NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sept. 30, 2012
NOTE 1 –SUMMARY OF ACCOUNTING POLICIES
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. On November 26, 2007, the Company changed its name to Trilliant Exploration Corporation, with a purpose to acquire and develop mineral properties.
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly our financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.
Going Concern
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. However, the Company has reported a net loss from operations of $115,443, for the three month period ended Sept. 30, 2012, $408,761 for the nine months ended Sept. 30, 2012, and accumulated deficit of $18,816,273 and total current liabilities in excess of current assets of $3,291,329 as of September 30, 2012.
The Company is currently seeking to acquire mining projects and as of the date of this Quarterly Report, we are devoting substantially all of our efforts to the execution of our business operations and re-establish the Company as an exploratory stage enterprise. The Company will be dependent on funds raised 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.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
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.
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.
Derivative financial instruments
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company’s convertible debt and Preferred Stock has reset provisions to the exercise price if the Company issues equity or a right to receive equity, at a price less than the exercise prices.
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.
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 our financial statements.
NOTE 2 -
CONVERTIBLE NOTE PAYABLE ISSUED DURING PERIOD ENDED JUNE 30, 2012
The Company issued a $20,000 Convertible Note with a maturity date of March 16
th
, 2013. The note bears interest at a rate of 10% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% discount of the two lowest closing bid prices reported during the ten days preceding the closing date prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible 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 $19,471 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
464.89
|
%
|
Risk free rate:
|
|
|
0.33
|
%
|
The initial fair value of the embedded debt derivative of $7,195 was allocated as a debt discount with the remainder ($12,276) charged to current period operations as interest expense.
The fair value of the described embedded derivative of $19,411 as of June 30, 2012 (unaudited) was determined using the Black Scholes Model with the following assumptions:
|
|
2012
|
|
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
464.89
|
%
|
Risk free rate:
|
|
|
0.33
|
%
|
At June 30, 2012 (unaudited), the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $60, respectively.
NOTE 3 – 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 September 30, 2012 and 2011 (unaudited):
|
|
|
|
|
|
Date of
|
|
|
2012
|
|
2011
|
|
|
Issuance
|
|
|
|
|
|
|
|
|
|
Imbedded Beneficial Conversion Feature:
|
|
|
|
|
|
|
|
Risk-free rate
|
|
|
0.33
|
%
|
|
|
0.62
|
%
|
|
|
0.85
|
%
|
Annual rate of dividends
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Volatility
|
|
|
464.89
|
%
|
|
|
254.30
|
%
|
|
|
214.23
|
%
|
Weighted Average life (years)
|
|
|
2.50
|
|
|
|
3.50
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
10,195,020
|
|
|
$
|
9,979,654
|
|
|
$
|
10,034,407
|
|
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 September 30, 2012 and 2011(unaudited), the Company adjusted the recorded fair value of the reset derivative liability to market resulting in a non-cash, non-operating gain of $2,556 and a loss of $564,835.
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 September 30, 2012 and 2011(unaudited):
|
|
|
|
|
Date of
|
|
2012
|
|
2011
|
|
Issuance
|
|
|
|
|
|
|
Imbedded Beneficial Conversion Feature:
|
|
|
|
|
|
Risk-free rate
|
|
|
0.33
|
%
|
|
|
0.70
|
%
|
|
|
0.68
|
%
|
Annual rate of dividends
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Volatility
|
|
|
464.89
|
%
|
|
|
254.30
|
%
|
|
|
180.22
|
%
|
Weighted Average life (years)
|
|
|
3.65
|
|
|
|
4.65
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
2,363,479
|
|
|
$
|
2,265,368
|
|
|
$
|
2,261,584
|
|
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 June 30, 2012 (unaudited) and 2011, the Company adjusted the recorded fair value of the reset derivative liability to market resulting in a non-cash, non-operating gain of $22 and a loss of $80,327, respectively.
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 pay 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.
|
|
Number of
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding – January 1, 2012
|
|
|
33,335
|
|
|
$
|
.09
|
|
Exercised During the Period
|
|
|
-
|
|
|
|
|
|
Issued During the Period
|
|
|
|
|
|
|
|
|
Expired During the Period
|
|
|
—
|
|
|
|
|
|
Warrants Outstanding – Sept 30, 2012 (unaudited)
|
|
|
33,335
|
|
|
$
|
.09
|
|
The warrants have an outstanding remaining contractual life of approximately 2.33 years as of Sept. 30, 2012 (unaudited)
NOTE 4 SUBSEQUENT EVENTS
On September 30, 2012, the Board of directors voted to cancel all preferred shares effective during the third quarter. At the time the financial statements were completed the cancellation had not yet completed. The financial statement will not reflect the effect of the cancellation until all the common shares associated with the cancellation have been issued.
FORWARD L
OOKING STATEMENTS
Except for statements of historical fact, certain information contained herein constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identified by our use of certain terminology, including “will,” “believes,” “may,” “expects,” “should,” “seeks,” “anticipates,” or “intends,” or by discussions of strategy or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include, among others, our history of operating losses and uncertainty of future profitability; our lack of working capital and uncertainty regarding our ability to continue as a going concern; uncertainty of access to additional capital; risks inherent in mineral exploration; environmental liability claims and insurance; dependence on consultants and third parties as well as those factors discussed in the sections entitled “
Risk Factors
,” “
Business
,” and “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.” If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated, or projected. Forward-looking statements in this document are not a prediction of future events or circumstances, and those future events or circumstances may not occur. Given these uncertainties, users of the information included herein, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We do not assume responsibility for the accuracy and completeness of these statements.
The United States Securities and Exchange Commission permits U.S. mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce. The Company is an exploration stage company and its properties have no known body of ore. U.S. investors are cautioned not to assume that the Company has any mineralization that is economically or legally mineable.
All references in this Quarterly Report on Form 10-Q to the terms “we,” “our,” “us,” “TTXP,” and the “Company” refer to Trilliant Exploration Corporation.