ISLV International Silver Inc (CE)

Large accelerated filer

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Accelerated filer

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Non–Accelerated filer

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Smaller reporting company

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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

SEALE AND BEERS, CPAs

PCAOB & CPAB REGISTERED AUDITORS

 

www.sealebeers.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

International Silver, Inc.

(An Exploration Stage Company)

We have reviewed the accompanying condensed consolidated balance sheet of International Silver, Inc. as of June 30, 2013, and the related condensed consolidated statements of operations for the three and six-month periods ended June 30, 2013 and 2012, and for the period from inception on June 16, 2006 through June 30, 2013, and condensed consolidated statements of cash flows for the six-month periods then ended and for the period from inception on June 16, 2006 through June 30, 2013. These interim financial statements are the responsibility of the Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for the financials and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has minimal revenues, has negative working capital at June 30, 2013, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Seale and Beers, CPAs

Seale and Beers, CPAs

Las Vegas, Nevada

August 9, 2013

 

50 S. Jones Blvd Suite 202 Las Vegas, NV 89107 Phone: (888)727-8251 Fax: (888)782- 2351

 

 

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International Silver, Inc.

(An Exploration Stage Company)

Condensed Consolidated Financial Statements

For The Six Months June 30, 2013

(Unaudited)

and

For the Year Ended December 31, 2012

(Audited)

 

 
 

 

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International Silver, Inc.

(An Exploration Stage Enterprise)

Unaudited Interim Condensed Consolidated Balance Sheets

 

		As At				As At
		June 30,				December 31,
		2013				2012
ASSETS
CURRENT ASSETS
Cash		$	366,833			$	211,188
Accounts receivable			135,403				61,323
Prepaid expenses - Note C			102,142				105,651
Total Current Assets		$	604,378			$	378,162
PROPERTY, PLANT AND EQUIPMENT- Note D
Mineral properties		$	103,388			$	103,388
Leasehold Improvements			26,812				26,812
Equipment			5,399				5,399
Furniture & Fixtures			11,877				3,502
Computer Software			8,390				-
Computer equipment			21,535				2,429
		$	177,401			$	141,530
Accumulated depreciation			(9,027	)			(6,240	)
		$	168,374			$	135,290
Other Assets - Note E
Deposit toward investment - Note F		$	180,000			$	150,000
Other Deposits - Note G			84,406				49,406
		$	264,406			$	199,406
TOTAL ASSETS		$	1,037,158			$	712,858

 

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	35,697			$	234,745
Payroll taxes payable			6,682				8,658
Accrued expenses			379,968				194,882
Due to related parties - Note L			65,255				52,218
Deferred Income - Note M			25,205				-
Total Current Liabilities		$	512,807			$	490,503
LONG-TERM LIABILITIES
Related party convertible notes payable - Note H		$	2,628,010			$	2,139,266
		$	2,628,010			$	2,139,266
Total Liabilities		$	3,140,817			$	2,629,769
SHAREHOLDERS' EQUITY (DEFICIT) - Note K
Common stock
authorized shares - 500,000,000
par value $0.0001 per share
issued & o/s at 12/31/12 - 37,052,280
issued & o/s at 06/30/13 - 37,052,280		$	3,705			$	3,705
Additional paid-in capital			4,678,527				3,260,984
Accumulated deficit prior to exploration stage			(176,034	)			(176,034	)
Accumulated deficit during exploration stage			(6,609,857	)			(5,005,566	)
Total Shareholders' Equity		$	(2,103,659	)		$	(1,916,911	)
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)		$	1,037,158			$	712,858

 

See accompanying notes to the condensed consolidated financial statements

 

 

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International Silver, Inc.

(An Exploration Stage Enterprise)

Unaudited Interim Condensed Consolidated Statement of Income

 

		Three Months Ended								Six Months Ended								Inception (June 16, 2006) of Exploration Stage through
		June 30,				June 30,				June 30,				June 30,				(June 30,
		2013				2012				2013				2012				2013)
Revenues
Mineral lease income		$	12,465			$	-			$	24,795			$				$	124,795
Consulting - third parties			35,001				-				70,002				-				263,945
Consulting -related parties			59,824				-				109,977				-				507,067
Total Revenues		$	107,290			$	-			$	204,774			$	-			$	895,807
Operating Expenses
Exploration costs		$	113,556			$	43,635			$	220,112			$	94,279			$	1,457,412
General and administration
Rent expense - related party			20,559				28,500				51,398				57,000				340,695
Rent expense - third party			16,280				-				23,780				-				23,780
Bad debt expense			-				-				-				-				41,860
All other general & administrative			433,582				358,306				889,364				654,556				4,262,597
Depreciation and depletion			1,594				39				2,787				79				4,237
Total operating expenses		$	585,571			$	430,480			$	1,187,441			$	805,914			$	6,130,581
Operating Income/(Loss)		$	(478,281	)		$	(430,480	)		$	(982,667	)		$	(805,914	)		$	(5,234,774	)
Other Income/(Expense)
Gain on settlement of debt		$	-			$	-			$	-			$	-				1,678,634
Impairment loss			-				-				-				-				(1,733,456	)
Interest expense			(401,836	)			(88,808	)			(621,624	)			(149,344	)			(1,320,261	)
Total other income/(expense)		$	(401,836	)		$	(88,808	)		$	(621,624	)		$	(149,344	)		$	(1,375,083	)
Net Income/(Loss)		$	(880,117	)		$	(519,288	)		$	(1,604,291	)		$	(955,258	)		$	(6,609,857	)
Basic Earnings per Share
Income/(Loss) per Share		$	(0.02	)		$	(0.01	)		$	(0.04	)		$	(0.03	)
Weighted Average Shares
Outstanding			37,052,280				36,780,828				37,052,280				36,780,828

 

See accompanying notes to the condensed consolidated financial statements

 

 

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International Silver, Inc.

(An Exploration Stage Enterprise)

Unaudited Interim Condensed Consolidated Statement of Cash Flows

 

		Six Months Ended								Inception (June 16, 2006) of Exploration Stage through
		June 30,				June 30,				(June 30,
		2013				2012				2013)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/(Loss)		$	(1,604,291	)		$	(955,258	)		$	(6,609,857	)
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			2,787				79				4,237
Impairment loss			-				-				1,733,456
Gain on settlement on debt			-				-				(1,678,634	)
Financing cost			406,285				34,109				820,387
Stock compensation expense			-				-				424,000
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
Changes in operating assets and liabilities
Decrease/(Increase) in receivables			(74,080	)			236				114,258
Decrease/(Increase) in employee receivable			-				-				2,317
Decrease/(Increase) in prepaid expenses			3,509				(20,119	)			(105,616	)
(Decrease)/Increase in payables			(187,986	)			32,747				94,466
(Decrease)/Increase in accrued expenses			185,087				94,207				403,590
(Decrease)/Increase in deferred income			25,205				-				25,205
Net Cash Flows (used by) Operating Activities		$	(1,243,484	)		$	(813,999	)		$	(4,479,806	)
CASH FLOW FROM INVESTMENT ACTIVITIES
Lease/purchase option on land		$	-			$	-			$	(90,000	)
Purchase of land			-				-				(90,000	)
Leasehold Improvements			-				-				(26,812	)
Purchase of equipment, furniture & fixtures			(35,871	)			(3,357	)			(48,324	)
Building improvements			-				-				(14,822	)
Deposits towards investment			(30,000	)			(110,000	)			(180,000	)
Nonrefundable deposit - Option payment			(35,000	)			-				(70,000	)
Refundable deposit - reclamation bond			-				(14,406	)			(14,406	)
Purchase of mineral land			-				(47,500	)			(103,388	)
Net Cash Flows from Investment Activities		$	(100,871	)		$	(175,263	)		$	(637,752	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock:
Net proceeds from stock issuance		$	-			$	-			$	1,329,290
Less: Stock issuance costs			-				-				(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			1,500,000				2,600,000				4,175,000
Debt service payments			-				(30,000	)			(100,000	)
Borrowings from related parties			-				-				152,980
Net Cash Flows from Financing Activities		$	1,500,000			$	2 ,570,000			$	5 ,452,761
Net Increase/(Decrease) in Cash		$	155,645			$	1,580,738			$	335,203
Beginning Cash Balance		$	211,188			$	1 ,913			$	31,630
Ending Cash Balance		$	366,833			$	1,582,651			$	366,833

 

See accompanying notes to the condensed consolidated financial statements

 

 

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International Silver, Inc.

(An Exploration Stage Enterprise)

Supplemental Disclosures of Non-Cash Financing Activities

 

										Exploration Stage
		Six Months Ended								(June 16, 2006
		June 30,				June 30,				through
		2013				2012				June 30, 2013)
The Company issued shares of its common stock in exchange for the following:
For services rendered:
Director services		$	-			$	-			$	21,000
Legal and professional services			-				-				116,350
Stock transfer agent services			-				-				5,500
Accounting services			-				-				6,150
Geology and engineering			-				-				8,000
Sub-total		$	-			$	-			$	157,000
For land/mining property			-				-				42,000
For equipment			-				-				3,000
For exploration costs			-				-				55,385
For debt retirement			-				-				156,651
For contributed capital			-				-				315,072
Total non-cash issuances of stock		$	-			$	-			$	729,108
Shares of common stock issuable
For debt interest		$	-			$	-			$	16,250
		$	-			$	-			$	16,250
Shares of common stock cancelled
Repurchase of its common stock		$	-			$	-			$	30,000
Issuance of incentive stock option grants
Grants issued		$	-			$	-			$	424,000
The Company relinquished its mining property in exchange for the following:
For repurchase of its common stock		$	-			$	-			$	(30,000	)
For marketable securities in another company		$	-			$	-			$	(25,000	)
For deed of trust in the mining property		$	-			$	-			$	90,000

 

See accompanying notes to the condensed consolidated financial statements

 

 

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International Silver, Inc.
(An Exploration Stage Enterprise)
Consolidated Statement of Shareholders' Equity

 

																				Accumulated Deficit
					Common Stock						Additional			Treasury Stock/						Prior			During
		Share			No. of			$ 0.0001			Paid-In			Shares Issuable						Exploration			Exploration
		Price			Shares			Par Value			Capital			Shares			Amount			Stage			Stage			Total
At Janaury 1, 2012						36,780,828			3,678			2,505,936			0			0			(176,034	)		(2,454,140	)		(120,560	)
Convertible Debt
Issuance of Warrants
February 6, 2012												133,334															133,334
Convertible Debt
Issuance of Warrants
May 25, 2012												444,444															444,444
Shares exchanged for debt
August 28, 2012		$	0.200			271,452			27			54,263															54,290
Cost of Discounted Shares
August 28, 2012												95,008															95,008
Stock option - grants issued
November 7, 2012		$	0.070									28,000															28,000
Net Income/(Loss)																								(2,551,426	)		(2,551,426	)
At December 31, 2012						37,052,280			3,705			3,260,985			0			0			(176,034	)		(5,005,566	)		(1,916,910	)
Convertible Debt
Issuance of Warrants
February 21, 2013												917,542															917,542
Net Income/(Loss)-Restated																								(724,174	)		(724,174	)
At March 31, 2013						37,052,280			3,705			4,178,527			0			0			(176,034	)		(5,729,740	)		(1,723,542	)
Convertible Debt
Issuance of Warrants
May 22, 2013												500,000															500,000
Net Income/(Loss)																								(880,117	)		(880,117	)
At June 30, 2013						37,052,280			3,705			4,678,527			0			0			(176,034	)		(6,609,857	)		(2,103,659	)

 

See accompanying notes to the condensed consolidated financial statements

 

 

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International Silver, Inc.

(An Exploration Stage Company)

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 is to acquire and explore high-grade silver properties throughout North and South America.

On September 4, 1992, the Company was incorporated in Arizona as ARX Engineering, Inc. and then changed its name to Western States Engineering, Inc. On June 20, 2006, the Company changed its name to International Silver, Inc. to reflect 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 continue a reconnaissance and exploration program in the Pioche Mining District located in Nevada, in Silver Bow County, Montana 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 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 analyzing its findings. At June 30, 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) representing the Company’s capital contribution towards the joint venture. Formation of the joint venture entity 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.

 

 

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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. The Company wholly owns approximately 1,300 acres of U.S federal lode mining claims. 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 June 30, 2013 and December 31, 2012 and results of operations for the comparative periods for the three months ended June 30, 2013 and June 30, 2012. Cash flows are presented for the comparative periods for the six months ended June 30, 2013 and June 30, 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. These condensed interim financial statements should 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 six-month period ended June 30, 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 upon 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, which may include, a private placement, a public offering, convertible notes, secured loans or any combination of the foregoing.

The ability of the Company to continue as a going concern is dependent upon its ability to secure 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.

 

 

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Note B - Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements for the three months ended June 30, 2013 and June 30, 2012 include the accounts of International Silver, Inc. and its subsidiaries, Western States Engineering, Inc. International Silver Nevada, Inc. and Butte Silver Mines, Inc. 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 reviewed and evaluated recent and relevant accounting pronouncements issued since its last audited financial statements and in managements’ opinion, these pronouncements 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 2013 and 2012, the Company negotiated additional financing with ISLV Partners, LLC; as a result, the Company’s entire tangible property, currently owned or acquired hereafter, is collateral in connection with the ISLV Partners, LLC financing. (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 June 30, 2013, trade receivables were $135,403 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.

 

 

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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 June 30, 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 June 30, 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 June 30, 2013 and December 31, 2012, all mineral interests were in the exploration stage.

 

 

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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:

 

Leasehold Improvements	15 years
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 June 30, 2013, there was $9,027 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 June 30, 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.

Income was recognized from management and engineering contracts rendered by Western States Engineering, Inc., a subsidiary of International Silver, Inc. for the six months ended June 30, 2013. As of June 30, 2013, there has been no production from any of the Company's mineral properties, as 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.

 

 

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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 June 30, 2013 and December 31, 2012, 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 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 six months ended June 30, 2013 were $406,285 and $34,109 for the six months ended June 30, 2012. During the six months ended June 30, 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 June 30, 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, which 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.

 

 

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Note C – Prepaid Expense

 

During the six months ended June 30, 2013, the leases on New Butte and the Continental Public Land Trust, located in the State of Montana, were renewed, as well as commercial insurance coverage for all our exploration properties located in Nevada and Montana. At June 30, 2013, prepaid expenses reflect the unexpired portion of mineral property leases, which are treated as operating leases, pursuant to FASB ASC 840-20. Also reflected in prepaid expenses is the unexpired portion of commercial insurance on our Nevada and Montana properties, prepayments on the roaster-leach study being conducted by Hazen Research and on a consulting arrangement with Gustavson Associates for a preliminary economic assessment on the Caselton Tailings located in Nevada, resulting in a prepaid expense balance of $102,142 at June 30, 2013, compared to a balance of $105,651 at December 31, 2012, summarized below:

 

		June 30, 2013				December 31, 2012
Prepaid mine leases		$	46,370			$	49,096
Prepaid commercial insurance			19,596				5,603
Prepaid director & officer insurance			578				35,413
Prepaid expense – metallurgical services			7,000				14,321
Prepaid expense – economic assessment study			25,000				0
Prepaid expense – rent			2,500				0
Prepaid expense – other			1,098				1,218
Total prepaid expenses		$	102,142			$	105,651

 

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.

 

 

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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:

November 6, 2013		$	50,000
November 6, 2014		$	50,000
Total		$	100,000

 

Lease expense on the Prince Mine since inception of the lease on November 6, 2010 through June 30, 2013 is $132,466. For the six months ended June 30, 2013, lease expense was $24,795.

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, 2014 - $15,000 annually		$	15,000
January 15, 2015 - $15,000 annually		$	15,000
Each January 15th - $20,000 annually - Years 2016 – 2020		$	100,000
Each January 15th - $25,000 annually - Years 2021 – 2030		$	250,000
Each January 15th - $50,000 annually - Years 2031 – 2060		$	1,500,000
Each January 15th - $75,000 annually - Years 2061 – 2062		$	150,000
Total		$	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 June 30, 2013 was $22,438.

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 – Paid		$	25,000
Each April 23rd - $25,000 annually - Years 2014– 2024		$	250,000
Each April 23rd - $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 the owner’s property.

Lease expense on the Continental Public Land Trust since inception of the lease on April 23, 2012 through June 30, 2013 was $23,726.

 

Leasehold Improvements, Equipment, Furniture and Fixtures

Acquisitions during the six months ended June 30, 2013 consisted of office furniture, scanner/plotter and computers and auto cad software for the newly-established exploration office at Butte, Montana. At June 30, 2013, total leasehold improvements, equipment and office furniture acquisitions were $74,013.

 

At June 30, 2013, property, plant and equipment is comprised of the following:

Land – Mining Properties		$	103,388
Leasehold Improvements			26,812
Equipment			5,399
Furniture and Fixtures			11,877
Computer Software and Equipment			29,925
		$	177,401
Accumulated Depreciation			(9,027	)
		$	168,374

Depreciation expense for the three months ended June 30, 2013 was $1,594 and accumulated depreciation was $9,027.

 

 

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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 June 30, 2013, the Company owned a 16.7 % interest in Continental, whose outstanding shares were 36,028,001. At the date of acquisition, the Company determined that the “Equity Method” of accounting was warranted because 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 June 30, 2013, there is no measurable value in the common stock of Continental Mining and Smelting Limited. Continental Mining and Smelting Limited has been attempting to obtain financing to enter the development stage of their mining operations, but has thus far been unsuccessful in doing so,

At June 30, 2013, the Company’s share of losses for the six months then ended were $27,297 and cumulative losses inception to–date are $226,783. 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 June 30, 2013, 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

 

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 June 30, 2013, the Company had reimbursed Aurum, LLC $180,000 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.

 

 

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Note G - Other Deposits

 

Non-Refundable Deposits – Option to Purchase the Assets of Pan American

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.

 

Non-Refundable Deposits – Option to Purchase Acid Plant

On April 1, 2013, the Company executed an exclusive right to purchase agreement with Atlas Precious Metals Inc., a related party, for the purchase of a sulfuric acid plant. The purchase price agreed to is the lower of either the market value or $5,000,000 during the term of 18 months. Under the agreement, the Company will make an initial payment of $14,000, payable at the signing of the agreement and $7,000, payable on the 20 th day of each month. All payments shall be applied towards the purchase price of the asset. Payment may be tendered in cash, shares of the Company’s common stock or a combination thereof. The common stock transaction is based on a per share price of $0.50 of the Company’s common stock. As of June 30, 2013, the Company had made $35,000 in option payments.

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 – Related Party 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 provide 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 February 14, 2014.

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.

 

 

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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.

Convertible Note Agreement – Third Amendment

On May 22, 2013, the Company executed a third amendment to the Convertible Note Agreement, dated February 6, 2012, as amended by the First and Second amendments, dated May 17, 2012 and February 13, 2013, respectively, giving ISLV Partners, LLC, the option to make an additional loan in the principal amount of up to $1,200,000. Under the terms of the Third Amendment, ISLV Partners, LLC loaned an initial amount of $500,000 on May 22, 2013 and shall have the right to loan an additional amount up to $700,000 by July 1, 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 2,500,000 additional common stock shares at an exercise price of $0.40 per share, exercisable through May 22, 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:

		June 30, 2013				December 31, 2012
Convertible Notes Payable – ISLV Partners, LLC:
Issued February 6, 2012		$	600,000			$	600,000
Issued May 17, 2012			130,000				130,000
Issued May 25, 2012			1,870,000				1,870,000
Issued February 21, 2013			1,000,000				0
Issued May 22, 2013			500,000				0
Total		$	4,100,000			$	2,600,000
Discount on Notes Payable			(1,471,990	)			(460,734)
Net Carrying Value		$	2,628,010			$	2,139,266

 

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 June 30, 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.

 

 

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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 June 30, 2013, the convertible note instruments had no beneficial conversion feature, and 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 29,010,450 shares of the Company’s common stock as of June 30, 2013 are as follows:

 

Warrants Issued February 6, 2012

On February 6, 2012, the Company, in conjunction with the issuance of the initial convertible note in the amount of $600,000, 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				Relative
		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							3,000,000
Beneficial Conversion Option for fully converted note						$	66,667

 

 

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Warrants Issued May 25, 2012

On May 25, 2012, the Company, in conjunction with the issuance of the two additional convertible notes in the amount of $130,000 and $1,870,000, issued a total of 10,000,000 “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				Relative
		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							10,000,000
Beneficial Conversion Option for fully converted note						$	222,222

 

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Warrants Issued on February 21, 2013

On February 21, 2013, the Company, in conjunction with the issuance of the an additional convertible note in the amount of $1,000,000, issued a total of 5,000,000 “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				Relative
		of Proceeds				Value
Face Value of Convertible Notes		$	1,000,000
No. of Common Shares			5,000,000
Current Market Value
Market Share price at February 21, 2013		$	0.35
Market Value of Stock, if converted		$	1,750,000			$	916,230
Fair Value - Warrants - At Time of Issuance – February 21, 2013
No. of Warrants Issued			5,000,000
Exercise Price		$	0.400
Fair Value - Based on Black-Scholes Method
Black-Scholes Value		$	0.032
Fair Value of Warrants		$	160,000			$	83,770
Total/Relative Value		$	1,910,000			$	1,000,000
Beneficial Conversion Option Calculation
Relative Note Value						$	916,230
Face value of Note						$	1,000,000
Market value of stock						$	0.200
Intrinsic conversion price/share						$	0.183
Beneficial Conversion Option for fully converted note						$	833,770

 

 

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Warrants Issued on May 22,2013

On May 22, 2013, the Company, in conjunction with the issuance of the an additional convertible note in the amount of $500,000, issued a total of 2,500,000 “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				Relative
		of Proceeds				Value
Face Value of Convertible Notes		$	500,000
No. of Common Shares			2,500,000
Current Market Value
Market Share price at May 22, 2013		$	0.45
Market Value of Stock, if converted		$	1,125,000			$	429,389
Fair Value - Warrants - At Time of Issuance – May 22, 2013
No. of Warrants Issued			2,500,000
Exercise Price		$	0.400
Fair Value - Based on Black-Scholes Method
Black-Scholes Value		$	0.074
Fair Value of Warrants		$	185,000			$	70,611
Total/Relative Value		$	1,310,000			$	500,000
Beneficial Conversion Option Calculation
Relative Note Value						$	429,389
Face value of Note						$	500,000
Market value of stock						$	0.200
Intrinsic conversion price/share						$	0.172
Beneficial Conversion Option for fully converted note						$	429,389

 

Adjustment to Warrant Price

The exercise price and the number of shares purchasable are subject to adjustment, but in no case shall the exercise price be reduced to below the par value of the class of stock for which this warrant is exercisable at such time, and the Company shall not take or permit to be taken any action which would cause the exercise price to be reduced below the par value per share of the class of stock for which this warrant is exercisable at such time.

 

If the Company makes a dividend or distribution on its common stock payable in common shares, the exercise price shall be proportionately adjusted effective as of the record date for the dividend or distribution. Other provisions requiring the adjustment to the warrant price relate to distributions other than common stock, adjustment upon merger, consolidation or exchange, recapitalization or reclassification.

 

 

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Note I – Contract Payable

On April 27, 2012, the Company entered into an agreement with Chattel, LLC, a Montana limited liability company, for the purchase of certain real property located in Silver Bow County, Montana. The contract for deed executed on August, 2012 was for a total purchase price was $1,500,000, with an earnest deposit of $50,000 placed prior to close of escrow. Interest on the unpaid balance is at a rate of four (4%) percent per annum. Payment terms are 1) $50,000 at close of escrow, plus accrued interest, 2) $50,000, plus accrued interest, due on the first and second anniversary date of the date of closing and 3) the balance due, including accrued interest, on the third anniversary date of the date of closing. In case of default, seller’s sole recourse shall be to reclaim all rights under the contract and buyer shall be liable for all payments in arrears, including interest.

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 paid were capitalized, and thus no liability was recognized on August 7, 2012. As of June 30, 2013, the outstanding principal balance is $1,450,000, plus accrued interest of $51,962.

 

Note J - Income Taxes

The Company has reported (for income tax purposes) net operating losses for 2012, 2011 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			1,061,616
Net Operating Loss carry-forward to Year 2012		$	1,623,490
Net Operating Loss - Year 2012			1,468,831
Net Operating Loss carry-forward to Year 2013		$	3,092,321

Pursuant to the provisions of the Internal Revenue Code, the Company has elected to forego the carry-back provisions, allowable under the IRS regulations, for the stated accounting periods.

 

At June 30, 2013, the Company recorded a deferred tax benefit of $1,408,271 but due to a going-concern issue, management made an allowance for a provision of an equal amount, should the Company not be able to avail itself of that tax benefit. Deferred tax asset is based on prevailing IRS graduated tax tables, which average 34% at June 30, 2013 and December 31, 2012. 

 

Net deferred tax assets consist of the following components:		June 30,				December 31,
		2013				2012
Deferred Tax Asset		$	1,408,271			$	1,105,626
Valuation Account			(1,408,271	)			(1,105,626	)
Net Deferred Tax Asset		$	0			$	0

 

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At December 31, 2012, the Company had a net operating loss carry-forward of $3,092,321 for federal income tax purposes that may be offset against future taxable income from years 2013 through 2031. Our deferred tax benefit is adjusted for interim results, but we simultaneously adjust the allowance for a net zero effect. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future years.

 

Note K – Shareholders’ Equity (Deficit)

Common Stock Issued and Outstanding

On August 28, 2012, the Company issued 271,452 shares of common stock at $0.20 per share in exchange for an outstanding debt owed to a shareholder/officer.

At June 30, 2013, the Company had 37,052,280 shares issued and outstanding. The Company has 500,000,000 shares of common stock authorized.

 

Stock Option Plan

At November 1, 2010, the Board of Directors (“Board”) of the Company authorized the approval of a stock option plan (the “Plan”). The Plan allows the Board, or a committee thereof at the Board’s discretion, to grant stock options to officers, directors, key employees and consultants of the company and its affiliates.

On February 28, 2013, the Board amended the Plan establishing the maximum number of shares of common stock to be reserved for issuance under the Plan at 5,000,000.

Pursuant to the Plan, in the case of Incentive Stock Options, the exercise price shall not be less than (i) 100% of the fair market value of one (1) share of common stock on the date the option is granted, or (ii) 110% of the fair market value of one (1) share of common Stock on the date the option is granted if, at that time the option is granted, the participant owns, directly or indirectly more than 10% of the total combined voting power of all classes of stock of the company. In the case of Non-Statutory Stock Options, the per share price to be paid by the Participant, at the time the option is exercised, shall be determined by the Committee in its sole discretion.

On November 1, 2010, stock options for 3,300,000 shares were granted to directors, officers, key employees and consultants at an exercise price of $0.20, which was in excess of the quoted market price of $0.12 of the Company’s shares at the date of the grant. All these options were deemed as “incentive stock options” by the Board in accordance with the Plan. These option grants are fully vested and expire on November 1, 2015. Stock compensation expense of $396,000 was recognized based on the Black-Scholes valuation of $0.12 per share of common stock

On November 5, 2012, stock options for 400,000 shares were granted to directors at an exercise price of $0.34, which was in excess of the quoted market price of $0.30 of the Company’s shares at the date of the grant. Stock options for 150,000 shares granted to new directors are fully vested and expire on November 5, 2015. The additional stock options for 250,000 shares issued to all directors vest on September 15, 2013. All these options were deemed as “incentive stock options” by the Board in accordance with the Plan. Stock compensation expense of $28,000 was recognized based on the Black-Scholes valuation of $0.07 per share of common stock.

No options were exercised or forfeited during the three months ended June 30, 2013 or for the year ended December 31, 2012.

Compensation expense has been recorded pursuant to ASC 718 – Compensation – Stock Compensation based on fair value derived by means of applying the Black Scholes (BSM) option-pricing model as follows.

The fair value of each option granted on November 1, 2010 was calculated assuming an expected life of five years, current stock price of $0.12 per share, an exercise price of $0.20 per share, an annual risk-free interest rate of 3.0% and a dividend yield of zero yielding a volatility of greater than 823%.

 

 

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The fair value of each option granted on November 5, 2012 was calculated assuming an expected life of five years, current stock price of $0.30 per share, an exercise price of $0.34 per share, an annual risk-free interest rate of 3.0% and a dividend yield of zero yielding a volatility of less than 1%.

 

A summary of the status of the Company’s stock options and changes during the three months ended June 30, 2013, is presented below: 

																		Weighted
														Weighted				(in years)
						Weighted								Average				Average
		Number of				Average				Options				Exercise				Contractual
		Stock Options				Exercise Price				Exercisable				Price				Life
Outstanding-January 1, 2010			0								0
Granted - November 1, 2010			3,300,000			$	0.20				3,300,000			$	0.20				5.00
Exercised			0								0
Outstanding-December 31, 2011			3,300,000			$	0.20				3,300,000			$	0.20
Granted - November 5, 2012			400,000			$	0.34				150,000			$	0.34				5.00
Exercised			0								0
Outstanding-December 31, 2012			3,700,000			$	0.22				3,450,000			$	0.22				3.00
Granted			0				0				0
Exercised			0				0				0
Outstanding-March 31, 2013			3,700,000			$	0.22				3,450,000			$	0.22				2.68
Granted			0				0				0
Exercised			0				0				0
Outstanding-June 30, 2013			3,700,000			$	0.22				3,450,000			$	0.22				2.43

Warrants

To date, the Board of Directors has approved the issuance of 29,010,450 warrants resulting from 1) a private placement occurring in 2011 in which 8,238,998 warrants were issued, 2) five convertible notes in which an aggregate of 20,500,000 warrants were issued, and 3) 271,452 warrants issued in settlement of outstanding debt due the Company’s Chief Executive Officer and Board Chairman, Harold R. Shipes.

On May 20, 2011 and June 14, 2011, as a component of the 8,238,998 “units” the Company sold in private placements, the Company issued 8,238,998 Class A common stock warrants, each granting the holder the right to purchase one share of common stock at an exercise price of $0.20 per share. Each warrant expires in three years.

On February 6, 2012, the Company negotiated a convertible note agreement, whereby the lender was issued 3,000,000 warrants, with an expiry date of February 6, 2015, exercisable at $0.40 per share for a number of shares equal to the number of shares into which the initial note is convertible.

On May 17 and May 25, 2012, the Company negotiated convertible term notes of $130,000 and $1,870,000, respectively, aggregating $2,000,000, whereby the lender was issued an additional 10,000,000 warrants, with an expiration date of May 25, 2015, exercisable at $0.40 per share for a number of shares equal to the number of shares into which the notes are convertible

On August 28, 2012, the Company issued Harold R. Shipes, its Chief Executive Officer and Director, a total of 271,452 shares of common stock in exchange for debt, plus 271,452 warrants, exercisable at $0.40 per share for a number of shares equal to the number of shares issued. These warrants expire on August 28, 2015.

On February 21, 2013, the Company a negotiated convertible term note of $1,000,000 whereby the lender was issued an additional 5,000,000 warrants, with an expiry date of February 21, 2016, exercisable at $0.40 per share for a number of shares equal to the number of shares into which the notes are convertible.

 

 

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On May 22, 2013, the Company a negotiated convertible term note of $500,000 whereby the lender was issued an additional 2,500,000 warrants, with an expiry date of May 22, 2016, exercisable at $0.40 per share for a number of shares equal to the number of shares into which the notes are convertible.

At June 30, 2013, none had yet been exercised.

A summary of warrant activity for the year 2012 and the six months ended June 30, 2013 is presented below:

 

						Weighted								Weighted
						Average								Average
		Number of				Exercise				Warrants				Exercise
		Warrants				Price				Exercisable				Price
Outstanding, January 1, 2012			8,238,998			$	0.20				8,238,998			$	0.20
Granted			3,000,000			$	0.40				3,000,000			$	0.40
Exercised			0								0
Outstanding, March 31, 2012			11,238,998			$	0.42				11,238,998			$	0.42
Granted			10,000,000			$	0.40				10,000,000			$	0.40
Exercised			0								0
Outstanding, June 30, 2012			21,238,998			$	0.42				21,238,998			$	0.42
Granted			271,452			$	0.40				271,452			$	0.40
Exercised			0								0
Outstanding, September 30, 2012			21,510,450			$	0.42				21,510,450			$	0.42
Granted			0			$	0.40				0			$	0.40
Exercised			0								0
Outstanding, December 31, 2012			21,510,450			$	0.42				21,510,450			$	0.42
Granted			5,000,000			$	0.40				5,000,000			$	0.40
Exercised			0								0
Outstanding, March 31, 2013			26,510,450			$	0.42				26,510,450			$	0.42
Granted			2,500,000			$	0.40				2,500,000			$	0.40
Exercised			0								0
Outstanding, June 30, 2013			29,010,450			$	0.42				29,010,450			$	0.42

 

At June 30, 2013, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows:

 

				Warrants Outstanding												Warrants Exercisable
Range of Warrant Exercise				Weighted- Average Remaining				Number of				Weighted Average				Number of				Weighted Average
Price				Contractual Life				Warrants				Exercise Price				Warrants				Exercise Price
$	0.20				0.89				7,699,998			$	0.20				7,699,998			$	0.20
$	0.20				0.96				539,000			$	0.20				539,000			$	0.20
$	0.40				1.61				3,000,000			$	0.40				3,000,000			$	0.40
$	0.40				1.90				10,000,000			$	0.40				10,000,000			$	0.40
$	0.40				2.16				271,452			$	0.40				271,452			$	0.40
$	0.40				2.65				5,000,000			$	0.40				5,000,000			$	0.40
$	0.40				2.90				2,500,000			$	0.40				2,500,000			$	0.409
									29,010,450								29,010,450

 

 

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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.

 

		June 30,				December 31,
		2013				2012
Due To Related Parties
Harold R. Shipes - Shareholder/Officer		$	2,755			$	1,608
Clinton W. Walker – Director			12,500				12,500
John P. Kennedy – Director			12,500				0
H. Eugene Dunham – Director			12,500				12,500
Michael Harrington – Director			12,500				12,500
Russell D. Alley – Director			12,500				12,500
Total		$	65,255			$	52,218

At June 30, 2013, we owed $65,255 to related parties.

Related party transactions have occurred with the following related party officer and directors:

Harold R. Shipes, the Company’s Chief Executive Officer and Chairman of the Board of Directors, travels extensively in connection with the Company’s holdings or prospective holdings which is reimbursable by the Company. At June 30, 2013, there were no reimbursable expenses due Mr. Shipes and December, 31, 2012, Mr. Shipes was owed $1,608.

Commencing with the month of September, 2012, the Company approved compensation to its Board of Directors of $50,000 each annually. At June 30, 2013, the Company owed its directors $62,500.

 

Note M – Deferred Income

 

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 was required to make a $100,000 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, commencing January 1, 2013. 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.

At June 30, 2013, there was $25,205 of deferred income from the Calico mineral lease agreement.

 

 

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Note N– Exploration Costs

Acquired mineral interests are presented as “exploration costs” as required by “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”. Exploration costs incurred since inception through June 30, 2013 are $1,457,412. Exploration costs incurred for the six months ended June 30, 2013 were $220,112.

Note O – Subsequent Events

 

Management has reviewed all subsequent events through the issuance date of the audited financial statements and has disclosed all material events that have transpired subsequent to June 30, 2013 up through the issuance date, which includes the following:

 

On July 24, 2013, the Company procured additional financing in the amount of $500,000 from ISLV Partners, LLC by the issuance of convertible notes pursuant to the 4th Amendment to its February 6, 2012 Convertible Note Agreement. Under the terms of the 4th Amendment, ISLV Partners, LLC loaned an initial amount of $500,000 and shall have the right to loan an additional amount up to $1,000,000 until November 1, 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 2,500,000 additional common stock shares at an exercise price of $0.40 per share, exercisable through July 31, 2016. Net proceeds from the loan will be used for working capital, exploration and corporate development purposes.

 

Note P – Adjustment to Prior Period

During the quarter ended March 31, 2013, the Company expensed 100% of the beneficial conversion feature (BCF) arising from the valuation of the “intrinsic “ value of warrants issued in conjunction with the issuance of $1,000,000 in convertible debt on February 21, 2013. A correction to the accounting records is required to amortize the BCF over the term of the note. This error has been corrected by debiting the account Discount on Notes Payable by $745,270 and crediting Amortization of Discount on Notes by $745,270. The following shows the accounts before and after the adjustment:

Balance Sheet

 

		As Filed  As of March 31, 2013				As adjusted				Difference
Long-term liabilities:
Convertible notes payable			3,095,238				2,349,968				(745,270	)
Total Liabilities			3,509,013				2,763,743				(745,270	)
Shareholders’ Equity:
Accumulated deficit during exploration stage			(6,475,010	)			(5,729,740	)			745,270
Total Shareholders’ Equity			(2,468,813	)			(1,723,543	)			745,270
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			1,040,200				1,040,200				0

 

Statement of Income

 

		As filed for the three months ended March 31, 2013				As adjusted				Difference
Other Income/(Expense):
Interest Expense			965,058				219,788				(745,270	)
Net (loss)			(1,469,444	)			(724,174	)			745,270
Net loss per share			(0.04	)			(0.02	)			0.02

 

This $745,270 reduction in amortization cost had the effect of reducing the previously reported net loss for the quarter ended March 31, 2013 from $(1,469,444) to $(724,174) and net loss per share from $(0.04) per share to $(0.02) per share.

 

 

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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. Additionally, this Management’s Discussion and Analysis should be read in conjunction with our audited financial statements and related notes for the Company’s Fiscal Year ending December 31, 2012. 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 June 30, 2013 (the “June 2013 Quarter”) as compared to the three months ended June 30, 2012 (the “June 2012 Quarter ”) was as follows:

For the June 2013 Quarter, we recorded a net loss of $880,117, as compared to a net loss of $519,288 for the June 2012 Quarter or an increase in net loss of $360,829. The increase in the net loss resulted primarily from the recognition of $313,028 in interest costs arising from the amortization of discount on notes due to the recognition of the “beneficial conversion feature” of warrants issued and accrued interest on convertible notes during the June 2013 Quarter. Revenues arising from engineering contracts increased by $107,290 and were mostly offset by the increase of $155,091 in operating costs.

 

Operating expenses reflected during the June 2013 Quarter were $585,571, an increase of $155,091 or 36% as compared to operating expenses of $430,480 for the June 2012 Quarter. The increase in operating expenses resulted from on-going exploration activities at the Caselton Tailings in Nevada and the Butte properties in Montana in the amount of $69,921. Increased administrative costs for director’s fees of $62,500, including commercial and director’ and officer’s liability insurance of $22,643, were incurred during the June 2013 Quarter, whereas, there was none in the June 2012 Quarter. These increases reflect first-time expenditures for liability insurance policies for its directors and officers, as well as added commercial insurance coverage for new properties acquired or leased during the current fiscal year. Other increases were in payroll for additional personnel and travel costs in the amount of $63,912, offset by lower legal fees by an amount of $63,885.

Other Income/(Expense) during the June 2013 Quarter was $401,836, a net increase of $313,028, as compared to the June 2012 Quarter of $88,808. The increase resulted from the recognition of interest costs arising primarily from the amortization of discount on notes on the recognition of the “beneficial conversion feature” of warrants issued and accrued interest on convertible notes.

 

 

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Operating Performance for the six months ended June 30, 2013 (the “First Half 2013”) as compared to the six months ended June 30, 2012 (the “First Half 2012”) was as follows:

For the First Half 2013, we recorded a net loss of $1,604,291, as compared to a net loss of $955,258 for the First Half 2012 or an increase in net loss of $649,033. The increase in the net loss resulted from the recognition of $472,280 in interest costs arising primarily from the amortization of discount on notes due to the recognition of the “beneficial conversion feature” of warrants issued to-date and accrued interest on convertible notes.

During the First Half 2013, revenue of $204,774 was realized from management and engineering consulting services. No revenues were realized during the First Half 2012.

Operating expenses reflected during the First Half 2013 were $1,187,441, an increase of $381,527 or 47% as compared to operating expenses of $805,914 for the First Half 2012. Increases resulted from on-going exploration activities at the Caselton Tailings in Nevada and the Butte properties in Montana in the amount of $125,833. Increased administrative costs for director’s fees of $125,000, including commercial and director’ and officer’s liability insurance of $44,300 were incurred during the First Half 2013, whereas, there was none in the First Half 2012. These increases reflect first-time expenditures for liability insurance policies for its directors and officers, as well as added commercial insurance coverage for new properties acquired or leased during the current fiscal year.

Other increases were in payroll for additional personnel, consulting fees, office rental and travel costs in the amount of $142,867, offset by lower legal fees by an amount of $56,473.

 

Other Income/(Expense) during the First Half 2013 was $621,624, a net increase of $472,280, as compared to the First Half 2012 of $149,344. The increase resulted from the recognition of interest costs arising primarily from the amortization of discount on notes on the recognition of the “beneficial conversion feature” of warrants issued and accrued interest on convertible notes.

 

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 six months ended June 30, 2013, 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 from management and engineering consulting services, and our net losses from inception as a development stage company, which total $6,609,857 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.

 

Currently, we have funded our operations through private placements, short-term convertible notes, and some on-going engineering consulting services. The capital required to execute our total business vision and objectives is significant. On February 6, 2012 and May 25, 2012, we negotiated convertible term notes totaling $2,600,000 and on February 21, 2013 and May 22, 2013, we negotiated a convertible notes for $1,500,000, bringing the total of financing procured during last twelve months to $4,100,000. During 2013, 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 2013 for the completion of acquisitions, exploration and development programs in the Pioche Mining District in Nevada and in Silver Bow County, Montana is approximately $4.2 million.

 

 

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Cash and Cash Flows

Cash on hand at June 30, 2013 was $366,833 as compared to $211,188 at December 31, 2012. The increase in cash of $155,645 was due to proceeds realized from the issuance of $1,500,000 in convertible notes and less operating expenditures up through the end of the current quarter.

Net cash flows from operating activities were ($1,243,484) for the six months ended June 30, 2013, compared to ($813,999) for the six months ended June 30, 2012, a net decrease in cash flows of $429,485. Negative cash flows from Operating Activities for the six months ended June 30, 2013 reflect higher exploration costs, general and administrative costs in director’s fees, insurance, salaries and travel expense. Most of these increases resulted from the acquisition of mineral land and additional mining leases and the establishment of an exploration office in Butte, Montana. Although revenues were generated from management and engineering consulting services, none of the properties are in the production stage, thus deficits will be incurred until such time that our properties are in production.

Investment activities during the six months ended June 30, 2013 of $100,871 included the purchase of office furnishings and computer equipment in the amount of $35,871 for a newly-established exploration office in Butte, Montana, an additional deposit of $30,000 in a joint venture investment with Aurum, LLC, bringing our total investment to date to $180,000 and $35,000 deposit for an option to purchase the assets of Pan American Zinc. In comparison, investments during the six months ended June 30, 2012 totaling $175,263, were $110,000 in the joint venture with Aurum, LLC, $47,500 towards the purchase of the Magna Charta property in Silver Bow County, Montana, $3,357 for equipment and $14,406 for a reclamation bond posted on the Caselton Tailing project.

Financing activities undertaken during the six months ended June 30, 2013 included the issuance of two convertible notes to ISLV Partners, LLC totaling $1,500,000. During the same time period in 2012, we issued convertible notes totaling $2,600,000 to the same lender.

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 until we confirm previously demonstrated mineralization, obtain operating permits, and construct mining and processing facilities. We have generated $179,979 in revenues for the six months ended June 30, 2013 from management and engineering contracts through our affiliate Western States Engineering, Inc.

 

 

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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:

 

Capital Acquisitions:
A) Purchase of 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			55,888
Total Capital Acquisitions		$	103,388
Exploration Costs:
A) Acquisition of 98% interest in Metals Preciosos, S.A. de C.V., a
Mexican company
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 payments			100,000
2) Exploration costs			21,075
C) Calico Mining District - San Bernadino County, California
1) Silverado mining claims - acquisition of BLM mineral claims			4,250
2) Leviathon mining claims - acquisition of BLM mineral claims			47,609
D) Pioche Mining District - Lincoln County, Nevada
1) Prince Mine lease			744,492
2) Caselton Tailings exploration costs			275,429
3) Caselton Mine/Mill exploration costs			21,360
E) Silver Bow County, Montana
1) New Butte property lease			66,399
2) Continental Public Land Trust lease			23,726
3) Chattel property			1,169
3) Silver Bar property (option) – abandoned			6,819
4) Butte properties - General exploration costs			48,192
F) Other Exploration Sites ( evaluated)
1) Anaconda			7,500
2) Oro Blanco			8,840
3) SE Arizona Silver			4,829
4) Mohave Gold			1,050
5) Zonia Mine			6,650
6) General Administrative costs			13,763
Total Exploration Costs		$	1,457,412

 

These direct exploration costs account for approximately 24% of the total operating expenditures of $6,130,581, 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.

 

 

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Uncertainties and Trends

Our 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, which will affect our ability to obtain additional and continuing funding;
·	Global and regional supply and demand of silver, gold, and other minerals, including investment, industrial and jewelry demand;
·	Political and economic conditions associated with 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 increased US mining operations cost; 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 its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material, other than those which may be disclosed in this Management’s Discussion and Analysis of Financial Condition and the audited Consolidated Financial Statements and related notes.

 

Changes in Accounting Policies

 

The significant accounting policies outlined within our interim condensed Consolidated Financial Statements for the six months ended June 30, 2013 have been applied consistently with the year ended December 31, 2012.

 

Recently Enacted Accounting Standards

 

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

 

 

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PLAN OF OPERATIONS

Overview

We have formulated a Plan of Operations 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. Our three Plans of Operations represent our expected exploration activities for a period of twelve months with respect to exploration at the Butte Silver Mines and the Prince Mine and site characterization and planning at the Caselton Tailings.

The total amount budgeted for exploration, acquisition and development in 2013 is $4,175,000.

We are   continuing with the evaluation of mine plans, Phase II drill program and resource potential of the Prince Mine. Phase 1 Drill program of the projected extensions of the known silver mineralization that was completed in the fall of 2012. On the Caselton Tailings remediation Project, we will conduct site characterization studies 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 voluminous historic exploration and mining data on the properties and will commence with preliminary mine development planning. We believe that we have adequate mineral resources defined on the Butte properties to merit initiation of this planning, 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.

 

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 have leased the Calico Silver property to another exploration company 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 programs are 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. We continue to compile data from various sources to supplement our already existing data. Once we acquire sufficient data, 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 Anaconda and New Butte underground mine plans, we expect to create new preliminary mine development plans for the Project. This will require underground mapping, surveying and confirmation sampling.

 

 

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Exploration at Prince Mine:

 

1)

Surface and underground drilling. All accumulated data from the 2012 Phase I Drill Program, geochemical and geophysical studies will be evaluated to confirm the highest priority targets for Phase II 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 continued 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)

Metallurgical testing The initial Phase I bench scale test work has been completed and the metallurgical lab is working on optimizing metal recoveries before commencing Phase II pilot scale test work using a continuous-feed fluidized-bed system.

2)

Feasibility and Permitting. This phase of the Operations Plan will commence once all the metallurgical test work is completed. Aerial surveying of the entire site was completed during the first half of 2013. The permitting will be done ‘in- house' by our 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 for submittal in conjunction with the process design work.

 

Our ability to complete any of the activities described under “Plan of Operations” will require significant funding. We presently have a commitment for a portion of the funding, 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 incompatible with our priorities.

 

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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 June 30, 2013, 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 June 30, 2013 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:

 

●

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 due to lack of independence. 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.

 

 

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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 June 30, 2013. 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 June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

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PART II - OTHER INFORMATION

 

ITEM 1 – Legal Proceedings

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

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 for our fiscal year ending December 31, 2012, which contains risk factors and is available for review at sec.gov. s.

 

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds

We issued no shares of our common stock during the quarter ended June 30, 2013, or thereafter.

 

ITEM 3 – Defaults upon Senior Securities

None

 

ITEM 4 – Mine Safety Disclosures

Not Applicable

 

ITEM 5 – Other Information

None

 

 

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ITEM 6 – 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.

 

 

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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: August 13, 2013	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		August 13, 2013
Harold R. Shipes		Chief Executive Officer
		(Principal Executive Officer)
/s/ John A. McKinney		Chief Financial Officer		August 13, 2013
John A. McKinney		Executive Vice President
		(Principal Financial Officer)

 

 

 

 

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