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LSTS > SEC Filings for LSTS > Form 10-Q on 19-Aug-2013All Recent SEC Filings

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Form 10-Q for LUSTROS INC.


19-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a pre-revenue development stage company that intends to market and sell the high quality food-grade copper sulfate obtained by processing copper ores and tailings at Company-owned processing facilities in Chile.

On March 9, 2012, Lustros acquired all of the outstanding capital stock and rights to acquire capital stock of Bluestone, S.A. a Chilean corporation ("Bluestone"), in exchange for 60,000,000 shares of its common stock (the "Bluestone Acquisition"). As of the closing, these shares represented 96.7% of Lustros' outstanding common stock. For financial reporting purposes, the Company has treated the Bluestone Acquisition as a reverse acquisition with Bluestone the acquiring entity and Lustros as the acquired entity. As a result, the Company's financial statements reflect the financial information of Bluestone prior to March 9, 2012 and the combined entity on and after March 9, 2012. Because Bluestone commenced operations in January 2012, there are no results of operations for Bluestone prior to that date.

On February 15, 2012, Bluestone purchased a 60% equity interest in Sulfatos Chile, S.A. from Santa Teresa Minerals S.A., a Chilean corporation ("Santa Teresa Minerals"). The purchase price for the equity interest was: (a) a 20% interest in Bluestone; (b) $2.2 million, with $1.1 million paid by assumption of a demand loan payable by Santa Teresa Minerals to Angelique de Maison, and the balance of $1.1 million to be paid in monthly installments from time to time upon demand by Santa Teresa Minerals. As of December 31, 2012, the entire purchase price has been paid. On October 16, 2012 Angelique de Maison entered into an agreement with Santa Teresa Minerals pursuant to which Santa Teresa Minerals waived and released any claim to any Equity Interests in Bluestone or Lustros and their affiliated companies, with Bluestone and Lustros Inc. express third party beneficiaries of that waiver and release. As such, Santa Teresa Minerals' 20% interest in Bluestone has been cancelled, and Bluestone is a wholly owned subsidiary of Lustros. This acquisition has been treated as an "asset purchase" for financial reporting purposes. Because the acquisition was between related parties, the purchase price has been allocated to additional paid-in capital and the assets and liabilities were carried over at historical costs. Results of operations for Sulfatos have been reflected in the Company's financial statements from the closing date.

On March 25, 2012, the Company sold the assets (including the "Power-Save" name) of its renewable energy and energy savings product business in which it had engaged prior to the Bluestone Acquisition, to the former management of the Company. The purchase price for the assets was the cancellation of obligations for unpaid salaries and other monies owed to prior management and the assumption by the buyer of certain liabilities of the Company related to the Power-Save business.

We will process copper ore at our copper sulfate processing plant in Puerto Oscuro, Chile. We will obtain the copper ore from our 1,325 hectare Anica copper mine or by purchase from local artisanal miners. On July 25, 2013 the Company announced that Sulfatos Chile SpA, had begun pilot production of Pentahydrate Copper Sulfate at its multi-million dollar, state-of-the-art facility. The plant capacity is three times its original design and is capable of processing up to 15,000 tons of mineral per month. It is currently permitted at 5,000 tons per month and permit applications for increased production will be filed very shortly. Current production is expected to result in approximately 529,000 pounds (240,000 kilos) of Pentahydrate Copper Sulfate per month. The current plant capacity of 15,000 tons per month will occur upon receiving permits for unlimited production which we expect to receive in the fourth quarter of 2013. Cash flow from this first phase is expected to begin in the third quarter of 2013 and will fund future expansion for an additional 25,000 ton processing plant.

Our consolidated financial statements contain our accounts and those of our consolidated subsidiaries, all of which are wholly-owned at June 30, 2013 except for Sulfatos and Mineraltus, which we control. Due to the structure of our ownership interests in Sulfatos and Mineraltus, in accordance with generally accepted accounting principles, we consolidate the financial statements of Sulfatos and Mineraltus into our financial statements rather than present our ownership interests as equity investments. As such, the non-controlling interests in Sulfatos and Mineraltus are reflected as income attributable to minority interests in our consolidated statements of operations and as a component of stockholders' equity on our consolidated balance sheet. Throughout this section, when we refer to "our" consolidated financial statements, we are referring to the consolidated results for us, our wholly-owned subsidiaries and the consolidated results of Sulfatos and Mineraltus, adjusted for non-controlling interests in Sulfatos and Mineraltus. All significant intercompany transactions and balances have been eliminated in the consolidation of our financial statements.

RESULTS OF OPERATIONS - Three and Six Months Ended June 30, 2013, Three Months Ended June 30, 2012 and From Inception (January 26, 2012) to June 30, 2012

The following discusses results of operations for the three and six months ended June 30, 2013, for the three months ended June 30, 2012 and from Inception (January 26, 2012) to June 30, 2012.

Revenue for the three and six months ended June 30, 2013 was $0 compared to $31,057 and $51,943 for the three months ended June 30, 2012 and from Inception (January 26, 2012) to June 30, 2012, respectively, all of which was derived from the sale of copper and copper sulfate. Gross profit for the three and six months ended June 30, 2013 was $0 compared to $31,057 and $51,943 for the three months ended June 30, 2012 and from Inception (January 26, 2012) to June 30, 2012, respectively. We expect revenues to increase significantly after the full scale launch of our copper sulfate production facility later this year.

Operating expenses for the three and six months ended June 30, 2013 were $912,818 and $1,679,353 respectively compared to $1,253,443 and $1,743,342 for the three months ended June 30, 2012 and from Inception (January 26, 2012) to June 30, 2012, respectively. Operating expenses were primarily associated with the operations of Sulfatos in the ordinary course of business as well as legal and accounting expenses required by a public company.

Due to the losses during the period the Company has not recorded a provision for income taxes.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.

As of June 30, 2013 our current liabilities exceeded our current assets by $1,990,668. For the six months ended June 30, 2013, we generated cash in the amount of $950,000 from the sale of preferred stock, $550,000 from the sale of common stock. $196,420 from related party loans, repaid $101,500 in relate party loans and $40,587 in notes payable.

Cash Requirements

During the next twelve months, the Company plans to satisfy its cash requirements by income from operations, loans and the sale of debt and equity securities. There can be no assurance that the Company will be successful in raising the capital it requires through loans or the sale of securities. While directors, officers, and principal shareholders provided funding to the Company through June 30, 2013, they have no commitment to provide additional funding.

Sulfatos Chile

The Company acquired property and equipment owned by Sulfatos Chile with a historical cost value of $7,331,655 in the Bluestone Acquisition in March 2012. The Company has spent an additional $1.4M in property, plant and equipment purchases as of June 30, 2013 toward the completion of the copper sulfate processing plant in Puerto Oscuro, Chile. The plant was completed at the end of July 2013 and cost approximately an additional $150,000 in capital expenditures to complete.

Going forward, Sulfatos Chile expects to incur average monthly costs, of approximately $220,000 once it begins production at the copper sulfate processing plant. These costs will be paid for by income from operations.

Congo Project

On October 18, 2012, the Company entered into an agreement pursuant to which the Company acquired the land, laboratory, tailings and other assets of the closed mine of La Africana, commonly known as the "Congo Project", in the Santiago, Chile metropolitan area. The land is approximately 81.2 hectares and contains an estimated 2.4 million tons of copper-rich tailings. The purchase price was $7 million payable as follows:

$360,000 was paid in November 2012 for the right to use all assets and facilities;

$436,858 is payable upon completion of the copper sulfate processing plant on site no later than November 13, 2014 as the final payment for the assets;

$6,203,172 is payable in equal monthly installments of $77,540 beginning on July 1, 2013 for the lease of the Lo Aguirre main pit. SMP may request that the final 12 lease payments not be made by the Company in exchange for the return of 60.2 hectares of land at their option on or before date the 69th lease payment is made. Lease payments had not yet begun and were in default as of the time of this filing.

The Company has agreed to remove the tailings and restore the value of the property so that it can be used for real estate development projects. The Company will separate the copper from the tailings with the intention of manufacturing an estimated 24,000 tons of food-grade, penta-hydrated copper sulfate. The Company plans to construct a copper sulfate processing plant on the property to process the tailings at an estimated cost of $6.2 million by November 2014.

Future Financing

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions, expansions and exploration activities or if we are able to secure additional financing, whether such financing shall be on favorable terms.

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