Form 52-109FV1 Certification of annual filings - venture issuer basic certificate I, Tawn Albinson, President and Chief Executive Officer of Prospero Silver Corp., certify the following: 1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the annual filings ) of Prospero Silver Corp. (the issuer ) for the financial year ended December 31, 2010. 2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date of and for the periods presented in the annual filings. Date: May 6, 2011. Tawn Albinson Tawn Albinson President and Chief Executive Officer NOTE TO READER In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer s GAAP. The issuer s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Form 52-109FV1 Certification of annual filings - venture issuer basic certificate I, David Huffer, Chief Financial Officer of Prospero Silver Corp., certify the following: 1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the annual filings ) of Prospero Silver Corp. (the issuer ) for the financial year ended December 31, 2010. 2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date of and for the periods presented in the annual filings. Date: May 6, 2011. David Huffer David Huffer Chief Financial Officer NOTE TO READER In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer s GAAP. The issuer s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Consolidated Financial Statements For the year ended December 31, 2010
INDEPENDENT AUDITOR S REPORT To the Shareholders of Prospero Silver Corp.: We have audited the accompanying consolidated financial statements of Prospero Silver Corp., which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of operations, comprehensive loss and deficit and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence that we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Prospero Silver Corp. and its subsidiary as at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 to the consolidated financial statements which describes certain conditions that give rise to doubt about the entity s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Vancouver, Canada May 6, 2011 DMCL DALE MATHESON CARR-HILTON LABONTE LLP CHARTERED ACCOUNTANTS
Consolidated Balance Sheets December 31, 2010 2009 Assets Current Cash $ 1,014,338 $ 2,784,902 Receivables 123,675 41,353 Prepaid expenses 9,821 2,798 1,147,834 2,829,053 Equipment (note 3) 35,521 27,319 Mineral property interests (note 4) Property and acquisition costs 315,813 157,066 Deferred exploration expenditures 2,053,474 458,180 $ 3,552,642 $ 3,471,618 Liabilities Current Accounts payable and accrued liabilities (note 6) $ 31,036 $ 172,511 Shareholders Equity Share capital (note 5) 4,034,784 3,321,072 Contributed surplus (note 5) 951,932 455,774 Deficit (1,465,110) (477,739) 3,521,606 3,299,107 Nature and Continuance of Operations (note 1) Commitments (note 4) Subsequent events (note 11) On behalf of the board: $ 3,552,642 $ 3,471,618 [signed]:"tawn Dewey Albinson Fatiguant", Director [signed]:'william Murray" Director The accompanying notes are an integral part of these consolidated financials statements.
Consolidated Statements of Operations, Comprehensive Loss and Deficit For the years ended December 31, 2010 2009 Operating Expenses Communications $ 43,148 $ - Consulting fees (note 6) 50,400 33,500 Directors fees (note 6) 58,000 - Filing fees 15,853 22,475 Foreign exchange 13,842 1,102 Office and general 24,213 1,117 Professional fees 86,828 110,051 Property investigation costs 104,283 51,352 Rent (note 6) 30,800 - Salaries and benefits 86,102 - Stock-based compensation (note 5) 460,636 - Travel and accommodation 15,036 18,754 Loss before other items 989,141 238,351 Other items Interest income (1,770) - Write-off of mineral property interest (note 4) - 118,042 Loss and comprehensive loss for the year 987,371 356,393 Deficit, beginning of the year 477,739 121,346 Deficit, end of the year $ 1,465,110 $ 477,739 Loss per share basic and diluted $ (0.04) $ (0.03) Weighted average number of shares outstanding basic and diluted 22,304,120 13,254,912 The accompanying notes are an integral part of these consolidated financials statements.
Consolidated Statements of Cash Flows For year ended December 31, Cash provided by (used in): 2010 2009 Operating activities Loss for the year $ (987,371) $ (356,393) Items not affecting cash: Amortization - 2,171 Stock-based compensation 460,636 - Write-off of mineral property interest - 118,042 (526,735) (236,180) Changes in non-cash working capital items: Receivables (82,322) 12,613 Prepaid expenses (7,023) (1,031) Accounts payable and accrued liabilities (84,709) 58,509 (700,789) (166,089) Financing activities Proceeds on share issuances, net of issuance costs 484,490 2,837,337 Investing activities Equipment purchases (13,094) (29,490) Property acquisition costs (108,813) (69,355) Deferred exploration expenditures (1,432,358) (266,382) (1,554,265) (365,227) Net increase (decrease) in cash (1,770,564) 2,306,021 Cash, beginning 2,784,902 478,881 Cash, ending $ 1,014,338 $ 2,784,902 Supplemental cash flow information: Income taxes paid $ - $ - Interest paid $ - $ - Effect of expenditures on mineral property interests in accounts payable and accrued liabilities $ (56,766) $ 27,701 The accompanying notes are an integral part of these consolidated financials statements.
1. Nature of and Continuance of Operations Prospero Silver Corp. (the Company or Prospero ) was incorporated in the Province of British Columbia on March 31, 2008. The Company is in the business of acquiring and exploring mineral resource properties for potentially recoverable resources. At December 31, 2010, the Company had mineral property interests located in Mexico that were all undergoing preliminary evaluation and exploration. On December 23, 2009, the Company had completed its initial public offering ( IPO ) and on January 5, 2010, the common shares commenced trading on the TSX-Venture Exchange TSX-V ) (the 'Listing Date" or the "Listing"). The Company is currently evaluating its mineral properties and has not yet determined the existence of economically recoverable reserves. The recoverability of amounts shown for property and acquisition costs and deferred exploration expenditures depends upon many factors, including; the discovery of economically recoverable reserves on its mineral properties, confirmation of the Company s interest in the underlying mineral claims, the ability of the Company to obtain the necessary financing to complete their development, and the sustainability of future profitable production or disposition thereof. These consolidated financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern which assumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. While management has been successful in obtaining sufficient funding for its operating, capital and exploration requirements from the inception of the Company to date there is, however, no assurance that additional funding will be available to the Company, or that, when it is required it will be available on terms which are acceptable to management. 2. Significant Accounting Policies These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ) and reflect the following significant accounting policies: a) Principles of consolidation These financial statements include the accounts of the Company and its wholly-owned Mexican subsidiary, MineraFumarola, S.A., de C.V., ( Fumarola ). All inter-company balances and transactions have been eliminated. b) Mineral property interests The Company defers the cost of acquiring, maintaining its interest in, exploring and developing mineral properties until such time as the properties are placed into production, abandoned, sold or considered to be impaired in value. Costs of producing properties will be amortized on a unit of production basis and costs of abandoned properties are written-off. Proceeds received on the sale of interests in mineral properties are credited to the carrying value of the mineral properties, with any excess included in operations. Write-downs due to impairment in value are charged to operations. Option payments are recorded as acquisition costs in the period in which the option payments are made. The Company defers exploration stage expenditures made to determine whether or not a property contains potentially economically recoverable resources. Deferred development expenditures are incurred once a determination has been made that a property contains economically recoverable reserves and a plan is in place to put the property into production.
Management reviews the carrying value of mineral properties on a periodic basis and recognizes impairment in value based upon: current evaluation results; the prospect of further work being carried out by the Company; the assessment of future probability of profitable revenues from the property; or, from the possible sale of the property. Amounts shown for mineral property interests represent costs incurred net of write-downs and recoveries, and may not represent present or future values. c) Equipment Equipment is carried at cost less accumulated amortization. Amortization is calculated using the following rates: Computer equipment Declining balance 40% Office equipment Declining balance 10% Geophysical equipment Straight line 15 years Transport equipment Declining balance 25% Amortization is included in field administrative costs which is recorded in project investigation costs and deferred exploration expenditures. d) Impairment of long-lived assets Canadian GAAP requires that long-lived assets used by the Company be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment charges are recognized when it is determined an asset s carrying value exceeds the present value of the undiscounted estimated future cash flows that can be expected to be generated from the asset s intended use and/or the proceeds that can be reasonably expected from its disposition. Upon such a determination, the asset is written down to its estimated fair value which, in the absence of any other determining factors, is generally considered to be the present value of the discounted future cash flows that the asset can be expected to generate. Management has determined there has been no impairment of the Company s long-lived assets as at December 31, 2010. e) Basic and diluted loss per share Basic loss per share is calculated by dividing the net loss for the period available to common shareholders by the weighted average number of shares outstanding during the period. Diluted loss per share reflects the potential dilution of securities that could share in earnings of an entity. In a loss period, potentially dilutive common shares are excluded from the loss per share calculation as the effect would be anti-dilutive and accordingly, basic loss per share figures will equal diluted figures in a loss period. f) Foreign currency translation The Company uses the temporal method to translate the accounts of Fumarola and all other balances and transactions denominated in foreign currency. Monetary items denominated in a foreign currency are translated into Canadian dollars at exchange rates prevailing at the balance sheet date and non-monetary items are translated at exchange rates prevailing when the assets are acquired. Foreign currency denominated revenue and expense items are translated at the average rate of exchange that prevailed over the period. Exchange gains and losses arising on translation are included in the statement of operations.
g) Stock-based compensation The Company records a compensation cost attributable to all share purchase options and warrants granted at fair value at the grant date using the Black-Scholes option pricing model. The fair value of all share purchase options and warrants are expensed over their respective vesting periods with a corresponding increase to contributed surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital. h) Financial instruments The Company follows Canadian Institute of Chartered Accountants ( CICA ) Sections 3855, Financial Instruments Recognition and Measurement. Section 3855 prescribes when a financial instrument is to be recognized on the balance sheet and at what amount. Under Section 3855, financial instruments must be classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. All held-for-trading and available-for-sale financial instruments are measured at the balance sheet date at fair value. Loans and receivables, held-to-maturity investments, and other financial liabilities are measured at amortized cost. The Company has determined that it does not have derivatives or embedded derivatives associated with any of its financial instruments. The Company s financial instruments consist of cash, receivables and accounts payable. Cash is measured at face value, representing fair value, and is classified as held-for-trading. Receivables are measured at amortized cost and are classified as loans and receivables. Accounts payable are measured at amortized cost and are classified as other financial liabilities. The fair value of these financial instruments approximates their carrying values, unless otherwise noted. The CICA Section 3862, Financial instruments Disclosure requires an entity to classify fair value measurements in accordance with an established hierarchy that prioritizes the inputs in valuation techniques used to measure fair value. The levels and inputs which may be used to measure fair value are as follows: Level 1 fair values are based on quoted prices in active markets for identical assets or liabilities; Level 2 fair values are based on inputs other than quoted prices that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); or Level 3 applies to assets and liabilities for inputs that are not based on observable market data, which are unobservable inputs. Cash is classified as a level 1. i) Use of estimates Estimates by management represent an integral component of financial statements prepared in conformity with Canadian GAAP. The estimates made in these financial statements reflect management s judgments based on past experiences, present conditions, and expectations of future events. Where estimates were made, the reported amounts for assets, liabilities and expenses may differ from the amounts that may otherwise be reflected from the ultimate outcome of all uncertainties and future events. Significant estimates include the recoverability of mineral property acquisition and deferred exploration costs, the fair value of stock-based compensation, and the expected tax rates for future income tax recoveries.
j) Asset retirement obligations The Company records a liability for the fair value of the statutory, contractual or legal asset retirement obligations associated with the retirement and reclamation of tangible long-lived assets when the related assets are put into use, with a corresponding increase to the carrying amount of the related assets. This corresponding increase to capitalized costs is amortized to operations on a basis consistent with depreciation, depletion, and amortization of the underlying assets. Subsequent changes in the estimated fair value of the asset retirement obligations are capitalized and amortized over the remaining useful life of the underlying asset. The asset retirement obligation liabilities are carried on the consolidated balance sheet at their discounted present value and are accreted over time for the change in their present value, with this accretion charge included as an operating item in the consolidated statements of operations. As at December 31, 2010, the Company had no known asset retirement obligations. k) Recent accounting pronouncements International Financial Reporting Standards ( IFRS ) In 2006, the Canadian Accounting Standards Board ( AcSB ) published a strategic plan that will affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian generally accepted accounting principles with IFRS over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada s own generally accepted accounting principles. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2010 will require the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. The Company continues to monitor and assess the impact of Canadian GAAP and IFRS. Other accounting pronouncements issued by the CICA with future effective dates are either not applicable or are not expected to be significant to the financial statements of the company. 3. Equipment 2010 2009 Accumulated Net Book Net Book Cost Amortization Value Value Computer equipment $ 5,029 $ 1,832 $ 3,197 $ 1,311 Office equipment 2,742 211 2,531 362 Geophysical equipment 27,478 3,581 23,897 25,646 Transport equipment 7,341 1,445 5,896 - $ 42,590 $ 7,069 $ 35,521 $ 27,319
4. Mineral Property Interests The continuity of mineral property interests for the years ended December 31, 2010 and 2009 is as follows: Cordero Baborigame Campana El Dorado Other Total Property rights and acquisition costs: Balance, December 31, 2008 $ 32,549 $ - $ - $ - $ 33,963 $ 66,512 Costs incurred in the year cash 30,156 28,383 28,383-9,533 96,455 Charges on project abandonment - - - - (5,901) (5,901) Balance, December 31, 2009 62,705 28,383 28,383-37,595 157,066 Costs incurred in the year cash - 12,894 13,140 26,013-52,047 Costs incurred in the year shares 65,400 20,650 20,650 - - 106,700 Balance, December 31, 2010 $ 128,105 $ 61,927 $ 62,173 $ 26,013 $ 37,595 $ 315,813 Deferred exploration expenditures: Balance, December 31, 2008 $ 208,415 $ - $ - $ - $ 95,523 $ 303,938 Geological consulting 467 24,484 21,281-30,470 76,702 Laboratory analysis and assays - 10,458 1,475-28,276 40,209 Logistics and support 215 9,652 14,115-12,193 36,175 Field administration 1,606 35,393 21,270-55,028 113,297 Charges on project abandonment - - - - (112,141) (112,141) Balance, December 31, 2009 210,703 79,987 58,141-109,349 458,180 Drilling 217,015 344,881-275,716-837,612 Fees, taxes and duties 38,954 71,610 8,971 70,301 35,509 225,345 Geological consulting 4,742-24,715 - - 29,457 Laboratory analysis and assays 23,069 17,059 318 46,603 3,266 90,315 Logistics and support 17,200 24,031 2,477 29,868 4,515 78,091 Stock-based compensation (note 5(d) 158,044 - - - - 158,044 Field administration 39,546 65,285 6,981 58,930 5,688 176,430 Balance, December 31, 2010 $ 709,273 $ 602,853 $ 101,603 $ 481,418 $ 158,327 $ 2,053,474
4. Mineral Property Interests (continued) a) Cordero Property Exploration and Option Agreement The Cordero Property was acquired pursuant to the terms of an Exploration and Option Agreement, dated August 29, 2008 and as amended during the years ended December 31, 2009 and 2010 (the Cordero Option Agreement ), with Exploraciones del Altiplano, S.A. de C.V. ( Altiplano ). Altiplano is a related company (note 6(b)) incorporated under the laws of Mexico, and the holder of a 100% mineral right and title to Cordero. The Company secured the exclusive right and option to acquire a 100% interest to and in Cordero subject to Altiplano s retained 2% net smelter return royalty ( NSR ). In accordance with the terms of the Cordero Option Agreement; at its option, the Company is required to make payments consisting of cash, Prospero shares and a drilling or property expenditure commitment as follows: (i) Cash payments a) US$25,000 payment was made on the execution of the agreement; b) a total of US$37,500, in installments, which was paid prior to December 31, 2009; c) a total of US$50,000 payable in 4 equal installments of US$12,500 each payable every six months beginning on August 28, 2010 until February 29, 2012. The Cordero Option Agreement was amended by the Company and Altiplano to make the cash payment and issuance of shares of the Company due on August 28, 2010 to now be due on January 31, 2011 (paid subsequent to December 31, 2010); d) a payment of US$150,000 on or before August 29, 2012, and e) a payment of US$200,000 on or before February 28, 2013. (ii) Prospero common shares: 20,000 shares plus a number of shares that will depend on the market price per share on the delivery date as follows: Less than $1.25 Market Price per Share $1.25 to $2.50 to $2.49 $7.50 Greater than $7.50 Delivery date Not later than: January 19, 2010 (issued) 60,000 50,000 40,000 30,000 February 28, 2010 (issued) 50,000 40,000 35,000 25,000 January 31, 2011* 50,000 40,000 35,000 25,000 February 28, 2011* 100,000 80,000 70,000 50,000 August 29, 2011 100,000 80,000 70,000 50,000 February 28, 2012 100,000 100,000 100,000 100,000 August 29, 2012 1,500,000 1,100,000 600,000 450,000 Following the Listing of its common shares on January 5, 2010, the Company issued a total of 130,000 shares in consideration for obligations under the Cordero Option agreement including: 20,000 common shares, originally due on August 29, 2008 and subsequently amended to be issued within 10 business days of the Listing, having a market value of $0.53 each for a gross consideration of $10,600;
60,000 shares due January 19, 2010 having a market value of $0.53 each for a gross consideration of $31,800, and 50,000 shares due February 28, 2010 having a market value of $0.46 each for a gross consideration of $23,000. *Subsequent to December 31, 2010, the Company issued 50,000 shares and 100,000 shares in accordance with the agreement (note 11). (iii) Drilling or property expenditure commitment by not later than: a) April 28, 2010 US$250,000 or 1,500 meters of drilling (completed); b) February 28, 2011 - a further US$400,000*; c) February 29, 2012 a further US$400,000; and d) February 28, 2013 a further US$600,000. *The Company was granted an extension to March 31, 2011, and the expenditure commitment was completed by that date. b) Baborigame and Campana Option Agreements On May 19, 2009, for consideration of US$25,000 each, pursuant to the terms of two exploration and option agreements, one agreement with Altiplano, the holder of a 100% interest in a property known as the Campana El Carmen Property ( Campana ) and the other agreement with Compañia Mineria Terciario, S.A. de C,V. ( Terciario ), a related company (note 6(b)) incorporated under the laws of Mexico and the holder of a 100% interest in a property known as the Baborigame Property ( Baborigame ), the Company secured the exclusive right to explore and evaluate and an option to acquire a 100% interest in Campana and Baborigame subject to a 2% NSR on each property (the "Baborigame and or Campana Option Agreement(s)"). The terms outlining the option consideration for each of the Campana and Baborigame Option Agreements require the Company to make payments, at its option with respect to each property consisting of cash, Prospero shares and a drilling or option expenditure commitment as follows: (i) Option cash payments for each property: a) a total of US$75,000 payable in 6 equal installments of US$12,500 each payable every six months beginning on July 5, 2010 (paid) until January 5, 2013; b) a payment of US$150,000 on or before July 5, 2013; and c) a US$200,000 payment due on or before January 5, 2014.
(ii) Prospero common shares for each property: 20,000 shares plus a number of shares that depends on the market price per share on the delivery date as follows: Less than $1.25 Market Price per Share $1.25 to $2.50 to $2.49 $7.50 Greater than $7.50 Delivery date Not later than: July 5, 2010 (issued) 30,000 25,000 20,000 15,000 January 5, 2011* 30,000 25,000 20,000 15,000 July 5, 2011 50,000 40,000 35,000 25,000 January 5, 2012 50,000 40,000 35,000 25,000 July 5, 2012 100,000 80,000 70,000 50,000 January 5, 2013 100,000 80,000 70,000 50,000 July 5, 2013 100,000 100,000 100,000 100,000 January 5, 2014 1,500,000 1,100,000 600,000 450,000 Following the Listing of its common shares on January 5, 2010, the Company issued a total of 50,000 shares for each property in consideration for obligations under the Baborigame and Campana Option agreements including: 20,000 common shares for each property, originally due upon receipt of approval by the TSX-V and subsequently amended to be issued within 10 business days of the Listing, having a market value of $0.53 each for a gross consideration of $10,600; and 30,000 shares due July 5, 2010 for each property having a market value of $0.335 each for a gross consideration of $10,050. *Subsequent to December 31, 2010, the Company issued 30,000 shares in accordance with the agreement. (iii) Drilling or property expenditure commitment for each property by not later than: a) January 5, 2011 - US$250,000 or 1,500 meters of drilling*; b) January 5, 2012 - a further US$400,000; c) January 5, 2013 a further US$400,000; and d) January 5, 2014 a further US$600,000. *Completed for the Baborigame and an extension has been granted for Campana. c) El Dorado agreements The terms of an agreement signed on July 23, 2010 require the Company to make an initial payment of US$25,000 at signing (paid), a second US$25,000 payment at the end of six months (paid subsequent to December 31, 2010) and incremental staged payments for a total of US$800,000 over two years, with no underlying royalties. The terms of a second agreement signed on September 6, 2010 (and subsequently amended on April 29, 2011) require the Company to make escalating payments every six months, up to a total of US$1.2 million at the end of year 3. The interest is subject to a 2% NSR. The Company has the option of reducing the NSR by 0.5% by making a payment of US$0.5 million.
d) Other properties Bermudez Property During the year ended December 31, 2010, the Company acquired the Bermudez property by staking. Ocampo and Gambusino Properties On August 29, 2008, the Company entered into a Promissory Agreement with a related party (note 6(b)) in which it was granted an option to acquire four mining concessions. On March 9, 2009, the Company entered into an assignment agreement with the related party and completed the acquisition of these concessions for cash consideration of $9,533. Ruiz and Santiago Properties During the year ended December 31, 2009, the Company abandoned its exploration activities in the two concession and recognized a write-off of $118,042 in its statement of operations. 5. Shareholders Equity a) Authorized: The authorized share capital consists of an unlimited number of common shares without par value. b) Issued: Number of Shares Share Capital Contributed Surplus Balance, December 31, 2008 12,225,633 $ 939,509 $ - Shares issued for cash 1,100,000 220,000 - Units issued for cash 8,595,268 2,641,174 367,170 Units issued to agent 167,925 51,601 7,173 Issuance costs cash - (391,007) - Issuance costs units - (58,774) - Issuance costs warrants - (81,431) 81,431 Balance, December 31, 2009 22,088,826 3,321,072 455,774 Shares issued for mineral property interests (note 4) 230,000 106,700 - Shares issued on exercise of warrants 1,139,785 492,750 - Transfer from contributed surplus on exercise of warrants - 122,522 (122,522) Issuance costs cash - (8,260) - Stock-based compensation - - 618,680 Balance, December 31, 2010 23,458,611 $ 4,034,784 $ 951,932
c) Shares and Units Issued for Cash: Initial Public Offering On December 23, 2009, the Company completed its IPO pursuant to the terms of an agency agreement to raise gross proceeds of $1,800,000 on the issuance of 5,142,856 units at a price of $0.35 each. Each unit consisted of one common share ( IPO Common Share ) and one half of one non-transferable share purchase warrant ( IPO Warrant ). Each whole IPO Warrant entitled the holder to purchase one additional common share at a price of $0.50 each at any time until December 23, 2010. As consideration for completing the IPO, the Agent s compensation consisted of: a cash payment equal to 8.5% of the gross proceeds ($153,000) of which, at the Agent's discretion, $108,226 was paid in cash and $44,774 was paid by the issuance of 127,925 IPO Units at $0.35 each; 514,285 Agent s warrants, being 10% of the number of IPO Units sold exercisable into one common share at $0.35 for a one year period from closing; and a corporate finance fee of $29,000 comprised of $15,000 cash and 40,000 Agent IPO units having a market value of $0.35 each. Concurrent Private Placement Concurrently with the IPO, on December 10, 2009, the Company completed a concurrent private placement ( CPP ) pursuant to the terms of a subscription agreement to raise gross proceeds of $1,208,344 on the sale of 3,452,412 units at a price of $0.35 each. Each unit consisted of one common share ( CPP Common Share ) and one half of one non-transferable share purchase warrant ( CPP Warrant ). Each whole CPP Warrant entitled the holder to purchase one additional common share at a price of $0.50 each at any time until December 10, 2010. A finder s fee consisting of a 6% cash payment ($44,415) and 126,900 finder s warrants ( Finder s Warrants ) with respect to the sale of 2,115,000 CPP units. The Finder s warrants are exercisable at a price of $0.50 each at any time until December 10, 2010. Non-brokered Private Placement On May 8, 2009, the Company completed a non-brokered private placement to raise $220,000 on the sale of 1,100,000 common shares at a price of $0.20 each. d) Stock options: The directors authorized a Company Share Option Plan (the Plan ) on August 6, 2008 that became effective on the Listing Date. The Plan has been established to recognize the contribution and continued assistance of Company directors, officers, employees and contracted consultants, including investor relations advisors (the Service Providers ) to the Company s development and growth. The maximum aggregate number of shares subject to issuance under the Plan is equal to a maximum of 10% of the common shares outstanding at the time each option is granted. The Plan contains restrictions on the number of options including share compensation arrangements to which any one Service Provider is entitled. The maximum term of the options may not exceed 10-years.
During the year ended December 31, 2010, the Company granted 2,230,000 stock options to directors, officers, consultants and an employee, which was recorded as stockbased compensation expense of $460,636 and deferred exploration expenditures of $158,044. The average grant date fair value of these options was $0.36 per option which was determined using the Black-Scholes option pricing model with the following weighted average assumptions: Expected life 5 years Volatility 100% Risk-free interest rate 2.34% Dividend rate 0% Stock option transactions are summarized as follows: Number of shares Weighted average exercise price Outstanding at December 31, 2008 and 2009 - $ - Granted 2,230,000 0.37 Outstanding at December 31, 2010 2,230,000 $ 0.37 Details of options outstanding at December 31, 2010 are as follows: Exercise price Expiry date Number of options outstanding and exercisable $ 0.35 January 5, 2015 1,350,000 $ 0.41 March 18, 2015 630,000 $ 0.39 June 9, 2015 250,000 2,230,000 e) Share purchase warrants: Share purchase warrant transactions are summarized as follows: Number of shares Weighted average exercise price Outstanding at December 31, 2008 - $ - Issued 5,022,781 0.48 Outstanding at December 31, 2009 5,022,781 0.48 Exercised (1,139,785) 0.43 Expired (3,882,996) 0.50 Outstanding at December 31, 2010 - $ -
f) Shares held in escrow: On September 18, 2009 the directors approved escrow agreements whereby the Company and certain of the shareholders on record as of September 17, 2009 would enter into an Escrow Agreement (the Escrow Agreement ) under which they would deliver a total of 7,270,217 common shares into escrow (the Escrow Shares ). Under the terms of the Escrow Agreement, a total of 727,021 and 1,090,533 shares were released from escrow on January 5, 2010 and July 5, 2010, respectively. The remaining shares will be released in 5 equal tranches of 1,090,533 shares every six months starting on January 5, 2011 (released) until January 5, 2013. 6. Related Party Transactions: a) Operating expense and deferred exploration expenditures Pursuant to service agreements dated September 1, 2008 between Fumarola and two of its officers, the Company has contracted to pay $4,000 per month to an individual who is also a Company officer and director for geological and administrative services and US$200 per day in geological consulting fees to an individual who is also a Company officer. During the year ended December 31, 2010, the total amount paid under these agreements amounted to $43,600 (2009 - $54,816) to the officer and director and $47,173 (2009 - $37,228) to the officer. All of these fees have been recorded as geological consulting fees allocated to deferred exploration expenditures and project investigation costs. On September 1, 2009, the Company entered into a one year management agreement (the Management Agreement ) with a company to provide corporate development and public relations services in consideration for a monthly fee of $3,500. The parties share a common director. The Management Agreement was terminated effective June 30, 2010. During the year ended December 31, 2010, $21,000 was recorded in consulting fees in connection with this agreement (2009 - $14,000). During the year ended December 31, 2010, the Company incurred rent of $30,800 (2009 - $nil) to a Company with a common director. On July 21, 2009, the Company adopted a compensation policy for its directors to be implemented upon completion of the Company s IPO and listing on the TSX-V to pay, on a go-forward basis, each director of the Company, other than the Chairman, $500 per month for their services as directors and to pay the Chairman a one-time payment of $15,000 and $2,500 per month for serving as the Company s part-time non-executive Chairman. During the year ended December 31, 2010, the Company paid $58,000 (2009 - $Nil) under this policy. b) Property acquisitions and option agreements The Cordero and Campana Properties (notes 4(a) and 4(b) respectively) were acquired under option agreements with Altiplano. The Baborigame (note 4(b)) property was acquired under an option agreement with Terciario. An officer, director and shareholder of Altiplano and Terciario is also an officer, director and shareholder of the Company. As at December 31, 2010, accounts payable and accrued liabilities included $Nil (2009 - $52,766) that was due ($26,383 each as to Altiplano and Terciario in connection with the Campana and Baborigame property acquisitions respectively). The Company acquired the Ocampo and Gambusino mineral property interests, included in Other Properties (note 4(d)), from a individual who is an officer of Fumarola.
7. Management of Capital The Company s objectives when managing capital are to safeguard the Company s ability to continue as a going concern in order to provide returns for shareholders and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. In the management of capital, the Company includes share capital, as well as cash. To date, the Company has been dependent on the equity markets as its sole source of operating working capital and the Company s capital resources are largely determined by the strength of the junior resource markets and by the status of the Company s projects in relation to these markets, and its ability to compete for investor support of its projects. In order to facilitate the management of its capital requirements, the Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. The Company expects its current capital resources will not be sufficient to carry out its exploration plans and operations through the next twelve months. Accordingly the Company intends to issue additional shares over the course of the next year. There were no changes to the Company s approach to capital management during the year ended December 31, 2010. The Company is not subject to any externally imposed capital requirements. 8. Risk Management The Company is exposed in varying degrees to a variety of financial instrument related risks as follows: Foreign exchange risk: Foreign currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to currency risk as it incurs expenditures that are denominated in Mexican Pesos and United States Dollars. The Company has not hedged its exposure to fluctuations in foreign exchange rates. At December 31, 2010, the Canadian dollar equivalent of financial instruments denominated in foreign currency is as follows: 2010 2009 Cash $ 131,804 $ 81,974 Receivables 101,527 6,946 Accounts payable (7,037) (61,119) $ 226,294 $ 27,801 Based on the above net exposures, as at December 31, 2010, a 10% change in the Canadian / Mexican exchange rate would impact the Company s earnings by approximately $22,600 (2009 - $2,800).
Credit risk: Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company s primary exposure to credit risk is on its cash held in bank accounts. The Company s cash is deposited in bank accounts held with a major bank in Canada and in Mexico. The majority of the Company s cash is held by the same Canadian bank; therefore, there is a concentration of credit risk. This risk is managed by using a major bank that is a high credit quality financial institution as determined by rating agencies. The Company s secondary exposure to risk is on its other receivables. This risk is minimal as receivables consist primarily of refundable government goods and services taxes. Liquidity Risk Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. The Company s objective in managing liquidity risk is to maintain sufficient liquid funds to meet its cash flow requirements at any point in time. Interest Rate Risk Interest rate risk is the risk of losses that arise as a result of changes in contracted interest rates. The Company is exposed to interest rate risk as bank accounts earn interest income at variable rates. 9. Segmented Information The Company had one reportable operating segment, being the acquisition, exploration, and disposition of interests in mineral properties. At December 31, 2010 and 2009, all of the Company s long-lived assets are located in Mexico. 10. Income Taxes A reconciliation of the expected income tax provision at the statutory rate to the reported income tax provision is as follows: 2010 2009 Net loss $ (987,371) $ (356,393) Statutory income tax rate 28.5% 30.0% Expected income tax recovery (281,401) (106,918) Permanent differences 135,505 (568) Effect of lower effective tax rate in Mexico 516 3,414 Effect of share issuance costs not recognized (2,354) (134,934) Effect of change in tax rate 14,610 38,709 Adjustments to valuation allowance 133,124 200,297 $ - $ -
Temporary differences that give rise to the following future income tax assets and liabilities are as follows: 2010 2009 Future income tax assets: Non-capital losses $ 855,202 $ 293,151 Share issuance costs 72,279 94,212 927,481 387,363 Future income tax liability: Mineral properties (558,137) (151,143) Net future income tax asset before valuation allowance 369,344 236,220 Valuation allowance (369,344) (236,220) $ - $ - The Company has income tax loss carry forwards of approximately $902,500 in Canada, which may be used to reduce future Canadian income taxes otherwise payable. These losses expire in the years 2028 to 2030. The Company has income tax loss carry forwards of approximately $2,248,491 in Mexico, which may be used to reduce future income taxes otherwise payable and which expire in the years 2018 to 2020. The tax benefit of the above noted tax assets have been offset by recognition of a valuation allowance in these consolidated financial statements. 11. Subsequent Events Private placement On March 21, 2011, Prospero completed a non-brokered private placement of 5,622,855 units (the Units ) at a price of $0.35 per Unit, for gross proceeds of $1,967,999. Each Unit consists of one common share and one non-transferable share purchase warrant with each whole warrant entitling the holder to purchase one common share of the Company for a term of 12 months at a price of $0.50 per common share. If at any time from four months and one day after the closing of the private placement, the volume weighted average trading price of Prospero s common shares on the TSX-V over a period of 20 consecutive trading days exceeds $0.75, Prospero may within five days after such event, provide notice to the warrant holders that the warrants will expire early, namely on the date which is 30 calendar days after the date of such notice to the warrant holders. In connection with the private placement, Prospero entered into finder s fee arrangements with arm s length finders pursuant to which the Company paid cash finder s fees of $112,080 and 320,777 finder s warrants having the same terms as the private placement warrants. Shares issued for mineral properties Subsequent to December 31, 2010, the Company issued a total of 210,000 common shares in accordance with the Cordero, Baborigame and Campana option agreements (notes 4(a) and 4(b)).