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 completed a preliminary drilling program and is in the process of analyzing their findings. At March 31, 2013, 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. The Company has deposited funds towards this investment (refer to Note E – Deposit in Investment) which constitutes the Company capital contribution towards the joint venture. Formation of the joint venture is pending.
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 362 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.
Continental Public Land Trust, Silver Bow County, Montana
On April 23, 2012, the Company executed a 99-year mining lease on 1,100 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. The Belmont mine property is part of the CPLT lease.
West Butte - Chattel Property. Silver Bow County Montana
On August 7, 2012, the Company entered into a purchase agreement and contract for deed with Chattel, LLC, a Montana limited liability company, for 1,022 acres of land and mineral rights, located in Silver Bow County, Montana.
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. There are approximately 1,300 acres of U.S federal lode mining claims wholly owned by the Company. In 2012, the Company leased this property to Calico Exploration, LLC.
Condensed Financial Statements
The accompanying interim condensed 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 March 31, 2013 and December 31, 2012 and results of operations for the comparative periods for the three months ended March 31, 2013 and March 31, 2012. Cash flows are presented for the comparative periods for the three months ended March 31, 2013 and March 31, 2012.
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, 2012 audited financial statements. The results of operations for the three-month period ended March 31, 2013 are not necessarily indicative of the operating results for the full year.
Going Concern
The Company’s interim 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 financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note B - Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of International Silver, Inc. and its subsidiaries Western States Engineering, Inc., International Silver Nevada, Inc. and Butte Silver Mines, Inc. for the three months ended March 31, 2013 and March 31, 2012. 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 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, prepaid expenses and trade receivables 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
During the first quarter of 2013 and the first half of 2012, the Company negotiated additional financing and as a result, the entirety of the Company’s tangible property, currently owned or acquired hereafter, is collateral for the ISLV Partners, LLC. (Refer to
Note H – Convertible Note Payable).
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.
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 March 31, 2013 trade receivables were $87,246 and at December 31, 2012, trade receivables were $61,323. No allowance for uncollectible accounts was established, as management deem the accounts as fully-collectible.
Investments
Investments in marketable securities are classified under one of three methods:
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1)
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available for sale
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2)
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held to maturity
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3)
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trading securities
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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 March 31, 2013 and December 31, 2012, the Company held securities in Continental Mining & Smelting, which are considered “available for sale” and were reported under the Equity Method. At March 31, 2013 and December 31, 2012, the value of the Company’s investments in Continental Mining & Smelting Limited was considered impaired. See
Note E – Other Assets – Investments in Stocks.
Mineral Development
Costs associated with the acquisition of mineral interests, in the exploration stage, are “expensed”. Mineral exploration costs are also “expensed” as incurred. 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.
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 March 31, 2013 and December 31, 2012, all mineral interests were in the exploration stage.
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, if any. 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:
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Leasehold Improvements
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15 years
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Equipment
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5 years
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Office furniture and equipment
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5 years
|
Development stage mineral interests are not amortized until such time as the underlying property is converted to the production stage. As of March 31, 2013, there was $7,433 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.
Estimates of future cash flows used to test the recoverability of a long-lived asset incorporate the company’s assumptions about its use of the asset and all available evidence was considered. For impairment purposes, the asset groupings were considered at their lowest level for which identifiable cash flows are independent of the cash flows of other assets and liabilities.
At March 31, 2013, an impairment test was conducted on the Company’s mineral land holdings and no impairment loss is required. Refer to
Note D – Property. Plant and Equipment – Mining Properties
.
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.
At March 31, 2013, income was recognized from management and engineering contracts from Western States Engineering, Inc., a subsidiary of International Silver, Inc. As of March 31, 2013, there has been no production from any of the Company's mineral properties, since these properties are still in the exploratory stage.
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. On November 7, 2012, the Company granted its members of the Board of Directors additional stock options. (Refer to Note K – Shareholders’ Equity)
On February 21, 2013, the Company executed an additional convertible note, whereby the lender was granted warrants to purchase additional shares of common stock of the Company. Refer to Note H – Convertible Notes Payable).
As of March 31, 2013 and December 31, 2012, no options nor 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 J- Income Taxes
.
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.
Statement of Cash Flows Information and Supplemental Non-Cash Financing Activities
Non-cash investing and financing transactions during the three months ended March 31, 2013 were $873,512 and $9,232 for the three months ended March 31, 2012. During the three months ended March 31, 2013, non-cash investing and financing activities reflected amortization of discount on notes issued by ISLV Partners, LLC. (refer to
Note H – Convertible Notes Payable
)
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 March 31, 2013 and December 31, 2012, 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.
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. In 2009, the Board of Directors of the Company approved a resolution for the stock issuance to officers and employees to recognize the cost of employee services. The Company adopted a stock option plan on November 1, 2010, which is accounted for pursuant to ASC 718.
Note C – Prepaid Expense
At March 31, 2013, prepaid expenses reflect the unexpired portion of mineral property leases, which are treated as operating leases, pursuant to FASB ASC 840-20. Disclosure of lease terms is explained in Note D – Property, Plant and Equipment. During the three months ended March 31, 2013, the lease on New Butte, located in the State of Montana, was renewed and commercial insurance coverage was taken out on the Caselton Mill, located in the State of Nevada. At March 31, 2013, the balance of prepaid expenses reflect the unamortized portion of prepaid commercial and director & officer professional liability insurance, prepaid mine leases and a partial prepayment remaining on metallurgical work being done on the Caselton tailings, resulting in a prepaid expense balance of $81,986 at March 31, 2013, compared to a balance of $105,651 at December 31, 2012, summarized below:
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March 31,
2013
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December 31,
2012
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Prepaid mine leases
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$
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42,561
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|
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$
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49,096
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|
|
Prepaid commercial insurance
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4,091
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|
|
|
5,603
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|
|
Prepaid director & officer insurance
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18,091
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35,413
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Prepaid expense – metallurgical services
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3,191
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14,321
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Prepaid rent
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2,500
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0
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Prepaid expense – other
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1,272
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|
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1,218
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Sub-total
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$
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71,706
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$
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105,651
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Prepaid rent – related party
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10,280
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0
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Total prepaid expenses
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$
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81,986
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$
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105,651
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Note D - Property, Plant and Equipment
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.
West Butte - 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. Pursuant to ASC 360-20-55-2, the minimal initial investment requirement for the full recognition of the purchase price on land held for commercial or industrial purposes, requires a minimal investment of 20% of the value. Upon execution of the contract for deed on August 7, 2012, only the initial deposit of $50,000, plus title fees were capitalized. The terms of the purchase agreement are disclosed in
Note I – Contract Payable.
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. During 2012, a preliminary drilling program was undertaken by the Company. At March 31, 2012 there were no proven or probable reserves.
The five-year lease requires annual lease payments of $50,000 payable annually on each anniversary date from the date of the lease agreement. Pursuant to FASB ASC 840 – 20 Operating Leases, the lease meets the criteria to be treated as an operating lease. Future minimum lease payments are as follows:
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November 6, 2013
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$
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50,000
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November 6, 2014
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$
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50,000
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Total
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$
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100,000
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Lease expense on the Prince Mine since inception of the lease on November 6, 2010 through March 31, 2013 is $120,000. For the three months ended March 31, 2013, lease expense was $12,329.
Should the Company exercise the purchase option, the total purchase price shall be $2,750,000, less any amounts paid as advance/lease payments. The initial payment is due within 30 days of the option exercise. Installment payments are as follows:
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No. 1 - Initial payment
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$
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687,500
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No. 2 - 1st anniversary of exercise
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$
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687,500
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No. 3 - 2nd anniversary of exercise
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$
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687,500
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No. 4 - 3rd anniversary of exercise
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$
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687,500
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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:
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January 15, 2014 - $15,000 annually
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$
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15,000
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|
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January 15, 2015 - $15,000 annually
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|
$
|
15,000
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|
|
Each January 15th - $20,000 annually - Years 2016 – 2020
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|
$
|
100,000
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Each January 15th - $25,000 annually - Years 2021 – 2030
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$
|
250,000
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Each January 15th - $50,000 annually - Years 2031 – 2060
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|
$
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1,500,000
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Each January 15th - $75,000 annually - Years 2061 – 2062
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$
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150,000
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Total
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$
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2,030,000
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|
The lease payment due January 15, 2013 was timely paid.
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 March 31, 2013 was $18,698.
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.
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April 23, 2013 - $25,000 annually - Year 2013
|
|
$
|
25,000
|
|
|
Each April 23rd - $25,000 annually - Years 2014– 2024
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|
$
|
250,000
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|
|
Each April 23rd - $25,000 annually - Years 2015 – 2112, as adjusted by US Producer Price Index
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|
$
|
2,175,000
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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 March 31, 2013 was $18,740.
Leasehold Improvements, Equipment, Furniture and Fixtures
Acquisitions during the three months ended March 31, 2013 consisted of office furniture and computers for the newly-established exploration office at Butte, Montana. At March 31, 2013, total leasehold improvements, equipment and office furniture acquisitions were $49,942.
At March 31, 2013, property, plant and equipment is comprised of the following:
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Land – Mining Properties
|
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$
|
103,388
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|
|
Leasehold Improvements
|
|
|
26,812
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|
|
Equipment
|
|
|
5,399
|
|
|
Furniture and Fixtures
|
|
|
11,877
|
|
|
Computer Equipment
|
|
|
5,854
|
|
|
|
|
$
|
153,330
|
|
|
Accumulated Depreciation
|
|
|
(7,433
|
)
|
|
|
|
$
|
145,897
|
|
Depreciation expense for the three months ended March 31, 2013 was $1,194 and accumulated depreciation was $7,433.
Note E – Other Assets
Investments in Stock
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 March 31, 2013, 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, 2012 and March 31, 2013, 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 March 31, 2013, the Company’s share of losses for the year then ended were $16,899 and cumulative losses inception to–date are $215,259. 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.
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At March 31, 2013, the Company held the following securities:
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|
No of Shares
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Share Price
|
|
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Fair Value
|
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Common Stock
|
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|
|
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|
Available for Sale securities:
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|
|
|
|
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|
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Continental Mining and Smelting Limited
|
|
|
6,000,000
|
|
|
$
|
0.000
|
|
|
$
|
0
|
|
Note F - Deposits Towards Investment
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 to be used to complete a Phase 1 site investigation.
As of March 31, 2013, the Company had reimbursed Aurum, LLC $160,000 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.
Note G - Other Deposits
Non-Refundable Deposits
On October 29, 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.
Refundable Deposits – Reclamation Bond
On June 18, 2012, the Company placed a reclamation bond with the Bureau of Land Management in the amount of $14,406 to provide surface reclamation coverage for the drilling program at the Caselton Mine tailings. When all terms and conditions of the operation have been fulfilled, the Office of the United States Department of Interior will authorize a refund.
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 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.
Convertible Note Agreement – First Amendment
On May 17, 2012, the Company executed an amendment to the Convertible Note Agreement, dated February 6, 2012, giving ISLV Partners, LLC, the option to make an additional loan in the principal amount of up to $2,000,000. Under the terms of the First Amendment, ISLV Partners, LLC advanced the Company an amount of $130,000 on May 17, 2012 and a loan for an additional $1,870,000 on May 25, 2012. The note is convertible into International Silver, Inc. common stock at $0.20 per share. In addition, the Company issued to ISLV Partners, LLC a warrant to purchase 10,000,000 additional common stock shares at an exercise price of $0.40 per share, exercisable through May 25, 2015. Net proceeds from the loan will be used for working capital, exploration and corporate development purposes.
Convertible Note Agreement – Second Amendment
On February 13, 2013, the Company executed a second amendment to the Convertible Note Agreement, dated February 6, 2012, giving ISLV Partners, LLC, the option to make an additional loan in the principal amount of up to $2,200,000. Under the terms of the Second Amendment, ISLV Partners, LLC loaned an initial amount of $1,000,000 on February 21, 2013 and shall have the right to loan an additional amount up to $1,200,000 by April 15, 2013. The note is convertible into International Silver, Inc. common stock at $0.20 per share. In addition, the Company issued to ISLV Partners, LLC a warrant to purchase 5,000,000 additional common stock shares at an exercise price of $0.40 per share, exercisable through February 21, 2016. Net proceeds from the loan will be used for working capital, exploration and corporate development purposes.
The following table summarizes the net carrying value, after the discount on the notes resulting from the issuance of warrants:
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|
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March 31,
2013
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December 31,
2012
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|
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Convertible Notes Payable – ISLV Partners, LLC:
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|
|
|
|
|
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Issued February 6, 2012
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$
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600,000
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|
|
$
|
600,000
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|
|
Issued May 17, 2012
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|
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130,000
|
|
|
|
130,000
|
|
|
Issued May 25, 2012
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|
|
1,870,000
|
|
|
|
1,870,000
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|
|
Issued February 21, 2013
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|
|
1,000,000
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|
|
|
0
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|
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Total
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|
$
|
3,600,000
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|
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$
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2,600,000
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|
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Discount on Notes Payable
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|
|
(504,762
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)
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|
|
(460,734)
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|
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Net Carrying Value
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$
|
3,095,238
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|
|
$
|
2,139,266
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|
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. At March 31, 2103, no conversion had occurred.
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
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.
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 March 31, 2013, 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.
Warrants
Detachable warrants issued by the Company providing the Lender with the option to purchase 18,000,000 shares of the Company’s common stock during year ended December 31, 2012 and the three months ended March 31, 2013 are as follows: