UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2014
☐ TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______ to
_______
Commission file number: 000-30215
LUSTROS INC.
(Exact name of
registrant as specified in its charter)
Utah |
45-5313260 |
(state or other jurisdiction of incorporation or organization) |
(I.R.S. Employer I.D. No.) |
9025 Carlton Hills Blvd. Suite A
Santee, CA 92071 |
(Address of principal executive offices) |
619-449-4800
(Issuer's telephone number)
_____________________________________
(former name or former
address, if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
£ Yes
S
No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). S Yes £
No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer £ |
Accelerated Filer £ |
|
|
Non-Accelerated Filer £ |
Smaller Reporting Company ☒ |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
£ No
S
As of March 25, 2015 there were 121,160,193 shares of the registrant’s
$0.001 par value Common Stock outstanding.
LUSTROS INC.
TABLE OF CONTENTS
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PAGE |
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PART I |
FINANCIAL INFORMATION |
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3 |
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ITEM 1. |
FINANCIAL STATEMENTS |
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3 |
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ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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21 |
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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23 |
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ITEM 4. |
CONTROLS AND PROCEDURES |
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23 |
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PART II |
OTHER INFORMATION |
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24 |
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ITEM 1. |
LEGAL PROCEEDINGS |
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24 |
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ITEM 1A. |
RISK FACTORS |
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25 |
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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26 |
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
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26 |
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ITEM 4. |
MINING SAFETY DISCLOSURE |
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26 |
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ITEM 5. |
OTHER INFORMATION |
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26 |
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ITEM 6. |
EXHIBITS |
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26 |
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Special Note Regarding Forward-Looking
Statements
Information included in this Form 10-Q
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information
may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements
of Lustros Inc. (the “Company”), to be materially different from future results, performance or achievements expressed
or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,”
or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these
forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied
by the forward-looking statements as a result of various factors. Included in these factors are our risk factors included in our
Form 10-K for the year ended December 31, 2013. Except as required by applicable laws, the Company has no obligation to update
publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the
future.
*Please note that throughout this Quarterly
Report, and unless otherwise noted or the context otherwise required, the words "we," "our," "us,"
or the "Company," refer to Lustros, Inc. (“Lustros”) and its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS |
INDEX |
|
|
|
Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (unaudited) |
4 |
|
|
Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited) |
5 |
|
|
Consolidated Statements of Comprehensive Income (Loss) for the
three months ended March 31, 2014 and 2013 (unaudited) |
5 |
|
|
Consolidated Statements of Cash Flows for the three months ended
March 31, 2014 and 2013 (unaudited) |
6 |
|
|
Notes to Consolidated Financial Statements |
7 |
Lustros, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| |
March 31, 2014 | | |
December 31, 2013 | |
ASSETS | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash | |
$ | 91,750 | | |
$ | 615,469 | |
Other receivables | |
| – | | |
| 915 | |
Prepaid expenses | |
| 145,856 | | |
| 124,770 | |
Inventory | |
| 91,939 | | |
| – | |
Total current assets | |
| 329,545 | | |
| 741,154 | |
| |
| | | |
| | |
Non-Current Assets | |
| | | |
| | |
Fixed asset, net | |
| 3,124,665 | | |
| 3,486,711 | |
Land | |
| 508,601 | | |
| 534,596 | |
Total non-current assets | |
| 3,633,266 | | |
| 4,021,307 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 3,962,811 | | |
$ | 4,762,461 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 1,583,192 | | |
$ | 1,792,529 | |
Convertible notes payable, net of unamortized discount of $8,643 and $21,066 respectively | |
| 43,139 | | |
| 50,113 | |
Accrued rents Congo | |
| 697,858 | | |
| 465,239 | |
Derivative liability from convertible notes | |
| 46,740 | | |
| 39,474 | |
Notes payable | |
| 358,251 | | |
| 351,183 | |
Notes payable - related party | |
| 3,117 | | |
| 2,467 | |
Total current liabilities | |
| 2,732,297 | | |
| 2,701,005 | |
| |
| | | |
| | |
Long Term Liabilities | |
| | | |
| | |
Convertible notes payable - related party, net of unamortized discount of $41,519 and $0 respectively | |
| 258,481 | | |
| – | |
Asset retirement obligations | |
| 446,633 | | |
| 433,794 | |
Total long term liabilities | |
| 705,114 | | |
| 433,794 | |
| |
| | | |
| | |
Total liabilities | |
| 3,437,411 | | |
| 3,134,799 | |
| |
| | | |
| | |
Stockholders' Equity | |
| | | |
| | |
Preferred stock, $.001 par value, 10,000,000 shares authorized, 401,876 and 441,416 shares issued and outstanding respectively | |
| 402 | | |
| 441 | |
Common stock, $.001 par value, 250,000,000 shares authorized, 101,251,993 and 97,169,346 issued and outstanding respectively | |
| 101,252 | | |
| 97,169 | |
Additional paid-in capital | |
| 12,456,891 | | |
| 12,384,745 | |
Accumulated other comprehensive income | |
| 2,224,006 | | |
| 1,971,935 | |
Accumulated deficit | |
| (12,349,825 | ) | |
| (11,204,535 | ) |
Total Lustros, Inc. stockholders' equity | |
| 2,432,726 | | |
| 3,249,755 | |
Non-controlling interest | |
| (1,907,326 | ) | |
| (1,622,093 | ) |
Total stockholders' equity | |
| 525,400 | | |
| 1,627,662 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 3,962,811 | | |
$ | 4,762,461 | |
See notes to consolidated financial statements.
Lustros, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| |
For the Three Months Ended March 31, 2014 | | |
For the Three Months Ended March 31, 2013 | |
| |
| | |
| |
Revenue | |
$ | – | | |
$ | – | |
Cost of goods sold | |
| – | | |
| – | |
Gross profit | |
| – | | |
| – | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
General and administrative | |
| 423,114 | | |
| 239,959 | |
Depreciation | |
| 169,055 | | |
| 31,029 | |
Foreign exchange losses | |
| 272,214 | | |
| – | |
Payroll | |
| 209,108 | | |
| 400,956 | |
Legal and accounting | |
| 64,218 | | |
| 73,189 | |
Asset impairment | |
| 25,233 | | |
| – | |
Congo rent expense | |
| 232,619 | | |
| – | |
Mining costs | |
| – | | |
| 21,353 | |
Research & development | |
| – | | |
| 49 | |
Total expenses | |
| 1,395,561 | | |
| 766,535 | |
| |
| | | |
| | |
Loss from operations | |
| (1,395,561 | ) | |
| (766,535 | ) |
| |
| | | |
| | |
Net change in fair value of derivative liability | |
| (7,266 | ) | |
| – | |
Interest expense | |
| (27,696 | ) | |
| (226,028 | ) |
| |
| | | |
| | |
Net loss | |
$ | (1,430,523 | ) | |
$ | (992,563 | ) |
| |
| | | |
| | |
Less net loss attributable to non-controlling interest | |
$ | (285,233 | ) | |
$ | (211,056 | ) |
Net loss attributable to Lustros, Inc. | |
$ | (1,145,290 | ) | |
$ | (781,507 | ) |
| |
| | | |
| | |
Loss per share, basic | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | |
Weighted average common shares, basic | |
| 98,427,334 | | |
| 89,018,101 | |
Consolidated
Statements of Comprehensive Income (Loss)
| |
For the Three Months Ended March 31, 2014 | | |
For the Three Months Ended March 31, 2013 | |
| |
| | |
| |
Net loss | |
$ | (1,430,523 | ) | |
$ | (992,563 | ) |
| |
| | | |
| | |
Gain on foreign currency conversion | |
| 252,071 | | |
| 113,034 | |
| |
| | | |
| | |
Total comprehensive loss | |
$ | (1,178,452 | ) | |
$ | (879,529 | ) |
Comprehensive loss attributable to non-controlling interest | |
$ | (184,405 | ) | |
$ | (98,022 | ) |
Comprehensive loss attributable to Lustros, Inc. | |
$ | (994,047 | ) | |
$ | (781,507 | ) |
See notes to consolidated financial statements.
Lustros, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
| |
For the Three Months Ended March 31, 2014 | | |
For the Three Months Ended March 31, 2013 | |
| |
| | |
| |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (1,430,523 | ) | |
$ | (992,563 | ) |
Adjustments to reconcile net loss to cash used in operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 169,055 | | |
| 31,029 | |
Amortization of original issued discount | |
| 12,363 | | |
| 183,169 | |
Accrued rents Congo | |
| 232,619 | | |
| – | |
Loss on sale of assets | |
| 31,777 | | |
| – | |
Loss on settlement of debt | |
| 13,066 | | |
| – | |
Interest paid with stock | |
| 802 | | |
| – | |
Loss on change in fair value of convertible note derivative liability | |
| 7,266 | | |
| – | |
Changes in operating assets and liabilities | |
| | | |
| | |
Increase in accrued interest included in notes payable | |
| – | | |
| 5,732 | |
Decrease/(increase) in receivables | |
| 868 | | |
| – | |
Decrease/(increase) in prepaid expenses | |
| (25,134 | ) | |
| (897 | ) |
Decrease/(increase) in inventory | |
| (91,939 | ) | |
| (8,571 | ) |
Decrease/(increase) in tax receivable | |
| – | | |
| (58,177 | ) |
Increase/(decrease) in asset retirement obligation | |
| 31,898 | | |
| 15,954 | |
Increase/(decrease) in accounts payable | |
| (143,696 | ) | |
| 111,922 | |
Total cash used in operations | |
| (1,191,578 | ) | |
| (712,402 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Purchase of fixed assets | |
| – | | |
| (139,510 | ) |
Total cash used in investing activities | |
| – | | |
| (139,510 | ) |
| |
| | | |
| | |
Cash from financing activities | |
| | | |
| | |
Proceeds from convertible notes payable, related parties | |
| 300,000 | | |
| – | |
Repayments on convertible notes | |
| – | | |
| (40,587 | ) |
Proceeds from notes payable, related parties | |
| 650 | | |
| 221,509 | |
Proceeds from the issuance of common stock | |
| – | | |
| 550,000 | |
Total cash provided by financing activities | |
| 300,650 | | |
| 730,922 | |
| |
| | | |
| | |
Effect of foreign currency exchange rate on cash | |
| 367,209 | | |
| (7,513 | ) |
| |
| | | |
| | |
DECREASE IN CASH | |
| (523,719 | ) | |
| (128,503 | ) |
| |
| | | |
| | |
BEGINNING CASH | |
| 615,469 | | |
| 277,565 | |
| |
| | | |
| | |
ENDING CASH | |
$ | 91,750 | | |
$ | 149,062 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | – | | |
$ | 14,818 | |
Income taxes paid | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Supplemental disclosure of non-cash investing activities: | |
| | | |
| | |
Related party notes transferred to convertible notes | |
$ | – | | |
$ | (270,988 | ) |
Convertible notes settled with common stock | |
$ | (20,000 | ) | |
$ | – | |
Shares issued in conversion of convertible note | |
| 128,647 | | |
| 426,141 | |
See notes to consolidated financial statements.
LUSTROS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 - Organization and Principal Activities
Organization and Description of Business
Lustros, Inc. ("Lustros", and
together with its consolidated subsidiaries, the "Company"), formerly Power-Save Energy Company, is a Utah corporation
formed in 1980. The Company is a pre-revenue development stage company that intends to market and sell high quality food-grade
copper sulfate obtained by processing copper ores and tailings at Company-owned processing facilities in Chile.
On March 9, 2012, Lustros acquired all
of the outstanding capital stock and rights to acquire capital stock of Bluestone, S.A. a Chilean corporation (“Bluestone”),
in exchange for 60,000,000 shares of its common stock (the "Bluestone Acquisition"). Bluestone's principal asset is a
60% equity interest in Sulfatos Chile, S.A. ("Sulfatos"), which it acquired in February 2012.
For accounting purposes, the Company has
treated the Bluestone Acquisition as a reverse acquisition with Bluestone as the acquiring entity and Lustros as the acquired entity.
As a result, the Company's financial statements reflect the financial information of Bluestone prior to March 9, 2012 and the combined
entity on and after March 9, 2012.
On March 25, 2012, the Company sold the
assets (including the "Power-Save" name) of its renewable energy and energy savings product business in which it had
engaged prior to the Bluestone Acquisition, to the former management of the Company (the "Power Save Sale").
On June 25, 2012, the Company created a
new subsidiary, Mineraltus S.A. (“Mineraltus”), a Chilean corporation, to extract copper from the tailings (waste products)
of expired copper mines to secure the raw materials to manufacture high quality, feed-grade copper sulfate. The Company owns 80%
of Mineraltus.
On August 22, 2012, the Company formed
Lustros Chile SpA as a 100% owned subsidiary, for the purpose of acting as a Chilean entity holding company for the Company’s
Chilean subsidiaries Sulfatos, Mineraltus, and Bluestone.
The Company shut down its copper sulfate
processing plant in December 2014 pending resolution of certain legal matters including the bankruptcy of our Sulfatos Chile S.A.
subsidiary. The Company’s subsidiary, Sulfatos Chile S.A. is engaged in litigation before the 4th Civil Trial Court of Santiago,
Docket No 25496-2014, in the matter of Oryxeio Ingenieria Limitada v. Sulfatos Chile S.A. On December 22, 2014 Sulfatos Chile S.A.
was declared bankrupt by the court. The Board of Directors of Sulfatos Chile S.A. decided not to oppose the bankruptcy process.
The resolution of this matter is uncertain.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements, including the estimated useful lives of tangible and intangible assets
and the asset retirement obligation. Management believes the estimates used in preparing the financial statements are reasonable
and prudent. Actual results could differ from these estimates.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary
for a fair presentation of the information contained therein. It is suggested that these interim financial statements be read in
conjunction with the financial statements of the Company for the years ended December 31, 2013 and 2012 and notes thereto included
in the Company’s 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.
Principles of Consolidation
The consolidated financial statements include
the financial statements of Lustros, Inc., its subsidiaries Lustros Chile SpA, Mineraltus, Bluestone, and Sulfatos. All significant
inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The presentation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Foreign Currency Translation
The Company records foreign currency translation
adjustments and transaction gains and losses in accordance with ASC 830, Foreign Currency Matters. The functional currency
of Bluestone and its subsidiaries is the Chilean Peso ("CLP"). Assets and liabilities of Bluestone and its subsidiaries
are translated into United States dollars at the exchange rates as of the balance sheet dates. Revenues and expenses of Bluestone
and its subsidiaries are translated into United States dollars at average exchange rates in effect during the period. The resulting
cumulative translation adjustments have been recorded as a component of other comprehensive income (loss), included as a separate
item in the balance sheet.
For purposes of these consolidated financial
statements: (i) the exchange rate was $550.53 CLPs to 1 US dollar at March 31, 2014; and (ii) the average exchange
rates were $551.76 CLPs to 1 US dollar during the three months ended March 31, 2014.
The Company is exposed to movements in
foreign currency exchange rates. In addition, the Company is subject to risks including adverse developments in the foreign political
and economic environment, trade barriers, managing foreign operations, and potentially adverse tax consequences. There can be no
assurance that any of these factors will not have a material negative impact on the Company's financial condition or results of
operations in the future.
Financial Instruments
The Company's financial instruments include
cash and cash equivalents, and accounts payable and notes payable. At March 31, 2014, the carrying cost of these instruments approximated
their fair value. The authoritative guidance for fair values establishes a three tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Cash Equivalents
Cash equivalents include highly liquid
investments with maturities of three months or less.
Inventory
Inventory, which consists primarily of
raw copper ore, chemicals and copper sulfate, is stated at the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method.
The Company evaluates the need to record
adjustments for impairment of inventory. As of March 31, 2014, the Company has not needed to adjust for impairment.
Income Taxes and Deferred Tax Asset
Accounting Standards Codification Topic
No. 740 “Income Taxes” (ASC 740) requires the asset and liability method of accounting be used for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation. Land is not depreciated.
Depreciation is computed principally on
the straight-line method over the estimated useful life of each type of asset which ranges from three to five years. Major improvements
are capitalized, while expenditures for repairs and maintenance are expensed when incurred. The depreciation methods, and estimated
remaining useful lives are reviewed at least annually. If property and equipment is classified as held for sale, it is reviewed
for impairment annually. The impairment charged to the income statement is the excess of the carrying value of the property and
equipment over its expected fair value less costs to sell. Upon retirement or disposition, the related costs and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Mining Properties and Equipment
The Company follows the successful efforts
method of accounting. All developmental costs are capitalized. Depreciation and depletion of producing properties will be computed
on the unit-of-production method based on estimated proved reserves. Repairs and maintenance are expensed, while renewals and betterments
are generally capitalized.
At least quarterly, or more frequently
if conditions indicate that long-term assets may be impaired, the carrying value of our properties will be compared to management's
future estimated pre-tax cash flow from the properties. If undiscounted cash flows are less than the carrying value, then the asset
value will be written down to fair value. Impairment of individually significant unproved properties will be assessed on a property-by-property
basis, and impairment of other unproved properties is assessed and amortized on an aggregate basis.
The Company reviewed its long term assets
as of March 31, 2014 based on ASC 360-10-35-21, Property, Plant, and Equipment - Overall – Subsequent Measurement –
Impairment or Disposal of Long-Lived Assets – Long-Lived Assets Classified as Held and Used – When to Test a Long-Lived
Asset, for Recoverability. Pursuant to ASC 360-10-35-21, a long-lived asset (asset group) shall be tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
The Company also reviewed its long lived
assets as of March 31, 2014 based on ASC 932-360-35, Extractive Activities-Mining, Property, Plant and Equipment, Subsequent Measurement.
ASC 932-360-35 states that all relevant facts and circumstances shall be evaluated when determining whether an entity is making
sufficient progress on assessing the reserves and the economic and operating viability of the project.
As of March 31, 2014, the Company had no
mining properties of any book value and determined that no adjustments for impairment were necessary.
Derivatives
Under ASC 815, “Derivatives and Hedging”,
the initial balance sheet classification of contracts that require net cash settlement are recorded as assets or liabilities and
contracts that require settlement in shares are recorded as equity instruments. At each balance sheet date, the Company reviews
contracts and equity instruments that are to be settled in common stock to determine if sufficient common shares are available
to satisfy the maximum number of shares that could be required to net-share settle the contracts, among other conditions. Changes
in fair value are accounted for in the consolidated statement of operations.
Asset Retirement Obligation
The Company follows ASC 410, Asset Retirement
and Environmental Obligations, which requires that an asset retirement obligation (“ARO”) associated with the retirement
of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with
an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially
recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded
at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement
value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted
risk-free interest rate.
The Company determined that an ARO existed
at its Sulfatos Chile property to eventually retire the land where the mine and copper sulfate plant were located. The original
ARO was determined to be $936,150 over an estimated 10 year life of the property (beginning January 1, 2012) which represents 15%
of original $6.9 million cost incurred for the mine acquisition and plant related assets. The Company used a 10% rate to discount
to PV. Even though an impairment charge was taken on the value of the mine at December 31, 2013, ARO is a legal obligation to repair
the land which has been altered, accordingly a reasonable estimate for retirement cost would be expected to remain.
To date, the Company estimates that an
asset retirement obligation of $446,633 exists. Accordingly, a liability for this amount has been included in long term liabilities.
The table below shows the changes in carrying value of ARO from December 31, 2013 through March 31, 2014:
| |
December 31,
2013 | | |
2014 Currency Fluctuation | | |
2014 Accretion Expense | | |
March 31,
2014 | |
ARO liability | |
$ | 433,794 | | |
$ | (20,006 | ) | |
$ | 32,845 | | |
$ | 446,633 | |
Revenue Recognition
Revenue is recognized in accordance with
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The Company recognizes revenue
when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations,
including factors such as when there has been evidence of a sales arrangement, delivery has occurred, or services have been rendered,
the price to the buyer is fixed or determinable, and collection is reasonably assured. The Company is responsible for warehousing
and shipping the merchandise.
Costs of Goods Sold and Operating Expenses
Costs of goods sold includes the cost of
the finished good inventory sold during the period, solvents, chemicals and other consumable materials directly used in the production
of our finished good inventory and packaging materials used to ship our product to customers. Consumable goods used in the production
of our products but not directly attributable to the finished product are recorded as an operating expense in General and Administrative.
Operating expenses are broken down into
General and Administrative which include costs such as rents, utilities, telecommunications, repairs and maintenance, office supplies,
insurance, travel, shareholder costs, commissions and consultants; Depreciation which includes all depreciation for fixed assets;
Payroll which includes all personnel costs not directly related to the production of finished goods inventory; Legal and Accounting
which includes all lawyers’ fees, accounting services, audit and financial reporting costs; Mining costs which includes any
costs related to the mine which do not produce revenue; and Research and Development which include costs to improve our products
or processes.
Earnings/(Loss) Per Common Share
ASC Topic 260, “Earnings Per Share”,
requires presentation of basic earnings per share and diluted earnings per share. Basic earnings/(loss) per share is computed by
dividing earnings/(loss) available to common shareholders by the weighted average number of common shares outstanding (including
shares reserved for issuance) during the period. Diluted earnings/(loss) per share gives effect to all potential dilutive common
shares outstanding during the period.
Going Concern
The Company’s financial
statements are prepared using US GAAP applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. As shown in these consolidated financial statements, the Company
has a limited operating history and limited funds and has an accumulated deficit of $12,349,825 as of March 31, 2014. These
factors affect the Company’s ability to continue as a going concern.
In order to continue as a going concern
and achieve a profitable level of operations, the Company will require additional financing from loans or the sale of debt or equity
securities. In addition, the Company will seek to generate revenues from its business lines. If the Company is unable
to secure such additional financing or secure such additional financing on favorable terms, the lack of adequate financing could
have a material adverse effect on its ability to conduct its business as intended.
The Company shut down its copper
sulfate processing plant in December 2014 pending resolution of certain legal matters including the bankruptcy of our
Sulfatos Chile S.A. subsidiary. The Company’s subsidiary, Sulfatos Chile S.A. is engaged in litigation before the 4th
Civil Trial Court of Santiago, Docket No. 25496-2014, in the matter of Oryxeio Ingenieria Limitada v. Sulfatos Chile S.A. On
December 22, 2014 Sulfatos Chile S.A. was declared bankrupt by the court. The Board of Directors of Sulfatos Chile S.A.
decided not to oppose the bankruptcy process. The resolution of this matter is uncertain. If the Company is unable to regain
the operating assets of Sulfatos Chile out of bankruptcy, there would be a material adverse effect on its ability to conduct
its business as intended. The Company will continue to report Sulfatos Chile's operations as continuing operations on
its Statement of Operations until such time as the bankruptcy process is resolved. If it becomes apparent that the
Company will not be able to restart operations at the Sulfatos Chile plant, then at that time the Company will
account for Sulfatos Chile's operations as discontinued.
The financial statements do not include
any adjustments relating to the recoverability and classification of assets and/or liabilities that might be necessary should the
Company be unable to continue as a going concern. The continuation as a going concern is dependent upon the ability of the Company
to meet its obligations on a timely basis and ultimately to attain profitability.
Fair Value Measurements
Assets and liabilities recorded at fair
value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure
the fair value. Level inputs, as defined by ASC 820-10, are as follows:
|
· |
Level 1 – quoted prices in active markets for identical assets or liabilities. |
|
· |
Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date. |
|
· |
Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. |
The following table summarizes fair value
measurements by level at March 31, 2014 for assets and liabilities measured at fair value on a recurring basis:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash | |
$ | 91,750 | | |
| – | | |
| – | | |
$ | 91,750 | |
Derivative liability | |
| – | | |
| – | | |
| 46,740 | | |
| 46,740 | |
In determining the valuation approach to
the derivative, it was determined to estimate the number of shares that would be required to settle the debt and apply the closing
price. This was determined to result in the most accurate valuation and effect of settlement as of the balance sheet date. The
following assumptions were used in this valuation:
Market trading lookback days used | |
| 11 | |
Weighted average closing price | |
$ | 0.1126 | |
Estimated rate of conversion | |
| 60 | % |
Estimated conversion rate | |
$ | 0.0675 | |
The following table summarizes fair value
measurements by level at December 31, 2013 for assets and liabilities measured at fair value on a recurring basis:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash | |
$ | 615,469 | | |
| – | | |
| – | | |
$ | 615,469 | |
Derivative liability | |
| – | | |
| – | | |
| 39,474 | | |
| 39,474 | |
In determining the valuation approach to
the derivative, it was determined to estimate the number of shares that would be required to settle the debt and apply the closing
price. This was determined to result in the most accurate valuation and effect of settlement as of the balance sheet date. The
following assumptions were used in this valuation:
Market trading lookback days used | |
| 11 | |
Weighted average closing price | |
$ | 0.2787 | |
Estimated rate of conversion | |
| 60 | % |
Estimated conversion rate | |
$ | 0.1672 | |
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued authoritative
guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to
present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out
of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income
in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012, with
early adoption permitted. The adoption of this guidance did not have a material effect on the Company’s financial condition,
results of operations or cash flows.
In April 2014, the Financial Accounting
Standards Board issued an accounting standard update that amends the definition of a discontinued operation to include only those
disposals of components of an entity that represent a strategic shift that has, or will have, a major effect on an entity's operations
and financial results. The amendment should be applied prospectively and is effective for fiscal years beginning on or after December
15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The
adoption of this guidance will not have a material effect on the Company's financial condition, results of operations or cash flows.
In May 2014, the FASB issued an accounting
standard update on revenue recognition that will be applied to all contracts with customers. The update requires an entity to recognize
revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be required to
be applied on a retrospective basis, using one of two methodologies, and will be effective for fiscal years beginning after December
15, 2016, with early application not being permitted. The Company is currently assessing the impact that the guidance will have
on the Company's financial condition and results of operations.
In June 2014, the FASB issued ASU 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction
of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information
on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively
for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early
adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended June 30, 2014, thereby no longer presenting or
disclosing any information required by Topic 915.
The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise
disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might
have a material impact on its financial position or results of operations.
Note 3- The Congo Project
On October 18, 2012, the Company entered
into an agreement with Nueva Pudahuel S.A. dba Sociedad Minera Pudahuel ("SMP") pursuant to which the Company acquired
the land, laboratory, tailings and other assets of the closed mine of La Africana, commonly known as the "Congo Project”,
in the Santiago, Chile metropolitan area. The land is approximately 81.2 hectares and contains an estimated 2.4 million tons of
copper-rich tailings.
The Company entered into the agreement
through Procesamiento de Relaves Pudahuel Limitada dba Mineraltus Pudahuel Ltd., a newly created subsidiary owned 99% by the Company's
subsidiary Mineraltus SA.
The Company agreed to remove the tailings
and restore the value of the property so that it can be used for real estate development projects. The Company was told that the
project, known in the industry as the "Congo Project," has received all necessary approvals and permits from the Chilean
authorities, however this is currently in dispute.
Financing for the project was to be provided
by the Company as a loan, and the Company would be entitled to 100% of the profits. The project was structured as a purchase /
buy-back to ensure that all necessary assets remain under our control for the duration of the project. The Company purchase price
was $7 million payable as follows:
|
· |
$360,000 was paid on November 26, 2012 for the right to use all assets and facilities; |
|
· |
$436,828 payable upon completion of
the copper sulfate processing plant on site no later than November 13, 2014 as the final payment for the assets; and |
|
· |
$6,203,172 payable in equal monthly installments of $77,540 beginning on July 1, 2013 for the lease of the Lo Aguirre main pit. SMP may request that the final 12 lease payments not be made by the Company in exchange for the return of 60.2 hectares of land at their option on or before date the 69th lease payment is made. Lease payments had not yet begun and were in default as of the time of this filing. The agreement is in dispute and the Company is currently in arbitration regarding this agreement. (see Note 10 - subsequent events) |
We reviewed our long lived assets as of
December 31, 2013 based on ASC 932-360-35, Extractive Activities-Mining, Property, Plant and Equipment, Subsequent Measurement.
ASC 932-360-35 states that all relevant facts and circumstances shall be evaluated when determining whether an entity is making
sufficient progress on assessing the reserves and the economic and operating viability of the project.
The required lease payments for the Congo
Project have not been made to date and production of the copper sulfate processing plant on the property has not yet begun. We
have accrued $697,858 of these lease payments as of March 31, 2014. We are currently disputing the validity of the contract in
arbitration. It is our position that the contract is invalid because the project was not permitted as we were told it was at the
time the contract was signed. The Company was unable to perform under the terms of the contract due to the lack of permits required.
The Company is currently in negotiations to amend the original agreement through arbitration but no agreement has been finalized.
Because the Company was in default under the original terms of this agreement and the resolution of said default is currently unknown,
the Company elected to fully reserve for the $360,000 paid for the right to use as of December 31, 2013. There is approximately
$3,017,191 claimed against the Company in arbitration in this matter. Should the arbitrator decide against the Company, it may
be forced to liquidate some or all of its assets to satisfy the judgment. (See Note 10 -Subsequent Events).
Note 4- Property and Equipment
The Company acquired property and equipment
with a historical cost value of $7,331,655 in the Sulfatos Acquisition in March 2012. The following table sets forth our property
and equipment at the dates indicated. These assets, with the exception of land which is not depreciable, are being depreciated
over their remaining useful lives. The Company recognized depreciation expense of $169,055 for the three months ended March 31,
2014 and $31,029 for the three months ended March 31, 2013.
On October 16, 2014 we were informed that
an injunction order was granted against Lustros Chile SpA’s assets in the Congo Project arbitration until a resolution is
reached. These assets include bank accounts and Lustros’ shares in Sulfatos Chile S.A. We have elected to shut down our copper
sulfate processing plant pending resolution of this matter. On February 2, 2015, our Chilean counsel reported that they were served
with an interim ruling that revoked the injunction orders previously put in place. Resolution of the matter is still pending.
The Company’s subsidiary, Sulfatos
Chile S.A. is engaged in litigation before the 4th Civil Trial Court of Santiago, Docket No 25496-2014, in the matter of Oryxeio
Ingenieria Limitada v. Sulfatos Chile S.A. On December 22, 2014 Sulfatos Chile S.A. was declared bankrupt by the court. The Board
of Directors of Sulfatos Chile S.A. decided not to oppose the bankruptcy process. The resolution of this matter is uncertain.
| |
March 31, 2014 | | |
December 31, 2013 | |
Buildings | |
$ | 155,644 | | |
$ | 163,600 | |
Furniture & fixtures | |
| 20,884 | | |
| 21,951 | |
Vehicles | |
| 61,988 | | |
| 120,048 | |
Machinery and mining equipment | |
| 378,532 | | |
| 397,879 | |
Plants (crushing and agglomeration plant, heap leaching area, chemical plant and Solvent Extraction and Crystallization (SX - CR - RCR) plant) / property improvements | |
| 3,234,955 | | |
| 3,404,244 | |
Computers | |
| 34,525 | | |
| 34,324 | |
Lab equipment | |
| 57,870 | | |
| 60,828 | |
Total fixed assets | |
$ | 3,944,398 | | |
$ | 4,202,874 | |
Less depreciation | |
| (819,733 | ) | |
| (716,163 | ) |
Net fixed assets | |
$ | 3,124,665 | | |
$ | 3,486,711 | |
| |
| | | |
| | |
Land | |
$ | 508,601 | | |
$ | 534,596 | |
Net property and equipment | |
$ | 3,633,266 | | |
$ | 4,021,307 | |
Note 5- Debt
The following
table sets forth the outstanding indebtedness of the Company at the date indicated. Inter-company transactions have been eliminated
in the consolidated balance sheet:
Description | |
Total Due at
March 31, 2014 | | |
Total Due at
December 31, 2013 | |
Related party notes | |
| | | |
| | |
LV Ventures | |
$ | 1,385 | | |
$ | 1,385 | |
Suprafin, Ltd. | |
| 1,732 | | |
| 1,082 | |
Total related party notes payable | |
$ | 3,117 | | |
$ | 2,467 | |
| |
| | | |
| | |
Notes payable | |
| | | |
| | |
Land Purchase Balance | |
$ | 358,251 | | |
$ | 351,183 | |
Total notes payable | |
$ | 358,251 | | |
$ | 351,183 | |
| |
| | | |
| | |
Convertible notes, net | |
| | | |
| | |
2014 Related Party Notes – Long Term, net | |
$ | 258,481 | | |
$ | – | |
July 2013 Convertible Notes, net | |
| 43,139 | | |
| 50,113 | |
Total convertible notes | |
$ | 343,139 | | |
$ | 50,113 | |
From February 2012 through January 2, 2014,
Suprafin, Ltd. (“Suprafin”) provided the Company a total of $3,748,414 in non-interest bearing unsecured demand loans
to enable Bluestone to pay the balance of the purchase price for the Sulfatos Acquisition and for working capital purposes. Zirk
de Maison (formerly Engelbrecht), a member of the Board of Directors until February 13, 2014, and formerly the Chief Executive
Officer, of the Company, is the owner of Suprafin. In April 2012 Suprafin assigned $570,988 of the loans to Walker River Investments,
Corp (“Walker”) and in December 2012 Suprafin assigned an additional $250,000 of the loans to Walker which the Company
was informed of in May 2013. In March 2013 Suprafin agreed to cancel $100,000 of these loans in exchange for 181,000 shares of
common stock. In May 2012, Suprafin agreed to cancel $429,000 of these loans in exchange for 100,000 shares of Series A Preferred
Stock. In May 2013 Suprafin agreed to cancel an additional $420,000 of these loans in exchange for 42,000 shares of Preferred Series
A Stock at $10 per share. In October 2013 Suprafin agreed to cancel an additional $110,000 of these loans in exchange for 22,000
shares of Preferred Series A Stock at $5 per share. On November 13, 2013 the Board of Directors of the Company approved that as
a condition to closing a financing transaction, all related party debt would be converted into stock of the Company. $280,640 of
Suprafin’s debt was converted into 17,540 shares of Preferred Series A Stock at $16 per share. As of March 31, 2014, the
Company had repaid $1,583,964 of these loans, and the outstanding balance of these loans was $1,732.
In November 2013, the Company borrowed
a total of $1,385 for working capital purposes from LV Ventures, Inc.. William Farley, currently our Chief Executive Officer and
a member of the Board of Directors, is the owner of LV Ventures, Inc. The outstanding balance due to LV Ventures, Inc. at March
31, 2014 was $1,385.
In July 2013 the Company borrowed a total
of $69,000 in Convertible Notes payable to unrelated third parties for working capital purposes. These Convertible Notes bear interest
at the rate of 8% per annum and are redeemable in 18 months or convertible after six months into shares of the Company’s
Common Stock at a price equal to 60% of the average of the variable weighted average price for the 10 trading days prior to the
date of conversion. The Company accrued $2,119 in interest expense for the year ended December 31, 2013 and $1,465 for the three
months ended March 31, 2014 for these Convertible Notes. On January 16, 2014, a holder of a Convertible Note in the amount of $20,000
elected to convert their Convertible Note into Common Stock of the Company. $20,000 of principal plus $802.19 in accrued interest
was converted into 128,647 shares of Common Stock at the rate of $0.1617 (60% of the 10 day average on 1/16/2014) which is a discount
of $0.1078 per share. The balance due with accrued interest payable on these Convertible Notes as of March 31, 2014 was $51,782.
We evaluated the original issue discount feature derived from the conversion option of these Convertible Notes upon their issuance
and deemed it to be $39,474. As of March 31, 2014, we recognized a total of $21,621 in amortized debt discount related to these
notes. The amount was recorded as interest expense. The balance due under these Convertible Notes, including original issue discount
and accrued interest of $1,782, was $43,139, net of unamortized debt discount of $8,643 as of March 31, 2014.
In March 2014 Bass Energy and LV Ventures,
Inc. provided the Company with $300,000 in cash through two year convertible notes which bear interest at 5% per annum. These notes
are convertible into shares of the Company’s Common Stock at the rate of $0.16 per share with 25% warrant coverage at $0.25
per share which is identical to the financing round closed by the Company in December of 2013. The note qualifies for the scope
exception under ASC 815 and as such no derivative accounting is required as the conversion option is indexed to the Company stock
and can be treated as equity. We evaluated the original issue discount feature derived from the conversion option of these Convertible
Notes upon their issuance and deemed it to be $0. We evaluated the original issue discount feature derived from the the value of
the warrants on a prorated basis as per ASC 470 upon their issuance and deemed it to be $41,519. Bill Hlavin, currently a member
of the Board of Directors is the owner of Bass Energy and William Farley, currently our Chief Executive Officer and a member of
the Board of Directors, is the owner of LV Ventures, Inc. The balance due under these Convertible Notes, including original issue
discount, was $258,481 as of March 31, 2014, $300,000 in principal net of an unamortized debt discount of $41,519.
Defaulted Senior Notes
As of March 31, 2014 Sulfatos owed $197,227,995
CLP, or approximately $358,251 US dollars, for the last two payments of the land acquired in the first quarter of 2011. This debt
was in default at March 31, 2014. There is no default rate on the note. In June 2014 the debt was renegotiated and was no longer
in default. See Note 10 – Subsequent Events.
Note 6- Stockholders’ Equity
On January 16, 2014, a holder of a Convertible
Note in the amount of $20,000 elected to convert their Convertible Note into Common Stock of the Company. $20,000 of principal
plus $802.19 in accrued interest was converted into 128,647 shares of Common Stock. See Note 5 – Debt.
On March 5, 2014, Suprafin, Ltd. converted
39,540 shares of Series A Preferred Stock into 3,954,000 shares of Common Stock of the Company.
Note 7- Related Party Transactions
From February 2012 through January 2014,
Suprafin provided the Company a total of $3,748,414 in non-interest bearing unsecured demand loans. Zirk de Maison, previously
a member of the Board, and formerly the Chief Executive Officer, of the Company is the owner of Suprafin. As of March 31, 2014,
the outstanding balance of these loans was $1,732. See Note 5 - Debt. On February 13, 2014, Zirk de Maison submitted his resignation
as a member of the Board of Directors and will therefore no longer be considered a related party.
From January through December 2013, the
Company borrowed a total of $35,385 for working capital purposes from the Company’s Chief Executive Officer. As of March
31, 2014, the outstanding balance of these loans was $1,385. See Note 5 - Debt.
In March 2014 Bass Energy and LV Ventures,
Inc. provided the Company with $300,000 in cash through two year convertible notes with warrant coverage. Bill Hlavin, currently
a member of the Board of Directors is the owner of Bass Energy and William Farley, currently our Chief Executive Officer and a
member of the Board of Directors, is the owner of LV Ventures, Inc. See Note 5 – Debt.
Note 8- Derivative Liability
In July 2013 the Company borrowed a total
of $69,000 in Convertible Notes payable to unrelated third parties for working capital purposes. These Convertible Notes bear interest
at the rate of 8% per annum and are redeemable in 18 months or convertible after six months into shares of the Company’s
Common Stock at a price equal to 60% of the average of the variable weighted average price for the 10 trading days prior to the
date of conversion. The Company accrued $2,119 in interest expense for the year ended December 31, 2013 and $1,465 for the three
months ended March 31, 2014 for these Convertible Notes.
The conversion option has been accounted
for in accordance with ASC Topic 815. Accordingly, the Conversion Option is not considered to be solely indexed to the Company’s
own stock and, as such, recorded as a liability.
The Company’s convertible promissory
note derivative liability has been measured at fair value at July, 2013, December 31, 2013 and March 31, 2014 using a level 3 input.
The fair value of the convertible note payable derivative liability is $30,324 and $39,474 at July, 2013 and December 31, 2013,
respectively and $46,740 at March 31, 2014. The increase in the fair value of the convertible note payable derivative liability
of $9,150 at December 31, 2013 and $7,266 at March 31, 2014 was recognized as a loss to net change in fair value of derivative
liability in current period earnings. The value of the derivative at July was treated as a discount and is being amortized.
Note 9 – Legal Proceedings
We previously were notified that the Company
was named in a action filed by Unirac, Inc. in New Mexico State Court on June 22, 2011 (Unirac, Inc. v. Power Save Energy Corporation
et al., Case No. D-202-CV-2011-06295). Also named as defendants in this lawsuit were, among others, SLO 3 Holdings, Inc., Michael
Forster, and Zirk Engelbrecht (“Other Defendants”). We have since determined that the company named in this suit is
Power Save Energy Corporation, a Delaware corporation and not our predecessor company, Power Save Energy Company, a Utah corporation.
The Company is not a judgment debtor in this matter.
The Company was engaged in litigation in
the Supreme Court in the County of Westchester, New York, Index No. 11139/2009, in the matter Steeneck v. Power-Save and Engelbrecht.
The claim was brought before the Court on or about May 8, 2009, although the defendants were never notified of the action until
September 2012. Putting aside pleading in the alternative (duplicative claims under different legal theories for the same acts/omissions
to act) the claim appears to be for approximately $200,000. As reported on Form 8-K filed with the Commission on January 18, 2013,
the Company was informed that on January 10, 2013 the Court filed and entered a Decision & Order stating that the statute of
limitations of the action had expired and that the plaintiff is not entitled to the relief that was sought. The plaintiff’s
motion was denied and the case is now marked as disposed by the court.
The Company’s subsidiary, Sulfatos
Chile, is engaged in arbitration in Chile, Docket Number 1639-2012 before Mr. Andres Molina del Rio, whereby Franciso Javier Morales
Rivera E.I.R.L and Nunez Ojeda y da Silva LLC asked for the termination of the Engineering and Construction contract of the Anica
Plant and sought damages of $1,989,300 for breach of contract. This matter was settled on May 6, 2014 by way of a public deed with
the claimants and respondents both dismissing their claims and counterclaims respectively.
The Company’s subsidiary, Sulfatos
Chile, is engaged in arbitration in Chile, Docket Number 5765-2013 before Mr. Mauricio Izquierdo, whereby in May of 2013 Minera
Anica S.A. asked for the dissolution of Sulfatos Chile S.A. as a consequence of a breach of the stockholders’ agreement by
Santa Teresa Minerals and seeking a to be determined amount of damages to be discussed in a different stage of the trial. Bluestone
SpA (a wholly owned subsidiary of Lustros Chile S.A.), Santa Teresa and Lustros Chile SpA. filed their responses to the claim,
asking the Court to dismiss it. Also, Bluestone SpA filed a counter claim against Minera Anica S.A. Minera Anica alleging, among
other things, a breach of the articles of incorporation of Sulfatos Chile S.A. The probatory stage of this case is still pending.
The Company’s subsidiary, Lustros
Chile SpA, is engaged in arbitration in Chile, Docket Number 1933-2013, before Mr. Juan Carlos Varela M. whereby Nueva Pudahuel
filed a request for arbitration before the Center for Arbitration and Mediation of the Santiago Center of Commerce in December
of 2013 against Lustros Chile, SpA, a wholly owned subsidiary of the Company, asking for the termination of the tails contract
referred to the “Congo” project. It is also asking for the restitution of some properties, the payment of due rent,
and damages in the amount of $3,017,191, (i) USD 775,396.5 for unpaid rents 2013-2014; (ii) USD 77,539.65 for each month of delay;
(iii) UF 50.000.- under penalty clause. Lustros is asking for the termination of the contract, plus damages of UF 50.000 in a counterclaim
under the penalty clause. On July 31, 2014 we filed our rejoinder to their claim and our rebuttal to our counter claim. On September
16, 2014 and September 29, 2014, the parties attended conciliatory hearings before the arbitrator. The arbitrator conceded an extension
for the parties to continue conversations about the possibility to settle. That extension ended on October 6, 2014. In addition,
Lustros Chile SpA has filed a civil law action, objection to an arbitrator Docket Number 111-2014 before the 23rd Civil Trial Court
in Santiago. We are asking the Civil Trial Court to declare that Mr. Varela, as an arbitrator for the case Docket Nº 1933-2013
cannot continue the arbitration because of his objection in the process. This action was brought since the arbitrator filed a preliminary
decision on the matter before he was allowed to do so. Therefore, we believe that he lacks impartiality for the final ruling. On
October 16, 2014, we were informed that an injunction order was granted by Mr. Varela and executed on Lustros Chile SpA’s
assets in the arbitration. As a consequence, the following assets are and will remain seized: Lustros Chile SpA’s shares
in Sulfatos (600,000 shares though it is alleged that Lustros Chile SPA does not own any property or shares in Sulfatos Chile S.A.);
24,000 shares in Bluestone SpA; bank account ending in 0748 at Itaú Bank; all credit that Lustros Chile SpA has against
Sulfatos Chile S.A.; and all credit related to the current account between Lustros Chile SpA and Sulfatos Chile S.A. On October
16, 2014 the Company’s bank account at Itau Bank was levied for 29,019,497 CLP or approximately $49,636 US Dollars. These
measures will remain in place until Lustros Chile SpA pays Nueva Pudahuel the full claimed amount, offers assets as guarantee,
or arrives at a settlement. Lustros Chile SpA continues to vigorously defend against the actions taken and is working through its
Chilean attorneys to resolve these matters as soon as reasonably possible. The arbitration and the trial are in their final stages,
the parties having presented their main arguments and means of proof however no decision has been made as of the time of this filing.
Our copper sulfate processing plant is currently shut down pending resolution of this matter. Should the arbitrator decide against
the Company, it may be forced to liquidate some or all of its assets to satisfy the judgment. On February 2, 2015, our Chilean
counsel reported the following with regard to the ongoing arbitration of the Congo Project. The Chilean representatives of Lustros
were served with an interim ruling that revoked the following measures previously put in place:
|
· |
Injunction over the 600,000 shares in Sulfatos Chile S.A. |
|
· |
Injunction over any and all credit that Lustros had/has against Sulfatos Chile S.A. |
|
· |
Injunction over all funds that belong to Lustros under the current merchant account (cuenta corriente mercantil) with Sulfatos Chile S.A. |
|
· |
Injunction over Lustros’ share in Bluestone SpA. |
The company’s subsidiary, Sulfatos
Chile S.A., in engaged in litigation before the 8th Civil Trial court of Santiago, Docket Nº 18242-2013, in the matter Nueva
Pudahuel S.A. v. Sulfatos Chile S.A. The claim was brought before the court on or about November 2013. Nueva Pudahuel S.A. is claiming
for the payment of invoices for a total amount of $58,386.61. The company has filed a formal opposition to such claim, under articles
464 et seq of the Chilean Civil Procedural Code., which is currently in the probatory stage.
The Company’s subsidiary, Sulfatos
Chile S.A. is involved in various labor lawsuits with former employees that are likely to have an unfavorable outcome. We have
accrued approximately $345,000 as of the date of this filing to handle these claims.
The Company’s subsidiary, Sulfatos
Chile S.A. is engaged in litigation before the 4th Civil Trial Court of Santiago, Docket No 25496-2014, in the matter
of Oryxeio Ingenieria Limitada v. Sulfatos Chile S.A. On December 22, 2014 Sulfatos Chile S.A. was declared bankrupt by the court.
The Board of Directors of Sulfatos Chile S.A. decided not to oppose the bankruptcy process. The Company will provide more information
on these proceedings via a Current Report on Form 8-K as it becomes available.
Other than the foregoing, we know of no
material, existing or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our interest.
Note 10 - Subsequent Events
In accordance with Accounting Standards
Codification Topic No. 855 “Subsequent Events” (ASC 855), the Company has evaluated subsequent events through the time
between the end of the reporting period and March 24, 2015 and has found the following events to report:
On March 31, 2011, Sulfatos Chile SA, a
subsidiary of the Company purchased property located in Los Vilos, Chile, and the corresponding water rights, under a Purchase
and Sale Agreement (the “Purchase and Sale Agreement”) from Mrs. MARÍA ESTER BUGUEÑO PÉREZ and
Ms. EMA PÉREZ ANDRADE (the “Landowners”). The price of the Purchase and Sale Agreement was the sum of CLP$280,000,000,
or approximately $501,241 US dollars at today’s exchange rate, which was to be paid in three installments. The first installment
of CLP$100,000,000 was paid at the time of the signing of the public deed of purchase. The second installment of CLP$90,000,000,
equivalent to 4,171.67 unidades de fomento, was payable 365 days from the date of the Purchase and Sale Agreement in its equivalent
in pesos as of the effective date. The third installment of CLP$90,000,000, equivalent to 4,171.67 unidades de fomento, was payable
365 days from the date of the Purchase and Sale Agreement in its equivalent in pesos as of the effective date. As of June 12, 2014,
Sulfatos owed the Landowners the sum of 7,900.67 unidades de fomento, equivalent to CLP$189,405,053, or approximately $339,063
US dollars (the “Debt”), for the last two payments under the Purchase and Sale Agreement.
On April 22, 2014 Angelique de Maison was
appointed to the Board of Directors.
On June 12, 2014, Sulfatos Chile SA and
the Landowners signed a Loan Refinance Agreement (the “Loan Refinance Agreement”) whereby the parties agreed that Sulfatos
Chile SA will pay the Debt in thirty-seven installments, which will accrue interest at a rate of 3% per year, payable at the end
of the last installment. The parties agree that the total amount of the interest accrued will be CLP$7,822,942, or approximately
$14,004 US dollars. The first installment for CLP$10,000,000, or approximately $17,901 US dollars, was paid at the signing of the
agreement. The following 35 installments of CLP$5,000,000 each, or approximately $8,951 US dollars, will be paid monthly within
the first five days of each month, beginning in August of 2014. The final installment, number 37, for the remaining unpaid principal
and all accrued interest, will be made in one payment for a total of CLP$12,227,995, or approximately $21,890 US dollars.
On June 16, 2014, Angelique de Maison converted
178,200 shares of Series A Preferred Stock into 17,820,000 shares of Common Stock of the Company and a company controlled by Ms.
de Maison converted 2,941 shares of Series A Preferred Stock into 294,100 shares of Common Stock of the Company.
On July 24, 2014, Lustros Chile SpA, the
wholly-owned subsidiary of the Company, which acts as the operating subsidiary for the purpose of running the Company’s Chilean
operations, signed a manufacturing contract with Sulfatos Chile S.A, of which 60% of the equity interests are owned by Lustros
Chile and the balance is owned by third parties. Pursuant to this manufacturing contract, the Company’s copper sulfate business
will be apportioned between Lustros Chile SpA which will have sole responsibility for sales and purchasing and supply of raw materials,
and Sulfatos Chile S.A. will solely concentrate on manufacturing. Further pursuant to this manufacturing agreement, both entities
have agreed to render services exclusively with respect to the Company’s copper sulfate business, and neither entity may
render services to third parties. The agreement sets the price of copper sulfate to be produced by Sulfatos Chile S.A. to be the
actual manufacturing cost (excluding the cost of raw materials which are provided by Lustros Chile SpA) plus 15%. The agreement
has a ten year term which automatically extends for additional one year periods unless written notice is given by one party to
the other at least two months before the end of the original or any renewal term.
On August 14, 2014, a shareholder converted
17,941 shares of Series A Preferred Stock into 1,794,100 shares of Common Stock of the Company.
On August 26, 2014, Angelique de Maison
resigned as a member of the Board of Directors of Lustros Inc. (the “Company”). Her resignation is not due to a disagreement
with the Company.
On September 23, 2014, Trisha Malone resigned
as the Chief Financial Officer of the Company. Her resignation is not due to a disagreement with the Company. Ms. Malone will remain
as a consultant of the Company to assist with its financial reporting obligations until such time as a new Chief Financial Officer
is appointed. She will be compensated at the rate of $10,000 per month and may be terminated by the Company at any time upon 30
days’ prior notice. Upon Board confirmation, Mr. Farley shall act as both the Principal Executive Officer and Principal Financial
Officer of the Company until such time as a new Chief Financial Officer is appointed.
From April 1, 2014 through March 25, 2015
Bass Energy and LV Ventures, Inc. provided the Company with $2,541,454 in cash through two year convertible notes which bear interest
at 5% per annum. These notes are convertible into shares of the Company’s Common Stock at the rate of $0.16 per share with
25% warrant coverage at $0.25 per share which is identical to the financing round closed by the Company in December of 2013.
The Company’s subsidiary, Lustros
Chile SpA, is engaged in arbitration in Chile, Docket Number 1933-2013, before Mr. Juan Carlos Varela M., a Chilean arbitrator,
pursuant to which Nueva Pudahuel is asking for the termination of the tails contract referred to the “Congo” project.
He is also demanding the restitution of some alleged properties, the payment of allegedly due rent, and alleged damages in the
amount of $3,017,191 US Dollars: (i) $775,396.50 US Dollars for unpaid rents 2013-2014; (ii) $77,539.65 US Dollars for each month
of delay; and (iii) UF (Unidad de Fomento, a funds index used in Chile) 50.000 or approximately $2.1m under an alleged penalty
clause. Lustros is asking for the termination of the contract, plus damages of UF 50.000 or approximately $2.1m in a counterclaim
under the penalty clause. On July 31, 2014 we filed our rejoinder to their claim and our rebuttal to our counterclaim. On September
16, 2014 and September 29, 2014, the parties attended conciliatory hearings before the arbitrator. The arbitrator conceded an extension
for the parties to continue conversations about the possibility to settle. That extension ended on October 6, 2014. In addition,
Lustros Chile SpA has filed a civil law action, objection to an arbitrator Docket Number 111-2014 before the 23rd Civil Trial Court
in Santiago. We are asking the Civil Trial Court to declare that Mr. Varela, as an arbitrator for the case Docket Nº 1933-2013,
cannot continue the arbitration because of his objection in the process. This action was brought since the arbitrator filed a preliminary
decision on the matter before he was allowed to do so. Therefore, we believe that he lacks impartiality for the final ruling.
On October 16, 2014, we were informed that
an injunction order was granted by Mr. Varela and executed on Lustros Chile SpA’s assets in the arbitration.
As a consequence, the following assets
are and will remain seized: Lustros Chile SpA’s shares in Sulfatos (600,000 shares); 24,000 shares in Bluestone SpA;
bank account ending in 0748 at Itaú Bank; all credit that Lustros Chile SpA has against Sulfatos Chile S.A.; and all credit
related to the current account between Lustros Chile SpA and Sulfatos Chile S.A. On October 16, 2014 the Company’s bank account
at Itau Bank was levied for 29,019,497 CLP or approximately $49,636 US Dollars. These measures will remain in place until Lustros
Chile SpA pays Nueva Pudahuel the full claimed amount, offers assets as guarantee, or arrives at a settlement. Lustros Chile SpA
continues to vigorously defend against the actions taken and is working through its Chilean attorneys to resolve these matters
as soon as reasonably possible. We have elected to shut down our copper sulfate processing plant pending resolution of this matter.
On October 22, 2014 a bank account belonging
to the Company’s subsidiary, Sulfatos Chile S.A. at BICE Bank was levied for 6,196,654 CLP or approximately $10,599 US Dollars.
The Company’s subsidiary, Sulfatos
Chile S.A. is engaged in litigation before the 4th Civil Trial Court of Santiago, Docket N⁰ 25496-2014, in the matter of
Oryxeio Ingenieria Limitada v. Sulfatos Chile S.A. On December 22, 2014 Sulfatos Chile S.A. was declared bankrupt by the court.
The Board of Directors of Sulfatos Chile S.A. decided not to oppose the bankruptcy process. The Company will provide more information
on these proceedings via a Current Report on Form 8-K as it becomes available.
On February 2, 2015, our Chilean counsel
reported the following with regard to the ongoing arbitration of the Congo Project. The Chilean representatives of Lustros were
served with an interim ruling that revoked the following measures previously put in place:
|
· |
Injunction over the 600,000 shares in Sulfatos Chile S.A. |
|
· |
Injunction over any and all credit that Lustros had/has against Sulfatos Chile S.A. |
|
· |
Injunction over all funds that belong to Lustros under the current merchant account (cuenta corriente mercantil) with Sulfatos Chile S.A. |
|
· |
Injunction over Lustros’ share in Bluestone SpA. |
Lustros Chile SpA continues to vigorously defend against the
actions taken and is working through its Chilean attorneys to resolve this matter as soon as reasonably possible. As further
developments arise, they will be reported on a current basis.
ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
References in this Quarterly Report to
the “Company”, “we”, “us” or “our” refer to Lustros, Inc., a Utah corporation (“Lustros”),
and its consolidated subsidiaries including, Bluestone, S.A, (“Bluestone”), Lustros Chile SpA (“Lustros Chile”),
Mineraltus SA (“Mineraltus”) and Sulfatos Chile, S.A., (“Sulfatos Chile”). The following discussion of
our financial condition and results of operations should be read in conjunction with the financial statements and related notes
to the financial statements included elsewhere in this filing.
We market and sell copper sulfate obtained
by processing copper ore raw materials purchased from third parties at a Company-owned processing facility in Chile.
On March 9, 2012,
Lustros acquired all of the outstanding capital stock and rights to acquire capital stock of Bluestone, S.A. a Chilean corporation,
in exchange for 60,000,000 shares of its common stock (the "Bluestone Acquisition"). As of the closing, these shares
represented 96.7% of Lustros' outstanding common stock. For financial reporting purposes, the Company has treated the Bluestone
Acquisition as a reverse acquisition with Bluestone the acquiring entity and Lustros as the acquired entity. As a result, the Company's
financial statements reflect the financial information of Bluestone prior to March 9, 2012 and the combined entity on and after
March 9, 2012. Because Bluestone commenced operations in January 2012, there are no results of operations for Bluestone prior to
that date.
On February 15, 2012, Bluestone purchased
a 60% equity interest in Sulfatos Chile, S.A. from Santa Teresa Minerals S.A., a Chilean corporation ("Santa Teresa Minerals").
The purchase price for the equity interest was: (a) a 20% interest in Bluestone; (b) $2.2 million, with $1.1 million
paid by assumption of a demand loan payable by Santa Teresa Minerals to Angelique de Maison, and the balance of $1.1 million to
be paid in monthly installments from time to time upon demand by Santa Teresa Minerals. As of December 31, 2013, the entire purchase
price has been paid. On October 16, 2012 Angelique de Maison entered into an agreement with Santa Teresa Minerals pursuant to which
Santa Teresa Minerals waived and released any claim to any Equity Interests in Bluestone or Lustros and their affiliated companies,
with Bluestone and Lustros Inc. express third party beneficiaries of that waiver and release. As such, Santa Teresa Minerals' 20%
interest in Bluestone has been cancelled, and Bluestone is a wholly owned subsidiary of Lustros. This acquisition has been treated
as an "asset purchase" for financial reporting purposes. Because the acquisition was between related parties, the purchase
price has been allocated to additional paid-in capital and the assets and liabilities were carried over at historical costs. Results
of operations for Sulfatos have been reflected in the Company's financial statements from the closing date.
On March 25, 2012, the Company sold the
assets (including the "Power-Save" name) of its renewable energy and energy savings product business in which it had
engaged prior to the Bluestone Acquisition, to the former management of the Company. The purchase price for the assets was the
cancellation of obligations for unpaid salaries and other monies owed to prior management and the assumption by the buyer of certain
liabilities of the Company related to the Power-Save business.
We process raw
copper ore material at our copper sulfate processing plant in Puerto Oscuro, Chile. We obtain the copper ore by purchase from local
corporate and artisanal miners. Our copper sulfate facility began crushing and processing 5,000 tons of raw material per month
in the second quarter of 2014. However, the Company shut down the copper sulfate processing plant in December 2014 pending resolution
of legal matters and our Sulfatos Chile S.A. subsidiary is currently in the process of bankruptcy (See Part II Item 1 - Legal Proceedings).
We currently do not know if or when this will be resolved.
Our consolidated financial statements contain
our accounts and those of our consolidated subsidiaries, all of which are wholly-owned at March 31, 2014 except for Sulfatos and
Mineraltus, which we control. Due to the structure of our ownership interests in Sulfatos and Mineraltus, in accordance with generally
accepted accounting principles, we consolidate the financial statements of Sulfatos and Mineraltus into our financial statements
rather than present our ownership interests as equity investments. As such, the non-controlling interests in Sulfatos and Mineraltus
are reflected as income attributable to non-controlling interests in our consolidated statements of operations and as a component
of stockholders’ equity on our consolidated balance sheet. Throughout this section, when we refer to “our” consolidated
financial statements, we are referring to the consolidated results for us, our wholly-owned subsidiaries and the consolidated results
of Sulfatos and Mineraltus, adjusted for non-controlling interests in Sulfatos and Mineraltus. All significant intercompany transactions
and balances have been eliminated in the consolidation of our financial statements.
Future Financing
We will continue to rely on equity sales
of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution
to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for
debt or other financing to fund planned acquisitions, expansions and exploration activities or if we are able to secure additional
financing, whether such financing shall be on favorable terms.
RESULTS OF OPERATIONS
The following discusses results of operations
for the three months ended March 31, 2014 and the three months ended March 31, 2013.
Revenue for the
three months ended March 31, 2014 and March 31, 2013 was $0. We finished pilot production and sales of said production in the fourth
quarter of 2013. We made plant adjustments during the first quarter of 2014 and had no production or sales during this quarter.
Gross loss for the three months ended March 31, 2014 and March 31, 2013 was $0. We expect revenues to increase after the full scale
launch of our copper sulfate production facility which began in the second quarter of 2014. However, the Company shut down the
copper sulfate processing plant in December 2014 pending resolution of legal matters and our Sulfatos Chile S.A. subsidiary is
currently in the process of bankruptcy (See Part II Item 1 - Legal Proceedings). We currently do not know if or when this will
be resolved.
Operating expenses for the three months
ended March 31, 2014 were $1,395,561 as opposed to $766,535 for the three months ended March 31, 2013. Operating expenses were
primarily associated with the operations of Sulfatos in the ordinary course of business as well as legal and accounting expenses
required by a public company. In addition, we began depreciating the processing plant in the first quarter of 2014 and had a significant
increase in foreign exchange losses.
Due to the losses during the period the
Company has not recorded a provision for income taxes. The Company will carry back any net operating loss to recover taxes paid
in prior periods.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
Liquidity and Capital Resources
Our primary source of liquidity has historically
been cash generated from issuances of our equity securities and from debt. From inception through March 31, 2014, we have not generated
revenue from operations that was significant enough to produce an operating profit.
Subsequent sources of outside funding will
be required to fund the Company’s future growth and will also be required for working capital, capital expenditures and corporate
operations if the Company does not reach cash positive cash flow in the near future. No assurances can be given that the Company
will be successful in arranging the further funding needed to continue the execution of its business plan including the development
and commercialization of new products, or if successful, on what terms. Failure to obtain such funding will require management
to substantially curtail, if not cease operations, which will result in a material adverse effect on the financial position and
results of operations of the Company.
Cash, Cash Equivalents, and Working
Capital
At March 31, 2014 we had cash and cash
equivalents of $91,750. At year ended December 31, 2013 we had $615,469 of cash and cash equivalents. At March 31, 2014
we had a working capital deficit of $2,402,752 compared to a working capital deficit of $1,959,851 at December 31, 2013. Cash equivalents
consist of short-term liquid investments with original maturities of no more than six months and are readily convertible into cash.
The amount of cash and cash equivalents
and short-term investments which we hold outside the U.S. was $31,638 as of March 31, 2014 and $128,063 as of December 31, 2013.
These were not needed for our domestic operations, but if they were, we would be required to accrue and pay federal taxes to repatriate
these funds. We intend to permanently invest these foreign amounts outside of the U.S. and our current plans do not demonstrate
the need to repatriate the foreign amounts to fund our domestic operations.
Cash Flows from Operating Activities
During the three months ended March 31,
2014, $1,191,578 was used for operating activities. Of the net cash used in three months ended March 31, 2014, $1,013,843 was used
to fund the operations of the business while $177,735 was used in changes in operating assets and liabilities. Of the net cash
used for operating activities of $712,402 during the same period in 2013, $778,365 was used to fund the operations of the business
while $65,963 was generated from changes in operating assets and liabilities
Cash Flows from Investing Activities
Net cash used by investing activities for
the three months ended March 31, 2014 was $0 compared to net cash used by investing activities of $139,510 for the same period
in 2013. Investing activities were primarily for purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities
for the three months ended March 31, 2014 was $300,650 compared to net cash provided by financing activities of $730,922 for the
same period in 2013. Financing activities were primarily sales of convertible promissory notes and sales of the Company’s
Common and Preferred Stock. Cash from financing activities is used to fund ongoing operational requirements, research & development,
administrative and capital needs.
Significant Financing Arrangements
From March 5, 2014 through March 25, 2015
Bass Energy and LV Ventures, Inc. provided the Company with $2,841,454 in cash through two year convertible notes which bear interest
at 5% per annum. These notes are convertible into shares of the Company’s Common Stock at the rate of $0.16 per share with
25% warrant coverage at $0.25 per share which is identical to the financing round closed by the Company in December of 2013.
As of March 31, 2014, our current liabilities
exceeded our current assets by $2,402,752. At March 31, 2014, we had cash in the amount of $91,750.
Subsequent sources of outside funding will
be required to fund the Company’s working capital, capital expenditures and corporate operations if the Company does not
reach cash flow positive. No such financing arrangements currently exist and no assurances can be given that the Company will be
successful in arranging the further funding needed to continue the execution of its business plan including the development and
commercialization of new products, or if successful, on what terms. Failure to obtain such funding will require management to substantially
curtail, if not cease operations, which will result in a material adverse effect on the financial position and results of operations
of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our
management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and
with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 ("Exchange Act").
Based upon the required evaluation, the
Principal Executive Officer and Principal Financial Officer concluded that as of March 31, 2014, the Company’s system of
controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. The Company’s management intends to address the material weaknesses
in its disclosure controls and procedures as soon as possible.
Changes in Internal Control over
Financial Reporting
There was no change in our internal control
over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS |
We previously were notified that the Company
was named in a action filed by Unirac, Inc. in New Mexico State Court on June 22, 2011 (Unirac, Inc. v. Power Save Energy Corporation
et al., Case No. D-202-CV-2011-06295). Also named as defendants in this lawsuit were, among others, SLO 3 Holdings, Inc., Michael
Forster, and Zirk Engelbrecht (“Other Defendants”). We have since determined that the company named in this suit is
Power Save Energy Corporation, a Delaware corporation and not our predecessor company, Power Save Energy Company, a Utah corporation.
The Company is not a judgment debtor in this matter.
The Company was engaged in litigation in
the Supreme Court in the County of Westchester, New York, Index No. 11139/2009, in the matter Steeneck v. Power-Save and Engelbrecht.
The claim was brought before the Court on or about May 8, 2009, although the defendants were never notified of the action until
September 2012. Putting aside pleading in the alternative (duplicative claims under different legal theories for the same acts/omissions
to act) the claim appears to be for approximately $200,000. As reported on Form 8-K filed with the Commission on January 18, 2013,
the Company was informed that on January 10, 2013 the Court filed and entered a Decision & Order stating that the statute of
limitations of the action had expired and that the plaintiff is not entitled to the relief that was sought. The plaintiff’s
motion was denied and the case is now marked as disposed by the court.
The Company’s subsidiary, Sulfatos
Chile, is engaged in arbitration in Chile, Docket Number 1639-2012 before Mr. Andres Molina del Rio, whereby Franciso Javier Morales
Rivera E.I.R.L and Nunez Ojeda y da Silva LLC asked for the termination of the Engineering and Construction contract of the Anica
Plant and sought damages of $1,989,300 for breach of contract. This matter was settled on May 6, 2014 by way of a public deed with
the claimants and respondents both dismissing their claims and counterclaims respectively.
The Company’s subsidiary, Sulfatos
Chile, is engaged in arbitration in Chile, Docket Number 5765-2013 before Mr. Mauricio Izquierdo, whereby in May of 2013 Minera
Anica S.A. asked for the dissolution of Sulfatos Chile S.A. as a consequence of a breach of the stockholders’ agreement by
Santa Teresa Minerals and seeking a to be determined amount of damages to be discussed in a different stage of the trial. Bluestone
SpA (a wholly owned subsidiary of Lustros Chile S.A.), Santa Teresa and Lustros Chile SpA. filed their responses to the claim,
asking the Court to dismiss it. Also, Bluestone SpA filed a counter claim against Minera Anica S.A. Minera Anica alleging, among
other things, a breach of the articles of incorporation of Sulfatos Chile S.A. The probatory stage of this case is still pending.
The Company’s subsidiary,
Lustros Chile SpA, is engaged in arbitration in Chile, Docket Number 1933-2013, before Mr. Juan Carlos Varela M. whereby
Nueva Pudahuel filed a request for arbitration before the Center for Arbitration and Mediation of the Santiago Center of
Commerce in December of 2013 against Lustros Chile, SpA, a wholly owned subsidiary of the Company, asking for the termination
of the tails contract referred to the “Congo” project. It is also asking for the restitution of some properties,
the payment of due rent, and damages in the amount of $3,017,191, (i) USD 775,396.5 for unpaid rents 2013-2014; (ii) USD
77,539.65 for each month of delay; (iii) UF 50.000.- under penalty clause. Lustros is asking for the termination of the
contract, plus damages of UF 50.000 in a counterclaim under the penalty clause. On July 31, 2014 we filed our rejoinder to
their claim and our rebuttal to our counter claim. On September 16, 2014 and September 29, 2014, the parties attended
conciliatory hearings before the arbitrator. The arbitrator conceded an extension for the parties to continue conversations
about the possibility to settle. That extension ended on October 6, 2014. In addition, Lustros Chile SpA has filed a civil
law action, objection to an arbitrator Docket Number 111-2014 before the 23rd Civil Trial Court in Santiago. We are asking
the Civil Trial Court to declare that Mr. Varela, as an arbitrator for the case Docket Nº 1933-2013 cannot continue the
arbitration because of his objection in the process. This action was brought since the arbitrator filed a
preliminary decision on the matter before he was allowed to do so. Therefore, we believe that he lacks impartiality for the
final ruling. On October 16, 2014, we were informed that an injunction order was granted by Mr. Varela and executed on
Lustros Chile SpA’s assets in the arbitration. As a consequence, the following assets are and will remain seized:
Lustros Chile SpA’s shares in Sulfatos (600,000 shares though it is alleged that Lustros Chile SPA does not own any
property or shares in Sulfatos Chile S.A.); 24,000 shares in Bluestone SpA; bank account ending in 0748 at Itaú Bank;
all credit that Lustros Chile SpA has against Sulfatos Chile S.A.; and all credit related to the current account between
Lustros Chile SpA and Sulfatos Chile S.A. On October 16, 2014 the Company’s bank account at Itau Bank was levied for
29,019,497 CLP or approximately $49,636 US Dollars. These measures will remain in place until Lustros Chile SpA pays Nueva
Pudahuel the full claimed amount, offers assets as guarantee, or arrives at a settlement. Lustros Chile SpA continues to
vigorously defend against the actions taken and is working through its Chilean attorneys to resolve these matters as soon as
reasonably possible. The arbitration and the trial are in their final stages, the parties having presented their main
arguments and means of proof however no decision has been made as of the time of this filing. Our copper sulfate processing
plant is currently shut down pending resolution of this matter. Should the arbitrator decide against the Company, it may be
forced to liquidate some or all of its assets to satisfy the judgment. On February 2, 2015, our Chilean counsel reported the
following with regard to the ongoing arbitration of the Congo Project. The Chilean representatives of Lustros were served
with an interim ruling that revoked the following measures previously put in place:
|
· |
Injunction over the 600,000 shares in Sulfatos Chile S.A. |
|
· |
Injunction over any and all credit that Lustros had/has against Sulfatos Chile S.A. |
|
· |
Injunction over all funds that belong to Lustros under the current merchant account (cuenta corriente mercantil) with Sulfatos Chile S.A. |
|
· |
Injunction over Lustros’ share in Bluestone SpA. |
The company’s subsidiary, Sulfatos Chile S.A., in engaged
in litigation before the 8th Civil Trial court of Santiago, Docket Nº 18242-2013, in the matter Nueva Pudahuel S.A. v. Sulfatos
Chile S.A. The claim was brought before the court on or about November 2013. Nueva Pudahuel S.A. is claiming for the payment of
invoices for a total amount of $58,386.61. The company has filed a formal opposition to such claim, under articles 464 et seq of
the Chilean Civil Procedural Code., which is currently in the probatory stage.
The Company’s subsidiary, Sulfatos
Chile S.A. is involved in various labor lawsuits with former employees that are likely to have an unfavorable outcome. We have
accrued approximately $345,000 as of the date of this filing to handle these claims.
The Company’s subsidiary, Sulfatos
Chile S.A. is engaged in litigation before the 4th Civil Trial Court of Santiago, Docket No 25496-2014, in the matter
of Oryxeio Ingenieria Limitada v. Sulfatos Chile S.A. On December 22, 2014 Sulfatos Chile S.A. was declared bankrupt by the court.
The Board of Directors of Sulfatos Chile S.A. decided not to oppose the bankruptcy process. The Company will provide more information
on these proceedings via a Current Report on Form 8-K as it becomes available.
Other than the foregoing, we know of no
material, existing or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our interest.
There are no material changes to risk factors
from those included in our Form 10-K for the year ended December 31, 2013.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On January 16, 2014, a holder of a Convertible
Note in the amount of $20,000 elected to convert their Convertible Note into Common Stock of the Company. $20,000 of principal
plus $802.19 in accrued interest was converted into 128,647 shares of Common Stock.
On March 5, 2014, Suprafin, Ltd. converted
39,540 shares of Series A Preferred Stock into 3,954,000 shares of Common Stock of the Company.
These issuances were exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) as transactions not involving a public offering. The purchasers
represented to the Company that they were "accredited investors" and made customary investment representations.
No underwriting discounts or commissions
were paid in connection with these issuances.
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
As of March 31, 2014 Sulfatos owed $197,227,995
CLP, or approximately $358,251 US dollars, for the last two payments of the land acquired in the first quarter of 2011. This debt
was in default at March 31, 2014. There is no default rate on the note. In June 2014 the debt was renegotiated and was no longer
in default.
ITEM 4. |
MINE SAFETY DISCLOSURE |
Nothing to report.
ITEM 5. |
OTHER INFORMATION |
Nothing to report.
Exhibit
Number |
Description
of Exhibit |
31.01 |
Certification of Principal Executive Officer Pursuant to Rule 13a-14* |
31.02 |
Certification of Principal Financial Officer Pursuant to Rule 13a-14* |
32.01 |
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act* |
32.02 |
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act* |
|
*Filed with this report. |
The following materials from the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language: (i) the Condensed
Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and
(v) the Notes to Condensed Financial Statements, as follows:
101.INS |
XBRL Instance Document |
101.SCH |
XBRL Taxonomy Extension Schema |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
XBRL Taxonomy Extension Label Linkbase |
101.PRE |
XBRL Presentation Linkbase Document |
SIGNATURES
In accordance with Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2015 |
/s/ William Farley |
|
By: William Farley
Its: Chief Executive Officer (Principal Executive Officer) and
Principal Financial Officer |
|
|
Exhibit 31.01
CERTIFICATION OF THE PRINCIPAL EXECUTIVE
OFFICER PURSUANT TO RULE 13a-14
I, William Farley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lustros Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2015 |
/s/ William Farley |
|
By: William Farley |
|
Its: Chief Executive Officer (Principal Executive
Officer) |
Exhibit 31.02
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER PURSUANT TO RULE 13a-14
I, William Farley, certify that:
1. I have
reviewed this quarterly report on Form 10-Q of Lustros Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2015 |
/s/ William Farley |
|
By: William Farley |
|
Its: Chief Executive Officer (Principal Financial
Officer) |
Exhibit 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Quarterly Report of Lustros Inc. (the “Company”)
on Form 10-Q for the period ending March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, William Farley, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge and belief:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
/s/ William Farley
By: William Farley
Chief Executive Officer (Principal Executive Officer)
Dated: March 30, 2015
A signed original of this written statement
required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Quarterly Report of Lustros Inc. (the “Company”)
on Form 10-Q for the period ending March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, William Farley, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge and belief:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
/s/ William Farley
By: William Farley
Chief Executive Officer (Principal Financial Officer)
Dated: March 30, 2015
A signed original of this written statement
required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.