Form 10-K for DEL TORO SILVER CORP.

 

Form 10-K for DEL TORO SILVER CORP.

13-Feb-2012

Annual Report

 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes for the years ended October 31, 2011 and October 31, 2010 that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" beginning on page 9 of this annual report.

Our audited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

Our plan of operation is to carry out exploration work on our Dos Naciones Property in order to ascertain whether it possesses commercially exploitable quantities of gold, silver, and other metals. We intend to primarily explore for gold, silver, and copper but if we discover that our mineral property holds potential for other minerals that our management determines are worth exploring further, then we intend to explore for those other minerals. We will not be able to determine whether or not the Dos Naciones Property contains a commercially exploitable mineral deposit, or reserve, until appropriate exploratory work is done and an economic evaluation based on that work indicates economic viability.

 


The three phase exploration program on the Dos Naciones property carries an aggregate estimated cost of $450,000. The first phase of our exploration program was completed during the quarter ended October 31, 2010and consisted of detailed geological mapping, sampling, hand trenching and prospecting. In July, 2010 our company's operator on the Dos Nactiones property engaged geological consultants to conduct mapping and sampling on the property. Our company commenced the second phase of its exploration program in September, 2011. The results of this second phase of our exploration program warrant the continuation into the third phase of the program. The timing and scale of the next phase of work has yet to be determined but the company is working with Yale to determine how best to advance the exploration at Dos Naciones. A detailed breakdown of the proposed budget and work exploration program is as follows:

 

Estimated Dos Naciones Work Program Costs

Phase One

Detailed geological mapping, stripping and trenching                                                                    Cost
1 Geologist for 50 days @ $300 per day:                                                                           $        15,000
3 Field Assistants for 50 days @ $100 per day:                                                                    $        15,000
Food and accommodation @ $30 per man-day:                                                                         $         6,000
Field supplies:                                                                                                   $         1,000
Vehicle rental, fuel and maintenance:                                                                             $         5,000
Analytical costs: 300 samples @ $30 per sample:                                                                   $         9,000
                                             Total geological mapping, stripping and trenching:                   $        51,000
Report preparation
For reporting on all of the above work, including drafting:                                                       $         2,500

                                                                                                         Subtotal $        53,500
Phase One


Phase Two

IP surveying in area of aeromagnetic low
15 days of surveying along cut grid lines with pickets at 25 m intervals (slope distance) at an all-inclusive cost    $         30,000
Diamond drilling to test mineralized vein structures at Josefina
500 meters at an all-inclusive (drilled, logged, split, sampled, water haul) cost of $180 per meter:                  $         90,000
Diamond drilling to test mineralized vein structures at Dos Naciones
300 meters at an all-inclusive (drilled, logged, split, sampled, water haul)
cost of $180 per meter:                                                                                               $         54,000

                                                                                                             Subtotal $        174,000
Phase Two


Phase Three

Phase Three is contingent on IP anomalies from Phase Two work being determined
to be favorable for testing with diamond drill holes.

                                       23

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Diamond drilling in area of IP chargeability anomalies

1,000 meters at an all-inclusive (drilled, logged, split, sampled, water haul)

 

cost of $180 per meter:    $  180,000
Subtotal Phase Three       $  180,000
Contingency 10%            $   42,500
TOTAL THREE PHASE PROGRAM: $  450,000

Our plan of operation is to carry out exploration work on our Dos Naciones Property in order to ascertain whether it possesses commercially exploitable quantities of gold, silver, and other metals. We intend to primarily explore for gold, silver, and copper but if we discover that our mineral property holds potential for other minerals that our management determines are worth exploring further, then we intend to explore for those other minerals. We will not be able to determine whether or not the Dos Naciones Property contains a commercially exploitable mineral deposit, or reserve, until appropriate exploratory work is done and an economic evaluation based on that work indicates economic viability.

Mineral property exploration is typically conducted in phases. Each subsequent phase of exploration work is recommended by a geologist based on the results from the most recent phase of exploration. Once we complete each phase of exploration, we will make a decision as to whether or not we proceed with each successive phase based upon the analysis of the results of that program. Our management will make these decisions based upon the recommendations of the independent geologist who oversees the program and records the results.

 

Anticipated Cash Requirements

We anticipate that we will incur the following expenses over the next twelve
months:

                            Expense Item                                  Cost

Expenditures on the Dos Naciones Property in accordance with the      $   150,000
terms of our Option Agreement with Yale Resources Ltd.
Ongoing professional expenses associated with our company being a     $    60,000
reporting issuer under the Securities Exchange Act of 1934
General and administrative expenses                                   $    25,000
                                Total                                 $   235,000

As of October 31, 2011 we had cash of $24,088. Effective December 3, 2010, we issued 2,000,000 units at a price of $0.10 per unit for gross proceeds of $200,000. Each unit consisted of one share of common stock and one share purchase warrant entitling the warrant holder to purchase an additional share of common stock at a price of $0.25 per share for a period of two years from closing.

On March 11, 2011, we issued 165,517 shares of our common stock to Asher Enterprises, Inc. ("Asher") pursuant to our 8% convertible note (the "Note") with Asher dated August 25, 2010 in the amount of $55,000. Asher provided us with a notice to convert $12,000 of the principal amount of the Note.

On June 3, 2011 $15,000 of the Note was converted into shares at a rate of $0.0493 per share for a total of 304,260 shares. On September 20, 2011, $8,000 of the Note was converted into shares at a rate of $0.0232 per share for a total of 344,828 shares. On October 26, 2011, we repaid the convertible debenture in full to the non-related party with $33,000.

On September 30, 2011, we issued 1,875,000 common shares for proceeds of $75,000.

Based on the above estimate of $235,000 for our expenses for the next twelve months we do not have enough funds to proceed with our plan of operation over the next twelve months. We plan to rely on the equity financing in order to raise any additional funds necessary to pursue our plan of operation and to fund our working capital deficit in

 


order to enable us to pay our accounts payable and accrued liabilities. We currently do not have any arrangements in place for the completion of any equity financings and there is no assurance that we will be successful in completing any equity financings.

Results of Operations

The following summary of our results of operations should be read in conjunction with our audited financial statements for the year ended October 31, 2011 which are included herein.

Our operating results for the years ended October 31, 2011 and 2010 are summarized as follows:

Years Ended October 31,

                        2011              2010
Revenue            $           -    $            -
Operating Expenses       154,083           514,001
Other Expenses            89,680                 -
Net Loss                 243,763           514,001

Revenues

We have not earned any revenues to date. We do not anticipate earning revenues from our planned mineral operations until such time as we enter into commercial production of the Doc Naciones Property, or other mineral properties we may acquire from time to time, and of which there are no assurances.

 

Expenses

Our expenses for the years ended October 31, 2011 and 2010 are outlined in the
table below:

                                               Years ended October 31,
                                                 2011             2010
Amortization                                $         536    $       703
Consulting                                         16,059        268,710
Foreign Exchange Loss (gain)                        1,987          1,422
General and Administrative                         33,449         27,417
Impairment of capital assets                        1,838              -
Mineral property expense                           20,000        157,907
Professional Fees                                  80,214         57,842
Accretion on discount of convertible debt          55,000              -
Interest expense                                    7,535              -
Loss on change in fair value of derivatives        14,962              -
Loss on settlement of debt                         12,183              -
Total                                       $     243,763    $   514,001

General and Administrative

The $6,032 increase in our general and administrative expenses for year ended October 31, 2011 compared to October 31, 2010 was primarily due to increases in transfer agent fees relating to issuances of common shares.

Interest Expenses

Our interest expenses increased by $7,535 during the year ended October 31, 2011 primarily due to interest incurred on the convertible debenture to Asher that was settled on October 26, 2011.

 


Professional Fees

Professional fees include our accounting and auditing expenses incurred in connection with the preparation and audit of our financial statements and professional fees that we pay to our legal counsel. Our professional fees increased by $22,372 during the year ended October 31, 2011 primarily due to due diligence work surrounding issuances of common shares and increased costs in our audit and legal work. Professional fees are expected to increase in fiscal 2012 due to our ongoing reporting obligations of the Securities Exchange Act of 1934.

Consulting Expenses

Our consulting expenses decreased by $252,651 during year ended October 31, 2011 due to decreased management and consulting expenses during the year.

Liquidity And Capital Resources

 

Working Capital

                                                             Percentage
                           As at           As at October     Increase /
                      October 31, 2011       31, 2010        (Decrease)
Current Assets      $           46,637   $        91,118        (48.82% )
Current Liabilities $           50,549   $       130,012        (61.12% )
Working Capital     $           (3,912 ) $       (38,894 )      (89.94% )



Cash Flows
                                                                             Percentage
                                      Year Ended           Year Ended        Increase /
                                   October 31, 2011     October 31, 2010     (Decrease)
Cash used in Operating           $         (181,420 ) $          (75,335 )      140.82%
Activities
Cash provided by Financing       $          122,701   $          157,404        (22.05% )
Activities
Net Increase (Decrease) in Cash  $          (58,719 ) $           82,069       (171.55% )

We anticipate that we will incur approximately $235,000 in operating expenses, including professional, legal and accounting expenses associated with our reporting requirements under the Exchange Act during the next twelve months. As of October 31, 2011 we had cash of $24,088. Accordingly, we will need to obtain additional financing in order to complete our business plan.

Cash Used In Operating Activities

We used cash in operating activities in the amount of $181,420 during the year ended October 31, 2011 and $75,335 during the year ended October 31, 2010. The increase in cash used for operating activities were attributed to an increase in operating activity during the year, including repayment of outstanding obligations. Cash used in operating activities was funded by cash from financing activities through debt and equity issuances.

Cash From Investing Activities

We generated cash of $Nil in investing activities during the year ended October 31, 2011 and 2010.

Cash from Financing Activities

We generated cash of $122,701 from financing activities during the year ended October 31, 2011 compared to cash of $157,404 generated from financing activities during the year ended October 31, 2010. The decrease in cash received from financing activities were attributed to the fact that the Company received $55,000 from Asher for financing in prior year that was repeated in the current year, and repaid $33,000 for outstanding convertible debentures during the year. The decrease was offset by an increase of $63,703 in proceeds from the issuance of common shares less share issuance costs of $16,494.

 


Disclosure of Outstanding Share Data

As of the date of this annual report, we have 15,462,240 shares of common stock issued and outstanding, and 2,000,000 warrants outstanding, exercisable at a price of $0.25 per share until December 6, 2012. We have 1,000,000 options to acquire additional shares of common stock at a price of $0.10 per share. We do not have shares of any other class issued and outstanding as at the date of this report.

Going Concern

The financial statements accompanying this report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. Our company has not generated revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon the continued financial support from our shareholders, the ability of our company to obtain necessary equity financing to achieve our operating objectives, and the attainment of profitable operations. As at October 31, 2011, our company has accumulated losses of $1,071,969 since inception. We do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.

Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above in their report on the financial statements for the year ended October 31, 2011, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

Future Financings

We anticipate continuing to rely on equity sales of our shares of common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned activities.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

Equity Compensation

Other than our 2010 Stock Option Plan adopted by or board of directors on September 7, 2010, under which we are able to issue up to 5,000,000 stock options, we do not have any equity compensation plans or arrangements.

Contractual Obligations

As a "smaller reporting company", we are not required to provide tabular disclosure obligations.

 


Critical Accounting Policies

The financial statements and the related notes of our company are prepared in accordance with generally accepted accounting principles in the United States and are expressed in US dollars. Our fiscal year-end is October 31.

These consolidated financial statements include the accounts of our company and our wholly owned Mexican subsidiary, Mineral Plata Del Toro S.A. de C.V. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. Our company regularly evaluates estimates and assumptions related to long-lived assets, mineral property costs, asset retirement obligations, stock-based compensation, and deferred income tax asset valuations. Our company bases our estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Cash and Cash Equivalents

Our company considers all highly liquid investments with maturity of three months or less at the date of acquisition to be cash equivalents.

Mineral Property Costs

Our company has been in the exploration stage since our inception and has not yet realized any revenues from its planned operations. We are primarily engaged in the acquisition and exploration of mining properties. Mineral property exploration costs are expensed as incurred. Mineral property acquisition costs are initially capitalized. Our company assesses the carrying costs for impairment under ASC 360, "Property, Plant, and Equipment" at each fiscal quarter end. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs then incurred to develop such property, are capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the probable reserve. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.

Long-Lived Assets

In accordance with ASC 360, "Property, Plant, and Equipment", our company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

 


Asset Retirement Obligations

Our company accounts for asset retirement obligations in accordance with the provisions of ASC 440, "Asset Retirement and Environmental Obligations" which requires our company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. As at October 31, 2011 and 2010, our company had no asset retirement obligations.

Property and Equipment

Property and equipment are recorded at cost. Amortization is provided using the declining balance method at the rate of 20% per annum for furniture and equipment and 30% per annum for computer equipment.

Loss per Share

Our company computes loss per share in accordance with ASC 260, "Earnings per Share" which requires presentation of both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Income Taxes

Our company accounts for income taxes using the asset and liability method in accordance with ASC 740, "Income Taxes". The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

As of October 31, 2011 and 2010, our company did not have any amounts recorded pertaining to uncertain tax positions.

Our company files federal and provincial income tax returns in Canada and federal, state and local income tax returns in the U.S., as applicable. Our company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2007 to 2010. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of our company's income tax returns for the open taxation years noted above.

Our company recognizes interest and penalties related to uncertain tax positions in tax expense. During the years ended October 31, 2011 and 2010, there were no charges for interest or penalties.

Foreign Currency Translation

The functional and reporting currency of our company is the United States dollar. Occasional transactions may occur in a foreign currency and our company has adopted ASC 740, "Foreign Currency Translation Matters". Monetary assets and liabilities denominated in foreign currencies are translated to United States dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are

 


translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Our company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

Financial Instruments and Fair Value Measures

ASC 820, "Fair Value Measurements and Disclosures" requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the . . .

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