ISLV International Silver Inc (CE)

International Silver, Inc.
(An Exploration Stage Enterprise)
Unaudited Interim Condensed Consolidated Statement of Income

 

																		Inception (June 16, 2006) of Exploration Stage through (September 30, 2012)
		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2012				2011				2012				2011
REVENUES
Consulting-third parties		$	23,334			$	-			$	23,334			$	-			$	67,533
Consulting-related parties			-				-				-				5,500				397,090
Total Revenues		$	23,334			$	-			$	23,334			$	5,500			$	464,623
Operating Expenses
Exploration costs		$	397,869			$	26,275			$	495,496			$	69,879			$	862,253
General and administration
Rent expense - related party			28,500				25,500				85,500				52,500				258,458
Bad debt expense			-				-				-				-				41,860
All other general & administrative			300,483				366,257				951,692				651,437				2,975,012
Depreciation and depletion			205				33				284				33				1,111
Total operating expenses		$	727,057			$	418,065			$	1,532,972			$	773,849			$	4,138,694
Operating Income/(Loss)		$	(703,723	)		$	(418,065	)		$	(1,509,638	)		$	(768,349	)		$	(3,674,071	)
Other Income/(Expense)
Gain on settlement of debt		$	-			$	-			$	-			$	-			$	1,678,634
Accretion expense			-				(11,693	)			-				(11,693	)			-
Impairment loss			-				-				-				(1,564,900	)			(1,733,456	)
Interest expense			(205,655	)			(146,112	)			(354,998	)			(261,362	)			(589,883	)
Total other income/(expense)		$	(205,655	)		$	(157,805	)		$	(354,998	)		$	(1,837,955	)		$	(644,705	)
Net Income/(Loss)		$	(909,378	)		$	(575,870	)		$	(1,864,636	)		$	(2,606,304	)		$	(4,318,776	)
Basic Earnings per Share
Income/(Loss) per Share		$	(0.02	)		$	(0.02	)		$	(0.05	)		$	(0.08	)
Weighted Average Shares Outstanding			37,052,280				36,780,828				36,871,312				32,469,557

 

International Silver, Inc.
(An Exploration Stage Enterprise)
Unaudited Interim Condensed Consolidated Statement of Cash Flows

 

										Inception (June 16,
		Nine Months Ended								2006) of Exploration Stage through
		September 30,				September 30,				(September 30,
		2012				2011				2012)
										(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/(Loss)		$	(1,864,636	)		$	(2,606,304	)		$	(4,318,776	)
Adjustments used to reconcile net (loss) to net cash (used) by operating activities:
Non-controlling interest in subsidiary			-				-				(3,530	)
Dissolution of subsidiary			-				-				3,530
Depreciation and depletion			284				33				1,111
Impairment loss			-				1,564,900				1,733,456
Gain on Settlement on Debt			-				-				(1,678,634	)
Financing cost			173,737				261,362				373,124
Accretion expense			-				11,693				0
Issuance of common stock
In exchange for land			-				-				30,000
In exchange for services			-				-				157,000
In exchange for exploration costs			-				-				55,385
In exchange for debt			-				-				50,000
Issuance of incentive stock option grants			-				-				396,000
Changes in operating assets and liabilities
Decrease/(Increase) in receivables			(11,368	)			7,876				237,994
Decrease/(Increase) in employee receivable			-				-				2,317
Decrease/(Increase) in prepaid expenses			(183,882	)			74,643				(231,118	)
(Decrease)/Increase in payables			63,763				(32,309	)			121,735
(Decrease)/Increase in accrued expenses			131,409				35,520				223,805
Net Cash Flows (used by) Operating Activities		$	(1,690,693	)		$	(682,586	)		$	(2,846,601	)
CASH FLOW FROM INVESTMENT ACTIVITIES
Lease/purchase option on land		$	-			$	-			$	(90,000	)
Purchase of land			-				-				(90,000	)
Purchase of equipment			(3,654	)			790				(11,112	)
Building improvements			-				-				(14,822	)
Deposits towards investment			(130,000	)			-				(130,000	)
Refundable deposit - reclamation bond			(14,406	)			-				(14,406	)
Purchase of mineral land			(1,552,900	)			-				(1,552,900	)
Net Cash Flows from Investment Activities		$	(1,700,960	)		$	790			$	(1,903,240	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock:
Net proceeds from stock issuance		$	54,290			$	1,155,000			$	1,329,290
Less: Stock issuance costs			-				(139,724	)			(139,724	)
Sale of mining property
For treasury stock			-				-				(30,000	)
Exchange for securities			-				-				(25,000	)
Return of deed of trust - mining property			-				-				90,000
Disposal of vehicle			-				-				215
Third-party loan			2,600,000				-				2,675,000
Contract payable - purchase of land			1,450,000				-				1,450,000
Debt service payments			(30,000	)			(50,000	)			(100,000	)
Borrowings from related parties			-				-				152,980
Net Cash Flows from Financing Activities		$	4,074,290			$	965,276			$	5,402,761
Net Increase/(Decrease) in Cash		$	682,637			$	283,480			$	652,920
Beginning Cash Balance		$	1,913			$	35,983			$	31,630
Ending Cash Balance		$	684,550			$	319,463			$	684,550

Notes to Unaudited Interim Condensed Consolidated Financial Statements

Note A - Organization and Business

General

International Silver, Inc. (the “Company”) is an exploration stage company, as set forth in FASB ASC 915 – Development Stage Entities and “Industry Guide 7” of the Securities and Exchange Commission’s Guides for the Preparation of Registration Statements and with the Society for Mining, Metallurgy and Exploration’s “Guide for Reporting Exploration Information, Mineral Resources, and Mineral Reserves” dated March 1, 1999. The Company’s strategy consists of acquiring and exploring high-grade silver properties throughout North and South America.

The Company was incorporated in the State of Arizona, as ARX Engineering, Inc. on September 4, 1992 and then later changed their corporate company name to Western States Engineering, Inc. On June 20, 2006, the Company changed its name to International Silver, Inc. in connection with its new business plan of acquiring exploration properties, along with providing engineering services.

The Company’s business strategy consists of acquiring and exploring high-grade silver properties throughout North and South America. Contingent upon adequate funding, the Company intends to initiate a reconnaissance and exploration program in the Pioche Mining District located in Nevada, in Silver Bow County, Montana and in Calico Mining District in California to identify potentially high-grade silver targets and to evaluate other properties in each of the districts for possible acquisition. The Company will continue to seek and evaluate new opportunities for exploration and/or development properties.

Key Mineral Properties

 

Prince Mine Property, Lincoln County, Nevada

On November 6, 2010, the Company has entered into a lease /purchase agreement to explore and acquire the historic Prince Mine in Lincoln County, Nevada, USA. The Prince Mine is a former producer of silver, gold, lead, zinc and manganese sulfide and oxide fluxing ore.  The Company has commenced a drilling program that continues through October, 2012.  At September 30, 2012, there are no proven and probable reserves.

 

Caselton Tailings Project

On March 27, 2012, the Company entered into a joint venture operating agreement to evaluate, remediate, reclaim and develop the Caselton Tailings that are located in the Pioche Mining District in Lincoln County, Nevada.

New Butte Mining Properties, Silver Bow County, Montana

On December 1, 2011, the Company executed a mining lease agreement on 954 acres of mineral rights and an additional 325 acres of surface and mineral rights located in the Butte District of Montana.  The lease provides full access for mining on the land for a term of fifty years and thereafter as long as minerals are produced.  The New Butte Properties were historically owned and operated as silver-zinc and silver-copper mines by the Anaconda Company.  The major formerly operating underground mines now held by the Company are known as the Alice, the Lexington, the Badger, the Diamond and the High One.

 

Magna Charta Property, Silver Bow County, Montana

On March 1, 2012, the Company purchased 18 acres of land, a patented mining claim, which includes surface rights situated in the County of Silver Bow, Montana under a fee simple contract.  

 

 

9

---

 

 

Continental Public Land Trust, Silver Bow County, Montana

On April 23, 2012, the Company executed a 99-year mining lease on 1,103 acres of mineral rights with Continental Public land Trust with an option to purchase certain patented lode and placer mining claims, including surface rights and other interests  Silver Bow County, Montana.  

Chattel Property. Silver Bow County Montana

On April 27, 2012, the Company entered into a purchase agreement with Chattel, LLC, a Montana limited liability company, for various parcels of land located in Silver Bow County, Montana.  Close of escrow occurred on August 7, 2012.

Calico Silver Project, San Bernardino County, California

The Calico Silver Project is located in the Calico silver mining district about 15 miles northeast of Barstow or 145 miles northeast of Los Angeles in the Mojave Desert of Southern California. The project is held for exploration with approximately 1300 acres of U.S federal lode mining claims wholly owned by the Company.   The Company intends to maintain the claims and to continue with exploration on this project.

Condensed Financial Statements

The accompanying interim consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position for the periods ended September 30, 2012 and December 31, 2011 and results of operations for the comparative periods for the three months ended September 30, 2012 and September 30, 2011 and including the comparative periods for the nine months ended September 30, 2012 and September 30, 2011 have been made.  Cash flows are presented for the comparative periods for the nine months ended September 30, 2012 and September 30, 2011.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2011 audited financial statements. The results of operations for the nine-month period ended September 30, 2012 are not necessarily indicative of the operating results for the full year.

Going Concern

The Company’s condensed financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. There is substantial doubt of the ability of the Company to continue as a going concern since it is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company may include (1) a private placement, and/or (2) a public offering and/or (3) convertible notes and secured loans.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other resources of financing and attain profitable operations. The accompanying condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

   

 

 

10

---

 

Note B - Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements include the accounts of International Silver, Inc. and its three wholly owned subsidiaries, Butte Silver Mines, Inc., International Silver Nevada, Inc. and Western States Engineering, Inc. for the nine months ended September 30, 2012 and September 30, 2011. The Company’s financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP).

Recent Accounting Pronouncements

Management has evaluated all of the recent accounting pronouncements issued since the audited financial statements and in managements’ opinion, the relevant pronouncements reviewed have no material effect on the Company’s financial statements.

Use of Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant areas requiring the use of management estimates include the determination of mineral ore quantities; the depletion expense calculation, if applicable; useful lives of property and equipment for depreciation; impairment valuations and calculation of any deferred taxes. Actual results may differ from those estimates, and such differences may be material to the condensed financial statements.

In management’s opinion all adjustments necessary for a fair statement of the results for the interim periods have been made, and the adjustments are of a normal recurring nature.

Concentration of Credit Risk

Our cash equivalents and prepaid expenses (and trade receivables when recorded) are exposed to concentrations of credit risk. We manage and control risk by maintaining cash with major financial institutions. Management believes that the financial institutions are financially sound and the risk of loss is low.

Concentrations and Economic Vulnerability

Concentrations and economic vulnerability include reliance on related parties. For the nine months ended September 30, 2011, $5,500 was of revenue was realized from a related party;  no third-party revenue was realized.  For the nine months ended September 30, 2012, the Company has realized $23,334 in engineering consulting fees through its subsidiary, Western States Engineering, Inc.

During the first half of 2012, the Company negotiated additional financing (refer to Note H – Convertible Note Payable) and as a result, the entirety of the Company’s tangible property, currently owned or acquired hereafter, is collateral for the ISLV Partners (See LLC note referred to in Note H).

Fair Value of Financial Instruments

Due to their short-term nature, the carrying value of our current financial assets and liabilities approximates their fair values. The fair value of our borrowings, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.

 

 

11

---

 

 

Cash and Cash Equivalents

For the statement of cash flows, any liquid investments with a maturity of three months or less at the time of acquisition are considered to be cash equivalents.

Accounts Receivable

Accounts receivable are stated, net of an allowance for uncollectible accounts. At September 30, 2012, trade receivables were $11,667 and at December 31, 2011, there were no trade receivables.  Related party receivables were $0 and $299, respectively for the same time periods. No allowance for uncollectible accounts was established, as management deemed the accounts as fully collectible.

Investments

Investments in marketable securities are classified under one of three methods:

 

1)	available for sale
2)	held to maturity
3)	trading securities

The accounting treatment accorded any investment will depend on whether the presence of ”significant influence” over an investee exists. If the investor owns at least 20% of its common stock, then significant influence is assumed. If there is less than 20% ownership or if there is no significant influence over an investee, the investment is valued at the Fair Value Method, otherwise the Equity Method is utilized. At September 30, 2012 and December 31, 2011, the Company held securities in Continental Mining & Smelting, which are considered “available for sale” and were reported under the Equity Method.  At September 30, 2012 and December 31, 2011, the value of the Company’s investments in Continental Mining & Smelting Limited was considered impaired.  See Note F.

Mineral Development

Costs associated with the acquisition of mineral interests, in the exploration stage, are “expensed”. Mineral exploration costs are also “expensed” as incurred. Mine infrastructure development costs incurred prior to establishing proven and probable reserves are expensed. When it otherwise becomes probable that infrastructure costs will not be recoverable, they are impaired. When it has been determined that a mineral property can be economically developed, the costs incurred to develop such property, including costs to further delineate the ore body and remove overburden to initially expose the ore body, are capitalized as incurred. These costs will then be amortized using the units-of-production method over the estimated life of the ore body based on estimated recoverable ounces of proven and probable reserves.

To the extent that any development costs benefit an entire mineralized property, they are amortized over the estimated life of the property. The specific capitalized cost bases subject to depletion are calculated on a formula based on the number of tons of ore that are expected to be mined divided by the total tons in proven and probable reserves in the property. To date, no development has occurred, nor has depletion has been taken, since production has not commenced.

Mineral Interests and Property

Mineral interests include the costs of acquired mineral rights and royalty interests in production, development and exploration stage properties.

Production stage mineral interests represent interests in operating properties that contain proven and probable reserves. Development stage mineral interests represent interests in properties under development that contain proven and probable reserves. Exploration stage mineral interests represent interests in properties that are believed to potentially contain mineralized material.

 

 

12

---

 

 

Mineral interests related to mining properties in the production stage are amortized over the life of the related property using the Units of Production method in order to match the amortization with the expected underlying future cash flows. Development stage mineral interests are not amortized until such time as the underlying property is converted to the production stage.  At September 30, 2012, and December 31, 2011, all mineral interests were in the exploration stage.  The Company does not have any proven and probable reserves at this time.

 

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, except for those fixed assets acquired and accounted for under the “Asset Acquisition Method” utilizing fair value measurements. Maintenance and repair are charged to expense as incurred, renewals and improvements that extend the useful lives of assets are capitalized. Depreciation on property and equipment is computed using the straight-line method over the assets’ estimated useful lives as follows:

 

Equipment	5 years
Office furniture and equipment	5 years

 

Development stage mineral interests are not amortized until such time as the underlying property is converted to the production stage. As of September 30, 2012, there was $5,900 in accumulated depreciation and no amortization has taken place on any of the mineral interests, as the Company is in the exploration stage.

Impairment of Long-Lived Assets

The Company adheres to ASC 360-10-20 and 360-10-35, "Accounting for the Impairment and Disposal of Long-Lived Assets," which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the estimated future cash flows are less than the carrying amount of the asset and would be calculated based on discounted cash flows.

Assets impaired to-date are comprised of 6,000,000 shares of common stock held in Continental Mining and Smelting, Limited (a Canadian company).  For the nine months ended September 30, 2012, there was no impairment on any of the Company’s long-lived assets.

Revenue Recognition and Production Costs

The Company recognizes revenue when sales contracts or consulting contracts have been properly executed, delivery of product has occurred or services have been rendered, the contract price is readily determinable and collectability is reasonably assured.

Reclamation and Remediation Costs (Asset Retirement Obligations)

The Company has adopted ASC 410-20 - Asset Retirement Obligation that addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. As of September 30, 2012, the Company did not have any environmental or reclamation obligations, other than a small area where the Company will be doing some exploratory drilling.  The Bureau of Land Management required the Company to post a bond, which has been so posted.

 

 

13

---

 

 

Earnings (Loss) Per Share

Basic income (loss) per share is computed by dividing income (loss) attributable to the common shareholders by the weighted-average number of common shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, unless the effect is to reduce a loss or increase earnings per share. On November 1, 2010, the Company adopted and granted stock options to its directors, employees and key consultants. Additionally, a private placement transacted in 2011 and convertible notes transacted during the first and second quarter of 2012, that involve options and warrants, do not have a dilutive effect on the earnings per share reflected on the Statement of Income for the nine months ended September 30, 2012.   As of September 30, 2012 and December 31, 2011, no options or warrants had been exercised.

Income Taxes

The Company accounts for income taxes under ASC 740-10-30 - Accounting for Income Taxes. ASC 740-10-30 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, ASC 740-10-35 generally considers all expected future events other than enactments of changes in the tax law or rates. Income tax information is disclosed in Note I – Income Taxes of the condensed consolidated financial statements.

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax assets are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Comprehensive Income

ASC 220-10-55-2 - Comprehensive Income, requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. On September 30, 2012 and September 30, 2011, the Company did not have any material items of comprehensive income.

Derivative Instruments

The Company revalues derivative liabilities as of each balance sheet date, and otherwise complies with the provisions of ASC 815-10.  There are no derivative liabilities at September 30, 2012 or December 31, 2011.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board, issued ASC 718 - Share-Based Payment, requires “public” companies to recognize the cost of employee services received in exchange for equity instruments, based on the grant-date fair value of those instruments, with limited exceptions. ASC 718 also affects the pattern in which compensation cost is recognized, the accounting for employee share purchase plans, and the accounting for income tax effects of share-based payment transactions. The Company adopted a stock option plan on November 1, 2010, which is accounted for pursuant to ASC 718.  As of September 30, 2012, no options have been exercised.

 

 

14

---

 

 

Note C – Prepaid Expense

At September 30, 2012, prepaid expenses reflect prepayments on three mineral leases, which are all treated as operating leases, pursuant to FASB ASC 840-20. Disclosure of lease terms is explained in Note D – Mining Properties.  At September 30, 2012 and December 31, 2011, prepaid expenses were comprised of the following:

		September  30, 2012				December 31, 2011
Prepaid Rent - Related Party		$	10,280			$	0
Prepaid Lease - Prince Mine		$	4,932			$	42,465
Prepaid Lease - New Butte			4,356				0
Prepaid Lease - Continental Public Land Trust			11,233				0
Prepaid Assaying, Drilling & Metallurgical Work			135,000				0
Prepaid Insurance			61,729				1,240
Prepaid – Other			114				57
		$	217,364			$	43,762
Total Prepaid Expense		$	227,644			$	43,762

 

Note D – Mining Properties

The Company’s mining interests, include property acquired by staking, purchasing and leasing mining claims located in the states of California, Nevada and Montana as follows:

Calico Silver Project

The Calico Silver Project consists of 60 unpatented mining claims, which were acquired through staking and filing Notices of Location with the Bureau of Land Management. The Company pays annual maintenance fees to the Bureau of Land Management (BLM) on its 60 unpatented lode-mining claims, located in San Bernadino County, California.  The Company expenses these maintenance fees in the year paid.

Magna Charta Mining Claim - Silver Bow County, Montana

On March 1, 2012, the Company acquired title to a fee simple estate or interest in the Magna Charta Lode Mining claim for $47,500.  The mining claim comprised of 18 acres, with a patented mining claim, including surface rights is located in the County of Silver Bow in the State of Montana.

Chattel Property - Silver Bow County Montana

On April 27, 2012, the Company entered into a purchase agreement with Chattel, LLC, a Montana limited liability company, for 1,022 acres of land and mineral rights, located in Silver Bow County, Montana at a purchase price of $1,500,000.  Close of escrow occurred on August 7, 2012.  The terms of the purchase agreement are disclosed in Note I – Contract Payable.

 

 

15

---

 

Prince Mine Lease – Lincoln County , Nevada

On November 6, 2010, the Company entered into a lease /purchase agreement to explore and acquire the Prince Mine in Lincoln County, Nevada, USA. The Prince Mine is a former producer of silver, gold, lead, zinc and manganese sulfide and oxide fluxing ore.   Former production is not any indication that there are proven and probable reserves.

 

The five-year lease requires annual lease payments of $50,000 payable annually on each anniversary date from the date of the lease agreement. Pursuant to FASB ASC 840 – 20 Operating Leases, the lease meets the criteria to be treated as an operating lease. Future minimum lease payments are as follows:

 

November 6, 2012 -		$	50,000
November 6, 2013 -		$	50,000
November 6, 2014 -		$	50,000
Total		$	150,000

 

Lease expense on the Prince Mine since inception of the lease on November 6, 2010 through September 30, 2012 is $ 95,068.  For the nine months ended September 30, 2012 lease expense was $37,534.

 

Should the Company exercise the purchase option, the total purchase price shall be $2,750,000, less any amounts paid as advance/lease payments. The initial payment is due within 30 days of the option exercise. Installment payments are as follows:

 

No. 1 - Initial payment		$	687,500
No. 2 - 1st anniversary of exercise		$	687,500
No. 3 - 2nd anniversary of exercise		$	687,500
No. 4 - 3rd anniversary of exercise		$	687,500

 

Prepayment of all or any portion of the principal balance are not subject to penalty.

 

New Butte Lease – Silver Bow County, Montana

On December 1, 2011, the Company entered into a mineral lease agreement with FL Leasing, LLC (“lessor”), now known as New Butte Leasing, LLC, to examine the mineral potential of the Silver Bow/Butte Area located in Silver Bow County, Montana.

 

The term of the agreement is for fifty (50) years and for so long as Product is produced, or until sooner terminated, extended or canceled.  The lease requires annual lease payments commencing January 15, 2012 and on each anniversary date thereafter.  The initial annual lease payment is $15,000 and $15,000 each year thereafter for the years 2013-2015.  Annual lease payments for years 2016 – 2020 are $20,000; thereafter, annual lease payments are variable and increase progressively.    The lease payment due January 15, 2012 was timely paid.  Pursuant to FASB ASC 840 – 20 Operating Leases, the lease meets the criteria to be treated as an operating lease. Future minimum lease payments, based on an amended agreement executed on May 22, 2012, are as follows:

January 15, 2013 -   $15,000 annually		$	15,000
January 15, 2014 -   $15,000 annually		$	15,000
January 15, 2015 -   $15,000 annually		$	15,000
Each January 15 th  - $20,000 annually - Years 2016 – 2020		$	100,000
Each January 15 th  - $25,000 annually - Years 2021 – 2030		$	250,000
Each January 15 th  - $50,000 annually - Years 2031 – 2060		$	1,500,000
Each January 15 th  - $75,000 annually - Years 2061 – 2062		$	150,000
Total		$	2,045,000

 

16

---

 

 

Additionally, the Company agrees to pay the “lessor” a Net Smelter Returns Royalty of three percent (3%) on production of gold, silver and various other metals.

Lease expense on the New Butte property since inception of the lease on December 1, 2011 through September 30, 2012 was $10,644.

Continental Public Land Trust Lease – Silver Bow County, Montana

On April 23, 2012, the Company entered into a mineral lease and option to purchase agreement with Continental Public Land Trust, a Montana non-profit organization, to explore the mineral potential of certain patented lode and placer mining claims located in located in Silver Bow County, Montana.

 

The term of the agreement is for ninety-nine (99) years and for so long as Product is produced, or until sooner terminated, extended or canceled.  The lease requires annual lease payments commencing April 23, 2012 and on each anniversary date thereafter.  The initial annual lease payment is $20,000, $25,000 on the first anniversary date and $25,000 each year thereafter for the next ten years.  Every ten years, thereafter, the lease payment shall be adjusted in proportion to the United States Bureau of Labor Producer Price Index.  The initial lease payment of $20,000 was paid on April 23, 2012.

 

April 23, 2013      -  $25,000 annually - Year 2013		$	25,000
Each April 23 rd     -   $25,000 annually - Years 2014– 2024		$	250,000
Each April 23 rd     -   $25,000 annually - Years 2015 – 2112, as adjusted by US Producer Price Index		$	2,175,000
Total		$	2,450,000

 

Additionally, the Company agrees to pay the Owner a royalty of two percent (2.0%) of the net cash flow from its operating activities (free cash flow royalty) derived from production of all mineral commodities produced from Owner’s property.

 

Lease expense on the Continental Public Land Trust since inception of the lease on April 23, 2012 through September 30, 2012 was $11,233.

 

Note E – Property, Plant and Equipment

 

Property, plant and equipment is comprised of the following:

 

Land		$	1,552,900
Equipment			3,357
Furniture and Fixtures			3,502
Computer Equipment			3,129
		$	1,562,888
Accumulated Depreciation			(5,900	)
		$	1,556,988

 

On January 30, 2012, the Company purchased land located in Butte, Montana known as “Magna Charta”, which it intends to explore for mineral content.  The contract sales price was $47,500.  On April 27, 2012, the Company executed a purchase agreement with Chattel, LLC for 1,022 acres of land and mineral interests at a total cost of $1,505,400 in Silver Bow County, Montana.  Close of escrow occurred on August 7, 2012.  Terms of the purchase agreement are disclosed in Note I – Contract Payable.

 

Depreciation expense for the nine months ended September 30, 2012 was $284 and for the twelve months ended December 31, 2011 depreciation was $72.

 

 

17

---

 

 

Note F – Investments

Current Assets

On November 30, 2010, the Company exchanged a 70% interest in the Estrades Mining Lease #795 (Quebec) and associated equipment in consideration for 6,000,000 shares of common stock from Continental Mining and Smelting Limited (“Continental”), a Canadian company. At December 31, 2012, the Company owned a 16.7 % interest in Continental, whose outstanding shares were 36,028,001.

At date of acquisition, the Company made the determination that the “Equity Method” of accounting was warranted in that the Company was deemed to exercise significant influence and control over Continental’s policies and operations, although the percentage was below the 20% threshold pursuant to FASB ASC 323-10-15-6 – Significant Influence. The Company has one director and an officer who represent Continental as directors.

The Company’s policy regarding the Equity Method pursuant to FASB ASC 323-10 – Investments – Equity Method and Joint Ventures will be to record the initial investment, at cost, and then recognize the increase or reduction in its investment based on its proportional share of Continental’s income, losses and dividends, as the case may be, at the end of each reporting period. At the date of acquisition and at December 31, 2011 and September 30, 2012, there is no measurable value in the common stock of Continental Mining and Smelting Limited.  Continental Mining and Smelting Limited has been trying to obtain financing in order to enter the development stage of their mining operations, but has been unsuccessful thus far.

At December 31, 2011, the Company’s share of losses for the year then ended were $135,960. For the nine months ended September 30, 2012, the Company’s proportional share of Continental’s losses were $64,654 and for cumulative losses, inception to–date of $224,067. These losses are held “in suspension” until such time that a measurable valuation of Continental’s common stock is ascertained, pursuant to ASC 323-10-35-20.

 

At September 30, 2012, the Company held the following securities:

 

		No of Shares				Share Price				Fair Value
Common Stock
Available for Sale securities:
Continental Mining and Smelting Limited			6,000,000			$	0.000			$	0

 

Other Assets –Long-Term

On March 27, 2012, the Company, executed a contract with Aurum, LLC (“Aurum”), a Colorado limited liability company, to form a joint venture with the Company for the purpose of conducting the evaluation, remediation, reclamation and processing of the Caselton Tailings owned by “Aurum”.  Pursuant to the agreement, “Aurum” and the Company will each have a 50% interest.  As consideration, the Company will undertake to arrange all capital funding required and provide custom processing availability for the tailings material owned by “Aurum”.

The Company is obligated to make an initial cash capital contribution of $50,000 and sequential funding of an additional $50,000 to $100,000 to be used to complete a Phase 1 site investigation.

As of September 30, 2012, the Company had reimbursed Aurum, LLC $130,000 for holding costs on property associated with a joint venture between the Company and Aurum, LLC.  These funds are recognized as a deposit towards the investment in the joint venture with Aurum, LLC.  Pursuant to the joint venture agreement, these costs, upon formation of the joint venture will be considered as part of International Silver Nevada, Inc.’s capital contribution.

 

 

18

---

 

 

Note G – Note Payable

On April 21, 2011 the Company issued a promissory note in the amount of $100,000 to the Atkinson Trust, payable in ten equal monthly installments of $10,000, interest only.  The note was issued as a condition of purchasing the assets of Pan American Zinc Company, with close of escrow to occur on February 23, 2012. At December 31, 2011, the Company rescinded the contemplated purchase and relinquished its rights to the property. The seller agreed to take back the property in exchange for forgiving all related liability created in the sale except for $30,000, the net present value of the remaining note balance at December 31, 2011.  On June 14, 2012, the Company paid the remaining balance owed on the note.

On January 9, 2012 and January 31, 2012, the Company secured loans and issued cognovit promissory notes in the amount of $90,300 and $81,000, respectively to Empire Advisors, LLC.  The full principal amount of the notes and accrued interest, at eight (8%) percent simple interest, were due February 9, 2012 and February 29, 2012, respectively.  At March 31, 2012, these notes, plus accrued interest had been paid.

Notes payable as of September 30, 2012 and December 31, 2011, respectively, are shown below:

 

		At September 31, 2012				At December 31, 2011
Promissory note – Atkinson Trust		$	0			$	30,000
		$	0			$	30,000
Less: Discount on note			0				( 2,663	)
Net Carrying Basis		$	0			$	27,337

 

Note H – Convertible Notes Payable

Convertible Note Purchase Agreement – Initial Financing

On February 6, 2012, the Company entered into a Convertible Note Purchase Agreement with ISLV Partners, LLC (the Lenders) to provide funding in the amount of $600,000 for working capital and other corporate purposes.  The general terms and conditions of the loan provided that the “lenders” retain out of the funding, the sum of the $90,300 and $80,000, to satisfy full repayment of the cognovit promissory notes (see Note G) which were assigned to the lender, including all unpaid accrued interest to the closing date.  The initial note in the principal amount of $600,000 is secured by the mortgages, deeds of trust, fixture filings, security agreements and assignment of leases and rents, and such security agreements executed and delivered on the closing date, pursuant to which certain real properties owned by the Company and /or any subsidiary, as more particularly specified in such mortgages, deeds of trust, assignment of leases and rents are pledged as collateral security for the obligations (Initial Mortgages). The principal and unpaid interest, at a per annum interest rate of eight (8%) percent, is due on or before July 27, 2013.

The lender was given the right, at its option, to make an additional loan to the Company in the principal amount of $4,000,000.  On May 17, 2012, the $4,000,000 was amended to $2,000,000.

 

 

19

---

 

 

Optional Conversion

The “Lender” may, at its option, upon written notice to the Company, convert all or any portion of the unpaid principal balance of the note and/or unpaid accrued interest into shares of common stock of the Company, at a price of $0.20 per share of common stock.  If converted, the total market value of the shares would be $600,000. At June 30, 2012, no conversion had occurred.

Warrants

Upon execution of the Convertible Note Purchase Agreement, dated February 6, 2012, the Company issued 3,000,000 warrants to purchase additional shares of common stock of the Company, at an exercise price of $0.40 per share.  The number of such warrants issued equals the number of shares into which the applicable Lender’s note is convertible.

Security

The Notes shall be secured by a first priority security interest in all tangible property of the Company, whether now owned or hereafter acquired, and all proceeds thereof.

Registration rights

Upon demand by the Lenders, the Company will file a registration statement on Form S-1 covering all shares issued or issuable upon conversion of the Notes and exercise of the Warrants.  The Lenders will have customary piggy-back registration rights.

Lender’s Option on Certain Projects

If additional financing is completed, the Lenders or their designees have a three-year (3) option to acquire a 20% interest in each of the Company’s Projects located in the Pioche Mining District in Nevada at a price equal to approximately the fair market value for each respective Project.

 

Convertible Note Purchase Agreement – Additional Financing

On May 17, 2012 and May 25, 2012, loans in the amount of $130,000 and $1,870,000, respectively, were procured by the Company pursuant to the first amendment to the convertible note purchase agreement.

 

Terms and conditions are identical to the initial financing, which are disclosed above.  On May 25, 2012, 10,000,000 warrants were issued to ISLV Partners, LLC on the additional financing. The warrants entitle the holder to purchase additional shares of common stock of the Company, at an exercise price of $0.40 per share.  The number of such warrants issued equals the number of shares into which the applicable Lender’s note is convertible.

 

 

20

---

 

 

  Convertible notes payable as of September 30, 2012 and December 31, 2011, respectively, are shown below:

 

		September 30, 2012				December 31, 2011
Convertible Notes Payable – ISLV Partners, LLC:
Issued February 6, 2012		$	600,000			$	0
Issued May 17, 2012		$	130,000			$	0
Issued May 25, 2012		$	1,870,000			$	0
Total		$	2,600,000			$	0
Discount on Notes Payable			(501,712	)		$	0
Net Carrying Value		$	2,098,288			$	0

 

Outstanding convertible instrument

An optional conversion feature was included in the convertible term notes issued. The terms of the optional conversion grants the “Lender” the option to convert all or any portion of the unpaid principal balance of the note and/or unpaid accrued interest into shares of common stock of the Company, at a price of $0.20 per share of common stock.  At September 30, 2012, the convertible note instruments had no beneficial conversion feature, thus a discount on the notes themselves, was not recognized, but the “detachable” warrants issued in conjunction with this financing, were assigned a fair value due to their beneficial conversion feature on a “fully-converted” basis.  In addition, an “intrinsic value” was also assigned on the warrants, pursuant to generally accepted accounting principles, as governed by ASC 470-20-55-12.

Qualified Financing

In the event that the Company, at any time after the original issuance of the Notes, proposes to consummate any equity offering or series of related equity offerings resulting in gross proceeds to the Company of not less than $250,000, the Company shall give written notice to the holder not less than 20 days prior to the consummation of such Qualified Financing.  Upon consummation of such Qualified Financing, the Notes shall then and thereafter be convertible into shares of the same class as the shares issued in the Qualified Financing, and the conversion price per share shall be equal to the lesser of a) 90% of the implied price per share of common stock in such Qualified Financing, or b) the then-effective conversion price, subject to adjustments.

 

 

21

---

 

Warrants

On February 6, 2012, the Company, in conjunction with the issuance of the $600,000 convertible note, issued a total of 3,000,000 “detachable” warrants to ISLV Partners, LLC for an option to purchase additional shares of common stock of the Company, at an exercise price of $0.40 per share.  The number of such warrants issued equals the number of shares into which the applicable Lender’s note is convertible.  The beneficial conversion option was derived as follows:

 

						(Allocation)
		Allocation				Relative
Convertible Note – Issued on February 6, 2012		of Proceeds				Value
Face Value of Convertible Note		$	600,000
No. of Common Shares			3,000,000
Current Market Value
Market Share price at Feb. 6, 2012		$	0.200
Market Value of Stock, if converted		$	600,000			$	533,333
Fair Value - Warrants - At Time of Issuance - Feb 6, 2012
No. of Warrants Issued			3,000,000
Exercise Price		$	0.400
Fair Value - Based on Black-Scholes Method
Black-Scholes Value		$	0.025
Fair Value of Warrants		$	75,000			$	66,667
Total/Relative Value		$	675,000			$	600,000
Beneficial Conversion Option Calculation
Relative Note Value						$	533,333
Face value of Note						$	600,000
Market price of stock						$	0.200000
Intrinsic Conversion price/share						$	0.177778
Difference in price/share						$	0.022222
Number of shares convertible						x	3,000,000
Beneficial Conversion Option for fully converted note						$	66,667

		Allocation				Relative
Convertible Notes – Issued on May 17 and May 25, 2012		of Proceeds				Value
Face Value of Convertible Notes		$	2,000,000
No. of Common Shares			10,000,000
Current Market Value
Market Share price at May 25, 2012		$	0.200
Market Value of Stock, if converted		$	2,000,000			$	1,777,778
Fair Value - Warrants - At Time of Issuance – May 25, 2012
No. of Warrants Issued			10,000,000
Exercise Price		$	0.400
Fair Value - Based on Black-Scholes Method
Black-Scholes Value		$	0.0250
Fair Value of Warrants		$	250,000			$	222,222
Total/Relative Value		$	2,250,000			$	2,000,000
Beneficial Conversion Option Calculation
Relative Note Value						$	1,777,778
Face value of Note						$	2,000,000
Market value of stock						$	0.200000
Intrinsic conversion price/share						$	0.177778
Difference in price/share						$	0.022222
Number of shares convertible						x	10,000,000
Beneficial Conversion Option for fully converted note						$	222,222

Note J - Income Taxes

The Company has reported (for income tax purposes) net operating losses for 2011, 2010 and prior years as follows:

Net Operating Loss carry-forward to Year 2006		$	106,508
Net Operating Income - Year 2006 (Applied)			(4,693	)
Net Operating Loss carry-forward to Year 2007		$	101,815
Net Operating Loss - Year 2007			111,921
Net Operating Loss carry-forward to Year 2008		$	213,736
Net Operating Loss - Year 2008			237,958
Net Operating Loss carry-forward to Year 2009		$	451,694
Net Operating Loss - Year 2009			62,811
Net Operating Loss carry-forward to Year 2010		$	514,505
Net Operating Loss - Year 2010			47,369
Net Operating Loss carry-forward to Year 2011		$	561,874
Net Operating Loss - Year 2011			1,195,343
Net Operating Loss carry-forward to Year 2012		$	1,767,216

		September 30,				December 31,
		2012				2011
Deferred Tax Asset		$	1,050,268			$	203,503
Valuation Account			(1,050,268	)			(203,503	)
Net Deferred Tax Asset		$	0			$	0

		No. of shares				Weighted Average Exercise Price			Contractual Life Remaining
Outstanding – January 1, 2012			3,300,000			$	0.20		3.8 years
Granted			0				-
Exercised			0				-
Forfeited			0				-
Outstanding – September 30, 2012			3,300,000			$	0.20		3.1 years

Note L - Related Party Transactions

Amounts due from and to related parties, are receivable from or payable to entities controlled by the shareholders, officers, or directors of the Company (“Related Entities”). The underlying transactions are with these related parties. These amounts are unsecured and not subject to specific terms of repayment.

 

		September 30,				December 31,
		2012				2011
Due From Related Parties
Atlas Precious Metals, Inc.		$	0			$	236
Arimetco International, Inc.			0				36
Total		$	0			$	299
Due To Related Parties
Harold R. Shipes - Shareholder/Officer		$	995			$	15,443
Clinton W. Walker – Director			4,167				0
H. Eugene Dunham – Director			4,167				0
John P. Kennedy – Director			4,792				0
Michael Harrington – Director			4,781				0
Russel D. Alley – Director			4,167				0
Danielle Lang			276				0
Atlas Precious Metals, Inc.			0				10,123
Total		$	23,345			$	25,566

Note O – Subsequent Events

Management has reviewed all subsequent events through the issuance date of the condensed financial statements and discloses the following events that transpired subsequent to September 30, 2012 up through the issuance date:

On  October 29, 2012, prior to the issuance of our quarterly filing of the 10-Q report for the third quarter ended September 30, 2012, the Company executed an option to purchase the assets of Pan American Zinc, a Nevada corporation.  The terms of the option required an option payment of $35,000, which has been paid, with the option period effective from October 29, 2012 and terminating on July 31, 2013, unless extended by either party to the contract.  The total purchase price shall be $5,000,000, payable in four (4) annual installments of $500,000, starting with the closing date of August 15, 2013 and extending for the next three anniversary dates and three (3) annual installments of $1,000,000, thereafter for the next three anniversary dates.

The Company may elect to pay an accelerated discounted purchase payment of three million ($3,000,000) dollars at any time after the closing and prior to the first anniversary.  The election of the accelerated discounted purchase payment shall make the total purchase price three million five hundred thousand ($3,500,000) dollars.

On November 5, 2012, the Board of Directors passed a resolution whereby the directors of the Company were granted 400,000 stock options, 150,000, which are fully vested, and 250,000, which vest on September 15, 2013. The exercise price of $0.34 per share was based on the Company’s average closing share price for the last 30 days.

 

On November, 10, 2012, the Company, as the “Lessor”, entered into a mineral lease agreement with Calico Exploration, LLC, a Delaware limited liability company (“Calico”), which provides for the Company’s lease of certain claims located in San Bernadino County, California. The lease provides for a 10 year term with Calico’s option to continue the lease for up to a maximum of 75 years. Calico is required to make a $100,00 down payment to the Company, which Calico has already paid. Calico is also required to pay the Company annual lease payments of $50,000 and a net smelter return production royalty of two percent (2%) on a quarterly basis. Prior to the payment of any net smelter return, the Company has a pre-emptive right and the first right of refusal to participate in up to forty (40) percent of the claims plus an area of influence of two thousand (2,000) feet in any direction of the outside boundaries.

 

 

29

---

 

ITEM 2 – MANAGEMENT DISCUSSION’S AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Management’s Discussion and Analysis should be read in conjunction with our financial statements and its related notes. The terms “we,” “our” or “us” refer to International Silver, Inc. This discussion contains forward-looking statements based on our current expectations, assumptions, and estimates. The words or phrases “believe,” “expect,” “may,” “anticipates,” or similar expressions are intended to identify “forward-looking statements.” The results shown herein are not necessarily indicative of the results to be expected in any future periods. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, included the risk factors contained herein.

We are an exploration stage company that engages in minerals exploration activities in the United States and Mexico involving silver, gold, zinc, copper and other minerals.  To date, we have not generated any revenues from any of these activities since approximately June, 2006, when we switched our emphasis in our business plan and commenced our mineral exploration business. To date, our exploration activities have been limited to the exploration and purchasing of mineral interests in the United States and Mexico.

Results of Operations

Operating Performance for the three months ended September 30, 2012 (the “September 2012 Quarter”) as compared to the three months ended September 30, 2011 (the “September 2011 Quarter”) was as follows:

For the September 2012 Quarter, we recorded a net loss of $909,378, as compared to a net loss of $575,870 for the September 2011 Quarter or an increase in net loss of $333,508. The primary reason for the substantial net loss increase resulted from the increased exploration activities due to the acquisition of the Prince Mine and New Butte properties in Nevada and Montana. Consulting and exploration work increased substantially during the September 2012 Quarter over the September 2011 Quarter.

During the September 2012 Quarter, $23,334 in revenue from engineering services were realized.  No revenues were realized during the September 2011 Quarter.

Operating expenses reflected during the September 2012 Quarter were $727,057, an increase of $308,992 or 74% as compared to operating expenses of $418,065 for the September 2011 Quarter.  Most of the increase resulted from exploration activities on the two properties located in the Pioche Mining District in Lincoln County, Nevada and the New Butte Mining District in Silver Bow County, Montana, which were recently acquired.

Other Income/(Expense) during the September 2012 Quarter was $205,655, a net increase of $47,850, as compared to the September 2011 Quarter of $157,805.  The net difference is due primary to amortization of two distinct notes negotiated, one negotiated during the September 2012 Quarter and the other during the September 2011 Quarter.  The amortization of the note payable to Pan American, Inc. and accretion expense on a reclamation liability incurred during the  September 2011 Quarter amounted to $157,805 versus the amortization of the ISLV Partners, Inc convertible notes executed during the first and second quarters of 2012 which amounted to $110,647.  In addition the Company incurred an additional financing cost of $95,008 on the issuance of 271,482 shares of common stock at a discounted price in settlement of outstanding debt.

 

 

30

---

 

 

Operating Performance for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was as follows:

For the nine months ended September 30, 2012, we recorded a net loss of $1,864,636, as compared to a net loss of $2,606,304 for the nine months ended September 30, 2011 or a decrease in net loss of $741,668.  The decrease in net loss is primarily attributed to an impairment loss on Goodwill taken in 2011 in the amount of $1,564,900.  Excluding the impairment loss recognized in 2011, actual losses incurred during the first nine months of this year are higher than for the nine months ended September 30, 2012 by $823,232, due to the acquisition of the Prince Mine and New Butte properties in Nevada and Montana, administrative costs, planning, legal expenses and exploration activities increased substantially during the nine months ended September 30, 2012 over the nine months ended September 30, 2011.

During the nine months ended September 30, 2012, we have realized $23,334 in revenues from engineering services provided by one of our subsidiaries.  Revenues of $5,500 were realized from a related company during the nine months ended September 30, 2011.  To-date no revenues have been realized from any of our properties, as we are still in the exploration stage.

Operating expenses reflected during the nine months ended September 30, 2012 were $1,532,972, an increase of $759,123 as compared to operating expenses of $773,849 for the nine months ended September 30, 2011.  Most of the increase resulted from exploration costs, administrative expenses, salaries, and legal fees as a result of the Company obtaining financing to commence plans for exploratory work on the two properties located in the Pioche Mining District in Lincoln County, Nevada and the New Butte Mining District in Silver Bow County, Montana recently acquired and exploration work underway on other mining leased property.

Other Income/(Expense) during the nine months ended September 30, 2012 was $354,998, a net decrease of $1,482,957, as compared to $1,837,955 incurred during the nine months ended September 30, 2011, due to the impairment loss on Goodwill resulting from the recognition of the Pan American business acquisition, which was subsequently rescinded in December, 2011.  Amortization on discount of notes payable and interest expense for the nine months ended September 30, 2012 of $354,998 reflects an increase of $93,636 over the interest expense of $261,362 for nine months ended September 30, 2011.  During the nine months ended September 30, 2012, three convertible notes were issued to ISLV Partners, LLC bringing the total financing to $2,600,000.  The nine months ended September 30, 2011 reflects interest expense related to the notes issued for bridge financing by Tintic Standard Gold Mines, whose debt was settled during that same period and amortization on discount of the note issued to Pan American, Inc. on a property acquisition later rescinded in the latter part of 2011. In addition, the Company incurred an additional financing cost of $95,008 on the issuance of 271,482 shares of common stock at a discounted price in settlement of outstanding debt.

 

Liquidity and Capital Resources

Our financial statements as presented in Item 1 of this report have been prepared in conformity with US GAAP, which contemplate our continuation as a going concern. However, the report of our independent registered public accounting firm on our financial statements, for the nine months ended September 30, 2012, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The “going concern” qualification results from, among other things, our development-stage status, no revenue recognized since inception, other than for engineering services, and our net losses from inception as a development stage company, which total $4,318,776 and the uncertainty in raising additional capital. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern.

 

 

31

---

 

 

Currently, we have funded our operations through private placements, short-term notes payable, and some on-going engineering consulting services. The capital required to execute our total business vision and objectives is significant. On May 25, 2012, the Company negotiated two convertible term notes totaling $2,000,000, bringing the total of financing procured during the first six months of 2012 to $2,600,000.  The convertible note agreement, as amended on May 17, 2012, contains a provision whereby the lender has an option to lend up to an additional $2.0 million. During 2012, we will continue our efforts to raise additional capital to fund the working capital requirements and exploration and development activities necessary to meet our business objectives.

Our global capital budget for the completion of acquisitions, exploration and development programs in the Pioche Mining District in Nevada and the New Butte Mining District in Montana is approximately $2.0 million.

 

Cash and Cash Flows

Cash on hand at September 30, 2012 was $684,550 as compared to $1,913 at December 31, 2011.  The increase in cash of $682,637 was due primarily from proceeds realized from the issuance of $2,600,000 in convertible notes , less operating expenditures up through September 30, 2012.

Net cash flows from operating activities were ($1,690,693) for the nine months ended September 30, 2012, compared to ($682,586) for the nine months ended September 30, 2011, a net decrease in cash flows of $1,008,107 over the nine months ended September 30, 2011. Negative cash flows from Operating Activities for the nine months ended September 30, 2012 reflect higher exploration costs and general administrative expenses in the areas of administrative salaries, legal fees, rent, director expenses and mineral leases due to procurement of financing and the commencement of planning exploratory and development work on the Prince mine property in Nevada and the Butte properties in Montana recently acquired.  During the nine months ended September 30, 2011, there were minimal exploration activities.

Investment activities during the nine months ended September 30, 2012 included the purchase of mineral land in Butte, Montana for $1,552,900, an investment of $130,000 in a newly-formed joint venture with Aurum, LLC, a reclamation bond of $14,406, as required by the Bureau of Land Management, where the Company proposes to conduct exploratory drilling and the purchase of surveying equipment of $3,654 for a total of $1,700,960 in capital expenditures.  There were minimal investing activities ($790) during the nine months ended September 30, 2011.

Financing activities undertaken during the nine months ended September 30, 2012 included the issuance of three convertible notes to ISLV Partners, LLC totaling $2,600,000, contract payable for $1,450,000 on the purchase of the Chattel property in Butte, Montana, net proceeds of $54,290 from stock issuance (stock issuance for debt repayment) less $30,000 in note payments due Lawrence Atkinson, for a net total of $4,074,290 from financing activities.  In comparison, for the nine months ended September 30, 2011, we generated cash proceeds of $1,155,000 less issuance costs of $139,724 on a private placement of our common stock.  Additionally, there were note installment payments to Lawrence Atkinson of $50,000, bringing the net of investing activities for the nine months ended September 30, 2011 to $965,276.   The difference in investing activities of $3,109,014 represents an increase of 322% over the nine months ended September 30, 2011.

Going forward, our business plan does not reflect, nor do we anticipate, any revenues from our properties during the remaining part of our exploration phase and until we confirm previously demonstrated mineralization, obtain operating permits, and construct mining and processing facilities.  We are presenting pursuing, through our engineering company, Western States Engineering Inc, several engineering contracts.

 

 

32

---

 

 

Exploration Costs – Inception to Date

 

On June 16, 2006, our Board of Directors passed a resolution to change the nature of its operations from an engineering services company to an exploration company. Since converting our business plan to conducting exploration activities, we have purchased the following properties and engaged in the exploration activities and incurred the following exploration costs since inception:

 

Capitalized Acquisitions
A) Purchase of the Tecoma Mine  – Year 2007		$	90,000
B) Sale of Tecoma Mine – Year 2008			(90,000	)
C) Purchase of Magna Charta property – Silver Bow County, Montana			47,500
D) Purchase of Chattel property – Silver Bow County, Montana			1,505,400
Total Acquisitions		$	1,552,900
Exploration Costs :
A) Acquired a 98% interest in Metales Preciosos, S.A. de C.V., a Mexican company - exploration  abandoned
1) El Cumbro property		$	14,260
2) El Cusito property			15,000
3) Canada de Oro property			15,000
4) La Moneda property			10,000
B) Langtry property (options expired – exploration abandoned)
1) Option payment			10,000
2) Option payment			90,000
3) Exploration			21,075
C) Acquisition of BLM mineral claims - Calico District
1) Silverado mining claims			4,250
2) Leviathon mining claims			47,099

 

 

33

---

 

 

D) Pioche Mining District – Lincoln County, Nevada
1) Prince Mine lease			396,051
2) Caselton Tailings			83,455
3) Caselton Mine			5,874
E) Silver Bow County, Montana
1) New Butte Property lease			44,132
2) Continental Public Land Trust			8,767
3) Silver Bar (Option) - abandoned			3,000
4) Butte Properties - General			41,109
F) Other Exploration Sites (evaluation)
1) Anaconda			7,500
2) Oro Blanco			8,840
4) SE Arizona Silver			4,829
5) Mohave Gold			1,050
6) Zonia Mine			6,650
e) General Administrative Costs			24,312
Total Exploration Costs		$	862,253

 

These direct exploration costs account for approximately 21% of the total operating expenditures of $4,138,694, since our exploration activities commenced on June 16, 2006. General and administrative expenses, which include salaries, consulting, rent, mineral leases and travel, comprise the majority of the remaining of the operating expenditures for this time period.

 

 

34

---

 

Uncertainties and Trends

 

Our operations, potential funding, and potential revenues are dependent now, and in the future, upon the following factors:

	-  Price volatility in worldwide commodity prices, including silver, gold, and other minerals, which is  affected by: (a) sale or purchase of silver by central banks and financial institutions; (b) interest rates; (c) currency exchange rates; (d) inflation or deflation; (e) speculation; and (f) fluctuating prices in worldwide and local commodities for petroleum-related products, chemicals, and solvents;
	-  Global and regional supply and demand of silver, gold, and other minerals, including investment, industrial and jewelry demand;
	-  Political and economic conditions of major silver, gold or other mineral-producing countries;
	- Threatened changes to the U.S. Mining Law that may cause increasing federal land royalties, or  other unanticipated consequences and related increased costs of conduct in mining operations in the United States; and
	- Global economic conditions may affect pricing and availability of materials and supplies.

Off-Balance Sheet Arrangements

 

We have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under whom we have:

an obligation under a guarantee contract,

a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,

any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or

any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements or commitments that have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material.

 

Changes in Accounting Policies

The significant accounting policies outlined within our Condensed Consolidated Financial Statements for the nine months ended September 30, 2012 have been applied consistently with the year ended December 31, 2011.

 

 

35

---

 

Recently Enacted Accounting Standards

 

Management has evaluated the recent accounting pronouncements issued since the audited financial statements and in management’s opinion, the relevant pronouncements reviewed have no material effect on the Company’s financial statements.

PLAN OF OPERATIONS

Our Plan of Operations has been organized for each of our properties and claims to account for the similarities and differences in the location, geology, the prospective metals that may be hosted by each property or claim, and the current stage of exploration of each property and claim; accordingly, we have several Plans of Operations to account for those similarities and differences among our various properties and claims. Our Plans of Operations represent our expected exploration activities and are for a period of twelve months. Our total amount budgeted for exploration in 2012 is $ 4,090,000.

We are   continuing with the evaluation of mine plans, potential drill targets and resource potential of the Prince Mine. Drill testing of the projected extensions of the possible silver mineralization should begin in the fall of 2012. On the Caselton Tailings Remediation Project, we will conduct site characterization studies with geotechnical drilling in conjunction with metallurgical testing. The data generated from the program will be used to design a processing facility and to determine the feasibility of economic precious metals recovery. At the newly acquired Butte Silver Mines properties, we will be evaluating and compiling the voluminous historic exploration and mining data on the properties and will commence with preliminary mine development planning.

We have initiated planning on the Butte properties, which will be concurrent with geologic mapping and sampling of mineralized structures and surveying of existing underground development. Based upon our analysis of the test results and studies, we will determine whether to proceed with development plans. We cannot determine, predict, or assure whether we will be able to proceed with advanced exploration and development activities regarding any of our properties or claims. Our exploration activities will be conducted under the overall direction of our registered Consulting Geologist using industry standard quality assurance and control procedures.

The Company’s Plan of Operations and related 2012 budget for $4,090,000 is contingent upon the Company obtaining adequate financing.

Properties - The Calico Silver Project in San Bernardino County, California, the Pioche Mining District properties in Lincoln County, Nevada and the Butte Silver Mines properties in Silver Bow County, Montana.

We will continue to hold the Calico Silver property and will focus our exploration efforts on the Pioche and Butte Mining Districts. We will use employees, consultants and existing infrastructure to conduct our activities in the Pioche Nevada and the Butte, Montana properties. Our exploration program is shown below:

Exploration at Butte Silver Mines

1)

Data and property acquisition.

Our staff will continue to compile the exploration records from these historic Anaconda Company mines. While much data is in our possession, other sources will be utilized in order to make the records as complete as possible. Once acquired, the exploration and development data will be compiled using mine planning software to regenerate resource estimates. Underground levels will be plotted as will drift sampling records and exploration drill holes. Selected mineral and surface interests ancillary to our properties are also slated for acquisition.

2)

Development Planning.

Based on the presently known historic resources and proposed AMC underground mine plans, we expect to be able to create new preliminary mine development plans for the Project. This will require underground mapping, surveying and confirmation sampling. As the condition of much of the existing underground development headings is presently unknown, the extent of this work to be conducted in 2012 is uncertain.

 

 

36

---

 

 

Exploration at Prince Mine:

1)

Surface and underground drilling.

All accumulated data from underground and surface sampling, geochemical and geophysical studies will be evaluated to confirm the highest priority targets for exploration on the Prince Mine. A drilling contractor will be hired to conduct the drilling program using the dual tube reverse circulation air rotary method of drilling and sample collection under the supervision of our registered Geologist. This drilling method is widely accepted as providing high quality sample integrity. Industry standard chain of custody and quality assurance and control procedures will be followed. This will include the use of duplicate samples and sample standards. Accurate geologic logs of the drill holes will be created and the drill hole locations surveyed. Geologic samples will be continuously collected and delivered to an independent certified analytical laboratory for assaying. It is estimated that this program will require up to four months for completion.

2)

Mine planning.

As assays come back from drilling programs, the corporate engineering department will enter them into a data base with mine planning software to produce a preliminary scoping study. Assuming the exploration is successful, an independent engineering firm will be hired to produce a deposit model using computerized mine planning software. This phase will require approximately three months and will most probably commence at approximately month twelve.

 

Site Characterization and Planning at the Caselton Tailings:

1)	Geotechnical drilling.
	Drilling using split spoon sampling and hollow stem auger drill methods will be conducted. All hole locations will be surveyed. Sample collection will be conducted under the supervision of a registered professional geologist. Samples will be split and the duplicates stored for reference. The first split will be shipped for chemical analysis and metallurgical testing. Industry standard chain of custody and quality control procedures will be followed.
2)	Feasibility and Permitting.
	This phase of the Operations Plan will commence providing the results of the drill testing and metallurgical work has been positive. The study will be done in 'house' by the Western States Engineering division with assistance from an established and reputable independent mining engineering firm. Permit applications for the combined metal recovery and site remediation project will be prepared by a reputable independent environmental firm for submittal in conjunction with the process design work.

Our ability to complete the activities described under “Plan of Operations” require significant funding. We presently have received  a portion of the funding and expect to receive the balance of the funding sometime in the third quarter, but we cannot assure you that we will be able to obtain full funding or that the terms on which additional funding may be available will be acceptable. To the extent that we are able to secure funding for a portion of our needs, we will have to allocate such funding among the projects, and we may be unable to complete components of these projects. If we are able to obtain only limited funding, it may result in significant dilution to our shareholders. Further, our use of proceeds may be determined by the investors based on their priorities, which may be different from our priorities.

 

 

37

---

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our executive officer to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation and the requirements of the Exchange Act, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2012, our disclosure controls and procedures needed to be declared as ineffective. The small size of our company does not provide for the desired separation of control functions, and we do not have the required level of documentation of our monitoring and control procedures. The potential remedies for this situation are described below.

 

Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that our internal control over financial reporting was ineffective as of September 30, 2012 due to material weaknesses. A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. Management’s assessment identified the following material weaknesses in internal control over financial reporting:

 

 

38

---

 

●

The small size of our Company limits our ability to achieve the desired level of separation our internal controls and financial reporting. We do have a separate CEO and CFO; however we do not have an Audit Committee to review and oversee the financial policies and procedures of the Company. Until such time as we are able to install an audit committee, we do not meet the full requirement for separation. In the interim, we will continue to strengthen the role of our CEO and CFO and their review of our internal control procedures.

●	We have not achieved the desired level of documentation of our internal controls and procedures. This documentation will be strengthened to limit the possibility of any lapse in controls occurring.

In light of the material weaknesses described above, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

Subject to the Company’s financial resources management hopes to further mitigate the risk of the material weaknesses going forward by utilizing external financial consulting services, in a more effective manner, prior to the review by our principal independent accounting firm to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the Commission’s rule and forms.

 

Changes in internal controls

 

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the financial quarter ending September 30, 2012. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in our internal controls over financial reporting during the financial quarter ending September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

39

---

 

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

 

We are not aware of any pending or threatened litigation against our directors or us.

ITEM 1A - RISK FACTORS

Risk Factors

ITEM 1A.  RISK FACTORS.

 

As a smaller reporting Company, we are not required to provide risk factors; however, please consult our Form 10-K to review risk factors.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 28, 2012, we issued 271,452 shares of our restricted common stock to a shareholder/officer to extinguish $54,290 we owed the shareholder/officer for outstanding salaries due him.  We have not issued any shares of our common stock subsequent to September 30, 2012, up to the filing of this 10-Q report.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

None

ITEM 4 - MINE SAFETY DISCLOSURES

 

We are an exploration stage company and we have no mines, operational or otherwise, or products from mines which enter commerce. Additionally, we have not been subject to any violations, notices, or orders specified in the Mine Safety and Health Act of 1977.

 

ITEM 5 - OTHER INFORMATION

None

 

 

40

---

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INTERNATIONAL SILVER, INC.
Dated: November 12. 2012	By:	/s/ Harold R Shipes
		Harold R. Shipes,
		Chief Executive Officer/Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.

Signature		Title		Date
/s/ Harold R. Shipes		Chairman of the Board/Director		November 12, 2012
Harold R. Shipes		Chief Executive Officer
		(Principal Executive Officer)
/s/ John A. McKinney		Chief Financial Officer		November 12, 2012
John A. McKinney		Executive Vice President
		(Principal Financial Officer)

 

 

41

---

 

 

Exhibits

 

Exhibit 31.1	Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 31.2	Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 32.1	Certification by the Principal Executive Officer pursuant to Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Exhibit 32.2	Certification by the Principal Financial Officer pursuant to Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101.INS **	XBRL Instance Document
101.SCH **	XBRL Taxonomy Extension Schema Document
101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **	XBRL Taxonomy Extension Label Linkbase Document
101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

42 

---