ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
Trilliant Exploration Corporation was incorporated under the laws of the State of Nevada on December 29, 2003 under the name Project Development Pacific Inc. We were previously engaged in the business of assisting Canadian citizens to access health care services from private providers. On November 26, 2007, we changed our name to Trialliant Exploration Corporation with a business purpose to acquire and develop mineral properties. During 2007, we began acquiring interests in mining properties. As of the date of this Annual Report, we are engaged in the evaluation, acquisition, exploration, and advancement of mining projects.
On October 15, 2008, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Compania Minera Del Pacifico S.A., an Ecuadorian corporation (“Del Pacifico”) for the purchase of the Muluncay Project. Subsequently, on March 30, 2009, we entered into a share transfer agreement (the “Share Transfer Agreement”) with Del Pacifico and its wholly owned subsidiary, Compania Muluncaygold Corp. S.A. (“Muluncay”). The Share Transfer Agreement superseded in its entirety the terms of the Asset Purchase Agreement.
In accordance with the terms and provisions of the Share Transfer Agreement, we acquired 100% of the total issued and outstanding shares of common stock of Muluncay and its assets, which includes certain customer receivables, foreign tax credit, equipment, fixtures, improvements, all contracts, operations and mining rights and interests in certain mining properties located in Muluncay, Ecuador (the “Controlling Assets”). The total purchase price for the shares of common stock and Controlling Assets was a $3,600,000 contingent note payable, which was to be paid in installments and in accordance with a promissory note in the principal amount of $3,600,000 between us and Muluncay (the “Muluncay Promissory Note”), which bears interest at 4.5% per annum. Repayment of the Muluncay Promissory Note was to begin only upon Muluncay reaching production of 400 tons per day in their operation using 26 day average in a 30-day calendar month (the “Minimum Operations”). Beginning thirty days from the date of first reaching Minimum Operations, we were to make four quarterly payments to Pacifico of $200,000 each. After making the first four quarterly payments, we were to continue to make quarterly payments in the minimum amount of $300,000 until all principal and interest in fully paid. As additional consideration for the purchase of Muluncay, we released Del Pacifico from a debt due and owing to us in the principal amount of $1,195,000 plus interest.
In further accordance with the terms and provisions of the Share Transfer Agreement, we also agreed to transfer to Muluncay an aggregate of $1,800,000 as follows: (i) an initial payment of $800,000 within ninety day of March 30, 2009; and (ii) the balance of $1,000,000 within 180 days of March 30, 2009.
Effective December 31, 2009, Del Pacifico terminated the agreement due to our inability to provide the $1,800,000 investment pursuant to the contract terms. Thus, we determined to discontinue operations through our Muluncay subsidiary. We were released from all obligations and released all claims on the Controlling Assets primarily because we had incurred significant operating losses since acquisition and we could not attract operating capital to meet contractual obligations since the acquisition of Muluncay. See “ - Current Business Operations.”
Subsidiaries
Muluncaygold
Muluncaygold was originally incorporated in Machala, Ecuador in February of 2007 as Compania Minera Ecuadorgold Corp S.A. In August of 2008, it changed its name to Compania Minera Muluncaygold Corp S.A.In accordance with the terms and provisions of the Share Transfer Agreement, we acquired 100% of the total issued and outstanding shares of common stock of Muluncay, including the Controlling Assets, for an aggregate purchase price of $3,600,000. As a result of the Share Transfer Agreement, Muluncay became our wholly-owned subsidiary. During fiscal year we conducted all of our mining operations through Muluncay. However, effective December 31, 2009, Muluncay is no longer our subsidiary, as the Share Transfer Agreement was terminated due to our inability to meet contractual obligations.
Trilliant Diamonds Limited
On June 29, 2009 (Date of Formation), the Company established a wholly-owned Trilliant Diamonds Limited (a Subsidiary) (Trilliant Diamonds), a private limited England and Wales Company, to facilitate the Company’s diamond exploration. Trilliant Diamonds was sold off on August 26, 2010 to Charms with its current and future debt.
Compania Minera Ayapambagold S.A.
On July 1, 2009, we entered into a stock purchase agreement (the “Ayapambagold Stock Purchase Agreement”) with William Magers (“Magers”). In accordance with the terms and provisions of the Ayapambagold Stock Purchase Agreement, we purchased 799 of the 800 shares of outstanding capital stock of Compania Minera Ayapambagold S.A. (“Ayapambagold”) from Magers at a purchase price of $799. Ayapambagold is a company organized and existing under the laws of Ecuador and has no assets or operations and has been inactive since inception. We acquired Ayapambagold to use as a holding company in Ecuador to facilitate future potential acquisitions.
Bozel S.A.
On September 8, 2009, we entered into a purchase agreement (the “Wellgate Agreement”) with Wellgate International Limited, a company registered under the laws of the British Virgin Islands (“Wellgate”), regarding acquisition by us of all of the shares of stock held of record by Wellgate of Bozel S.A. (“Bozel”). Bozel is a company organized under the laws of Luxembourg. In accordance with the terms and provisions of the Wellgate Agreement, we were to purchase up to 100% of the outstanding capital stock of Bozel in consideration for payment of $80,000,000 of our common stock. It was disclosed in the Wellgate Agreement that Wellgate was the subject of a judgment in the amount of $8,572,995 (the “Wellgate Judgment”). In further accordance with the terms and provisions of the Wellgate Agreement, we were to advance to Bozel $20,000,000 for a term of one year at an interest rate not to exceed 14% per annum. Consummation of the Wellgate Agreement was subject to us acquiring not less than 66% of the issued capital stock of Bozel after the exercise of outstanding warrants for Bozel’s common stock and completion of due diligence, including the status of the Wellgate Judgment.
On September 24, 2009, the Eastern Caribbean Supreme Court in the Virgin Islands, acting in the case of Crastvell Trading Limited v. Wellgate International Limited issued an ex parte order temporarily enjoining Wellgate from transferring to us its shares of Bozel. Subsequently, Wellgate filed a response to the injunction with the Eastern Caribbean Supreme Court seeking dissolution of the injunction based upon false and misleading information provided to the Eastern Caribbean Supreme Court and a $65,000,000 counterclaim as well as other substantive and procedural objections.
On December 5, 2009, we terminated the Wellgate Agreement entirely based upon the inability of Wellgate to perform its obligations under the Wellgate Agreement due to the injunction. We did not incur any penalties with regard to termination of the Wellgate Agreement.
Compania Minera Santafemining S.A.
On July 23, 2009, our wholly-owned subsidiary, Ayapambagold, entered into a share purchase agreement (the “Santafemining Share Purchase Agreement”) to acquire the assets and liabilities of Compania Minera Santafemining S.A. (“Santafemining”) for payment of $1,631,844. An initial payment of $600,000 was required at execution of the Santafemining Share Purchase Agreement, which could be used to satisfy any and all claims, liens or encumbrances to title of any shares of assets to be acquired by Ayapambagold. The remainder of the purchase price was payable in three installments of $343,948 due on or before each of the six months, twelve months and eighteen months following the execution date. As of the date of this Annual Report, the transaction has not yet been completed and there is no indication that we will be able to secure the necessary financing and complete the acquisition. Avapambagold has paid an aggregate of $0 to Santafemining.
Santafemining processes rock and sand tailings and has been operating at 80 tons per day since inception in 2007.Its processing facilities are currently being retrofitted to add an additional 70 tons of operating capacity. Santafemining is located approximately one kilometer from our Muluncay operation.
RECENT DEVELOPMENTS
Amendment to Articles of Incorporation
On June 30, 2009, we filed a Certificate of Designation with the Secretary of State of Nevada, whereby 10,200,000 shares of the 200,000,000 authorized shares of preferred stock, $0.001 par value per share, were designated as Series I Preferred Stock, $0.001 par value and having the powers, designations, preferences, limitations, restrictions and relative rights as set forth in the Certificate of Designation of Series I Preferred Stock. The Certificate of Designation was approved by our Board of Directors on June 30, 2009.
On July 1, 2009, pursuant to a unanimous decision of the shareholders of the Series I Preferred Shares, the designation of the preferred shares were amended as follows: “Each share of Series I Preferred Stock will be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of the Corporation’s Common Stock as is determined by dividing (i) the Base Amount by (ii) the lowest volume weighted average price of the securities on the OTCBB, NASDAQ or other exchange or market on which such Common Stock trades in the five preceding days prior to the closing of such transaction (the "Series I Conversion Price").”The amendment to the Designation of Series I Preferred Stock was approved by our Board of Directors on July 1, 2009. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Reverse Stock Split
On January 26, 2011, the Board of Directors of Trilliant Exploration Corporation, a Nevada corporation (the “Corporation”) pursuant to unanimous written consent resolutions authorized and approved a reverse stock split of one for every three hundred (1:300) of our total issued and outstanding shares of common stock (the “Reverse Stock Split”). On January 26, 2011,certain shareholders holding in the aggregate a majority of the total issued and outstanding shares of common stock of the Corporation pursuant to written consent resolutions authorized and approved the Reverse Stock Split. The Reverse Stock Split was effectuated based on market conditions and upon a determination by the Corporation’s Board of Directors that the Reverse Stock Split was in our best interests and those of the shareholders. Certain factors were discussed among the members of the Board of Directors concerning the need for the Reverse Stock Split, including: (i) current trading price of the Corporation’s shares of common stock on the OTC Bulletin Board and potential to increase the marketability and liquidity of the Corporation’s common stock; (ii) possible reluctance of brokerage firms and institutional investors to recommend lower-priced stocks to their clients or to hold in their own portfolios; and (iii) desire to meet future requirements of per-share price and net tangible assets and shareholders’ equity relating to admission for trading on other markets;
The Reverse Stock Split was effectuated on April 8, 2011 following the filing of the appropriate documentation with FINRA. The Reverse Stock Split decreased our total issued and outstanding shares of common stock from 186,231,500 to 620,771 shares of common stock. The common stock will continue to be $0.001 par value.
All references in the accompanying consolidated financial statements and notes thereto have been retroactively restated to reflect the above change in the ordinary share structure.
TRANSFER AGENT
Our transfer agent is Island Stock Transfer, 100 Second Avenue South, Suite 705S, St. Petersburg, Florida 33701.
CURRENT BUSINESS OPERATIONS
We are engaged in the evaluation, acquisition, exploration and advancement of mining projects. As of the date of this Annual Report, we are devoting substantially all of our efforts to the execution of our business operations. Through fiscal 2011, funding to acquire and explore alternative mining, gold and copper properties and for operational purposes was acquired through private financings.
Employees
As of the date of this Annual Report, we have one part time employee.
Government Regulation
Mining operations and exploration activities are subject to various national, state, provincial and local laws and regulations which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. Upon acquisition of Muluncaygold, we will have obtained or have pending applications for those licenses, permits or other authorizations required to conduct our exploration and other programs. We believe that we will be in compliance in all material respects with applicable mining, health, safety and environmental statutes and the regulations passed thereunder in the jurisdictions in which we will operate. See “Item 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.
RISKS RELATED TO OUR BUSINESS
We may need additional financing to expand our business plan.
Our business plan calls for substantial investment and cost in connection with the exploration of our mineral properties. While we believe we have sufficient funds to carry out our current plans, unforeseen expenses, an expanded exploration plan or establishing future mining operations could require additional operating capital. We do not currently have any arrangements for additional financing and we can provide no assurance to investors that we will be able to find additional financing if required. Obtaining additional financing would be subject to a number of factors, including market prices for minerals, investor acceptance of our properties, and investor sentiment.These factors may make the timing, amount, terms or conditions of additional financing unfavorable to us. The most likely source of future funds would be through the sale of additional equity capital and loans. Any sale of additional shares will result in dilution to existing stockholders while incurring additional debt will result in encumbrances on our property and future cash flows.
Because there is no assurance when we will generate revenues, we may deplete our cash reserves and not have sufficient outside sources of capital to complete our exploration or mining programs.
To date we have been involved primarily in financing activities, acquisition activities, and limited exploration activities. Before discontinuation of operations, our only anticipated revenue producing properties comprised the Muluncay Project. These revenue producing properties have been virtually exhausted of high grade ore to a depth of 200 meters, and there has been no drilling to test the depth potential of the mining system. Our inability to generate revenues could eventually inhibit our ability to continue in business or achieve our business objectives.
Exploration for natural resources is a speculative venture involving substantial risk. Hazards such as unusual or unexpected geological formations and other conditions often result in unsuccessful exploration efforts. Success in exploration is dependent upon a number of factors including, but not limited to, quality of management, quality and availability of geological expertise and availability of exploration capital. Due to these and other factors, no assurance can be given that our exploration programs will result in the discovery of new mineral reserves or resources.
Gold prices are volatile and there can be no assurance that a profitable market for gold will exist.
The gold mining industry is intensely competitive, and there is no assurance that, even if we discover commercial quantities of gold mineral resources, a profitable market will exist for the sale of those resources. There can be no assurance that gold prices will remain at such levels or be such that we can mine at a profit. Factors beyond our control may affect the marketability of any minerals discovered. Gold prices are subject to volatile changes resulting from a variety of factors including international economic and political trends, expectations of inflation, global and regional supply and demand and consumption patterns, metal stock levels maintained by producers and others, the availability and cost of metal substitutes, currency exchange fluctuations, inflation rates, interest rates, speculative activities and increased production due to improved mining and production methods.
Uncertainty involved in mining.
Mining involves various types of risks and hazards, including environmental hazards, unusual or unexpected geological operating conditions such as rock bursts, structural cave-ins or slides, flooding, earthquakes and fires, labor disruptions, industrial accidents, metallurgical and other processing problems, metal losses, and periodic interruptions due to inclement or hazardous weather conditions. These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury, environmental damage, delays in mining, increased production costs, monetary losses, and possible legal liability.
We may not be able to obtain insurance to cover these risks at economically feasible premiums. Insurance against certain environmental risks, including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from production, is not generally available to us or to other companies within the mining industry. We may suffer a material adverse effect on our business if we incur losses related to any significant events that are not covered by our insurance policies.
Calculation of mineral resources and metal recovery is only an estimate, and there can be no assurance about the quantity and grade of minerals until resources are actually mined.
The calculation of reserves, resources and corresponding grades being mined or dedicated to future production are imprecise and depend on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which might prove to be unpredictable. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Until reserves or resources are actually mined and processed, the quantity of reserves or resources and grades must be considered as estimates only. Any material change in the quantity of reserves, resources, grade or stripping ratio may affect the economic viability of our properties. In addition, there can be no assurance that metal recoveries in small-scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.
Our planned operations involve exploration and development and there is no guarantee that any such activity will result in commercial production of mineral deposits.
Gold deposits have been nearly exhausted within 200 meters of the surface on the properties we originally intended to mine before discontinuation of operations. There has been no drilling to test the depth potential of commercial ore on these properties, and proposed programs on such properties are exploratory in nature. Development of these mineral properties is contingent upon obtaining satisfactory exploration results.
Mineral exploration and development involve substantial expenses and a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to adequately mitigate. There is no assurance that additional commercial quantities of ore will be discovered on our exploration properties. There is also no assurance that, even if commercial quantities of ore are discovered, a mineral property will be brought into commercial production, or if brought into production, that it will be profitable. The discovery of mineral deposits is dependent upon a number of factors including the technical skill of the exploration personnel involved. The commercial viability of a mineral deposit is also dependent upon, among a number of other factors, its size, grade and proximity to infrastructure, current metal prices, and government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals, and environmental protection.Most of the above factors are beyond our control.
Competition for new mining properties may prevent us from acquiring interests in additional properties or mining operations.
Significant and increasing competition exists for mineral acquisition opportunities throughout the world. Some of the competitors are large, more established mining companies with substantial capabilities and greater financial resources, operational experience and technical capabilities than us. As a result of the competition, we may be unable to acquire rights to exploit additional attractive mining properties on terms we consider acceptable. Increased competition could adversely affect our ability to attract necessary capital funding or acquire any interest in additional operations that would yield reserves or result in commercial mining operations.
Recent high metal prices have encouraged increased mining exploration, development and construction activity, which has increased demand for, and cost of, exploration, development and construction services and equipment.
Recent increases in gold prices have led to increases in mining exploration, development and construction activities, which have resulted in higher demand for, and costs of, exploration, development and construction services and equipment. Increased demand for services and equipment could cause project costs to increase materially, resulting in delays if services or equipment cannot be obtained in a timely manner due to inadequate availability, and increase potential scheduling difficulties and cost increases due to the need to coordinate the availability of services or equipment, any of which could materially increase project exploration, development and construction costs and/or result in project delays.
Actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated and there can be no assurance that any future development activities will result in profitable mining operations.
Capital and operating costs, production and economic returns, and other estimates contained in the feasibility studies for our projects may differ significantly from those anticipated by our current studies and estimates, and there can be no assurance that our actual capital and operating costs will not be higher than currently anticipated. In addition, delays to construction schedules may negatively impact the net present value and internal rates of return of our mineral properties as set forth in the applicable feasibility studies
There can be no assurance that the interests held by us in our properties is free from defects.
We investigated the rights to explore and exploit the Muluncay properties, and, to the best of our knowledge, believed those rights were in good standing. As of the date of this Annual Report, operations have been discontinued through Muluncay. In the event we acquire subsequent interests and rights, no guarantee can be given that such rights will not be revoked or significantly altered to our detriment. There can also be no guarantee that our rights will not be challenged or impugned by third parties. The properties may be subject to prior recorded and unrecorded agreements, transfers or claims, and title may be affected by, among other things, undetected defects. A successful challenge to the precise area and location of these claims could result in our inability to operate on these properties as permitted or being unable to enforce any rights with respect to our properties.
We are exposed to risks of changing political stability and government regulation in the country in which it intends to operate.
Any potential mining rights in Ecuador that we acquire may be affected in varying degrees by political instability, government regulations relating to the mining industry and foreign investment therein, and the policies of other nations in respect of Ecuador. Any changes in regulations or shifts in political conditions are beyond our control and may adversely affect its business. Our operations may be affected in varying degrees by government regulations, including those with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, employment, land use, water use, environmental legislation and mine safety. The regulatory environment is in a state of continuing change, and new laws, regulations and requirements may be retroactive in their effect and implementation. Our operations may also be affected in varying degrees by political and economic instability, economic or other sanctions imposed by other nations, terrorism, military repression, crime, extreme fluctuations in currency exchange rates and high inflation.
We are subject to substantial environmental and other regulatory requirements and such regulations are becoming more stringent. Non-compliance with such regulations, either through current or future operations or a pre-existing condition could materially adversely affect us.
All phases of our operations are subject to environmental regulations in the jurisdiction in which it operates. Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors, and employees. There can be no assurance that future changes in environmental regulation, if any, will not be materially adverse to our operations.
The mining properties may contain environmental hazards, which are presently unknown to us and which have been caused by previous or existing owners or operators of the properties. If these properties do contain such hazards, this could lead to our inability to use the properties or may cause us to incur costs to clean up such hazards. In addition, we could find ourselves subject to litigation should such hazards result in injury to any persons.
Government approvals and permits are sometimes required in connection with mining operations. Although we believe we will obtain all of the material approvals and permits to carry on its operations, we may require additional approvals or permits or may be required to renew existing approvals or permits from time to time. Obtaining or renewing approvals or permits can be a complex and time-consuming process. There can be no assurance that we will be able to obtain or renew the necessary approvals and permits on acceptable terms, in a timely manner, or at all. To the extent such approvals are required and not obtained; we may be delayed or prohibited from proceeding with planned exploration, development or mining of mineral properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, which may require operations to cease or be curtailed, or corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation of such requirements could have a material adverse impact on us and cause increases in capital expenditures or production costs or reductions in levels of production at producing properties or require abandonment or delays in development of new mining properties.
We Are a New Entrant Into the Gold Mining and Development Industry Without Profitable Operating History.
Since inception, our activities have been limited to organizational efforts, obtaining working capital, acquiring and subsequently terminating the Muluncay Project, and consummating the acquisition of various agreements. As a result, there is limited information regarding property related production potential or revenue generation potential.
The business of gold exploration and development and mining is subject to many risks and if gold is found in economic production quantities, the potential profitability of future possible gold ventures depends upon factors beyond our control. The potential profitability of gold properties if economic quantities are found is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) mining and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected gold finds; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labor disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment to operate in accordance with specifications or expectations.
We have a limited operating history and have not generated a profit since inception; consequently our long term viability cannot be assured.
Our prospects for financial success are difficult to forecast because we have a limited operating history. Our prospects for financial success must be considered in light of the risks, expenses and difficulties frequently encountered by mining companies initiating exploration of unproven properties. Our business could be subject to any or all of the problems, expenses, delays and risks inherent in the establishment of a gold and silver exploration enterprise, including limited capital resources, possible delays in mining explorations and development, failure to identify commercially viable gold or silver deposits, possible cost overruns due to price and cost increases in exploration and ore processing, uncertain gold and silver market prices, inability to accurately predict mining results and attract and retain qualified employees. Therefore, there can be no assurance that our exploration or mining will be successful, that we will be able to achieve or maintain profitable operations or that we will not encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated.
We Have a History of Operating Losses and There Can Be No Assurance We Will Be Profitable in the Future.
We have a history of operating losses, expect to continue to incur losses, and may never be profitable; thus, we must re-enter the pre-exploration stage effective December 31, 2009. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses totaling $ 18,420,470 from December 29, 2003 (inception) to December 31, 2011. During the year ended December 31, 2011, we incurred losses of $ 2,056,356. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that: (i) the costs to acquire additional properties are more than we currently anticipate; (ii) mining and completion costs for additional properties increase beyond our expectations; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs.
Our development of and participation in what could evolve into an increasing number of gold prospects may require substantial capital expenditures. The uncertainty and factors described throughout this section may impede our ability to economically find, develop, produce, and acquire gold properties. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future.
We Have Received a Going Concern Opinion From Our Independent Registered Public Auditors’ Report Accompanying Our December 31, 2011 and December 31, 2010 Financial Statements.
The independent registered public auditor's report accompanying our December 31, 2011 and 2010 audited financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that the Company will continue as a going concern." Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected
We may need additional capital to accomplish our exploration and future development plans, and there can be no assurance that financing will be available on terms acceptable to us or at all.
The exploration and development of mining properties, including the continued exploration and development of any proposed projects and the construction of mining facilities and operations may require substantial additional financing. Failure to obtain sufficient financing, or financing on terms acceptable to us, may result in a delay or indefinite postponement of exploration, development or production on any or all properties we may obtain, or even a loss of an interest in a property. The only source of funds now available to us is through the sale of debt or equity capital, properties, royalty interests or the entering into of joint ventures or other strategic alliances in which the funding sources could become entitled to an interest in properties or projects we may obtain. Additional financing may not be available when needed or if available, the terms of such financing might not be favorable to us and might involve substantial dilution to existing shareholders. If financing involves the issuance of debt, the terms of the agreement governing such debt could impose restrictions on our operation of our business. Failure to raise capital when needed would have a material adverse effect on our business, financial condition and results of operations.
We are exposed to risks of changing labor and employment regulations.
Production at its mining operations is dependent upon the efforts of mining employees. In addition, employee relations may be affected by changes in the scheme of labor relations that may be introduced by the relevant governmental authorities in whose jurisdictions we carry on business. Changes in such legislation or in the relationship between us and our employees may have a material adverse effect on our business, results of operations and financial condition.
We rely on our management and key personnel, and there is no assurance that such persons will remain with us or that we will be able to recruit skilled individuals.
We rely heavily on our existing management. We do not maintain "key man" insurance. Recruiting and retaining qualified personnel is critical to our success. The number of persons skilled in the acquisition, exploration and development of mining properties is limited and competition for the services of such persons is intense. As our business activity grows, it may require additional key financial, administrative, technical and mining personnel. Although we believe that we will be successful in attracting and retaining qualified personnel, there can be no assurance of such success. The failure to attract such personnel to manage growth effectively could have a material adverse effect on our business, prospects, financial conditions and results of operations.
Our Officers and Directors May be Subject to Conflicts of Interest.
Certain of our officers and directors at times may only part time and can become subject to conflicts of interest. Some devote part of their working time to other business endeavors, including consulting relationships with other entities, and has responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, our officers and directors could be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest.
Nevada Law and Our Articles of Incorporation May Protect our Directors From Certain Types of Lawsuits.
Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
RISKS RELATED TO OUR COMMON STOCK
Sales of a Substantial Number of Shares of Our Common Stock Into the Public Market by Certain Stockholders May Result in Significant Downward Pressure on the Price of Our Common Stock and Could Affect Your Ability to Realize the Current Trading Price of Our Common Stock.
Sales of a substantial number of shares of our common stock in the public market by certain stockholders could cause a reduction in the market price of our common stock. As of the date of this Annual Report, we have 620,771 shares of common stock issued and outstanding.
As of the date of this Annual Report, there are 442,217 outstanding shares of our common stock that are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. Further, as of the date of this Annual Report, there are an aggregate of 33,335 whole warrants outstanding. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Any significant downward pressure on the price of our common stock as the selling stockholders sell their shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock.
The Trading Price of Our Common Stock on the OTC Bulletin Board Will Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares.
As of the date of this Annual Report, our common stock trades on the Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results from our exploration or development efforts; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts' estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; and (viii) general economic trends; and (ix) commodity price fluctuation
In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment.
Additional Issuance of Equity Securities May Result in Dilution to Our Existing Stockholders.
Our Articles of Incorporation, as amended, authorize the issuance of 1,000,000,000 shares of common stock and 200,000,000 shares of preferred stock. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control.
As at December 31, 2008, there were $1,300,000 of debentures outstanding, which debentures are convertible into common shares at a conversion price equal to the lesser of: (a) an amount equal to one hundred percent (100%) of the Volume Weighted Average Price (“VWAP”) as quoted by Bloomberg L.P. on October 15, 2008, or (b) an amount equal to eighty-five percent (85%) of the lowest daily closing VWAP as quoted by Bloomberg L.P. during the five (5) trading days immediately preceding the conversion date. During the life of the debentures, the holders of such securities are given an opportunity to profit from a rise in the market price of common shares with a resulting dilution in the interest of the other shareholders.
Reverse Stock Split
On January 26, 2011, the Board of Directors of Trilliant Exploration Corporation, a Nevada corporation (the “Corporation”) pursuant to unanimous written consent resolutions authorized and approved a reverse stock split of one for every three hundred (1:300) of our total issued and outstanding shares of common stock (the “Reverse Stock Split”). On January 26, 2011,certain shareholders holding in the aggregate a majority of the total issued and outstanding shares of common stock of the Corporation pursuant to written consent resolutions authorized and approved the Reverse Stock Split. The Reverse Stock Split was effectuated based on market conditions and upon a determination by the Corporation’s Board of Directors that the Reverse Stock Split was in our best interests and those of the shareholders. Certain factors were discussed among the members of the Board of Directors concerning the need for the Reverse Stock Split, including: (i) current trading price of the Corporation’s shares of common stock on the OTC Bulletin Board and potential to increase the marketability and liquidity of the Corporation’s common stock; (ii) possible reluctance of brokerage firms and institutional investors to recommend lower-priced stocks to their clients or to hold in their own portfolios; and (iii) desire to meet future requirements of per-share price and net tangible assets and shareholders’ equity relating to admission for trading on other markets;
The Reverse Stock Split was effectuated on April 8, 2011 following the filing of the appropriate documentation with FINRA. The Reverse Stock Split decreased our total issued and outstanding shares of common stock from 186,231,500 to 620,771 shares of common stock. The common stock will continue to be $0.001 par value.
As at December 31, 2011, there were 12,563,500 shares of Series I Preferred Shares issued and outstanding, which have certain liquidation rights . Under the terms of the Certificate of Designation , in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Preferred Shares will be entitled to receive for each share of Preferred Shares, out of the assets of the Company or proceeds available for distribution to our shareholders, subject to any rights of our creditors, before any distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other class or series of our stock ranking junior to the Preferred Shares, payment of an amount equal to the sum of (i) the $1.00 liquidation preference amount per Preferred Shares and (ii) the amount of any accrued and unpaid dividends on the Preferred Shares (including dividends accrued on any unpaid dividends). To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Preferred Shares and the holders of any other class or series of our stock ranking equally with the Preferred Shares, the holders of the Preferred Shares and such other stock will share ratably in the distribution.
For purposes of the liquidation rights of the Preferred Shares, neither a merger or consolidation of the Company with another entity, including a merger or consolidation in which the holders of Preferred Shares receive cash, securities or other property for their shares, nor a sale, lease or exchange of all or substantially all of the Company’s assets will constitute a liquidation, dissolution or winding up of the affairs of the Company.
In December 2009, the Company disposed of its principal asset, the Muluncay Gold Corp subsidiary. The Company has not received notice from the holders of the Preferred Stock exercising their rights under the terms of the Preferred Stock Designation to paid the liquidation preference of $1.00 per share , plus accrued and unpaid dividends
Our ability to obtain additional financing during the period in which such rights are outstanding may be adversely affected and the existence of the rights may have an adverse effect on the market price of its common shares. The holders of the debentures may exercise such securities at a time when we would be able to obtain needed capital by a new offering of securities on terms more favorable than those provided by the outstanding rights. The increase in the number of our common shares in the market resulting from the exercise of such rights and the possibility of sales of such shares may have a depressive effect on the price of our common shares. In addition, as a result of such additional common shares, the voting power of our existing shareholders will be substantially diluted.
We may, in the future, grant to some or all of its directors, key employees and consultants options to purchase its common shares at exercise prices equal to market prices at times when the public market is depressed. To the extent that significant numbers of such options are granted and exercised, the interests of our then existing shareholders will be subject to additional dilution.
We may be subject to "penny stock" regulations.
The Securities and Exchange Commission, or SEC, has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and our sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. These additional sales practice and disclosure requirements could impede the sale of our securities. Whenever any of our securities become subject to the penny stock rules, holders of those securities may have difficulty in selling those securities.
The trading price for our common shares is volatile.
Securities of micro- and small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally and market perceptions of the attractiveness of particular industries. Our share price is also likely to be significantly affected by short-term changes in gold prices or in its financial condition or results of operations as reflected in its quarterly earnings reports. Other factors unrelated to our performance that may have an effect on the price of its common shares include the following: the extent of analytical coverage available to investors concerning our business may be limited if investment banks with research capabilities do not follow our securities; the lessening in trading volume and general market interest in our securities may affect an investor's ability to trade significant numbers of common shares; the size of our public float may limit the ability of some institutions to invest in our securities; and a substantial decline in the price of its common shares that persists for a significant period of time could cause our securities to be delisted from the OTCBB, further reducing market liquidity. As a result of any of these factors, the market price of our common shares at any given point in time may not accurately reflect our long-term value.
We have no record of paying dividends.
We have no dividend record. We have not paid any dividends on the common shares since incorporation and do not anticipate doing so in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including operating results, financial condition, capital requirements, business opportunities and restrictions contained in any financing agreements.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 2. PROPERTY
Our principal office space is located at 545 Eighth Avenue, Suite 401, New York, New York 10018. The office space is for corporate identification, mailing, and courier purposes only and is provided to us at no cost. The office and services related thereto may be cancelled at any time.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.
ITEM 4.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Shares of our common stock commenced trading on the OTC Bulletin Board under the symbol “TTXP:OB.” The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the NASDAQ stock market. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.
As of December 31, 2011, we had 74 shareholders of record of our common stock, including shares held by brokerage clearing houses, depositories, or otherwise in unregistered form. We have 33,335 in outstanding warrants, do have $1,610,407in outstanding convertible debentures that are convertible into common equity and $565,000 in convertible notes payable - related party.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not indicate the intention of paying cash dividends either on our common stock in the foreseeable future.
SECTION 15(g) OF THE SECURITIES EXCHANGE ACT OF 1934
Our shares are covered by section 15(g) of the Securities Exchange Act of 1934, as amended that imposes additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses). For transactions covered by the Rule, the broker/dealer must make a special suitability determination for the purchase and have received the purchaser's written agreement to the transaction prior to the sale. Consequently, the Rule may affect the ability of broker/dealers to sell our securities and also may affect your ability to sell your shares in the secondary market.
Section 15(g) also imposes additional sales practice requirements on broker/dealers who sell penny securities. These rules require a one page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important to in understanding of the function of the penny stock market, such as “bid” and “offer” quotes, a dealers “spread” and broker/dealer compensation; the broker/dealer compensation, the broker/dealers duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers rights and remedies in causes of fraud in penny stock transactions; and, the FINRA's toll free telephone number and the central number of the North American Administrators Association, for information on the disciplinary history of broker/dealers and their associated persons.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We do not have an equity compensation plan. The table set forth below presents information relating to outstanding warrants.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended December 31, 2011, we issued 333,333 shares of our common stock in exchange for previously incurred debt.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATION
The summarized financial data set forth in the table below is derived from and should be read in conjunction with our audited financial statements for the period from inception (December 29, 2003) through December 31, 2011, including the notes to those financial statements which are included in this Annual Report. The following discussion should be read in conjunction with our audited financial statements and the related notes 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." Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
We are a pre-exploration stage company and have not generated any revenue to date. The following table sets forth selected financial information for the periods indicated. We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
We are engaged in the evaluation, acquisition, exploration and advancement of mining projects. Although we were considered to have exited the pre-exploration stage with the Muluncay acquisition, the disposal of Muluncay necessitates that we re-enter the pre-exploration stage effective December 31, 2009. As of the date of this Annual Report, we are devoting substantially all of our efforts to the execution of our business operations. To date, funding to acquire and explore suitable gold properties and for operational purposes was acquired through private financings. The Company may need additional cash advances from stockholders or loans from other parties to pay for operating expenses until the Company consummates an acquisition . Although it is currently anticipated that the Company can satisfy its cash requirements with additional cash advances or loans from other parties, if needed, for at least the next twelve months, the Company can provide no assurance that it can continue to satisfy its cash requirements for such period.
RESULTS OF OPERATION
12 Month Period Ended December 31, 2011 Compared to 12 Month Period Ended December 31, 2010.
Our net loss for the 12 month period ended December 31, 2011 was $2,056,356compared to a net loss of $4,020,502 during the twelve month period ended December 31, 2010, a 50% increase of $1,964146. During the twelve months periods ended December 31, 2011 and 2010, we did not generate any revenue from continuing operations.
During the twelve month period ended December 31, 2011, we incurred operating expenses of $9,323 compared to $186,383 incurred during the twelve month period ended December 31, 2010, a decrease of $177069. These expenses incurred during the twelve month period ended December 30, 2011 consisted of: (i) professional fees of $5,000 (2010: $135,116); (ii) salaries and wages of $-0- (2010: $3,000); (iii) advertising and promotion of $-0- (2010: $12,600); (iv) insurance of $-0- (2010: $9,833); and (v) other general and administrative expenses of $4,273 (2010: $5,208). Operating expenses decreased due to the decreased scope and scale of our business operations. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs.
Twelve Month Period Ended December 31, 2011 Compared to Twelve Month Period Ended December 31, 2010 (Cont’d).
Other income (expense) was incurred during the nine month period ended December 31, 2011 of ($2,047,033)) (2010: ($3,3834,119). Other income (expense) during the nine month period ended September 30, 2011 consisted of: (i) interest expense (including amortization of beneficial conversion feature) of ($272,725) compared to ($1,179,999) during the nine month period ended September 30, 2010; and (ii) change in fair value of derivative liability of $1,111,629 (2010: ($2,218,084)). The company in January 2011 incurred a loss of $583,333 on conversion of a Charms note.
Therefore, this resulted in a net loss applicable to common shares during the twelvemonth period ended December 3`, 2011 of $2,056,356 compared to a net loss applicable to common shares during the twelve month period ended December 31, 2010 of $4020,502
LIQUIDITY AND CAPITAL RESOURCES
Twelve Month Period Ended December 31, 2011
As at Decemberr 31, 2011, our current assets were $0 Our current liabilities were $2,995,257, which resulted in a working capital deficit of ($2,995,257. As of December 31, 2011, our liabilities were primarily comprised of: (i) $248,485 in accounts payable; (ii) $565,000 in convertible notes payable, current; (iii) $1,610,407 of convertible bonds payable, and (iv) a derivative liability is $13,110,869. The decrease in total assets during the three month period ended September 30, 2011 from fiscal year ended December 31, 2010 was primarily due to the payment of Company expenses.
Stockholders’ deficit increased from $25,591,777 for fiscal year ended December 31, 2010 to $26,952,318 for the twelve month period ended December 31, 2011.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. For the Twelve month period ended December 31, 2011, net cash flows used in operating activities was $11,451 consisting primarily of a net loss of $1,976,960 offset by loss on settlement of debt of $583,333 and loss on change in fair value of derivative liability of $1,111,629.
Cash Flows from Investing Activities
We did not engage in any investing activities during the Twelve month period ended December 31, 2011.
Cash Flows from Financing Activities
We did not engage in any financing activities during the twelve month period ended December 31, 2011.
Plan of Operation and Funding
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has reported a net loss from operations of $ 2,056,356 for the twelve month period ended December 31, 2011, accumulated deficit of $ 26,952,3184 and total current liabilities in excess of current assets of $ 2,995,257as of December31, 2011.
The Company is in the pre-exploratory stage and does not have any revenues from operations and will be dependent on funds raise to satisfy its ongoing capital requirements for at least the next 12 months. The Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion or respond to competitive pressures, any of these circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations.
Management expects that global economic conditions will continue to present a challenging operating environment through 2012.
While we have been able to manage our working capital needs with the current credit facilities, additional financing is required in order to meet our current and projected cash flow requirements from operations. We cannot predict whether this new financing will be in the form of equity or debt. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments.
Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Off- Balance Sheet Arrangement s
We do not have any 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 investors.
Number of Employees
As of December 31, 2011 the Company had one (1) part-time employee.
Disclosure of Contractual Obligations
The Company does not have any significant contractual obligations which could negatively impact our results of operations and financial condition.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TRILLIANT EXPLORATION CORPORATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and, 2010
Consolidated Statements of Operations for the years Ended December 31, 2011 and 2010
Consolidated Statement of Changes in Stockholders’ (Deficit)
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010
-6
Notes to Consolidated Financial Statements
-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
Trilliant Exploration Corporation
We have audited the accompanying consolidated balance sheets of Trilliant Exploration Corporation (a pre-exploration stage company) (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, changes in stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidate financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and cash flows for the years then, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7 to the consolidated financial statements, the Company has generated minimal revenues from operations and has incurred net losses since inception. This raises substantial doubt about the Company's ability to meet its obligations and to continue as a going concern. Management's plans in regard to this matter are described in Note 7. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
New York, New York
June 4, 2012
TRILLIANT EXPLORATION CORPORATION
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
TRILLIANT EXPLORATION CORPORATION
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
TRILLIANT EXPLORATION CORPORATION
Consolidated Statement of Stockholder Deficit
For the Two Year Ended December 31, 2011
TRILLIANT EXPLORATION CORPORATION
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
TRILLIANT EXPLORATION CORPORATION
Consolidated Statements of Cash Flows (continued)
See accompanying notes to consolidated financial statements.
Trilliant Exploration Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2011 and 2010
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Trilliant Exploration Corporation, (the “Company”) was incorporated as Project Development Pacific, Inc. on December 29, 2003, under the laws of the State of Nevada. The business purpose of the Company was originally to assist Canadian citizens to access health care services from private providers. On November 26, 2007, the Company changed its name to Trilliant Exploration Corporation, with a purpose to acquire and develop mineral properties. The Company has elected a fiscal year end of December 31.
On March 30, 2009 (Date of Acquisition), Trilliant Exploration Corporation (the Parent) acquired a 100% interest in MuluncayGoldCorp (a Subsidiary) (Muluncay). The transaction was accounted for as a purchase pursuant to ASC Topic No. 805.
On June 29, 2009 (Date of Formation), the Company established a wholly-owned Trilliant Diamonds Limited (a Subsidiary) (Trilliant Diamonds), a private limited England and Wales Company, to facilitate the Company’s diamond exploration. Trilliant Diamonds was sold off on August 26, 2010 to Charms with its current and future debt.
On July 1, 2009 the Company acquired 799 of 800 shares of AyapampaGold S.A (AYA) (a Subsidiary) at $1 per share for a purchase price of $799. AYA was formed in mid-2007 as a shell and has been inactive since inception.
On February 11, 2010, Minera Del Pacifico (the seller of MuluncayGoldCorp) exercised its rights retroactive to December 31, 2009 to terminate the purchase of MuluncayGoldCorp. The activity of MuluncayGoldCorp from the Date of Acquisition through December 31, 2009 is reported as discontinued operations pursuant to ASC Topic 205.
The accompanying consolidated financial statements include the operations of the Subsidiaries’ activity from the dates of Acquisition and Formation through this quarter end. Intercompany transactions have been eliminated upon consolidation. The Parent and Subsidiaries are collectively referred to as “the Company.”
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The 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. Actual results could differ from those estimates. Significant estimates that may change in the near future include value of goodwill, impairment of long-lived assets acquired, and value of investments.
Cash and Cash Equivalents
Cash and cash equivalents consists principally of currency on hand, demand deposits at commercial banks, and liquid investment funds having a maturity of three months or less at the time of purchase. The Company had $0 and $11,450 in cash and cash equivalents as of December 31, 2011 and, 2010, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Revenue Recognition
The Company will follow the guidance of ASC Topic 605, formerly, SAB 104 for revenue recognition. In general, the Company will record revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenues from services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectability is probable. In circumstances when these criteria are not met, revenue recognition is deferred until resolution occurs.
Property, Plant, and Equipment
Property and equipment are stated at cost. Depreciation and amortization are determined using the straight-line method over estimated useful lives of the assets. As of December 31, 2011, the Company held no property, plant or equipment.
Net Income or (Loss) Per Share of Common Stock
Basic and diluted loss per common share is based upon the weighted average number of common shares outstanding during the period computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). All primary dilutive common shares have been excluded since the inclusion would be anti-dilutive.
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on Companies consolidated financial statements.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.
In accordance with 740-10, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Derivative Liabilities
The Company accounts for its embedded conversion features in its convertible debentures in accordance ASC 815-10, “Derivatives and Hedging”, which requires a periodic valuation of their fair value and a corresponding recognition of liabilities associated with such derivatives, and ASC 815-40, “Contracts in Entity’s Own Equity”. The recognition of derivative liabilities related to the issuance of convertible debt is applied first to the proceeds of such issuance as a debt discount, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as “Loss on Valuation of Derivative” in other expense in the accompanying financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as “Other expense” or “Other income”, respectively.
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging; Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company. The Company’s Convertible Preferred Stock and Convertible debt has certain provisions that require the Company to change conversion price of the Convertible debt and Convertible Preferred Stock based on the discounted market value. Upon the effective date, the provisions of ASC 815-40 required a reclassification to liability based on the reset feature of the agreements. Therefore, in accordance with ASC 815-40, the Company determined the fair value of the initial reset provision on preferred stock and convertible debt using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 0.68%-0.85%, expected volatility of 155.49%-214.23%, and expected life of 1 and 5 years. The net value of the reset provision at the date of adoption of ASC 815-40 was recorded as a derivative liability on the balance sheet and a reduction to series A convertible redeemable preferred stock and convertible debt. Changes in fair value are recorded as non-operating, non-cash income or expense at each reporting date.
The fair value of the preferred stock and convertible debt at December 31, 2011 was determined using the Black Scholes Option Pricing Model with the following assumptions:
Dividend yield: 0%
Volatility 464.89%
Risk free rate: 0.28%
The change in fair value of the convertible preferred stock and convertible debt derivative liability resulted in a current year non-operating loss to operations of $1,105,220.
Fair Value of Instruments
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
The company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value
Reclassification
Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss.
NOTE 3 - PROVISION FOR INCOME TAXES
The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes. Deferred taxes provided for under ASC Topic No. 740 give effect to the temporary differences which may arise from differences in the bases of fixed assets, depreciation methods, and allowances based on the income taxes expected to be payable in future years. Deferred tax assets arising as a result of net operating loss carry-forwards and other temporary differences have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Operating loss carry-forwards of approximate $18 million generated since inception through December 31, 2011, will begin to expire in 2031 subject to limitations of Section 382 of the Internal Revenue Code, as amended. Accordingly, deferred tax assets of approximately approximate $6.3 million, which were completely offset by the valuation allowance, which increased by $1,484,443 from the previous year, respectively, based on the U.S. Statutory rate of 35%.
Significant changes in the Company’s ownership, the Company’s future use of its existing net operating losses may be limited.
NOTE 4- RELATED PARTY TRANSACTIONS
A - Convertible Notes Payable
The Company has entered into multiple convertible notes payable agreements with an investment firm that is also a minority stockholder of the Company. Each note carries a separately dated promissory note that bears interest of 8% and is payable on or before August 31, 2010, with each funding due one year from original date of receipt. Principal and interest are convertible at the option of the note-holder into shares of the Company’s common stock at the rate of 80% of the average of the five daily volume weighted average price preceding the conversion date. Several Notes are in default and status of default is indicated in the following table. The Notes carry no penalty or change in interest rate for default. Interest expense on the convertible notes years ended December 31, 2011 and December 31, 2010, totaled $45,682 and $53,200, respectively. Due to the contingent nature of the conversion price, the company accounted for beneficial conversion feature and derivative liability on the note. The convertible promissory notes with the investment firm totaled $565,000 at December 31, 2011 and December 31, 2010 and are summarized as follows:
(A), Amounts borrowed were part of a master note agreement totaling $ 275,000
* This note was repaid in January 2011
January 5, 2009 Note:
From January 5, 2009 to March 9, 2009, the Company issued a $275,000 Convertible Note that matured on January 5, 2010. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 80% of the average rate of five preceding the closing date prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Note entered into on March 9, 2009 (completion of funding as per agreement). These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Note, the Company determined a fair value of $218,585 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $125,165 was allocated as a debt discount with the remainder ($93,420) charged to current period operations as interest expense.
During the year ended December 31, 2011 and 2010, the Company amortized $0 and $2,072 to current period operations as amortization of beneficial conversion feature.
The fair value of the described embedded derivative of $267,608 and $134,590 at December 31, 2011 and 2010, respectively was determined using the Black Scholes Model with the following assumptions:
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $133,019 and $64,336, respectively.
April 8, 2009 Note:
From April 8, 2009, the Company issued a $50,000 Convertible Note that matured on April 8, 2010. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 80% of the average rate of five preceding the closing date prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Note entered into on April 8, 2009. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Note, the Company determined a fair value of $42,239 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $20,261 was allocated as a debt discount with the remainder ($21,978) charged to that period of operations as interest expense.
During the year ended December 31, 2011 and 2010, the Company amortized $0 and $2,378 to current period operations as amortization of beneficial conversion feature.
The fair value of the described embedded derivative of $48,656 and $24,470 at December 31, 2011 and 2010, respectively was determined using the Black Scholes Model with the following assumptions:
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $24,185 and $2,560, respectively.
June 23, 2009 Note:
From June 23, 2009, the Company issued a $25,000 Convertible Note that matured on June 23, 2010. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 80% of the average rate of five preceding the closing date prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Note entered into on June 23, 2009. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Note, the Company determined a fair value of $19,148 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $12,102 was allocated as a debt discount with the remainder ($7,046) charged to that period of operations as interest expense.
During the year ended December 31, 2011 and 2010, the Company amortized $0 and $4,449 to current period operations as amortization of beneficial conversion feature.
The fair value of the described embedded derivative of $24,328 and $12,235 at December 31, 2011 and 2010, respectively was determined using the Black Scholes Model with the following assumptions:
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $12,093 and gain of $951, respectively.
July 2009 and August 2009 Note:
From July 2009 to August, 2009, the Company issued a three note totaling to $315,000 Convertible Note that matured on July 1, 2010, July 6, 2010 and August 31, 2010. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 80% of the average rate of five preceding the closing date prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Note entered into on date of Note. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Note, the Company determined a fair value of $241,266 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $152,484 was allocated as a debt discount with the remainder ($88,782) charged to that period of operations as interest expense.
During the year ended December 31, 2011 and 2010, the Company amortized $0 and $88,360 to current period operations as amortization of beneficial conversion feature.
On January 22, 2011, the $100,000 of the Convertible Note was assigned to Shareholder at the $0.001 of conversion price. The Company recorded $582,973 as loss on change in term of note. On the same date the Company issued 333,333 no of Common stock against settlement of this Note of $100,000 and accrued interest of $12,482.
The fair value of the described embedded derivative of $209,220 and $154,166 at December 31, 2011 and 2010, respectively was determined using the Black Scholes Model with the following assumptions:
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $55,055 and $30,600, respectively.
B - Short-Term Notes Payable
The Company has borrowed funds from stockholders for working capital purposes from time to time. The loans are non-interest bearing, payable on demand and, consequently, reported as current liabilities. The Company has received $39,514 in advances since inception and made repayments of $7,019 in cash, resulting in a payable balance of $32,495. The outstanding balance as of December 31, 2011 and 2010 was $32,495.
C - Bonds Payable, Convertible and Secured
The Company has entered into multiple convertible bond agreements with an investment firm that is also a minority stockholder of the Company.
The convertible bonds were listed below:
*On August 23, 2010, the Company repaid $241,593 in principal on (A) and $210,000 in principal on (D).
October 2008 Bond:
In October 15, 2008, the Company issued a $1,300,000 of Convertible Bond that matured on October 15, 2010. The note bears interest at a rate of 9% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 85% of the average rate of five preceding the closing date prior to notice of conversion, provided that Holder shall not receive more than 9.99% of the issued and outstanding Common Stock. The debenture was recorded net of a beneficial conversion feature of $229,412, based on the relative fair value of the conversion feature.
The beneficial conversion feature is being amortized over the term of the debenture. During the year ended December 31, 2011 and 2010, the Company recorded amortization of the beneficial conversion feature related to this bond of $0 and $90,508, respectively.
The Company is in default under the terms of the Bond
April 2009 Bond:
In April 30, 2009, the Company issued a $300,000 of Convertible Bond that matured on October 31, 2010. The note bears interest at a rate of 9% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 85% of the average rate of five preceding the closing date prior to notice of conversion, provided that Holder shall not receive more than 9.99% of the issued and outstanding Common Stock. The debenture was recorded net of a beneficial conversion feature of $52,941, based on the relative fair value of the conversion feature.
The beneficial conversion feature is being amortized over the term of the debenture. During the year ended December 31, 2011 and 2010, the Company recorded amortization of the beneficial conversion feature related to this bond of $0 and $29,315, respectively.
The Company is in default under the terms of the Bond
October 2009 Bond:
In October 12, 2009, the Company issued a $252,000 of Convertible Bond that matured on January 12, 2010. The note bears interest at a rate of 9% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 85% of the average rate of five preceding the closing date prior to notice of conversion, provided that Holder shall not receive more than 9.99% of the issued and outstanding Common Stock. The debenture was recorded net of a beneficial conversion feature of $44,471, based on the relative fair value of the conversion feature.
The beneficial conversion feature is being amortized over the term of the debenture. During the year ended December 31, 2011 and 2010, the Company recorded amortization of the beneficial conversion feature related to this bond of $0 and $5,801, respectively.
The Company is in default under the terms of the Bond
November 2009 Bond:
In November 3, 2009, the Company issued a $252,000 of Convertible Bond that matured on February 03, 2010. The note bears interest at a rate of 9% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 85% of the average rate of five preceding the closing date prior to notice of conversion, provided that Holder shall not receive more than 9.99% of the issued and outstanding Common Stock. The debenture was recorded net of a beneficial conversion feature of $37,059, based on the relative fair value of the conversion feature.
The beneficial conversion feature is being amortized over the term of the debenture. During the year ended December 31, 2011 and 2010, the Company recorded amortization of the beneficial conversion feature related to this bond of $0 and $13,696, respectively
The Company is in default under the terms of the Bond
On August 23, 2010, the Company issued 2,363,500 shares of its Series I Preferred stock to a third party in connection a payment by the third party of $193,599 in accrued interest and $451,593 in principal payable (an aggregate payment of $645,192) to agent of a holder of certain of the Company’s convertible bonds.
The Company and the holder of the convertible bonds are currently in dispute as to the application of the $645,192 payment made to its agent.
The Company incurred bond issuance expenses which are being amortized over the period of bond. The amortization of issuance expenses were $45,605 and $51,948 for the year ended December 31, 2011 and 2010, respectively.
Interest expenses for the year ended December 31, 2011 and 2010 on this Convertible Bond were $267,193 and $294,995, respectively
NOTE 5 - STOCKHOLDERS’ DEFICIT
Reverse Stock Split
On January 26, 2011, the Company’s Board of Directors , pursuant to unanimous written consent resolutions , authorized and approved a reverse stock split of one for every three hundred (1:300) of our total issued and outstanding shares of common stock was effectuated on April 8, 2011. All references in the accompanying consolidated financial statements and notes thereto have been retroactively restated to reflect the above change in the ordinary share structure.
Preferred Stock
The Company is authorized to issue 200,000,000 shares of Preferred stock, par value of $ 0.001 per share.
On June 30, 2009, the Company filed a Certificate of Designation with the Secretary of State of Nevada, whereby 10,200,000 shares of the 200,000,000 authorized shares of Preferred stock were designated as Series I Preferred Stock, $0.001 par value and having the powers, designations, preferences, limitations, restrictions and relative rights as set forth in the Certificate of Designation of Series I Preferred Stock.
Holders of the Series I Preferred shares do not receive interest or dividends separately from common stock shareholders. Preferred Stock holder shall participate in dividends when and if declared in the same proportion as common stock shareholders. Preferred stock is convertible into common shares at the lowest volume weighted average price of the common shares in the five days preceding conversion.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Series I Preferred Shares will be entitled to receive for each share of Preferred Shares, out of the assets of the Company or proceeds available for distribution to our shareholders, subject to any rights of our creditors, before any distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other class or series of our stock ranking junior to the Series I Preferred Shares, payment of an amount equal to the sum of (i) the $1.00 liquidation preference amount per Series I Preferred Shares and (ii) the amount of any accrued and unpaid dividends on the Series I Preferred Shares (including dividends accrued on any unpaid dividends). To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Series I Preferred Shares and the holders of any other class or series of our stock ranking equally with the Series I Preferred Shares, the holders of the Series I Preferred Shares and such other stock will share ratably in the distribution.
For purposes of the liquidation rights of the Series I Preferred Shares, neither a merger or consolidation of the Company with another entity, including a merger or consolidation in which the holders of Series I Preferred Shares receive cash, securities or other property for their shares, nor a sale, lease or exchange of all or substantially all of the Company’s assets will constitute a liquidation, dissolution or winding up of the affairs of the Company.
Issuance of 10,200,000 shares of Series I Preferred Shares
On December 31, 2009, the Company issued to Trafalgar Capital Specialized Investment Fund FIS (“Trafalgar”) (a significant stockholder of the Company), 10,200,000 shares of Series I Preferred Stock, in exchange for 23,000 shares of the Company’s own common stock previously held by Trafalgar. The 19,667 common stock were acquired in the year 2009 and 3,333 common stock in the year 2010 at $443 per share and the preferred stock was issued at $1.00 per share. The transaction was recorded using the Cost Method, resulting in treasury stock of $10,200,000 and an increase to Preferred Stock value of $10,200,000.
In accordance with Accounting Standards Codification subtopic 470-20, Debt, Debt with Conversions and Other Options (“ASC 470-20”), the Company recognized an imbedded beneficial conversion feature present in the convertible Series I Preferred Stock. The Company allocated a portion of the value of share cancelled to Preferred stock. The fair value of the imbedded beneficial conversion feature was determined using the Black-Scholes Option Pricing Model which approximates the fair value measured using the Black-Scholes Model with the following assumptions: Dividend yield: $-0-; Volatility: 214.38% and risk free rate: 0.85%.
The FASB finalized ACS 815, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” Under ASC 815, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. In accordance with ASC 470-20, the Company has classified the Series I Preferred Stock outside of permanent equity. The Company has determined that it needs to account for these imbedded beneficial conversion features, issued to holder in 2009 for its Convertible Preferred Stock, as derivative liabilities, and apply the provisions of ASC 815. The instruments have a ratchet provision (that adjusts the exercise price according to market rate i.e., at 85% of the market rate). As a result, the ratchet provision has been accounted for as derivative liabilities, in accordance with ASC 815. ASC 815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815”) requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in fair value reported in the consolidated statement of operations
The fair value of the embedded conversion features were measured using the Black-Scholes option pricing model as of the date of issuance and as of December 31, 2011 and 2010:
The risk-free interest rate was based on rates established by the Federal Reserve. The Company based expected volatility on the historical volatility for its common stock. The expected life of the embedded beneficial conversion features was based on their full term. The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
The net value of the reset provision at the date of issuance was recorded as a derivative liability in the amount of $10,034,407 and debited to beneficial conversion feature which was deducted from the face value of the preferred stock, since the preferred stock is a classified as temporary equity. This was immediately amortized in year 2009.
As of the date of the financial statements, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the reset derivative liability to market resulting in non-cash, non-operating loss of $782,757 and $896,714.
Issuance of 2,363,500 shares of Series I Preferred Shares
On August 23, 2010, the Company issued an additional 2,363,500 shares of its Series I Preferred stock to a third party in connection a payment by the third party of $193,599 in accrued interest and $451,593 in principal payable (an aggregate payment of $645,192) to agent of a holder of certain of the Company’s convertible bonds. The Company and the holder of the convertible bonds are currently in dispute as to the application of the $645,192 payment made to its agent.
While the Company’s Certificate of Designation limited the issuance of the Series I Preferred shares to 10,200,000, the Company intends to amend the Certificate to correct this ministerial omission and increase the number of designated Series I Preferred shares to 12,563,000 , and accordingly has accounted for the issuance consistent with the issuance of the previous 10,200,000 Series I Preferred shares
The fair value of the embedded conversion features were measured using the Black-Scholes option pricing model as of the date of issuance and as of December 31, 2011 and 2010:
The risk-free interest rate was based on rates established by the Federal Reserve. The Company based expected volatility on the historical volatility for its common stock. The expected life of the embedded beneficial conversion features was based on their full term. The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
The net value of the reset provision at the date of issuance was recorded as a derivative liability in the amount of $645,192 (maximum limit to value of preferred stock) and debited to beneficial conversion feature which was deducted from the face value of the preferred stock, since the preferred stock is a classified as temporary equity. This was immediately amortized in 2010.
As of the date of the financial statements, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.
At December 31, 2011 and 2010, the Company adjusted the recorded fair value of the reset derivative liability to market resulting in non-cash, non-operating loss of $98,111 and $1,620,176.
In December 2009, the Company disposed of its principal asset, the Mulunkay Gold Corp subsidiary. The Company has not received notice from the holders of the Preferred Stock exercising their rights under the terms of the Preferred Stock Designation to paid the liquidation preference of $1.00 per share , plus accrued and unpaid dividends
Common Stock
The Company is authorized to issue 1,000,000,000 shares of common stock, par value $.001 per share
On August 23, 2010, the company cancelled 3,333 shares of common stock as part of issuance of 10,200,000 Preferred stock, as described above.
On January 22, 2011, a previously issued $100,000 Convertible Note was assigned to a Company shareholder at the $0.001 of conversion price. The Company recorded $582,973 as loss on change in term of note. On the same date the Company issued 333,333 of Common stock in exchange for settlement of the Note of $100,000 in principal and accrued interest of $12,482.
Warrants
A summary of the changes in outstanding warrants is as follows.
The warrants have an outstanding remaining contractual life of approximately 3 years as of December 31, 2011
NOTE 6 - OTHER MATERIAL CONTRACTS
In June 2009, the Company acquired a one year insurance policy with total premium of $20,760. As of December 31, 2010, total payments of $20,760 were made and $20,760 of the total premium has been amortized, resulting in a balance of $-0- as of December 31, 2010.
NOTE 7- GOING CONCERN
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has a recurring net losses, and total deficit accumulated including during pre-exploration stage is $18,420,870 and a working capital deficit (current liabilities minus current assets) at December 31, 2011 of $2,995,257. Additionally, current economic conditions in the United States and globally create significant problems attaining sufficient funding. Accordingly, management has encountered significant difficulties in obtaining financing. These items raise substantial doubt about the Company’s ability to continue as a going concern. In view of these matters, realization of the assets of the Company is dependent upon the Company’s ability to meet its financial requirements through equity financing, borrowing, and the success of future operations. These consolidated financial statements do not include 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.
NOTE 8 - CORRECTION OF PRIOR YEAR ACCOUNTING ERROR
The Company’s consolidated financial statements as of December 31, 2009, contained the following errors: (1) overstatement of debt in the amount of $2,389,200; overstatement of a related investment in the amount of $2,389,200, and overstatement of accrued interest payable in the amount of $149,112. As of December 31, 2009, the investment and debt (along with minimal foreign currency translation adjustments) were eliminated, and accumulated deficit was increased by $149,112 to correct the aggregate effect of the errors. The error is a result of the Company recording a transaction, known as Global Diamond Resources, which did not materialize wherein the Company was borrowing funds under a convertible loan agreement to purchase, through a subsidiary, stock of a privately held company. The lenders were unable to complete the transaction and neither funds nor equities changed hands. The Board of Directors issued a resolution to void the transaction. The Company also made the following adjustments:
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement. The debt derivative, comprised of our bifurcated convertible debt features on our convertible notes, is measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities:
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2011:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2011, the Company performed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rules 13a - 15(e) or 15d - 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation and due to the lack of segregation of duties and failure to implement accounting controls, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.
The reason for the ineffectiveness of our disclosure controls and procedures was the result of having a limited number of employees and not having proper segregation of duties based on the cost benefit of hiring additional employees solely to address the segregation of duties issue. We compensate for the lack of segregation of duties by employing close involvement of management in day-to-day operations.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
As a small business, without a viable business and revenues, the Company does not have the resources to install a dedicated staff with deep expertise in all facets of SEC disclosure and GAAP compliance. As is the case with many small businesses, the Company will continue to work with its external consultants and attorneys as it relates to new accounting principles and changes to SEC disclosure requirements. The Company has found that this approach worked well in the past and believes it to be the most cost effective solution available for the foreseeable future.
The Company will conduct a review of existing sign-off and review procedures as well as document control protocols for critical accounting spreadsheets. The Company will also increase management's review of key financial documents and records.
As a small business, the Company does not have the resources to fund sufficient staff to ensure a complete segregation of responsibilities within the accounting function. However, Company management does review, and will increase the review of, financial statements on a monthly basis. These actions, in addition to the improvements identified above, will minimize any risk of a potential material misstatement occurring.
Changes in Internal Controls
During the fiscal quarter ended December 31, 2011, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Our directors and executive officers, their ages and positions held are as follows:
Name
Age
Position with the Company
William Lieberman
President, Chief Executive Officer and Treasurer/Chief Financial Officer and a Director
William Lieberman.Mr. Lieberman is a Chartered Financial Analyst Candidate, Level one at the CFA Institute in New York, and earned a Masters in Business Administration from Hult International Business School in Boston, MA, in 2007. He has an extensive track record in international mining, metal, plastic and advertising sales. Mr. Lieberman was vice president of sales and development for Zapoint, Inc. in Boston Massachusetts, where he was highly involved in all stages of financing and development for the solicitation and close of $1,250,000 of venture capital and angel investment. From 2005 through 2006, Mr. Lieberman was vice president of sales and development for Resource Polymers, Inc. in Toronto, Canada. During his tenure at Resource Polymers, Mr. Lieberman networked throughout Canada and internationally in global scrap markets, and provided arbitrage services to secondary metal and plastics markets. Mr. Lieberman is also the president/chief executive officer and treasurer/chief financial officer and a member of the board of directors of Fox Petroleum Inc., a publicly traded company on the Bulletin Board.
Business Experience
The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies.
AUDIT COMMITTEE AND CHARTER
We do not have a separately-designated audit committee of the board. Audit committee functions are performed by our board of directors. Our director is not deemed independent. All directors also hold positions as our officers. Our audit committee is responsible for: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing matters; (3) establishing procedures for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters; (4) engaging outside advisors; and, (5) funding for the outside auditory and any outside advisors engagement by the audit committee. .
CODE OF ETHICS
We have adopted a corporate code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely, and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
DISCLOSURE COMMITTEE AND CHARTER
We have a disclosure committee and disclosure committee charter. Our disclosure committee is comprised of all of our officers and directors. The purpose of the committee is to provide assistance to the Chief Executive Officer and the Chief Financial Officer in fulfilling their responsibilities regarding the identification and disclosure of material information about us and the accuracy, completeness and timeliness of our financial reports.
COMMITTEES OF THE BOARD OF DIRECTORS
As of the date of this Annual Report, we have not established a compensation committee nor a nominating committee. We intend within the next fiscal quarter to establish such committees and adopt and authorize certain corporate governance policies and documentation.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning: (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated).
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2011. The exception to the compliance is
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executives have no compensation.
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2011
The following table sets forth information as at December 31, 2011 relating to Stock Options that have been granted to the Named Executive Officers:
All compensation received by our officers and directors has been disclosed. There are no stock option, retirement, pension, or profit sharing plans for the benefit of our officers and directors.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.
EMPLOYMENT AND CONSULTING AGREEMENTS
As of the date of this Annual Report, we do not have any contractual relationships with certain of our executive officers and directors as follows.
INDEMNIFICATION
Under our Bylaws, we may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. We may advance expenses incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as to which he is to be indemnified, we must indemnify him against all expenses incurred, including attorney's fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to directors or officers under Nevada law, we are informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy, as expressed in the Act and is, therefore, unenforceable.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of the date of this Annual Report, there are 620,771 shares of common stock outstanding.
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding as of the date of this Annual Report. As of the date of this Annual Report, there are 643,771 shares issued and outstanding.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
As of the date of this Annual Report, other than as disclosed below, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended December 31, 2011.
Short-term Notes Payable - Related Parties
We have borrowed funds from stockholders for working capital purposes from time to time. The loans are non-interest bearing. They are payable on demand and, consequently, reported as current liabilities. We have received $39,514 in advances since inception and made repayments of $7,019 in cash, resulting in a payable balance of $32,495 as of December 31, 2009. Interest has not been imputed due to its immaterial impact on the financial statements. The Company also owes its officers and directors $24,589 and $0 at December 31, 2009 and 2008, respectively, for reimbursable expenses incurred in the normal course of business.
On January 11, 2008, we received $10,000 from a stockholder pursuant to a note dated January 19, 2008. Terms were 8% interest with repayment due upon receipt by us of $250,000 in equity financing. Interest accrued through May 21, 2008 was $287. On May 21, 2008, the stockholder forgave the note principal and accrued interest to compensate us for various expenses incurred in reliance on the mineral purchase agreement which was unfulfilled (Note 5). The $10,000 forgiveness was recognized by us as an increase in additional paid-in capital, while the interest of $287 was reversed against expenses.
Long-term Notes Payable
The Company has entered into multiple convertible notes payable agreements with an investment firm that is also a minority stockholder of the Company. Each note carries a separately dated promissory note that bears interest of 8% and is payable on or before August 31, 2010, with each funding due one year from original date of receipt. Principal and interest are convertible at the option of the note-holder into shares of the Company’s common stock at the rate of 80% of the average of the five daily volume weighted average price preceding the conversion date.
Accrued interest and interest expense on the convertible notes payable as of and for the year ended December 31, 2009 totaled $35,897. Due to the contingent nature of the conversion price, no beneficial conversion feature was noted.
The convertible promissory notes with the investment firm are summarized as follows:
(A) In August, the Company entered into a master borrowing agreement with the investment firm, which allows for notes payable of up to $500,000 to be paid in installments as needed. Each note carries a separately dated promissory note that bears interest of 8% and is payable on or before August 31, 2010. As of December 31, 2009, six installments were made totaling $195,000.
Notes Receivable and Share Transfer Agreement
On October 16, 2008, we entered into a note receivable agreement with Minera del Pacifico (Pacifico) a significant stockholder, whereby we were required to advance Pacifico up to $1,200,000. A total of $1,195,000 was advanced to Pacifico as follows
The note bears interest of 8% and was payable on or before January 5, 2010. The December 31, 2008 balance was comprised of the first, second, and third installments totaling $990,000. Interest earned on the note for the period of the note’s inception through December 31, 2008 totaled $14,904, all of which was receivable at year-end. Proceeds from this loan correspond with several of the payments for, and are being partially funded by, the Long-term Notes Payable above.
On March 30, 2009, we executed the Share Transfer Agreement whereby we purchased 100% ownership interest in Muluncay. In consideration of this acquisition, the Company issued a $3,600,000 promissory note to Pacifico, which carries an annual interest rate of 4.5% (compounded quarterly), and is payable in four $200,000 quarterly installments commencing 30 days following Muluncay’s reaching production of 400 tons per day. We would then pay $300,000 in quarterly installments until principal and interest is fully paid.We would also be required to pay an additional $1,800,000 investment to Muluncay with $800,000 due within 90 days following the Agreements execution date, and $1,000,000 due within 180 days of the execution date.
As of December 11, 2009, we were in default for the purchase of Muluncay. We received a letter on February 11, 2010 in which Del Pacifico informed us of its intent to enforce its rights under the Share Transfer Agreement and terminated all contractual agreements between us and Del Pacifico effective December 31, 2009. In the interest of our shareholders and lacking financial funds to further pursue contractual agreements with Del Pacifico, we acknowledged the letter from Del Pacifico and released all claims on the Controlling Assets and rights under the terms of the Share Purchase Agreement.
Effective December 31, 2009, we determined to discontinue operations through our Muluncay subsidiary. We were released from all obligations and released all claims on the Controlling Assets primarily because we had incurred significant operating losses since acquisition and we could not attract operating capital to meet contractual obligations since the acquisition of Muluncay. On December 31, 2009, we completed the loss recognition for a total loss of $2,178,971.
Bonds Payable, Convertible
October 15, 2008 Bonds
On October 15, 2008, we issued $1,300,000 in convertible secured bonds to Trafalgar Capital Specialized Investment Fund (Trafalgar), a significant stockholder of the Company, for net proceeds of $1,235,356 (including two months of interest totaling $19,500 retained by Trafalgar). The bonds bear interest of 9% and mature (if not converted) on October 15, 2010. Upon the event of default, the interest rate is increased to 18%. Trafalgar incurred bond issuance costs of $64,644, which are being amortized to interest expense on a straight-line basis over the term of the bond. The carrying amount of the bond issuance costs at December 31, 2008 was $57,214, net of $7,430 in amortization for 2008. Interest payments are made mid-month, resulting in bond interest payable of $4,875 at December 31, 2008, and bond interest expense of $24,375 for 2008.
The bonds have an optional conversion feature whereby Trafalgar is entitled to convert the bonds and accrued interest at any time based on the lesser of the stock price on the bonds’ inception (the ‘Fixed Price,’ which was determined to be $.75 per share) or the lowest daily closing volume weighted average price during the five days preceding conversion. If the common stock price drops below the Fixed Price, the Company has the option to redeem the bonds, provided it pays a 16% redemption premium on the amount redeemed. If the bonds are not converted, the Company is required to make interest-only payments for a period of one year following the bonds’ inception. Thereafter, we shall continue making monthly interest payments, in addition to quarterly principal payments of $325,000 and quarterly 16% redemption premium payments that amount to $52,000 per quarter ($208,000 total).
April 30, 2009 Bonds
On April 30, 2009, the Company issued $300,000 in convertible secured bonds to a stockholder for net proceeds of $258,856 (including two months of prepaid interest totaling $4,500 retained by the stockholder that was amortized to interest expense by December 31, 2009). The bonds bear interest of 9% and mature (if not converted) on October 31, 2010. Upon default, the interest rate is increased to 18%. The stockholder incurred bond issuance costs of $41,144, which are being amortized to interest expense on a straight-line basis over the term of the bond. The carrying amount of the bond issuance costs at December 31, 2009 was $29,715, net of $11,429 in amortization for the year ended December 31, 2009. Interest payments are made at month-end, resulting in bond interest payable or $2,464 at December 31, 2009. Bond interest expense was $22,679 (including $11,429 in bond issuance cost amortization) for the year ended December 31, 2009.
The bonds have an optional conversion feature whereby the stockholder is entitled to convert the bonds and accrued interest at any time based on the lesser of the stock price on the bonds’ inception (the ‘Fixed Price,’ which was determined to be $.61 per share) or the lowest daily closing volume weighted average price during the five days preceding conversion. If the common stock price drops below the Fixed Price, the Company has the option to redeem the bonds, provided it pays a 16% redemption premium on the amount redeemed. If the bonds are not converted, the Company is required to make interest-only payments for a period of eighteen months following the bonds’ inception. Thereafter, the Company shall continue making monthly interest payments, in addition to quarterly principal payments of $75,000 and quarterly 16% redemption premium payments that amount to $12,000 per quarter ($48,000 total). Due to the contingent nature of the conversion price, no beneficial conversion feature was noted.
October 12, 2009 Bonds
On October 12, 2009, the Company issued $210,000 in convertible secured bonds to a stockholder for net proceeds of $210,000 The bonds bear interest of 9% and mature (if not converted) on January 12, 2010 or upon completion of any new investments in the company exceeding $1,500,000. Upon default, the interest rate is increased to 18%, and the company may convert all bonds held by lender without restriction. The Company incurred bond issuance costs of $42,000, which are being accrued to bonds payable on a straight-line basis over the term of the bond. The carrying amount of the bond issuance costs at December 31, 2009 was $23,062. Interest payments are made at month-end, resulting in bond interest payable or $4,115 at December 31, 2009. Bond interest expense was $4,115 for the year ended December 31, 2009. Use of the funds was to provide services for new financing, payment on mortgages, payment of past due bills, and to support operations.
The bonds have an optional conversion feature whereby the stockholder is entitled to convert the bonds and accrued interest at any time based on the lesser of the stock price on the bonds’ inception (the ‘Fixed Price,’ which was determined to be $.07 per share) or the lowest daily closing volume weighted average price during the five days preceding conversion. If the common stock price drops below the Fixed Price, the Company has the option to redeem the bonds, provided it pays a 16% redemption premium on the amount redeemed. Due to the contingent nature of the conversion price, no beneficial conversion feature was noted. Limitations on conversion prevent the number of shares issued from exceeding 9.99%. The bonds carry a currency rate conversion clause wherein if the Euro to US dollar exchange rate is lower than the rate of October 12, 2009 then the number of shares to be issued shall be increased by an equal percentage of the decline in the exchange rate.
November 3, 2009 Bonds
On November 3, 2009, we entered into a convertible secured bond debenture in the principal amount of $210,000. Interest accrues monthly at the rate of 9% APR and is payable monthly. Unless converted, principal is payable in full on January 12, 2010 or upon completion of any new investments in us exceeding $1,500,000. Upon default, the interest rate is increased to 18% and we may convert all bonds held by the bond holder without restriction. Interest payments are made at month end resulting in bond interest payable or $2,993 at December 31, 2009. Bond interest expense was $2,993 for the fiscal year ended December 31, 2009. The bond has an optional conversion feature whereby the bond holder is entitled to convert the bond and accrued interest at any time based on the lesser of the stock price on the bonds’ inception (the “Fixed Price”), which was determined to be $0.07 per share) or the lowest daily closing volume weighted average price during the five days preceding conversion. If the common stock price drops below the Fixed Price, we have the option to redeem the bond provided we pay a 16% redemption premium on the amount redeemed. Limitations on conversion prevent the number of shares issued from exceeding 9.99%. The bonds carry a currency rate conversion clause wherein if the Euro to US dollar exchange rate is lower than the rate of October 12, 2009, then the number of shares to be issued shall be increased by an equal percentage of the decline in the exchange rate.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was:
(5) Our audit committee’s pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor.
(6) The percentage of hours expended on the principal accountant’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full time, permanent employees was 0%.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
We currently do not have a designated Audit Committee, and accordingly, our Board of Directors’ policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES
The following exhibits are filed as part of this Annual Report.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Definition Linkbase Document
TRILLIANT EXPLORATION CORPORATION
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 and on the dates indicated.
Dated: June 4, 2012
By:
/s/ WILLIAM LIEBERMAN
Director