital Fund QP, LP and Raging Capital Fund LP, has voting and investment control over such securities. |
| (2) | Based on 8,832,301 shares of common stock outstanding as of April 18, 2012. |
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PLAN OF DISTRIBUTION
The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
The selling securityholders may use any one or more of the following methods when disposing of shares or interests therein:
The selling securityholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus; provided , however , that prior to any such transfer the following information (or such other information as may be required by the federal securities laws from time to time) with respect to each such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as appropriate: (1) the name of the selling owner; (2) any material relationship the selling owner has had within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned by such security owner before the offering; (4) the amount to be offered for the security owner’s account; and (5) the amount and (if one percent or more) the percentage of the class to be owned by such security owner after the offering is complete.
In connection with the sale of our common stock or interests therein, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling securityholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling securityholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling securityholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.
The selling securityholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.
The selling securityholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling securityholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of the selling securityholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the common stock may be sold in the public market, subject to compliance with Rule 144. At any time without notice, the representatives of the underwriters may,these jurisdictions only through registered or licensed brokers or dealers. In addition, in their sole discretion, release all or some of the securities subject to these lock-up agreements. Such decision to waiver the lock-up restrictions may be based on market conditions, then-current stock price, the number of shares requested to be waived from the lock-up
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restrictions, the potential price impact of the release and other factors the selection of which are based on its sole discretion. The underwriter has no present intention to release such lock-ups early.
Notwithstanding the foregoing, if (a) during the last 17 days of the lock-up period we release earnings results or material news or a material event relating to us occurs, or (b) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period following the last day of the lock-up period, the above restrictions shall continue to apply until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or material event.
Pricing of this Offering
Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, includingstates the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and warrants underlyingis complied with.
We have advised the units, include:
However, although these factors were considered,shares against certain liabilities, including liabilities arising under the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry.Securities Act.
In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe. PDF format will be used in connection with this offering.
The underwriters have informed us that they do not expect to confirm sales of units offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder.
Price Stabilization and Short Positions
Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. The “Restricted Period” under Regulation M for this offering will have ended when (i) all of the Units have been sold, (ii) there are no more selling efforts, (iii) there is no more stabilization, and (iv) the over-allotment option has been exercised or has expired. However, the underwriters may engage in the following activities in accordance with the rules:
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Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities.
Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the American Stock Exchange or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.
Other Terms
We have also agreed that upon successful completion of the offering in excess of $35 million, and for a period of 24 months from the offering, that it would grant the representatives of the underwriters the right of first participation to act as lead underwriters or minimally as co-managers with at least 30% of the economics; or in the case of a three-handed deal 20% of the economics, for any and all future public and private equity and debt offerings during such 24 month period by us, or any successor to or any subsidiary of ours.
Although we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so, any of the underwriters may, among other things, assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter fair and reasonable fees that would be determined at that time in an arm’s length negotiation; provided that if no agreement will be entered into with any of the underwriters and no fees for such services will be paid to any of the underwriters prior to the date which is 90 days after the effective date of the registration statement, unless the FINRA determines that such payment would not be deemed underwriters compensation in connection with this offering.
Indemnification
We have agreed to indemnify the underwritersselling securityholders against some liabilities, including civil liabilities under the Securities Act or to contribute to payments the underwriters may be required to make in this respect.
Foreign Regulatory Restrictions on Purchase of Shares
We have not taken any action to permit a public offering of the units outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of units and the distribution of the prospectus outside the United States.
Italy. This offering of the units has not been cleared by Consob, the Italian Stock Exchanges regulatory agency of public companies, pursuant to Italianstate securities legislation and, accordingly, no units may be offered, sold or delivered, nor may copies of this prospectus or of any other documentlaws, relating to the shares be distributed in Italy, except (1) to professional investors (operatori qualificati); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or deliveryregistration of the units of or distribution of copies of this prospectus or any other document relating to the units in Italy under (1) or (2) above must be (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of
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Italy depending,inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations.
Germany. The offering of the units is not a public offering in the Federal Republic of Germany. The units may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz), as amended, and any other applicable German law. No application has been made under German law to publicly market the units in or out of the Federal Republic of Germany. The units are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The units will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party’s account.
France. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorit des Marchs Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Montaire et Financier and decree no. 98-880 dated October 1, 1998, provided they are “qualified investors” within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the units offered by this prospectus may be effected only in compliance with the above mentioned regulations.
“Les actions offertes par ce document d’information ne peuvent pas être, directement ou indirectement, offertes ou vendues au public en France. Ce document d’information n’a pas t ou ne sera pas soumis au visa de l’Autorit des Marchs Financiers et ne peut être diffus ou distribu au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d’information que pour leur compte propre et conformment aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Montaire et Financier et du dcret no. 98-880 du 1 octobre 1998, sous rserve qu’ils soient des investisseurs qualifis au sens du dcret susvis. Chaque investisseur doit dclarer par crit qu’il est un investisseur qualifi au sens du dcret susvis. Toute revente, directe ou indirecte, des actions offertes par ce document d’information au public ne peut être effectue que conformment à la rglementation susmentionne.”
Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland.
United Kingdom. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at paragraph (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any shares offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the section 85 of the Financial Services and Markets Act 2000 (as amended) (“FSMA”); and (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) itprospectus.
To our knowledge, no selling stockholder is a person who falls within the exemptions to Section 21 of the FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Order”), being either an investment professional as described under Article 19broker-dealer or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than €500,000 (if more than 20 members) or otherwise €5 million) or an unincorporated association or partnership (with net assets of not less than €5 million) or is a trusteeaffiliate of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined
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TABLE OF CONTENTSbroker-dealer.
under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom.
Norway. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997 as amended. This prospectus has not been approved or disapproved by, or registered with, neither the Oslo Stock Exchange nor the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to other Norwegian potential investors than the addressees without the prior consent of Maxim Group LLC.
Denmark. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 March 2005 as amended from time to time or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by or filed with the Danish Financial Supervisory Authority or any other public authorities in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable.
Sweden. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the prospectus may not in any way forward the prospectus to the public in Sweden.
Israel. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
LEGAL MATTERS
The validity of the securities offered in this prospectus are being passed upon for us by Ellenoff Grossman & Schole, LLP, New York, New York. Lowenstein Sandler PC New York, New York, is acting as counsel for the underwriters in this offering. Ellenoff Grossman & Schole, LLP has previously represented Maxim Group LLCSMG Indium Resources Ltd. and expects to do so again in the future.
EXPERTS
The financial statements of SMG Indium Resources Ltd. as of December 31, 2011 and for the year ended December 31, 2011, have been included in this Prospectusherein and in the Registration Statement have been audited by Marcum & Kliegmanregistration statement in reliance upon the report of KPMG LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein, and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditingaccounting and accounting.auditing.
77
TABLE OF CONTENTSThe financial statements of SMG Indium Resources Ltd. as of December 31, 2010 and for the year ended December 31, 2010, have been included herein and in the registration statement in reliance upon the report of Marcum LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus, which is part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information pertaining to us and our common stock, reference is made to the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents referred to in this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement without charge at the office of the SEC at the Public Reference Room at Station Place, 100 F Street, N.E., Washington, D.C. 20549. Copies of the registration statement may be obtained from the SEC at prescribed rates from the Public Reference Section of the SEC at such address. In addition, registration statements and certain other filings made with the SEC electronically are publicly available through the SEC’s web site at http://www.sec.gov. The registration statement, including all exhibits and amendments to the registration statement, has been filed electronically with the SEC.
Upon completion of this offering, we will become
We are subject to the information and periodic reporting requirements of the Securities Exchange Act and, accordingly, will file annual reports containing financial statements audited by an independent public accounting firm, quarterly reports containing unaudited financial data, current reports, proxy statements and other information with the SEC. You will beare able to inspect and copy such periodic reports, proxy statements and other information at the SEC’s public reference room, and the web site of the SEC referred to above.
78SMG INDIUM RESOURCES LTD.
INDEX TO FINANCIAL STATEMENTS
| | |||
| (1) | ||||
| F-1 | ||||
| Balance | F-3 | |||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| Notes to Financial Statements | F-7 |
| (2) | Financial Statement Schedules. All schedules are omitted because they are inapplicable, or not required, or the information is shown in the financial statements or notes thereto. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ToYou should rely only on the Board of Directors of SMG Indium Resources Ltd.(formerly Specialty Metals Group Indium Corp.)
information contained in this document. We have auditednot authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the accompanying balance sheetdate of SMG Indium Resources Ltd. (formerly Specialty Metals Group Indium Corp.) (a developmental stage enterprise) (the “Company”) as of June 30, 2008,this document.
Additional risks and the related statements of operations, changes in stockholders’ equity and cash flows for the period January 7, 2008 (inception) through June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based upon our audit.
We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company isuncertainties not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedurespresently known or that are appropriatecurrently deemed immaterial may also impair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the circumstances, but not forfuture will have a greater impact on those who purchase our common stock. These purchasers will purchase our common stock at the purposemarket price or at a privately negotiated price and will run the risk of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.losing their entire investment.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMG Indium Resources Ltd., (a development stage enterprise), as of June 30, 2008, and the results of its operations and its cash flows for the period January 7, 2008 (inception) through June 30, 2008 in conformity with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no present revenue. The Capitalization of the Company’s business plan is also dependent upon the completion of its proposed initial public offering. The Company’s capital resources as of June 30, 2008 are not sufficient to sustain operations or complete its planned activities for the upcoming year unless it completes its proposed initial public offering. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are described in Notes 1 and 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.
/s/ Marcum & Kliegman LLP
New York, New YorkJuly 11, 2008
F-1
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
BALANCE SHEET
June 30, 2008
| | |||
| ASSETS | ||||
| Current Assets – Cash | $ | 50,936 | ||
| Deferred Offering Costs | 207,843 | |||
| Total Assets | $ | 258,779 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current Liabilities: | ||||
| Note Payable to Manager | $ | 250,000 | ||
| Accrued Expenses | 1,106 | |||
| Accrued Interest Payable – Manager | 5,596 | |||
| Total Liabilities | $ | 256,702 | ||
| Commitment and contingencies | ||||
| Stockholders’ Equity: | ||||
| Preferred Stock, $.001 par value; 1,000,000 shares authorized, 0 issued and outstanding | $ | — | ||
| Common Stock, $.001 par value, 50,000,000 shares authorized 90,000 issued and outstanding | 90 | |||
| Additional Paid-in Capital | 9,910 | |||
| Deficit Accumulated during the development stage | (7,923 | ) | ||
| Total Stockholders’ Equity | 2,077 | |||
| Total Liabilities and Stockholders’ Equity | $ | 258,779 | ||
The accompanying notes are an integral part of these financial statements.
F-2
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
For the Period January 7, 2008 (Inception) Through June 30, 2008
| | |||
| Formation and operating costs | $ | 2,327 | ||
| Interest expense – Manager | 5,596 | |||
| Net loss | $ | (7,923 | ) | |
| Net loss per share common – basic and diluted | (0.09 | ) | ||
| Weighted average number of common shares outstanding – basic and diluted | $ | 90,000 | ||
The accompanying notes are an integral part of these financial statements.
F-3
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Period January 7, 2008 (Inception) Through June 30, 2008
| | | | | | |||||||||||||||
| Common Stock | Additional Paid-In Capital | Deficit Accumulated During the Development Stage | Total Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | |||||||||||||||||||
| Proceeds from the sales of common stock to founding stockholders on January 7, 2008 at $.1111 per share | 90,000 | $ | 90 | $ | 9,910 | — | $ | 10,000 | ||||||||||||
| Net loss | (7,923 | ) | (7,923 | ) | ||||||||||||||||
| Balances, June 30, 2008 | 90,000 | $ | 90 | $ | 9,910 | (7,923 | ) | $ | 2,077 | |||||||||||
The accompanying notes are an integral part of these financial statements.
F-4
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
For the Period January 7, 2008 (Inception) Through June 30, 2008
| | |||
| Cash flow from operating activities: | ||||
| Net loss | $ | (7,923 | ) | |
| Accrued expenses | 1,106 | |||
| Accrued interest – Manager | 5,596 | |||
| Net cash used in operating activities | (1,221 | ) | ||
| Cash flow from financing activities: | ||||
| Proceeds from note payable – Manager | 250,000 | |||
| Deferred offering costs | (207,843 | ) | ||
| Proceeds from issuance of common stock to founding stockholders | 10,000 | |||
| Net cash provided by financing activities | 52,157 | |||
| Net increase in cash | 50,936 | |||
| Cash, at beginning of period | — | |||
| Cash, at end of period | $ | 50,936 | ||
The accompanying notes are an integral part of these financial statements.
F-5
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Proposed Business Operations, Going Concern and Significant Accounting Policies
Organization and Proposed Business Operations
SMG Indium Resources Ltd. (formerly Specialty Metals Group Indium Corp.) (a development stage enterprise) (the “Company”) is a corporation established pursuant to the laws of Delaware on January 7, 2008. On April 2, 2008, the Company changed its name from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. The Company’s sole business purpose is to purchase and stockpile indium, a specialty metal that is being increasingly used as a raw material in a wide variety of consumer electronics manufacturing applications. The Company’s business strategy is to achieve long-term appreciation in the value of its indium stockpile, and not to actively speculate with regard to short-term fluctuations in indium prices. The Company’s indium will be insured and physically stored in facilities located in the United States, Canada, and or the United Kingdom. While it is not the Company’s current intention to do so in the short term, at its discretion, the Company may subsequently lend or sell some or its entire indium stockpile based on market conditions. The Company’s common shares will represent an indirect interest in the physical indium it will own.
In furtherance of the strategy of the Company, the Board of Directors will implement policies, including but not limited to: (i) utilizing at least 85% of the net proceeds of a proposed initial public offering (see Note 2) (or any future offering) in, or holding for future purchases of indium, (ii) having funds available to purchase indium pursuant to contracts and (iii) having indium available to satisfy delivery commitments to lend or sell indium pursuant to contracts. Indium is an essential raw material for a number of consumer electronics applications. The primary commercial application of indium is in coatings for the flat panel display industry and in the Liquid Crystal Display industry on electronic devices like television sets, computers, cell phones and digital cameras. Indium is increasingly being used as a crucial raw material in the solar energy industry. Its main use in solar energy applications is for high-efficiency photovoltaic cells in the form of thin-film photovoltaic. Other uses of Indium are in electrical components, alloys and solders.
From January 7, 2008 (inception) through June 30, 2008, the Company had not yet commenced any operations. All activity through June 30, 2008 relates to the Company’s formation and proposed public offering described in Note 2 below. The Company has no operating history and is therefore subject to all of the risks and uncertainties that are associated with starting a new business, including inherent uncertainties as to the viability of the business model. The Company has selected December 31 as its fiscal year-end.
Going Concern
The Company has $50,936 of cash as of June 30, 2008 and incurred a $7,923 loss in its initial operating period. To date, the Company has financed its initial operations principally from the proceeds drawn under its Revolving Line of Credit with the Manager (see Note 4). The Company’s ability to commence operations and realize its business plan is dependent upon its ability to complete the proposed public offering which is discussed in Note 2. There is no assurance that the Company will complete the proposed public offering or that the completion of the proposed public offering will lead to the successful execution of the Company’s business plan. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
The Company will incur substantial additional operating costs following the completion of the proposed public offering (if completed). Company management has established specific guidelines as to how the proceeds of the proposed public offering would be used. The Company would use 85% of such net proceeds to fund Indium purchases the remaining 15% of such net proceeds for general corporate and working capital purposes.
F-6
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Proposed Business Operations, Going Concern and Significant Accounting Policies – (continued)
If the Company has not, within 18 months after the closing of the offering, purchased indium in sufficient quantity to utilize at least 50% of the net proceeds (gross proceeds less underwriting discounts and commission, corporate finance expenses and offering expenses) of the offering that have been allocated for the purchase of indium or 42.5% of the total net proceeds, the Company’s Board of Directors will have the discretion to distribute such unused proceeds to the stockholders as a return of capital. Any such distributions will lower the amount of cash available to purchase additional indium which will, in turn, lower the net market value of the Company’s supply of indium. This may have the effect of decreasing the Company’s stock price.
Further, after the proposed public offering, the Company expects annual operating costs to approximate $1,675,000 comprised of $125,000 for storing and holding the indium, $75,000 for insuring the indium, $150,000 for stockholder communications and relations; $1,025,000 for the initial annual manager’s fee which is subject to fluctuations in the Company’s Net Market Value; $150,000 for directors and officers liability insurance premiums; and $150,000 for other/administrative expenses including legal, accounting and director fees. As with the indium purchases, the Company expects to pay for these expenses and asset purchases from the offering proceeds. The Company is not certain that its business model will be viable or that it can sustain revenue growth or be profitable. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the Company’s inability to consummate the offering or its ability to continue as a going concern.
Income Taxes
The Company follows Statement of Financial Standards No. 109, “Accounting for Income Taxes” (SFAS No. 109) and FASB Interpretation No. 48, ”Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”). Under SFAS No. 109, the Company establishes financial accounting assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such amounts were not material during the initial period ending June 30, 2008.
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position(s) on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Such amounts required to be recorded under Fin 48 were not material during the initial period ending June 30, 2008.
Start-Up Costs
The Company follows the guidance of Statement of Position (“SOP” 93-7), “Reporting on the Costs of Start-Up Activities”. This SOP provides guidance on the financial reporting of start-up costs and organizational costs. It requires the costs of start-up activities and organizational costs to be expensed as incurred.
Inventory or “Stockpile” of the Metal Indium
The Company’s inventory or “stockpile” of the metal indium will be recorded at cost on the date we take delivery of the physical metal. The stockpile of the physical metal indium will be carried at the lower of cost or market with cost being determined on a specific identification method and market being determined as the net realizable value as computed from the closing spot price as posted by Metal Bulletin on
F-7
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Proposed Business Operations, Going Concern and Significant Accounting Policies – (continued)
Bloomberg L.P., a real-time financial information services data platform, based on the last day of the period amongst other considerations. The difference between cost and fair market value will be reviewed on a periodic basis to determine if a loss should be recognized where the utility of indium has been impaired. Where such impairment is viewed as something other than temporary, the Company will charge against earnings the value by which the fair market value is less than the cost. Realized gains (losses) from other transactions will be determined for income tax and for financial reporting purposes on specific identification method.
The Company envisions that its stockpile of indium may be used from time to time for “direct sales” and or “lending” transactions. Under a “direct sale” transaction it will record a gain (loss) equal to the difference between the proceeds received from the sale of indium and the indium carrying value. The Company may also elect to enter into a lending transaction. In indium lending transactions, it would exchange a specified tonnage and purity of indium for cash. Title and the risks and rewards of such indium ownership would pass to the purchaser/counterparty in the lending transaction. The Company will simultaneously enter into an agreement with such counterparty in which it would unconditionally commit to purchase and the counterparty would unconditionally commit to sell a specified tonnage and purity of indium that would be delivered to the Company at a fixed price and at a fixed future date in exchange for cash (the Unconditional Sale and Purchase Agreement or “USPA”). The USPA would also contain terms providing the counterparty with substantial disincentives (“penalty fees”) for non-performance of the return of indium to the company as a means to assure our future supply of indium. While the Company believes that this risk is somewhat mitigated by the penalty fee features of the USPA, it is nonetheless a risk associated with a transaction of this type. We anticipate recognizing revenues on purchases and sales of indium under these arrangements in accordance APB 29 “Non-Monetary Transactions” and EITF Issue No. 04-13 “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Accordingly we will disclose unconditional purchase obligations under these arrangements in accordance with SFAS 47 “Disclosure of Long Term Obligations” and, if applicable, accrue net losses on such unconditional purchase obligations in accordance with ARB 43.
Employee Share Based Payment Arrangements
The Company accounts for employee share based payment arrangements in accordance with the provision of SFAS 123R, “Share-Based Payments” (“SFAS 123R”). This statement is a revision of SFAS 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations. As the Company only recently adopted an equity incentive plan but has not yet issued any employee share-based payments there is currently no compensation for the periods.
Basic and Diluted Loss per Share
The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”). SFAS No. 128 requires presentation of both basic and diluted earnings/(loss) per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants, using the treasury stock method and convertible debt using the if-converted method. If anti-dilutive, the effect of outstanding warrants and options is ignored. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock option or warrants. For the period ended June 30, 2008, basic and diluted EPS loss per share are based upon 90,000 common shares outstanding.
F-8
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Proposed Business Operations, Going Concern and Significant Accounting Policies – (continued)
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company accounts for the issuance of common stock purchase warrants and other free standing derivative financial instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company currently has no outstanding free standing derivatives. Notwithstanding, the Company, as a matter of policy, will evaluate any common stock purchase warrants or other free standing derivatives at each reporting date to assess their proper classification using the applicable classification criteria enumerated in EITF 00-19.
Use of Estimates
The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Company adopted the provisions of SFAS No. 157 at the date of the Company’s inception. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position, results of operations or cash flows, however, this pronouncement may have an effect in the future.
In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Misstatements in Current Year Financial Statements (”SAB 108”). SAB 108 provides guidance on how the effects of the carry over or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (i) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (ii) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Accordingly, reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the cause of the error and that error had been deemed to be immaterial in the past. The adoption of this pronouncement did not have any material effects on the Company’s consolidated financial position, results of operation, or cash flows.
F-9
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Proposed Business Operations, Going Concern and Significant Accounting Policies – (continued)
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, “(SFAS No. 159”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of this pronouncement did not have any material effects on the Company’s consolidated financial position, results of operation, or cash flows, however, this pronouncement may have an effect in the future.
In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 addresses share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified non-vested shares, (b) dividend equivalents on equity-classified non-vested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under SFAS 123R and result in an income tax deduction for the employer. A realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings are paid to employees for equity-classified non-vested shares, non-vested equity share units, and outstanding equity share options should be recognized as an increase in additional paid in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payments. The Company does not expect that the adoption of this pronouncement had a material impact on its financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.
Note 2 — Proposed Public Offering
The proposed public offering calls for the Company to offer for public sale up to 11,000,000 units at a proposed offering price of $5.00 per unit (plus up to 1,650,000 units to cover over-allotments, if any). Each unit consists of one share of the Company’s common stock and one redeemable common stock purchase warrant. Each warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $6.00 per share immediately following the effectiveness of the offering and will expire three years from the effective date of the proposed offering. The Company may redeem the warrants at a price of $.01 per warrant six months following the effectiveness of the offering, upon providing at least 30 days advance written notice of redemption and if, and only if, the last sales price of the Company’s common stock equals or exceeds $9.00 per share for any 20 trading days within a 30 trading day period ending three business days before the Company sends the notice of redemption. In addition, the Company may not redeem the Warrants unless the warrants comprising the units sold in the proposed offering and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption.
If the foregoing conditions are satisfied and the Company calls the warrants for redemption, each warrant holder shall then be entitled to exercise their warrants prior to the date scheduled for redemption. The redemption provisions for the Company’s warrants have been established at a price which is intended to avail to the warrant holders a premium in the market price as compared to the initial exercise price. There can be no assurance, however, that the price of the common stock will exceed either the redemption price of $9.00 or the warrant exercise price of $6.00 after the Company calls the warrants for redemption.
F-10
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 — Proposed Public Offering – (continued)
The Company will pay the underwriters in the proposed offering an underwriting discount of five percent of the gross proceeds of the proposed offering and a non accountable expense allowance of one percent of the gross proceeds of the proposed offering. The Company will also issue a unit purchase option, for $100, only upon the consummation of the proposed offering, to allow the underwriter to purchase an additional 550,000 units at an exercise price of 110% of the price per unit in the proposed offering. The Company intends to account for the fair value of this purchase option, net of the receipt of the $100 cash payment, as an expense of the proposed public offering resulting in a charge directly to stockholders’ equity. The Company estimates that the fair value of this option is approximately $1,350,718 ($2.46 per unit) using the Black Scholes option pricing model. The fair value of the unit purchase option granted to the underwriter is estimated as of the date of grant using the following assumptions: (i) expected volatility of 57.48%; (ii) risk free interest rate of 2.82%; and (iii) a contractual exercise term of five years. The volatility rate was based upon the five year average volatility of ten small-cap mining stocks traded on U.S. exchanges between February 19, 2003 and February 19, 2008. The assumed discount rate was computed by taking the average Treasury bill rate for the contractual exercise term of the option.
Note 3 — Deferred Offering Costs
Deferred offering costs consist principally of legal and underwriting fees incurred through the balance sheet date that are directly related to the proposed offering and that will be charged to stockholders’ equity upon the receipt of the capital raised. In the event that the proposed offering is not consummated, the deferred offering costs will be charged against operations.
Note 4 — Related Party Transaction
Some of the Company’s executives are also members of the limited liability company Specialty Metals Group Advisors, LLC (the “SMG Advisors”). Prior to the consummation of the offering, the Company will enter into a management services agreement with SMG Advisors (the “Manager”) to engage them to perform certain services on behalf of the Company. To date the Manager has been an inactive entity. The Manager is also considered to be a variable interest entity with its members being the primary obligors. Pursuant to the management agreement, the Manager will be responsible for: (i) the purchase and sale of indium, (ii) submission of written reports detailing the delivery and payment particulars regarding each purchase and sale to the Company’s Board of Directors, (iii) arrange for the storage of indium and prepare a report on the net market value of the Company’s common stock, (iv) prepare regulatory filing materials, reports to the Company’s stockholders and other reports to its Board of Directors and (v) generally manage the Company’s business and affairs.
The management agreement shall have an initial term of five years with options to renew the agreement on terms mutually acceptable to each party and may be terminated by either party upon 90 days prior written notice. The Company shall be responsible for paying all costs and expenses incurred in connection with the business, except those expressly assumed by the Manager. The Company shall pay the Manager a fee equal to 2% per annum of its net market value. The members of SMG Advisors, and the positions they hold in the Company, are as follows: Ailon Z. Grushkin, President; Richard A. Biele, Chief Operating Officer; and Alan Benjamin, Chairman and Chief Executive Officer. SMG Advisors is managed by Ailon Z. Grushkin.
On January 7, 2008, the Company agreed to reimburse its Chief Operating Officer Richard Biele or his affiliates commencing upon the successful completion of the offering for office, secretarial and related office expenses as follows: (1) $1,200 per month for rent; (2) reimbursement for up to 20% of his secretary’s salary and healthcare benefits; and (3) office expenses directly related to the Company’s operations. The Company will continue to reimburse its Chief Operating Officer or his affiliates for rent and other office-related expenses as set forth above. As of June 30, 2008, there were no expenses incurred in connection with this agreement to be accrued in the accompanying financial statements.
F-11
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 — Related Party Transaction – (continued)
On January 8, 2008, the Company entered into a revolving line of credit with the Manager in the aggregate amount of $300,000. The line of credit will be used to fund the deferred offering costs to be incurred by the Company in connection with the proposed offering. To date, the Company has borrowed $250,000 under the line of credit. Borrowings under the line are unsecured and bear interest at the rate of six percent per annum. As of the balance sheet date, 174 days have been accrued there under and the Company has recorded a charge to operations of $5,596 in connection therewith. The loan is anticipated to be payable on the earlier of December 31, 2008 or the consummation of this offering. The loan is anticipated to be repaid out of the net proceeds of this offering.
Note 5 — Commitments and Contingency
On behalf of the Company, the Manager will begin making purchases of indium upon consummation of the offering. If the Manager has not, within 18 months after the closing of the offering, purchased indium in sufficient quantity to utilize at least 50% of the proceeds of the offering that have been allocated for the purchase of indium, the Company’s Board of Directors will have the discretion to distribute such unused proceeds to its stockholders as a return of capital. Any such distributions will lower the amount of cash available to purchase additional indium which will, in turn, lower the net market value of the Company’s supply of indium. This may have the effect of decreasing the Company’s stock price.
The Company entered into an annual employment arrangement with Richard T. Morena, the Company’s Chief Financial Officer that will provide for an annual base salary of $30,000 to be paid in quarterly installments of $7,500. As noted above, Mr. Morena has also been awarded a stock option to purchase 30,000 shares of the Company’s common stock at an exercise price equal to $4.50 per share of common stock, exercisable subject to the completion of the offering, for a period of five years. Additionally, Mr. Morena will receive an award of 30,000 options annually thereafter on terms to be established by the board of directors and compensation committee of the board of directors.
In connection with the commencement of the Company’s initial public offering, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2008 Equity Incentive Plan (the “Plan”) in its entirety in January 2008. Under the Plan, the Company may grant incentive stock options, non-qualified stock options, restricted and unrestricted stock awards and other stock-based awards. A maximum of 330,000 shares of common stock has been reserved for issuance under this plan. Since inception, the Company has agreed to grant 5,000 options to purchase common stock to each of the Company’s two independent directors and 30,000 options to the Company’s Chief Financial Officer. Exercise of these options is contingent upon the successful completion of the initial public offering. The options will be exercisable at $4.50 per share, subsequent to the completion of the offering for a period of five years. The Company estimates that the fair value of the 10,000 director’s options will be approximately $20,000 and Mr. Morena’s 30,000 options will be approximately $61,000 using the Black-Scholes option pricing model, assuming the successful completion of the offering at the proposed offering price of $5.00 per share. The fair value of these options granted to the directors and officers is estimated as of the date of grant using the following assumptions: (i) expected volatility of 57.48%; (ii) risk free interest rate of 2.82%; and (iii) an expected life of 2.5 years for the director’s (contractual life) and 2.5 years for Mr. Morena’s options using Staff Accounting Bulletin No. 110 method. The volatility rate was based upon the five year (2.5 years for Mr. Morena’s options) average volatility of ten small-cap mining stocks traded on U.S. exchanges between February 19, 2003 and February 19, 2008. The assumed discount rate was computed by taking the Treasury bill rate for 5 years (2.5 years for Mr. Morena’s options). The valuation of these options is an estimate and at the time the public offering is consummated the options will be valued again and the value may change.
F-12
SMG INDIUM RESOURCES LTD.
(formerly Specialty Metals Group Indium Corp.)
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 6 — Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At June 30, 2008, there were no outstanding preferred shares.
Note 7 — Subsequent Events
On July 11, 2008, the Company entered into a Purchase/Supply/Agency Agreement with Unionmet. Pursuant to the Agreement, Unionmet agreed to (i) sell a minimum of ten (10) metric tons of indium to us within ten (10) months upon the effectiveness of this offering at a price to be determined by a formula negotiated between the Company and Unionmet and (ii) act as a non-exclusive agent to negotiate sales on the Company’s behalf and broker introductions with suppliers of indium based in China. The Company agreed to purchase the ten (10) metric tons of indium and agreed to pay Unionmet a commission for all transactions negotiated by Unionmet on the Company’s behalf or introductions brokered by Unionmet between the Company and other indium suppliers resulting in a transaction. The term of the Agreement shall begin on the effectiveness of this offering and terminate one year after the effectiveness of this offering.
F-13
Until [• ] 2008, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.2,000,000 Shares of
No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.Common Stock
PROSPECTUS
___________ , 2012
| | |||
$
SMG Indium Resources Ltd.
11,000,000 Units
PROSPECTUS
Maxim Group LLC
Canaccord Adams
September __, 2008
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of the various costs and expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered. All of the amounts shown are estimated except the SEC registration fee, the American Stock Exchange listing fee and the FINRA filing fee:
| | |||||||
| SEC registration fee | $ | 5,731 | $ | 700 | ||||
| AMEX listing fee | 70,000 | |||||||
| FINRA filing fee | 15,081 | |||||||
| Accounting fees and expense | 100,000 | 12,500 | ||||||
| Printing and engraving expenses | 50,000 | |||||||
| Printing expenses | 2,500 | |||||||
| Legal fees and expenses | 135,000 | 25,000 | ||||||
| Transfer Agent and Registrar fees | 10,000 | 1,000 | ||||||
| Miscellaneous | 40,000 | 1,000 | ||||||
| Total | $ | 425,812 | $ | 42,700 | ||||
Item 14. Indemnification of Directors and Officers.
Our certificate of incorporation, as amended, and bylaws, as amended, provide that each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or an officer of SMG Indium Resources Ltd.our Company, or is or was serving at our request as a director, officer, or trustee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or trustee or in any other capacity while serving as a director, officer or trustee, shall be indemnified and held harmless by us to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such.
Section 145 of the Delaware General Corporation Law permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative action, (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law, our amended and restated certificate of incorporation, as amended, eliminates the liability of a director to us or our stockholders for monetary damages for such a breach of fiduciary duty as a director, except for liabilities arising:
II-1
We carryhave insurance policies insuring our directors and officers against certain liabilities that they may incur in their capacity as directors and officers. In addition, we expect to enter into indemnification agreements with each of our directors and executive officers prior to completion of the offering.
Pursuant to the indemnification agreements, the Company agrees to hold harmless and indemnify its directors and executive officers to the fullest extent authorized or permitted by the provisions of the Company’s amended and restated certificate of incorporation, amended and restated by-laws and the DGCL, including for any amounts that such director or officer becomes obligated to pay because of any claim to which such director or officer is made or threatened to be made a party, witness or participant, by reason of such director’s or officer’s service as a director, officer, employee or other agent of the Company.
There are certain exceptions from the Company’s obligation to indemnify its directors and executive officers pursuant to the indemnification agreements, including for “short-swing” profit claims under Section 16(b) of the Securities Exchange Act of 1934, losses that are as a result of conduct that is established by a final judgment as knowingly fraudulent or deliberately dishonest or that constituted willful misconduct, or that constituted a breach of the duty of loyalty to the Company or resulted in any improper personal profit or advantage, where payment is actually made to a director or officer under an insurance policy, indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement, for indemnification which is not lawful, or in connection with any proceeding initiated by such director or officer, or any proceeding against the Company or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the board of directors of the Company, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the DGCL, or (iv) the proceeding is initiated to enforce a claim for indemnification pursuant to the indemnification agreement.
All agreements and obligations of the Company contained in the indemnification agreements shall continue during the period when the director or officer who is a party to an indemnification agreement is a director, officer, employee or other agent of the Company (or is or is serving at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as such director or officer shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative. In addition, the indemnification agreements provide for partial indemnification and advance of expenses.
Additionally, reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto, which provides for indemnification by the underwriters of SMG Indium Resources Ltd., our directors and officers who sign the registration statement and persons who control SMG Indium Resources Ltd. under certain circumstances.
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Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this Registration Statement, we have sold the following securities that were not registered under the Securities Act.
| | |||
• On January 9, 2010, we completed a private placement offering of 1,163,600 units to 61 investors for aggregate net proceeds of approximately $5.6 million. Each unit contained one share of Class A Common Stock, par value $.001 per share and one warrant to purchase one share of common stock at an exercise price of $5.75 per share. In accordance with the terms of the private placement, upon the successful completion of our IPO, each share of Class A Common Stock was automatically converted into shares of Common Stock, subject to certain adjustments based upon the purchase price of the private placement unit compared to the purchase price of the units in the IPO, the amount of time elapsed between the private placement and successful completion of the IPO. The sale and issuance of these securities was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering.
• On January 5, 2012, we completed a private placement of an aggregate of 2,000,000 shares of our common stock at $3.75 per share to two accredited investors, Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., for aggregate net proceeds of approximately $7.5 million. Raging Capital Management, LLC is the general partner of Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., respectively, and collectively, the entities represent our largest stockholder(s). Such entities are affiliated and controlled by William C. Martin, our director and member of our Manager, Specialty Metals Group Advisors LLC. We intend to use 85% of the gross proceeds, or approximately $6.4 million, from such transaction to purchase and stockpile the metal indium and 15% of the gross proceeds, or approximately $1.1 million, for general corporate purposes. No underwriting discounts or commissions were paid with respect to such sales. The sale and issuance of these securities was exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transaction by an issuer not involving a public offering.
Certain Grants and Exercises of Stock Options
The sale and issuance of the securities described below were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering.
Pursuant to our 2008 Long Term Incentive Compensation Plan and certain stand alone stock option agreements, we issued the following:
In 2008, we agreed to grant 8,333 options to purchase common stock to each of our three independent directors and 50,000 options to Richard Morena, our former CFO, contingent upon the successful completion of the IPO. In May 2011, such options were granted upon the closing of the IPO. The options are exercisable at $7.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016.
On January 8, 2008, we entered into a revolving line of credit with the Manager in the aggregate amount of $0.3 million. The revolving line of credit was used to fund the deferred offering costs incurred by us in connection with our IPO. We borrowed approximately $0.3 million under the revolving line of credit. The revolving line of credit was unsecured and bore interest at the rate of 6.0% per annum. The loan wassettled upon the consummation of the Company’s IPO in May 2011. Approximately $0.3 million of principal due plus accrued and unpaid interest under such revolving line of credit was automatically converted into 150,000 five-year options to purchase shares of common stock, at an exercise price of $4.50 per share.
In 2010, we agreed to grant 5,000 options to purchase common stock to each of our four non-executive directors and 30,000 options our former chief financial officer, contingent upon the successful completion of the IPO. In May 2011, such options were granted upon the closing of the IPO. The options are exercisable at $4.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016.
In May 2011 upon the closing of our IPO, we granted to the Manager155,000 five-year stock options, exercisable at $4.50 per share.
In June 2011, we granted an additional 5,000 stock options to each of our three independent directors and 30,000 options to our former CFO. The options are exercisable at $4.75 per share, vested immediately and expire in five years. In July 2011, October 2011, January 2012 and April 2, 2012, we awarded our new CFO options to acquire 2,500 shares of common stock at $4.51, $3.90, $3.55 and $3.40 per share, respectively. The options vested immediately and expire on July 22, 2016, October 23, 2016, December 31, 2016 and March 31, 2017, respectively.
No options to purchase shares of common stock have been exercised.
* Mr. William C. Martin is no longer an independent member of our board of directors.
Item 16. Exhibits and Financial Statement Schedules.(a) (a) The following exhibits are filed as part of this Registration Statement:
| | |
| Exhibit | Description | |
| 3.1 | Certificate of | |
| 3.2 | Certificate of Amendment to the Certificate of | |
| 3.3 | ||
| 3.4 | Certificate of Amendment to the Certificate of Incorporation filed on November 3, 2010(5) | |
| 3.5 | Form of Amended and Restated Certificate of Incorporation(5) | |
| 3.6 | Amended and Restated Bylaws(6) | |
| 4.1 | Specimen Unit Certificate(2) | |
| 4.2 | Specimen Common Stock Certificate(2) | |
| 4.3 | Specimen Warrant Certificate(2) | |
| 4.4 | Form of Warrant | |
| 4.5 | Form of Unit Option Purchase Agreement(6) | |
| 4.6 | 2008 Long-Term Incentive Compensation | |
| 5.1 | Opinion of Ellenoff Grossman & Schole LLP cover 6,998,101 shares of Common Stock issuable upon exercise of warrants(6) | |
| 5.2 | Opinion of Ellenoff Grossman & Schole LLP covering 2,000,000 shares of Common Stock registered for resale | |
| 10.1 | Form of Amended and Restated Management Services Agreement | |
| 14.1 | Amended and Restated Corporate Code of Conduct and | |
| 23.1 | Consent of | |
| 23.2 | Consent of Marcum LLP | |
| 23.3 | Consent of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1) | |
| 99.1 | Amended and Restated Audit Committee Charter(7) | |
| 99.2 | Amended and Restated Corporate Governance and Nominating Committee Charter |
| 99.3 | ||
| 101.ins* | XBRL Instance Document | |
| 101.xsd* | XBRL Taxonomy Extension Schema Document | |
| 101.cal* | XBRL Taxonomy Calculation Linkbase Document | |
| 101.def* | XBRL Taxonomy Definition Linkbase Document | |
| 101.lab* | XBRL Taxonomy Label Linkbase Document | |
| 101.pre* | XBRL Taxonomy Presentation Linkbase Document |
Item
* Furnished. Not filed. Not incorporated by reference. Not subject to liability.
(1) Previously filed as an exhibit to Form S-1 on April 7, 2010.
(2) Previously filed as an exhibit to Amendment No. 1 to Form S-1 on June 4, 2010.
(3) Previously Filed as an exhibit to Amendment No. 2 to Form S-1 on July 9, 2010.
(4) Previously filed as an exhibit to Amendment No. 3 to Form S-1 on July 14, 2010.
(5) Previously filed as an exhibit to Amendment No. 4 to Form S-1 on December 15, 2010.
(6) Previously filed as an exhibit to Amendment No. 5 to Form S-1 on March 10, 2011.
(7) Previous filed as an exhibit to the Annual Report filed on Form 10-K on March 23, 2012.
ITEM 17. Undertakings.UNDERTAKINGS
(a)
The undersigned registrant hereby undertakesundertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to providethis registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the underwriterplan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the closing specifiedtermination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting agreements, certificates inmethod used to sell the securities to the purchaser, if the securities are offered or sold to such denominationspurchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and registered inwill be considered to offer or sell such names assecurities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the underwriterundersigned registrant;
(iii) The portion of any other free writing prospectus relating to permit prompt deliverythe offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to eachthe purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities
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being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
| 77 |
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.SIGNATURE
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURE
Pursuant to the requirements of the Securities Act, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 526th day of September, 2008.April, 2012.
SMG INDIUM RESOURCES LTD.
By: /s/ Alan BenjaminName: Alan Benjamin
| SMG INDIUM RESOURCES LTD. | |
| By: | |
| /s/ Alan Benjamin | |
| Name: Alan Benjamin | |
| Title:Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alan Benjamin his true and lawful attorney-in-fact, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments including post-effective amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that said attorney-in-fact or his substitute, each acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| | | ||
| Name | Position | Date | ||
| /s/ | Chairman, Chief Executive Officer and Director | April 26, 2012 | ||
| Alan Benjamin | (Principal Executive Officer) | |||
| /s/ Richard T. Morena | Chief Financial Officer | April 26, 2012 | ||
| Mary E. Paetzold | (Principal Financial and Accounting Officer) | |||
| /s/ | President and Director | |||
| Ailon Z. Grushkin | ||||
| /s/ | Chief Operating Officer and Director | |||
| Richard A. Biele | ||||
| /s/ | Director | |||
| P.J. Richardson | ||||
| /s/ | Director | |||
| Fred Arena | ||||
| /s/ | Director | |||
| Mark S. Neuhof | ||||
| /s/ William C. Martin | Director | April 26, 2012 | ||
| William C. Martin |
Report of Independent Registered Public Accounting Firm
The Board of Directors
SMG Indium Resources Ltd.:
We have audited the accompanying balance sheet of SMG Indium Resources Ltd. (the Company) as of December 31, 2011 and the related statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMG Indium Resources Ltd. as of December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
March 23, 2012
| F-1 |
II-5
REPORT OF CONTENTSINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
SMG Indium Resources Ltd.
We have audited the accompanying balance sheet of SMG Indium Resources Ltd. (the "Company") as of December 31, 2010 and the related statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audit.
We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMG Indium Resources Ltd. as of December 31, 2010 and the results of its operations and its cash flows for the year ended December 31. 2010 in conformity with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, not presented herein, to the financial statements appearing as an exhibit to the Company’s amendment 5 to Form S-1 filed on March 10, 2011, the Company has no present revenue. Further, the Company completed a Private Placement Offering which requires the Company to complete an initial public offering (IPO) by November 24, 2011. If the IPO is not completed by November 24, 2011, the Company would be forced into liquidation and hence the Company's business plan is directly dependent upon the completion of an IPO. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are described in Notes 1 and 4, not presented herein, to the financial statements appearing as an exhibit to the Company’s amendment 5 to Form S-1 filed on March 10, 2011. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.
/s/ Marcum LLP
New York. NY
March 10, 2011
|
SMG INDIUM RESOURCES LTD.
BALANCE SHEETS
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 3,536,331 | $ | 693,940 | ||||
| Prepaid expenses and other current assets | 23,704 | 3,077 | ||||||
| Total Current Assets | 3,560,035 | 697,017 | ||||||
| Cash and cash equivalents restricted for indium purchases | 2,700,781 | - | ||||||
| Inventory - indium | 18,998,756 | 4,591,016 | ||||||
| Equipment, net of accumulated depreciation | 929 | - | ||||||
| Total Assets | $ | 25,260,501 | $ | 5,288,033 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses, including Manager fee of $88,228 in 2011 | $ | 195,696 | $ | 10,463 | ||||
| Note payable to Manager - related party | - | 265,000 | ||||||
| Accrued interest payable - Manager - related party | - | 45,778 | ||||||
| Total Current Liabilities | 195,696 | 321,241 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock - $.001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding | - | - | ||||||
| Class A common stock - $.001 par value; authorized - 0 shares and 2,000,000 shares at December 31, 2011 and 2010, respectively; issued and outstanding - 0 shares and 1,163,600 shares at December 31, 2011 and 2010, respectively | - | 1,164 | ||||||
| Common stock - $.001 par value; authorized 40,000,000 shares and 5,000,000 shares at December 31, 2011 and 2010, respectively; issued and outstanding 6,832,301 shares and 155,000 shares at December 30, 2011 and 2010, respectively | 6,833 | 155 | ||||||
| Additional paid-in capital | 32,598,678 | 5,373,771 | ||||||
| Accumulated deficit | (7,540,706 | ) | (408,298 | ) | ||||
| Total Stockholders' Equity | 25,064,805 | 4,966,792 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 25,260,501 | $ | 5,288,033 | ||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
SMG INDIUM RESOURCES LTD.
STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Operating Costs: | ||||||||
| Inventory-indium write-down | $ | 3,254,874 | $ | - | ||||
| Operating expenses-Manager-related party | 691,171 | - | ||||||
| Officers and directors compensation expense | 233,275 | - | ||||||
| Other operating expenses | 615,095 | 38,022 | ||||||
| Total Operating Costs | 4,794,415 | 38,022 | ||||||
| Other expense (income): | ||||||||
| Interest expense - Manager-related party | 5,300 | 16,120 | ||||||
| Interest income | (27,062 | ) | - | |||||
| Net Loss | (4,772,653 | ) | (54,142 | ) | ||||
| Preferential Dividend to Class A Common Stockholders | (2,359,755 | ) | - | |||||
| Net Loss Applicable to Common Stockholders | $ | (7,132,408 | ) | $ | (54,142 | ) | ||
| Net Loss per Common Share - Basic and Diluted | $ | (1.61 | ) | $ | (0.35 | ) | ||
| Weighted Average Number of Common Shares Outstanding - Basic and Diluted | 4,443,019 | 155,000 | ||||||
The accompanying notes are an integral part of these financial statements.
SMG INDIUM RESOURCES LTD.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| Additional | Total | |||||||||||||||||||||||||||
| Class A Common Stock | Common Stock | Paid-In | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2009 | 1,003,600 | $ | 1,004 | 155,000 | $ | 155 | $ | 4,829,341 | $ | (354,156 | ) | $ | 4,476,344 | |||||||||||||||
| Issuance of Class A common stock and warrants at $5.00 per share for cash, net of offering expenses | 160,000 | 160 | - | - | 544,430 | - | 544,590 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (54,142 | ) | (54,142 | ) | |||||||||||||||||||
| Balance at December 31, 2010 | 1,163,600 | 1,164 | 155,000 | 155 | 5,373,771 | (408,298 | ) | 4,966,792 | ||||||||||||||||||||
| Awards of stock options to | - | - | - | - | - | - | - | |||||||||||||||||||||
| officers and directors | - | - | - | - | 97,075 | - | 97,075 | |||||||||||||||||||||
| Exchange of Manager-related party note payable for stock options | - | - | - | - | 316,078 | - | 316,078 | |||||||||||||||||||||
| Exchange by Manager-related party of shares of common stock for stock options | - | - | (75,000 | ) | (75 | ) | 75 | - | - | |||||||||||||||||||
| Issuance of common stock and warrants in IPO at $5.00 per unit, net | - | - | 5,084,750 | 5,085 | 24,207,258 | - | 24,212,343 | |||||||||||||||||||||
| Conversion of Class A common stock for shares of common stock | (1,163,600 | ) | (1,164 | ) | 1,163,600 | 1,164 | - | - | - | |||||||||||||||||||
| Preferential dividend of units to Class A common stockholders in connection with IPO | - | - | 471,951 | 472 | 2,359,283 | (2,359,755 | ) | - | ||||||||||||||||||||
| Awards of common stock to officers | 10,000 | 10 | 47,190 | - | 47,200 | |||||||||||||||||||||||
| Award of common stock to Manager-related party | 22,000 | 22 | 100,298 | - | 100,320 | |||||||||||||||||||||||
| Award of stock options to Manager-related party | - | - | - | - | 97,650 | - | 97,650 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (4,772,653 | ) | (4,772,653 | ) | |||||||||||||||||||
| Balance at December 31, 2011 | - | $ | - | 6,832,301 | $ | 6,833 | $ | 32,598,678 | $ | (7,540,706 | ) | $ | 25,064,805 | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
SMG INDIUM RESOURCES LTD.
STATEMENTS OF CASH FLOWS
| For the Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Cash flow from operating activities: | ||||||||
| Net loss | $ | (4,772,653 | ) | $ | (54,142 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Write-down of inventory | 3,254,874 | - | ||||||
| Non-cash compensation to officers and directors | 144,275 | - | ||||||
| Non-cash compensation to Manager-related party | 197,970 | - | ||||||
| Accrued interest to Manager - related party | 5,300 | 16,120 | ||||||
| Depreciation | 83 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in prepaid expenses | (20,627 | ) | - | |||||
| Increase in cash and cash equivalents restricted for indium purchases | (2,700,781 | ) | - | |||||
| Increase in inventory - indium | (17,662,614 | ) | (3,419,963 | ) | ||||
| Increase in accounts payable and accrued expenses | 185,233 | 2,107 | ||||||
| Net cash used in operating activities | (21,368,940 | ) | (3,455,878 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of equipment | (1,012 | ) | - | |||||
| Net cash used in investing activities | (1,012 | ) | - | |||||
| Cash flow from financing activities: | ||||||||
| Proceeds from IPO and overallotments, net | 24,212,343 | (255,410 | ) | |||||
| Proceeds from sale of Class A common stock, net | - | 800,000 | ||||||
| Net cash provided by financing activities | 24,212,343 | 544,590 | ||||||
| Net increase (decrease) in cash and cash equivalents | 2,842,391 | (2,911,288 | ) | |||||
| Cash and cash equivalents, at beginning of period | 693,940 | 3,605,228 | ||||||
| Cash and cash equivalents, at end of period | $ | 3,536,331 | $ | 693,940 | ||||
The accompanying notes are an integral part of these financial statements.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Business and Basis of Presentation
Organization and Nature of Business and Basis of Presentation
SMG Indium Resources Ltd. (the “Company”) is a corporation established pursuant to the laws of Delaware on January 7, 2008. On April 2, 2008, the Company changed its name from Specialty Metals Group Indium Corp. to SMG Indium Resources Ltd. The Company operates a single-segment business whose primary business purpose is to purchase and stockpile indium, a specialty metal that is being increasingly used as a raw material in a wide variety of consumer electronics manufacturing applications. Effective with the quarter ended June 30, 2011, the Company is an operating company and is no longer considered a development stage company. At its discretion and based on market conditions, the Company may subsequently lend or sell some, or all, of its indium stockpile to cover annual operating expenses. The Company’s common shares represent an indirect interest in the physical indium it owns.
To assist in the purchase of indium, the Company entered into a Management Services Agreement, as amended and restated on May 10, 2011 (the “MSA”) with a related party, Specialty Metals Group Advisors, LLC (“SMG Advisors” or the “Manager”). The primary responsibilities of the Manager are: (i) purchasing and selling indium; (ii) submitting written reports to the Company’s board of directors detailing the delivery and payment particulars regarding each purchase and sale of indium; (iii) arranging for the storage of indium; (iv) preparing a biweekly report on the net market value (“NMV”), as defined below; (v) preparing any regulatory filings or special reports to the Company’s stockholders and board of directors; and (vi) managing the general business affairs of the Company. The MSA will have an initial term of five years with options to renew upon mutual agreement between the parties. Pursuant to the terms of the MSA, the Company is required to pay the Manager a fee of 2% per annum of the monthly NMV beginning in May 2011 upon the completion of the Company’s Initial Public Offering (“IPO”) see Note 4. Since the Company was not obligated to pay any fees prior to the IPO, no fees were paid or accrued to the Manager prior to May 2011.
The NMV is not a United States generally accepted accounting principles (“U.S. GAAP”) measurement. It is an internally created formula used by the Company to monitor performance and to compute the management fee and the number of IPO units that the Class A stockholders received upon the completion of the IPO. The NMV is determined by multiplying the number of kilograms of indium held by the Company by the last spot price for indium published by Metal Bulletin and posted on Bloomberg L.P. for the month, plus cash and other Company assets, less any liabilities. At December 31, 2011 and 2010, the Company’s management calculated the NMV of the Company to be approximately $25.7 million and $5.5 million, respectively. At December 31, 2011 and 2010, the excess of the indium spot price as of the respective dates (as published by Metal Bulletin PLC and posted on Bloomberg L.P. (Bloomberg L.P. is not regulated or government approved), over the historical book value was approximately $0.6 million in both years.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Business and Basis of Presentation-(continued)
The Company’s business strategy is to purchase and stockpile indium in order to achieve long-term appreciation in the value of its indium stockpile, and not to actively speculate with regard to short-term fluctuations in indium prices. However, there is no assurance that the price of indium or the value of the Company’s securities will increase over time. The Company was required to use at least 85% of the net proceeds of the IPO to purchase and stockpile already processed and mined indium ingots within 18 months of consummating the IPO. As of March 1, 2012, the Company satisfied its obligation and expended or contracted to expend the 85% required by the IPO. The Company’s indium is insured and physically stored in a facility located in New York. In the future, the Company’s indium may be stored in other facilities in the United States, Canada, the Netherlands and/or the United Kingdom.
Indium is a raw material used in a number of consumer electronics applications. The primary commercial application of indium is in coatings for the flat panel display industry and in the liquid crystal display ("LCD") industry on electronic devices such as television sets, computer monitors, cell phones and digital cameras. Indium is increasingly being used as a raw material in light emitting diodes ("LED") and in the solar energy industry. Its main use in solar energy applications is for high-efficiency photovoltaic cells in the form of thin-film photovoltaic. Other uses of indium are in electrical components, alloys and solders.
Note 2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenue and expenses during the reporting period. The most significant estimates relate to the valuation of indium inventory, share-based compensation, income tax, and revenue recognition. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original maturities of 90 days or less at the time of purchase to be cash equivalents. Upon the closing of the IPO, the Company classified 85% of the net proceeds from the IPO as noncurrent restricted cash and cash equivalents designated for the purchase of indium, which is a noncurrent asset. The balance sheet at December 31, 2011 includes restricted cash of approximately $2.7 million, representing the Company’s remaining commitment to purchase indium at December 31, 2011 in order to utilize 85% of the net proceeds from the IPO.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies, continued
Inventory of the Metal Indium
The Company’s inventory or “stockpile” of the metal indium is recorded at cost, including all associated costs of delivering the indium to the bonded storage warehouse on the date the Company takes delivery of the physical metal. Cost is determined using the specific-identification method. The stockpile of the physical metal indium is classified as noncurrent as the Company does not expect to sell any of the indium during the next twelve months. The stockpile of the physical metal indium is carried at the lower of cost or market with cost being determined on a specific-identification method and market being determined as the net realizable value based on the spot prices obtained from Metal Bulletin as posted on Bloomberg L.P., a real-time financial information services data platform. The Company charges against earnings on an interim basis the amount by which the spot price of indium is less than cost on a specific-identification basis. Increases in the spot price of the same lots of indium held in inventory in later interim periods within the fiscal year are recognized in the later interim period. Increases in value recognized on an interim basis do not exceed the previously recognized diminution in value within that fiscal year.Further, the Company periodically reviews the indium stockpile to determine if a loss should be recognized where the utility of indium has been impaired on an other-than-temporary basis. Where such impairment is viewed as something other-than-temporary, the Company will charge against earnings the amount by which the fair market value is less than the cost. Realized gains (losses) from sale transactions will be determined for income tax and for financial reporting purposes on a specific-identification method when incurred. At December 31, 2011, certain lots of indium in inventory were adjusted to reflect a lower of cost or market write-down of approximately $3.3 million.
Basic and Diluted Earnings (Loss) per Share
The Company presents both basic and diluted earnings (loss) per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants, using the treasury-stock method and convertible stock using the if-converted method. If anti-dilutive, the effect of outstanding warrants and options is ignored. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock option or warrants. For the years ended December 31, 2011 and 2010, the basic and diluted net loss per share are based upon a weighted average number of shares outstanding of 4,443,019 and 155,000, respectively. For the year ended December 31, 2011, the number of common shares potentially issuable upon the exercise of certain (1) warrants was 6,998,101, (2) options was 629,999 and (3) unit purchase options (“UPOs”) was 240,000. For the year ended December 31, 2010, there were 1,201,400 shares of common stock potentially issuable upon the exercise of warrants. These potentially issuable shares have been excluded from the computation of the diluted EPS since the effect would be anti-dilutive. Also, for the year ended December 31, 2010, 1,163,600 shares of Class A common stock were excluded from the calculation of dilutive EPS since the effect would be anti-dilutive.
Revenue Recognition
The stockpile of indium may be used from time to time for “direct sales” and or “lending” transactions. Under a “direct sale” transaction, the Company would record a gain (loss) equal to the difference between the proceeds received from the sale of indium and the indium carrying value. The Company may also elect to enter into a lending transaction. In indium lending transactions, the Company would exchange a specified tonnage and purity of indium for cash. Title and the risks and rewards of such indium ownership would pass to the purchaser/counterparty in the lending transaction.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
Revenue Recognition, continued
The Company would simultaneously enter into an agreement with such counterparty in which it would unconditionally commit to purchase and the counterparty would unconditionally commit to sell a specified tonnage and purity of indium that would be delivered to the Company at a fixed price and at a fixed future date in exchange for cash (the Unconditional Sale and Purchase Agreement or “USPA”). The USPA would also contain terms providing the counterparty with substantial disincentives (“penalty fees”) for nonperformance of the return of indium to the Company as a means to assure its future supply of indium. While the Company believes that this risk would be mitigated by the penalty fee features of the USPA, it is nonetheless a risk associated with a transaction of this type.
The Company anticipates accounting for any USPA transaction on a combined basis (sale and purchase) and will evaluate whether, and in what period, revenue may be recognized based on the specific terms of any arrangements. The Company will disclose unconditional purchase obligations under these arrangements and, if applicable, accrue net losses on such unconditional purchase obligations.
Income Taxes
Income taxes are accounted under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized, must then be offset by recording a valuation allowance. A valuation allowance has been established against all of the deferred tax assets, as it is more likely than not that these assets will not be realized given the Company’s history of operating losses. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company will recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the statements of operations in any future periods in which the Company must record a liability.
Share-Based Payment Arrangements
The Company measures the cost of employee services received in exchange for an award of equity instruments (share-based payments or “SBP”) based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to performance conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.The Company recorded noncash charges for SBP of approximately $0.3 million for the year ended December 31, 2011, of which approximately $0.2 million is included in operating expenses-Manager related party.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
Share-Based Payment Arrangements, continued
There was no share-based compensation recorded prior to 2011. The fair value of each option granted during 2011 was estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions in the following table:
| ||||
| 0 | % | |||
| 5 | ||||
| 19 | % | |||
| .87-1.57 | ||||
The weighted average fair value at the date of grant for options granted during the year ended December 31, 2011 was $0.69 per share. The expected term of options granted represents the period of time that options granted are expected to be outstanding. Because of the limited history of trading volume, the expected volatility was calculated based on the five-year volatility of indium. The assumed discount rate was the default risk-free interest rate provided by Bloomberg L.P.
Common Stock Purchase Contracts
The Company classifies as equity any common stock purchase contracts that: (i) require physical settlement or net-share settlement or gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement), and (ii) is index to the Company’s common stock. The Company classifies as assets or liabilities any common stock purchase contracts that: (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and that event is outside the control of the Company), (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) is not indexed to the Company’s common stock. The Company assesses classification of its equity classified contracts at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company’s outstanding common stock purchase contracts were accounted for as equity through December 31, 2011.
Concentration of Credit Risk
The Company maintains cash deposits with banks that at times exceed applicable Federal Deposit Insurance Corporation limits. The Company reduces its exposure to credit risk by maintaining such deposits with high-quality financial institutions. The Company has not experienced any losses in such accounts. At December 31, 2011, the Company had cash on deposit (inclusive of restricted cash) of approximately $6.0 million in excess of federally insured limits of $250,000.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
Fair Value
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. For cash and cash equivalents, accrued expenses, and other liabilities, the carrying amount approximated the fair value because of the immediate or short-term nature of those instruments. For inventory, the carrying amount is based on lower of cost or market calculated on a specific identification method with market being determined by the value of indium published by Metal Bulletin as posted on Bloomberg L.P. (a level 2 fair value measurement). The carrying amount of notes payable at December 31, 2010 approximates fair value due to the length of the maturity of the underlying note and the interest rate, which is comparable to market rates currently available to the Company.
Equipment
Equipment is stated at cost and depreciated on a straight-line basis over the estimated useful life of three years.
Supplemental Cash Flow Information
The following is a summary of non-cash transactions:
| · | In May 2011, the Manager, a related party, exchanged 75,000 shares of common stock for fully vested options to acquire 150,000 shares of common stock at $4.50 per share expiring in May 2016. The 75,000 shares of common stock were retired - see Note 4. |
| · | In May 2011, the Company’s Class A Common Stockholders converted 1,163,600 shares of Class A common stock outstanding for 1,635,551 common shares including 471,951 shares representing an adjustment required as a result of the consummation of the IPO. Such adjustment resulted in a non-cash preferential stock dividend of approximately $2.4 million - see Note 3. |
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future financial statements.
Note 3 — Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. At December 31, 2011 and 2010, there were no outstanding preferred shares. For a period of one year after the effectiveness of the IPO, the Company will not offer preferred stock to any of its promoters (including the Company’s officers, directors and the Manager, a related party) except on the same terms as it is offered to all other existing or new stockholders. In addition, a majority of the Company’s independent directors that do not have an interest in the transaction shall approve any offering of preferred stock and have access, at the Company’s expense, to its counsel or independent counsel. Any document relating to an offering of preferred stock by the Company will disclose whether the dividends on the preferred stock are cumulative, the risk of failure to declare or pay dividends on the preferred stock and the equity characteristics of any convertible preferred stock being offered to investors.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity, continued
Class A Common Stock
In 2009 and 2010, the Company raised aggregate net proceeds of approximately $5.6 million from the sale of an aggregate of 1,163,600 units in a private placement. A unit consisted of one share of Class A common stock and one warrant to purchase one share of common stock at an exercise price of $5.75 per share. The warrants became exercisable immediately after the IPO and expire in May 2016. The Class A Common Stockholders converted all of their Class A common stock into common stock immediately prior to the IPO. The Class A Common Stockholders were entitled to an adjustment reflecting: (i) the 20% increase in shares of common stock and warrants associated with the failure to complete an IPO within a certain timeframe, plus (ii) the NMV adjustment (“Further Adjustment” shares) which is computed by multiplying the number of kilograms of indium held by the Company by the average spot price (see * below) for indium published by Metal Bulletin as posted on Bloomberg L.P., plus cash and other assets, less any liabilities. The Company issued an additional 471,951 shares of common stock and warrants with an exercise price of $5.75 per share to the Class A Common Stockholders in connection with the IPO that was accounted for as a non-cash preferential dividend of approximately $2.4 million. The additional shares of common stock and warrants were valued using the IPO price of $5.00 per unit, as the terms of the warrants were the same as the IPO warrants.
The 471,951 adjustment took into consideration the 20% time-based accretion factor resulting in the issuance of 232,720 shares of common stock and warrants and the NMV-based accretion factor resulting in the issuance 239,231 shares of common stock and warrants. The NMV based adjustment for the increase of 239,231 shares of common stock and warrants was calculated as follows:
Total “Further Adjustment” Shares to be issued:
| NMV of the Company immediately preceding the IPO Closing* | Minus | NMV of the Company after the application of the Private Placement gross proceeds from the sale of Class A Common Stock | ||
| Divided by: $5.00 or the IPO Unit Price | ||||
Calculation of “Adjustment Ratio per Private Placement Share”:
| Total Further Adjustment Shares to be Issued | ||||
| Equals | Adjustment Ratio Per Private | |||
| Total Class A Common Stock Outstanding | Placement Share |
Following the conversion of all of the Class A shares into common shares, all of the authorized but unissued shares of the Class A common stock were retired.
| * |
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity – (continued)
Common Stock
On May 4, 2011, the Company amended its Certificate of Incorporation to extend the life of the Company to perpetuity. In addition, it increased the number of authorized common stock from 5,000,000 shares to 40,000,000 shares.
The Company completed its IPO pursuant to a Registration Statement that was declared effective May 4, 2011. The Company sold an aggregate of 5,084,750 units, including the partial exercise of the underwriters’ overallotment option, at a price of $5.00 per unit for aggregate net proceeds of approximately $24 millionafter deducting underwriting discounts and commissions of and offering expenses aggregating approximately $1.5 million. Of those expenses approximately (1) $1.2 million has been recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital during the year ended December 31, 2011 and (2) $0.3 million was recorded at December 31, 2010. Each IPO unit consisted of one share of the Company’s common stock and one redeemable common stock purchase warrant. Of the total net proceeds, approximately $20.4 millionwas committed to be used to purchase and stockpile indium and approximately $3.6 millionwas used for general working capital purposes. Each warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.75 per share commencing with the effective date of the registration statement and expiring on May 4, 2016. The warrants also contain a call feature that permits the Company to redeem the warrants at a price of $0.01 per warrant at any time after the warrants become exercisable, upon providing at least 30 days advance written notice of redemption and if, and only if, the last sales price of the Company’s common stock equals or exceeds $8.00 per share for any 20 trading days within a 30-trading-day period ending three business days before the Company sends the notice of redemption. In addition, the Company may not redeem the warrants unless the warrants comprising the units sold in the IPO and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date scheduled for the redemption. If the foregoing conditions are satisfied and the Company calls the warrants for redemption, each warrant holder shall then be entitled to exercise their warrants prior to the date scheduled for redemption. The redemption provisions for the Company’s warrants have been established at a price that is intended to avail to the warrant holders a premium in the market price as compared to the initial exercise price. There can be no assurance, however, that the price of the common stock will exceed either the redemption price of $8.00 or the warrant exercise price of $5.75 after the Company calls the warrants for redemption.
| F-14 |
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity – (continued)
Common Stock, continued
The Company also issued a UPO to the underwriters or their designees for 240,000 units. The underwriters paid $100 for the UPO, which is included in the net proceeds from the IPO in the Company’s statement of changes in stockholders’ equity for the year ended December 31, 2011. The UPO allows the underwriters to purchase units at an exercise price of 110% of the price per unit in the IPO (or $5.50 share) commencing one year from May 4, 2011 and expiring in May 2015. The associated warrants in connection with this UPO are exercisable at $5.75. The Company accounted for the fair value of this purchase option as an expense of the IPO resulting in a charge directly to additional paid-in capital. The Company engaged the underwriters as its exclusive advisors with respect to the solicitation of the exercise of the warrants and, subject to applicable Financial Industry Regulatory Authority rules, shall pay the underwriters a fee equal to 5% of the gross proceeds, if any, received from the exercise of such warrants for a period of twelve months from May 4, 2011.
Equity Compensation Plan
In January 2008, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2008 Equity Incentive Plan (the “Plan”). Under the Plan, the Company may grant incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards. On July 7, 2010, the Company’s board of directors authorized an increase from 550,000 shares of common stock to 1,000,000 shares of common stock to be reserved for issuance pursuant to the Plan. On April 19, 2011, prior to the consummation of the IPO, such increase was submitted and approved by the stockholders. Options are granted with exercise prices equal to or greater than the fair value of the common stock. The terms of the options are approved by the Company’s board of directors. Options granted to date have vested immediately and expire in five years. At December 31, 2011, there were 370,001 options available under the plan for future grants.
Stock Options
In 2008, the Company agreed to grant 8,333 options to purchase common stock to each of the Company’s three independent directors and 50,000 options to the Company’s Chief Financial Officer, contingent upon the successful completion of the IPO. The options are exercisable at $7.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016. The Company estimated the fair value of these options upon the closing of the IPO at $0.15 per share using the Black-Scholes-Merton option pricing model.
In 2010, the Company agreed to grant an additional 5,000 options to purchase common stock to each of the Company’s four nonexecutive directors and 30,000 options to the Company’s Chief Financial Officer, contingent upon the successful completion of the IPO. The options are exercisable at $4.50 per share, vested immediately with the closing of the IPO and expire on May 9, 2016. The Company estimated the fair value of the 2010 option grants at $0.79 per share using the Black-Scholes-Merton option pricing model.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity – (continued)
Stock Options, continued
In June 2011, the Company agreed to grant an additional 5,000 stock options to each of the Company’s three independent directors and 30,000 options to the Company’s CFO. The options are exercisable at $4.75 per share, vest immediately and expire in five years. The Company estimated that the fair value of the director’s and CFO options are $0.94 per share using the Black-Scholes-Merton option pricing model. In July 2011 and October 2011, the Company awarded its new CFO options to acquire 2,500 shares of common stock at $4.51 and $3.90 per share, respectively. The options vested immediately and expire on July 22, 2016 and October 23, 2016, respectively. The Company estimated the fair value of the options at $0.84 and $.75 per share using the Black-Scholes-Merton option pricing model.
The Company recorded non-cash officers’ and directors’ compensation expense aggregating approximately $0.1 million for the above stock options during the year ended December 31, 2011.
Upon the successful completion of the IPO, the Manager, a related party, was granted 155,000 stock options that are exercisable at $4.50 per share, vesting immediately upon the closing of the IPO and expire on November 23, 2014. The Company valued these options at $0.63 per share using the Black-Scholes-Merton option pricing model and resulted in non-cash compensation expense of approximately $0.1 million recorded as operating expenses-Manager – related party during the year ended December 31, 2011.
Further, the Manager, a related party, also received 150,000 stock options in connection with the exchange of 75,000 shares of common stock on the IPO closing date and an additional 150,000 stock options received in connection with the exchange of the Company’s Note Payable on the IPO closing date. These 300,000 stock options are exercisable at $4.50 per share, vest immediately and expire on May 9, 2016. The exchange of (1) the stock options for common stock resulted in an adjustment to retire the common stock, and (2) the Note Payable and related interest was recorded as an equity transaction in the accompanying statement of changes in stockholders’ equity for the year ended December 31, 2011. No gain was recognized on either exchange because the Manager is a related party.
Summary stock option information for the year ended December 31 is as follows:
| Weighted | ||||||||||||||||
| Aggregate | Aggregate | Exercise Price | Average | |||||||||||||
| Number | Exercise Price | Range | Exercise Price | |||||||||||||
| Outstanding, December 31, 2010 | - | - | - | - | ||||||||||||
| Granted | 629,999 | $ | 3,069,768 | $ | 3.90-7.50 | $ | 4.87 | |||||||||
| Exercise | - | - | - | - | ||||||||||||
| Cancelled or Forfeited | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| 629,999 | $ | 3,069,768 | $ | 3.90-7.50 | $ | 4.87 | ||||||||||
The weighted average grant date fair value was $0.69 and the weighted average remaining contractual life is 4.3 years for stock options granted in 2011.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity – (continued)
Stock Options, continued
At December 31, 2011, all options were exercisable. The options have a weighted average remaining contractual life of 4.28 years and an aggregate intrinsic value of approximately $1 thousand at December 31, 2011. Intrinsic value is the amount by which the quoted market price of the Company’s common stock was in excess of the exercise price.
Stock Awards
In June 2011, the Company awarded 22,000 and 10,000 fully-vested restricted shares of common stock to the Manager, a related party and one of the Company’s officers resulting in non-cash compensation expense of approximately $0.1 million and $47 thousand, respectively, recorded during the year ended December 31, 2011 based on the fair value at the time of the awards of $4.61 per share and $4.72 per share, respectively. The fair value was determined based on the NMV on the date of issue since the Company’s common stock was not trading separate from the units issued in the IPO.
Warrants
As of December 31, 2011, the Company has outstanding warrants exercisable for 6,998,101 shares of the Company’s common stock including 240,000 warrants underlying the UPO not yet exercised, all at an exercise price of $5.75 per share. Such warrants expire on May 4, 2016, except for 240,000 warrants underlying the UPO which expire on May 4, 2015.
Note 4 — Related-Party Transaction
The members of SMG Advisors, and the positions they hold in the Company, are as follows: Ailon Z. Grushkin, President and Director; BRACK Advisors LLC, an entity controlled by Richard A. Biele, Chief Operating Officer and Director; Alan C. Benjamin, Chairman and Chief Executive Officer; and RCM Indium, LLC, an entity controlled by William C. Martin, Director. SMG Advisors is managed by Ailon Z. Grushkin. The Manager’s financial statements are not consolidated with those of the Company. Pursuant to the MSA, the Manager is responsible for: (i) purchasing and selling indium, (ii) submitting written reports to the Company’s board of directors detailing the delivery and payment particulars regarding each purchase and sale, (iii) arranging for the storage of indium, (iv) preparing a report on the NMV of the Company’s common stock, (v) preparing any regulatory filing materials or special reports to the Company’s stockholders and board of directors and (vi) managing the general business and affairs of the Company. Upon the initial closing of the minimum funds sought in connection with the private placement, the Company issued to the Manager, subject to the completion of the IPO options exercisable for 155,000 shares of common stock at an exercise price of $4.50 per share. The options expire on November 23, 2014.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 4 — Related-Party Transaction – (continued)
The MSA has an initial term of five years, with options to renew the agreement on terms mutually acceptable to each party and may be terminated by either party upon 90 days prior written notice. The Company is responsible for paying all costs and expenses incurred in connection with the business, except those expressly assumed by the Manager. The Company pays the Manager a fee equal to 2% per annum, payable monthly, based on its NMV beginning upon the successful completion of the IPO. Such Manager fees aggregated approximately $0.4 million during the year ended December 31, 2011. In addition, the manager received a cash bonus of $0.1 million and non-cash compensation for stock awards and stock options aggregating approximately $0.2 million during the year ended December 31, 2011.
On January 8, 2008, the Company entered into a revolving line of credit with the Manager in the aggregate amount of $0.3 million (the “Revolver"). The line of credit was used to fund the offering costs incurred by the Company in connection with its attempt to go public in 2008. The Company borrowed approximately $0.2 million under the line of credit. On January 25, 2010, the Company amended its revolving line of credit as follows: the maturity date was amended to be due and payable on the earlier of (a) the date the Company completes an IPO; (b) the date of a dissolution, liquidation, winding up or insolvency proceeding commenced by or on behalf of the Company in the event the Company does not complete the IPO; or (c) November 24, 2011. On May 10, 2011, the Company completed its IPO, and such amount due to the Manager was automatically converted into 150,000 common stock options, which were immediately vested, are exercisable at $4.50 per share and expire on May 9, 2016. In connection with this conversion, the Company recorded additional paid-in capital for the aggregate value of the accrued interest and the amount borrowed under the line of credit of approximately $0.3 million, no gain was recorded on this transaction because the Manager is a related party.
On May 10, 2011, the Company completed its IPO, and 75,000 shares of common stock owned by the Manager were automatically converted into 150,000 common stock options, which were immediately vested, are exercisable at $4.50 per share and expire on May 9, 2016 (see Note 3).
In September 2011, the Company engaged a relative of one of its officers to perform outsourced secretarial services for the Company at $5 thousand per quarter of which $10 thousand was paid in 2011.
The Company believes that all related-party transactions were made on terms no less favorable to the Company than could have been obtained from unaffiliated parties. The Company will not engage in any transactions with its officers and directors involving purchasing, lending, or selling indium to or from the Company, except pursuant to the terms of the MSA.
Traxys Projects LP, 100% owned by Traxys S.a.r.l and its wholly owned subsidiary, Traxys North America LLC, and Traxys Commodity Fund LP each invested $500,000 in the Company’s 2009 Private Placement. This represented beneficial ownership in the Company by entities affiliated with Traxys North America LLC of 15.2% prior to the IPO and 4.1%,upon the completion of the IPO. Accordingly, after the IPO, Traxys affiliated entities are no longer deemed to be a related party as they do not have significant influence. Through May 10, 2011, the completion date of the IPO, the Company purchased an aggregate of 7.2 metric tons of indium, representing 78.2% of its stockpile at that time, at prices that approximate market value, from Traxys North America LLC. The Company did not and does not have any outstanding special agreements or arrangements with Traxys S.a.r.l or any of its affiliates including its wholly owned subsidiary, Traxys North America LLC.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 5 — Income Taxes
The components of income taxes are as follows, in thousands:
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Current | $ | - | $ | - | ||||
| Deferred | 1,889 | 39 | ||||||
| Valuation Allowance | (1,889 | ) | (39 | ) | ||||
| Income tax expense (benefit) | $ | - | $ | - | ||||
Reconciliation between the benefit for income taxes, computed by applying the statutory federal income tax rate of 34% to net loss before income taxes, and the actual benefit for income taxes follows:
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Federal income tax provision at statutory rates | (34.0 | )% | (34.0 | )% | ||||
| State income taxes, net of Federal benefit | (5.2 | )% | (5.2 | )% | ||||
| Change in valuation allowance | 39.2 | % | 39.2 | % | ||||
| Effective rate | 0 | % | 0 | % | ||||
Components of deferred tax asset are as follows, in thousands:
| December 31, | ||||||||
| Deferred tax assets: | 2011 | 2010 | ||||||
| Net operating tax loss carryforwards | $ | 1813 | $ | 21 | ||||
| Expenses not currently deductible | 76 | 18 | ||||||
| Total | 1,889 | 39 | ||||||
| Valuation allowance | (1,889 | ) | (39 | ) | ||||
| Net deferred taxes | $ | - | $ | - | ||||
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowances for fiscal years 2011 and 2010 have been applied to offset the deferred tax assets in recognition of the uncertainty that such tax benefits will be realized as the Company continues to incur losses. The differences between book income and tax income primarily relate principally to stock compensation expenses. At December 31, 2011, the Company has available net operating loss carry forwards for federal and state income tax reporting purposes of approximately $4.6 million.The Federal and state net operating loss carryforwards begin to expire in 2028. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of a company’s net operating loss may be limited if the Company experiences a change in ownership of more than 50 percentage points within a three-year period. As a result of certain financing equity transactions, the Company may have experienced such ownership changes. Accordingly, the Company’s net operating loss carry forwards available to offset future federal taxable income arising before such ownership changes may be limited.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 5 — Income Taxes, continued
At December 31, 2011, the Company did not have any unrecognized tax benefits. All of the Company’s federal and state income tax returns, beginning in 2008, are subject to audit for those tax years.
Note 6 — Accounts Payable and Accrued Expenses
Accounts Payable and accrued expenses consist of the following, in thousands:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| Accounts payable to Manager-related party | $ | 88 | $ | - | ||||
| Accrued professional services | 61 | - | ||||||
| Franchise tax accrual | 38 | - | ||||||
| Other | 9 | 10 | ||||||
| $ | 196 | $ | 10 | |||||
Note 7 — Commitments and Contingencies
Management Services Agreement (“MSA”)
As described in Note 4, the Company entered into the MSA, as amended and restated on May 10, 2011, with the Manager, a related party. The MSA has an initial term of five years with options to renew upon mutual agreement between the parties. The Company is required to pay the Manager a fee of 2% per annum of the monthly NMV, as previously defined, beginning with the closing of the IPO.
Indium Purchase Commitments
Through March 1, 2012, the Company has purchased and taken delivery of a total of approximately 5,000 kilograms of indium pursuant to purchase orders entered into after December 31, 2011. The Company expended approximately $2.6 million paying an average purchase price of $527 per kilogram. The Company has future commitments to purchase an additional 2,000 kilograms of indium for which it has ordered, but not yet received or paid for. The value of these purchase commitments are approximately $1.01 million or $520 per kilogram. These purchases and commitments to purchase are not included in indium inventory nor included in accounts payable at December 31, 2011.
Director and Executive Compensation
In July 2011, the Company entered into an arrangement with its new chief financial officer (“CFO”) that provides for an annual base compensation of $50 thousand to be paid quarterly. Further, the Company will grant the CFO quarterly five-year options to acquire 2,500 shares of common stock up to an aggregate of 10,000 shares vesting at the date of grant and exercisable at the market value at the date of grant. In June 2011, the compensation committee of the board of directors approved the payment of $10 thousand per year to each of the nonexecutive board members and $1 thousand to such directors for each meeting attended in person. In September 2011, the Company engaged a relative of one of its officers to perform outsourced secretarial services for the Company at $5 thousand per quarter.
SMG INDIUM RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 — Commitment and Contingencies – (continued)
The Company’s board of directors approved a contingent cash bonus award of $0.1 million and a contingent award of 22,000 shares of restricted common stock to the Manager, a related party. The aforementioned award will be granted if the Company completes an additional equity offering raising a minimum of $15 million in one single transaction of cash or a combination of cash and indium metal in lieu of cash. Further, the board of directors approved an additional contingent cash bonus award of $0.1 million and a contingent award of 22,000 shares of restricted common stock to the Manager, a related party if the Company can successfully lists its common stock on a major exchange.
Note 8 — Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or unrecognized subsequent events that have required adjustment or disclosure in the financial statements other than mentioned below.
On January 5, 2012, the Company closed a private placement of an aggregate of 2.0 million shares of its common stock at $3.75 per share to two accredited investors, Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., for an aggregate purchase price of $7.5 million. Raging Capital Management, LLC is the general partner of Raging Capital Fund, L.P. and Raging Capital Fund (QP), L.P., respectively, and collectively, the entities represent the Company’s largest stockholder(s). Such entities are affiliated and controlled by William C. Martin, a member of the Company’s board of directors and, through his control of RCM Indium, LLC, a member of our Manager, Specialty Metals Group Advisors LLC. The Company intends to use 85% of the gross proceeds, or approximately $6.4 million, from such transaction to purchase and stockpile indium and 15% of the gross proceeds, or approximately $1.1 million, for general corporate purposes.
Subsequent to December 31, 2011, the Company purchased and took delivery of approximately 5000 kilograms of indium at $527 per kilogram for an aggregate purchase price of approximately $2.6 million. Such amounts are not included in indium inventory at December 31, 2011 See note 7 for indium purchase commitments for which the indium has not been received or paid for as of March 1, 2012.
| F-21 |