PINX:PPFP Pacific Copper Corp Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2012

Commission file number 000-52495

PACIFIC COPPER CORP.

(Exact name of registrant as specified in its charter)

Delaware
 
98-0504006
(State of incorporation)
 
(I.R.S. Employer Identification No.)


3040 N. Campbell Avenue, Suite 110, Tucson, Arizona 85719
(Address of principal executive offices including zip code)

PHONE (520) 989-0221; FAX (520) 623-3326
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o   No  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer   o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of registrant’s common stock outstanding as of March 19, 2012 was 49,861,600.


 
 
 

 
 
PART I

ITEM 1. FINANCIAL STATEMENTS


PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
(Unaudited- Prepared by Management)
 
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
JANUARY 31, 2012
 
(Amounts expressed in US Dollars)
 
(Unaudited)
 
 
 
 
 
 
 
CONTENTS
 

Interim Consolidated Balance Sheets as of January 31, 2012 (unaudited) and October 31, 2011 (audited)
2
   
Interim Consolidated Statements of Operations for the three months ended January 31, 2012
 
and January 31, 2011 and the period from Inception (May 18, 1999) to January 31, 2012
3
   
Interim Consolidated Statements of Changes in Stockholders' Equity for the three months ended
 
January 31, 2012 and from Inception (May 18, 1999) to January 31, 2012.
4
   
Interim Consolidated Statements of Cash Flows for the three months ended January 31, 2012
 
and January 31, 2011 and from Inception (May 18, 1999) to January 31, 2012.
7
   
Condensed Notes to Interim Consolidated Financial Statements
8-22
 

 

 


 
1

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Interim Consolidated Balance Sheets as at
January 31, 2012 and October 31, 2011
(Amounts expressed in US Dollars)
(Unaudited – Prepared by Management)
 
   
January 31, 2012 (unaudited)
   
October 31, 2011 (audited)
 
    $     $  
ASSETS
 
Current
               
Cash
    1,184       1,322  
Advances to related party (note 12)
    -       48,555  
Total Current Assets
    1,184       49,877  
Plant and Equipment, net (note 4)
    42,205       53,353  
Mining claims (note 8)
    800       800  
Total Assets
    44,189       104,030  
                 
LIABILITIES
 
Current
               
Accounts payable and accrued liabilities
    981,836       959,418  
                 
Due to related parties (note 10)
    2,308,694       2,207,806  
Derivative financial instrument (note 14)
    -       -  
Advances from non-related parties (note 13)
    669,128       655,689  
Convertible notes (note 14)
    286,500       286,500  
Total Liabilities
    4, 246,158       4, 109,413  
Going Concern (note 2)
               
Commitments and Contingencies (note 9)
               
Related Party Transactions (note 10)
 
               
STOCKHOLDERS’ DEFICIENCY
 
Capital Stock (note 5)
               
Preferred stock, $0.0001 par value, 50,000,000 shares authorized, Nil issued and outstanding (2010 - nil)
    -       -  
Common stock, $0.0001 par value, 200,000,000 shares authorized, 49,861,600 issued and outstanding (October 31,2010-49,861,600)
    4,986       4,986  
Additional Paid-in Capital
    15,150,907       15,150,907  
Deferred stock compensation (note 11)
    (1,583 )     (5,333 )
Accumulated Other Comprehensive Income
    2,825       2,825  
Deficit Accumulated During the Exploration Stage
    (19,414,170 )     (19,213,834 )
Total Pacific Copper Stockholders’ Deficiency
    (4,257,035 )     (4,060,449 )
Non-controlling Interest
    55,066       55,066  
Total Stockholders’ Deficiency
    (4,201,969 )     (4,005,383 )
Total Liabilities and Stockholders’ Deficiency
    44,189       104,030  
 
See condensed notes to the interim consolidated financial statements

 
2

 

PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Interim Consolidated Statements of Operations
For the three months ended January 31, 2012 and January 31, 2011 and the
Period from Inception (May 18, 1999) to January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited – Prepared by Management)

   
Cumulative
since
inception
$
   
For the three months ended January 31, 2012
$
   
For the three months ended January 31, 2011
$
 
Operating Expenses
                 
  General and administration
    6,318,043       24,868       55,800  
  Project expenses
    6,315,344       135,819       125,912  
  Mineral claims acquisition cost expense (note 8)
    6,273,571       -       -  
  Amortization and Impairment
    155,896       11,148       5,711  
Total Operating Expenses
    19,062,854       171,835       187,423  
Loss from Operations
    (19,062,854 )     (171,835 )     (187,423 )
  Other income-Interest
    54,508       -       -  
  Other expense-Interest
    (468,257 )     (28,501 )     (34,670 )
  Other income-Derivative Financial Instrument
    61,875       -       -  
Loss before Income Taxes
    (19,414,728 )     (200,336 )     (222,093 )
  Provision for income taxes
    -       -       -  
Net Loss
    (19,414,728 )     (200,336 )     (222,093 )
Net Loss attributable to Non-controlling interests
    558       -       -  
Net Loss attributable to Pacific Copper Corp. Stockholders
    (19,414,170 )     (200,336 )     (222,093 )
Loss per share-Basic and Diluted
            (0.00 )     (0.00 )
Weighted Average Common Shares Outstanding
            49,861,600       49,861,600  
 
See condensed notes to the interim consolidated financial statements

 
3

 

PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) from inception (May 18, 1999) to January 31, 2012
(Amounts expressed in US Dollars)
 
   
 
 
 
 
 
Common Stock
   
Additional 
Paid-in Capital
   
Deferred Stock 
Compen-
sation
    Stock Subscription Receivable     Deficit Accumulated during the Exploration Stage    
Accumulated Other Comprehen-sive
Income (Loss)
    Total Pacific Copper Corp. Stockholders’ Equity (Deficiency)     Non- Controlling Interests     Total Deficiency    
Comprehen-
sive Income (loss) attributable to Pacific Copper Corp. Stockholders
 
    Number    
Amount
                                     
   
of Shares
    $     $     $     $     $       $     $     $     $     $  
Common stock issued on inception
    1               1                                       1               1          
Common stock issued for nil consideration
    7,605,932       761       (761 )                     -               -               -          
Cancelled shares
    (1 )     -       (1 )                                     (1 )             (1 )        
Contributed Services
                    8,743                                       8,743               8,743          
Net Loss for the period from inception (May 18, 1999) through October 31, 2004
                    -                       (8,743 )             (8,743 )             (8,743 )     (8,743 )
Balance, October 31, 2004
    7,605,932       761       7,982       -               (8,743 )             -               -       (8,743 )
Contributed Services
                    1,178                                       1,178               1,178          
Net Loss
                    -                       (1,178 )             (1,178 )             (1,178 )     (1,178 )
Balance October 31, 2005
    7,605,932       761       9,160       -               (9,921 )             -               -       (1,178 )
Common stock issued for cash
    4,710,000       471       470,529                       -               471,000               471,000          
Common shares issued for acquisition of interests in mineral claims
    5,000,000       500       499,500                                       500,000               500,000          
Net Loss
    -       -       -                       (647,453 )             (647,453 )             (647,453 )     (647,453 )
Balance, October 31, 2006 (audited)
    17,315,932       1,732       979,189       -               (657,374 )             323,547               323,547       (647,453 )
Common stock issued for cash
    660,000       66       65,934                                       66,000               66,000          
Common stock issued for cash
    2,000,000       200       199,800                                       200,000               200,000          
Common stock issued for cash
    4,520,000       452       2,259,548                                       2,260,000               2,260,000          
Stock subscription received
                    30,000                                       30,000               30,000          
Stock Issuance cost
                    (72,800 )                                     (72,800 )             (72,800 )        
Common stock issued for stock subscriptions received
    60,000       6       (6 )                                     -               -          
Common stock issued for cash
    1,590,000       159       794,841                                       795,000               795,000          
Common stock issued for services
    3,000,000       300       1,499,700       (1,062,499 )                             437,501               437,501          
Stock based compensation
                    294,574                                       294,574               294,574          
Compensation expense on issue of warrants
                    21,093                                       21,093               21,093          
Stock Issuance cost
                    (43,750 )                                     (43,750 )             (43,750 )        
Net Loss
    -       -       -                       (2,940,779 )             (2,940,779 )             (2,940,779 )     (2,940,779 )
Balance October 31, 2007 (audited)
    29,145,932       2,915       6,028,123       (1,062,499 )             (3,598,153 )             1,370,386               1,370,386       (2,940,779 )
 
 
4

 
 
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) from inception (May 18, 1999) to January 31, 2012 - continued
 
Common stock issued on acquisition of Peru subsidiary
    4,850,000       485       2,424,515                                       2,425,000       24,556       2,449,556          
Common stock issued on acquisition of Chile subsidiary
    6,088,452       608       3,043,617                                       3,044,225       30,750       3,074,975          
Common stock issued for cash (net)
    3,157,143       316       1,027,334               (175,000 )                     852,650               852,650          
Common stock issued for cash (net)
    743,572       75       246,805                                       246,880               246,880          
Stock subscription received
                                    175,000                       175,000               175,000          
Common stock issued for cash (net)
    576,501       57       201,228                                       201,285               201,285          
stock based compensation
                    679,971                                       679,971               679,971          
Compensation expense on issue of warrants
    -       -       235,982       -               -               235,982               235,982          
Amortization of deferred stock compensation
                            916,666                               916,666               916,666          
Beneficial conversion feature of the convertible note financing transaction
                    5,625                                       5,625               5,625          
Foreign currency translation
                                                    1,053       1,053       11       1,064       1,053  
Net Loss for the year  ended October  31, 2008
    -       -       -       -               (10,579,162 )             (10,579,162 )     (356 )     (10,579,518 )     (10,579,162 )
Balance October 31, 2008 (audited)
    44,561,600       4,456       13,893,200       (145,833 )     -       (14,177,315 )     1,053       (424,439 )     54,961       (369,478 )     (10,578,109 )
Stock based compensation
                    256,091                                       256,091               256,091          
Compensation expense on issue of warrants
                    85,855                                       85,855               85,855          
Amortization of deferred stock compensation
                            145,833                               145,833               145,833          
Beneficial conversion feature of convertible debt
                    55,950                                       55,950               55,950          
Fair value of warrants issued
                    52,099                                       52,099               52,099          
Common stock issued for acquisition of interests in mineral claims
    5,000,000       500       749,500                                       750,000               750,000          
Foreign currency translation
                                                    1,860       1,860       19       1,879       1,860  
Net Loss for the year  ended October 31, 2009
                                            (2,993,591 )             (2,993,591 )     (146 )     (2,993,737 )     (2,993,591 )
Balance October 31, 2009 (audited)
    49,561,600       4,956       15,092,695       -               (17,170,906 )     2,913       (2,070,342 )     54,834       (2,015,508 )     (2,991,731 )
 
 
 
 
 
5

 
 
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) from inception (May 18, 1999) to January 31, 2012 - continued
 
Common stock issued for services
    300,000       30       29,970       (20,333 )                             9,667               9,667          
Stock based compensation
                    28,242                                       28,242               28,242          
Foreign currency translation
                                                    (88 )     (88 )     288       200       (88 )
Net Loss for the year ended October 31, 2010
                                            (1,025,522 )             (1,025,522 )     (56 )     (1,025,578 )     (1,025,578 )
Balance October 31, 2010 (audited)
    49,861,600       4,986       15,150,907       (20,333 )     -       (18,196,428 )     2,825       (3,058,043 )     55,066       (3,002,977 )     (1,025,666 )
Amortization of deferred stock compensation
                            15,000                               15,000               15,000          
Foreign currency translation
                                                                                       
Net Loss for year ended October 31, 2011
                                            (1,017,406 )             (1,017,406 )             (1,017,406 )     (1,017,406 )
Balance October 31, 2011
    49,861,600       4,986       15,150,907       (5,333 )     -       (19,213,834 )     2,825       (4,060,449 )     55,066       (4,005,383 )     (1,017,406 )
Amortization of deferred stock compensation
                            3,750                               3,750               3,750          
Foreign currency translation
                                                                                       
Net Loss for period ended January 31, 2012
                                            (200,336 )             (200,336 )             (200,336 )     (200,336 )
Balance January 31, 2012
    49,861,600       4,986       15,150,907       (1,583 )             (19,414,170 )     2,825       (4,257,035 )     55,066       (4,201,969 )     (200,336 )
 
See condensed notes to the interim consolidated financial statements
 
 
 
 
 
 

 
 
6

 

 
 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Interim Consolidated Statements of Cash Flows
For the three months ended January 31, 2012 and January 31, 2011 and from inception (May 18, 1999) to January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited – Prepared by Management)

   
Cumulative Since Inception
   
January 31, 2012
   
January 31, 2011
 
Cash Flows from Operating Activities
                 
  Net Loss
    (19,414,170 )     (200,336 )     (222,093 )
  Adjustment for:
                       
    Amortization and Impairment
    155,896       11,148       5,711  
    Stock based compensation
    1,258,878       -       -  
    Compensation expense on issue of warrants
    342,930       -       -  
    Expenses credited (debited) to Additional Paid-in Capital
    7,932       -       -  
    Shares issued for mineral claims
    6,719,225       -       -  
    Amortization of deferred stock compensation
    1,528,417       3,750       3,750  
    Fair value adjustment to compound derivative
    (6,875 )     -       -  
    Fair value adjustment to additional investment rights
    (55,000 )     -       -  
    Amortization of debt discount
    177,538       -       15,631  
    Impairment of mining claims
    100                  
  Changes in non-cash working capital
                       
    Deferred financing costs
    -       -       578  
    Accrued interest on advances from non- related parties
    171,432       13,439       13,778  
    Repayments from (Advance to) related parties
    -       48,555       (7,100 )
    Accounts payable and accrued liabilities
    981,836       22,418       22,470  
                         
    Due to related parties
    2,308,694       100,888       165,137  
    Minority Interest
    54,748       -       -  
  Net cash used in operating activities
    (5,768,419 )     (138 )     (2,138 )
Cash Flows from Investing Activities
                       
    Acquisition of plant and equipment
    (198,101 )     -       -  
    Acquisition of mineral claims
    (900 )     -       -  
  Net cash used in investing activities
    (199,001 )     -       -  
Cash Flows from Financing Activities
                       
    Issuance of common shares for cash (net)
    5,181,265       -       -  
    Advances from non-related parties
    498,809       -       -  
    Convertible notes
    286,500       -       -  
  Net cash provided by financing activities
    5,966,574       -       -  
Effect of foreign currency exchange rate changes
    2,030       -       -  
Net increase (decrease) in Cash
    1,184       (138 )     (2,138 )
Cash- beginning of period
    -       1,322       5,569  
Cash - end of period
    1,184       1,184       3,431  
Supplemental Cash Flow Information
                       
    Interest paid
    -       -       -  
    Income taxes paid
    -       -       -  
See condensed notes to the interim consolidated financial statements

 
7

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

1.        Basis of Presentation

The accompanying unaudited condensed consolidated financial statements  have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and Notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s annual report on Form 10-K for the year ended October 31, 2011. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at January 31, 2012 and October 31, 2011, the results of its operations for the three month periods ended January 31, 2012 and January 31, 2011, and its cash flows for the three-month periods ended January 31, 2012 and January 31, 2011. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may be considered forward-looking and involve risks and uncertainties that could significantly impact expected results. The results of operations for the three-month period ended January 31, 2012 are not necessarily indicative of results to be expected for the full year.

The interim consolidated financial statements include the accounts of Pacific Copper Corp. (the “Company” or “Pacific Copper”), and its subsidiaries Pacific Copper Peru SRL, a limited liability partnership (99% owned by the Company) and Sociedad Pacific Copper Chile Limitada, a limited liability partnership (99% owned by the Company).  All material inter-company accounts and transactions have been eliminated.
 
2.
Going Concern
 
The Company’s financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has no source of operating revenue and expects to incur significant expenses before establishing operating revenue. The Company has a need for equity capital and financing for working capital and exploration of its properties. Because of continuing operating losses, negative working capital and cash outflows from operations, the Company’s continuance as a going concern is dependent upon its ability to obtain adequate financing and to reach profitable levels of operation. The Company’s future success is dependent upon its continued ability to raise sufficient capital, not only to maintain its operating expenses, but to explore for reserves. There is no guarantee that such capital will continue to be available on acceptable terms, if at all or if the Company will attain profitable levels of operation. If the Company is unable to develop its mining claims to a commercial stage or if the going concern is otherwise not appropriate for future periods, adjustments to the amounts recorded for, and classification of assets and liabilities may be necessary. Management’s plans to mitigate these conditions are described below.
 
The Company is in the exploration stage and has not yet realized revenues from any operations.  The Company has incurred a loss of $200,336 for the three month period ended January 31, 2012. At January 31, 2012, the Company had an accumulated deficit during the exploration stage of $19,414,170.  During the year ended October 31, 2008 the Company raised capital of $1,475,815 (net of offering costs). Further, during the year ended October 31, 2008 the Company raised an additional $100,000 being subscription for convertible notes (See note 15-“Convertible Note Financing Transaction”). The Company raised an additional $186,500 during the year ended October 31, 2009 from issue of convertible notes. Management's plan is to continue raising capital through future equity or debt financing until it achieves profitable operations from mineral extraction activities.

 
8

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
3.        Nature of Business and Operations
 
The Company was incorporated on May 18, 1999 as Gate-1 Financial, Inc. under the laws of the State of Delaware.  On August 17, 2006, Gate-1 Financial, Inc. changed its name to Pacific Copper Corp.  The Company operates with the intent of exploration and, if feasible, extraction of minerals.
 
On December 17, 2007, Pacific Copper completed the acquisition of Pacific Copper Peru SRL, a limited liability partnership organized under the laws of Peru (“Peru SRL”) pursuant to the Share Exchange Agreement among the Company, Peru SRL and the former partners of Peru SRL dated as of April 11, 2007, as amended (the “Peru Agreement”).

Pursuant to the Peru Agreement, the Company issued 4,850,000 shares of the Company’s common stock (the “Peru Consideration Shares”) to the partners of Peru SRL as consideration for the acquisition of 99% of Peru SRL.  As a result of the acquisition, Peru SRL became a subsidiary of the Company.  The Peru Consideration Shares were issued in escrow subject to a Closing and Escrow Agreement dated December 14, 2007 among the Company, Peru SRL and the former partners of Peru SRL (the “Closing Agreement”).  Pursuant to the terms of the Closing Agreement, the former partners of Peru SRL must satisfy certain post-closing items, prior to the release of the Peru Consideration Shares from escrow.  As of the date of this report, the Peru Consideration Shares remain in escrow.

On January 8, 2008, Pacific Copper acquired Sociedad Pacific Copper Chile Limitada, a limited liability partnership organized under the laws of Chile (“Pacific LTDA”) pursuant to a Share Exchange Agreement entered into as of April 11, 2007 (the “Chile Agreement”), as amended, between the Company and the former partners of Pacific LTDA.  Pursuant to the Chile Agreement the Company issued 6,088,452 of its common shares (the “Chile Consideration Shares”) to the former partners of Pacific LTDA as consideration for the acquisition of 99% of Pacific LTDA.  The 1% minority interest was credited with $30,750.  As a result of the acquisition, Pacific LTDA became a subsidiary of the Company.  The Chile Consideration Shares were issued in escrow subject to a Closing and Escrow Agreement dated January 8, 2008 among the Company, Pacific LTDA and the former partners of Pacific LTDA (the “Closing Agreement”).  Pursuant to the terms of the Closing Agreement, the former partners of Pacific LTDA had to satisfy certain post-closing items prior to the release of the Chile Consideration Shares from escrow. The conditions under the Closing Agreement have been satisfied or waived, and the Chile Consideration shares have been issued to the former partners of Pacific LTDA.

 
 
 
 
 

 
 
9

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

4.        Plant and Equipment
 
Plant and equipment are recorded at cost less accumulated depreciation.  Depreciation is provided commencing in the month following acquisition using the following annual rate and method:
 
Computer equipment
30%
declining balance method
Office furniture and fixtures
20%
declining balance method
Operating equipment
30%
declining balance method

   
January 31, 2012
   
October 31, 2011
 
   
Cost
$
   
Accumulated
Depreciation and impairment
$
   
Cost
$
   
Accumulated
Depreciation and impairment
$
 
Office, furniture and fixtures
    386       386       386       262  
Computer equipment
    6,529       6,529       6,529       4,904  
Operating Equipment
    191,185       148,980       191,185       139,581  
      198,100       155,895       198,100       144,747  
Net carrying amount
  $ 42,205             $ 53,353          
Amortization and impairment expense
  $ 11,148             $ 22,844          
 
5.
Issuance of Common Shares

Three months ended January 31, 2012

The Company did not raise any capital during the three month period ended January 31, 2012
 
Year ended October 31, 2011

The Company did not raise any capital during the year ended October 31, 2011




 
10

 


PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

6.
Stock Purchase Warrants

   
Number of Warrants Granted
   
Exercise Prices
 
          $    
Outstanding at October 31, 2010 and average exercise price
    3,365,000       0.39  
Granted in 2011
    -       -  
Expired in year 2011
    (1,865,000 )     (0.25 )
Outstanding at October 31, 2011 and average exercise price
    1,500,000       0.57  
Granted in 2012
    -       -  
Expired in 2012
    -       -  
Outstanding at January
31, 2012 and average exercise price
    1,500,000       0.57  

The warrants do not confer upon the holders any rights or interest as a shareholder of the Company.

Three months ended January 31, 2012

 
The Company did not issue any warrants during the three month period ended January 31, 2012

Year ended October 31, 2011

 
The Company did not issue any warrants during the year ended October 31, 2011
 
7.
Stock Based Compensation

On August 8, 2006, the Board of Directors approved a stock option plan (the"2006 Stock Option Plan"), the purpose of which is to enhance the Company's stockholder value and financial performance by attracting, retaining and motivating the Company's officers, directors, key employees, consultants and its affiliates and to encourage stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company's success through stock ownership. Under the 2006 Stock Option Plan, officers, directors, employees and consultants who provide services to the Company may be granted options to acquire common shares of the Company.  Options may have a term of up to 10 years.  The aggregate number of shares of common stock originally authorized under the plan was 5,000,000. Since adoption of the Plan an additional 1,200,000 shares were authorized for issuance pursuant to the Plan’s “evergreen share reserve increase” provision. 


 
11

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
7.
Stock Based Compensation-Cont’d
 
During the three month period ended January 31, 2012, no stock options were granted.

As of January 31, 2012 there was $nil of unrecognized expenses related to non-vested stock-based compensation arrangements granted.  The stock-based compensation expense for the three month period ended January 31, 2012 was $nil.

The following table summarizes the options outstanding as at January 31, 2012:

   
Option Price
   
Number of shares
 
Expiry Date
 
Per Share
       
May 14, 2012
      0.50        1,500,000  
July 20, 2012
    0.50       250,000  
August 1, 2012
    0.50       1,700,000  
August 9, 2012
    0.51       650,000  
 March 1, 2013     0.50       380,000  
September 24, 2013
    0.50       50,000  
              4,530,000  
Weighted average exercise price
      0.50  
 

 
12

 

PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

8.       Mining Claims

(a)           On December 17, 2007, Pacific Copper acquired Pacific Copper Peru SRL (“Pacific Peru”), a limited liability partnership organized under the laws of Peru pursuant to the Share Exchange Agreement among the Company, Peru SRL and the former partners of Peru SRL dated as of April 11, 2007, as amended (the “Peru Agreement”). Pursuant to the Peru Agreement, the Company issued 4,850,000 shares of the Company’s common stock (the “Peru Consideration Shares”) to the partners of Peru SRL as consideration for the acquisition of 99% of Peru SRL.  The 1% minority interest was credited with $24,495.  As a result of the acquisition, Peru SRL became a subsidiary of the Company. The Company expensed $2,449,295, relating to the issue of 4,850,000 common shares calculated at $0.50 per common share and the allocation of minority interest for $24,495 net of capitalization for $200 for mineral property claims. Property acquisition costs relating to the exploration properties were expensed as the assets were considered impaired.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims.  The Company does not consider the mineral claim groups to be acquired upon the closing of the transaction to be material assets at this time, but our assessment may change after further work is done on the properties.  Pursuant to the formal closing of this acquisition the Company through Pacific Peru will acquire interests in three mineral claim groups (Don Javier, Tonalia and Tenospa) which were capitalized at $100 each.
 
Pursuant to the terms of the Closing Agreement, the former partners of Pacific Peru must satisfy certain post-closing items, prior to the release of the Peru Consideration Shares from escrow.  As of the date of this report, these conditions remain unsatisfied and the Peru Consideration Shares remain in escrow.

(b)           On January 8, 2008, Pacific Copper acquired Pacific LTDA, a limited liability partnership organized under the laws of Chile, pursuant to a Share Exchange Agreement entered into as of April 11, 2007 (the “Chile Agreement”), as amended, between the Company and the former partners of Pacific LTDA.  Pursuant to the Chile Agreement the Company issued 6,088,452 of its common shares (the “Chile Consideration Shares”) to the former partners of Pacific LTDA as consideration for the acquisition of 99% of Pacific LTDA.  The 1% non-controlling interest was credited with $30,750.  As a result of the acquisition, Pacific LTDA became a subsidiary of the Company.  The Company expensed $3,074,576, relating to the issue of 6,088,452 common shares calculated at $0.50 per common share and the allocation of non-controlling interest for $30,750 net of capitalization for $400 for mineral property claims.  Property acquisition costs relating to the exploration properties were expensed as the assets were considered impaired.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims groups acquired in the transaction (as listed below).  The Company does not consider either of the foregoing mineral claims owned by Pacific LTDA to be material assets at this time, but our assessment may change after further work is done on the properties.  Pursuant to this acquisition the Company acquired interest in the following mineral claims which were capitalized at $100 each:
Carrera Pinto
Carrizal
Cerro Blanco
La Guanaca

The conditions under the Chile Agreement have been satisfied or waived, and the Chile Consideration shares were issued to the former partners of Pacific LTDA in 2009.
 
On February 3, 2011, the Board resolved to discontinue exploration at the Cerro Blanco project in Chile and instructed Pacific LTDA to let lapse all concession fees associated with this project, effectively dropping the claims. The amount of $100 previously capitalized was written off to expenses.


 
13

 


PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

8.        Mining Claims-Cont’d

(c) As of February 27, 2009 Pacific Copper, through its wholly owned subsidiary Pacific LTDA, entered into a definitive mineral property acquisition agreement (the “Gareste Agreement”) with Gareste pursuant to which the Company acquired a 100% interest in the following copper oxide properties located in Atacama Region III, Chile: the “Venado Property” (also known as the “Venapai Property”) consisting of approximately 4,900  hectares of exploration concessions, located roughly 45 kilometers from the city of Copiapo, the “El Corral Property”, consisting of approximately 3600  hectares of exploration concessions, located roughly 60 kilometers from the city of Copiapo, and the adjacent “La Mofralla Property”, consisting of approximately 250 hectares of exploration concessions also located roughly 60 kilometers from the City of Copiapo.  These properties were subject to separate letters of intent entered into during July and October of 2008, as previously disclosed. Under the Gareste Agreement the Company issued a total of 5,000,000 shares of its common stock to Gareste on October 12, 2009, allocable as follows: 2,000,000 shares of common stock as consideration for the Venado Property, 2,000,000 shares of common stock as consideration for the El Corral Property and 1,000,000 shares of common stock as consideration for the La Mofralla Property (collectively, the “Gareste Oxide Shares”).  In addition, the Venado Property is subject to a 2% net smelter return royalty, capped at $10,000,000, 50% of which can be repurchased by Pacific Copper at any time prior to the commencement of production for $3,000,000, and the El Corral Property is subject to a 2% net smelter return royalty, capped at $10,000,000, 50% of which can be repurchased by Pacific Copper at any time prior to the commencement of production for $2,000,000.  The Company expensed $749,700, relating to the issue of 5,000,000 common shares calculated at $0.15 per common share net of capitalization for $300 for mineral property claims.  Property acquisition costs relating to the exploration properties were expensed as the assets were considered impaired.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims groups acquired in the transaction (as listed below).  Pursuant to this acquisition the Company acquired interest in the following mineral claims which were capitalized at $100 each:

Venado
ElCorral
La Mofralla

During calendar year 2011, the Company relinquished or let lapse a number of the mineral exploration concessions comprising part of the claims groups described above, as well as the Guanaca Lease set forth in the Note immediately below. These relinquishments were based both on a decision by the Company to preserve only the key or core concessions of said claims groups, as well as funding limitations which prevented the Company from maintaining all of the concessions. In total, the Company retained only 3,200 hectares of the 13,400 hectares comprising the claims groups. However, the Company’s contractual operator in Chile, Sociedad Gareste Limitada (in which Harold Gardner, a member of the Company’s board of directors, is a 50% owner and co-managing partner) re-filed and re-located, in trust and on behalf of the Company, 6,000 hectares of such concessions. Gareste and the Company have memorialized an arrangement by letter dated February 3, 2012, in which the Company acknowledges that it is indebted to Gareste for the expenses of preserving these claims, and whereby the Company agrees to reimburse Gareste for these expenses and further to grant to Gareste a 2% Net Smelter Return royalty interest on future production from the claims groups. The Company recorded a cost of  $35,000 in relation to this agreement.

 
14

 

PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
9.        Commitments and Contingencies
 
On April 19, 2007, the Company executed an agreement dated as of April 11, 2007 with David Hackman, a director of the Company, on behalf of a corporation to be formed in Peru which, prior to closing, would then own certain mineral claims located in Peru.  On December 17, 2007, Pacific Copper completed the acquisition of Peru SRL, pursuant to the Share Exchange Agreement among the Company, Peru SRL and the former partners of Peru SRL dated as of April 11, 2007. The 4,850,000 shares of the Company’s common stock issued in connection with the closing of this transaction are held in escrow subject to the satisfaction of certain post-closing conditions.

On August 22, 2007 the Company entered into an agreement with Kriyah for the performance of certain administrative and management services.   The Kriyah Agreement has an initial term of two years and is then automatically renewable.  Either party may terminate the Kriyah Agreement upon 60 days prior written notice.  Under the Kriyah Agreement, Kriyah received an initial payment of $57,504 and was to receive payments of $4000 each month thereafter.  Commencing in January of 2009, this amount was reduced to $2,500 per month, and as of March, 2009, to $250 per month.  In order to facilitate the retaining of Kriyah, the Company guaranteed a lease agreement for the office space used by Kriyah in Tucson, Arizona.  The Company’s maximum obligation under the lease guarantee, as of July 31, 2009, is $212,774 in the event of a lease default with full acceleration of rent. The lease which was executed by War Eagle Mining Corporation, a Canadian corporation which at the time of execution was related to the Company through common directors, (“War Eagle”) as Lessee, is now in default and Kriyah subsequently moved its office location. The War Eagle lease is also guaranteed by Zoro Mining Corp. (a related Company).  Kriyah’s Manager, Andrew A. Brodkey, is also the President and CEO of the Company.  The potential liability as a result of this default is not determinable at this time. Expense, if any, will be recorded in the period in which any liability becomes known.

On January 24, 2008, the Company, through its subsidiary Pacific LTDA entered into an exclusive exploration, mining and exploitation agreement (the “Guanaca Lease”) for the La Guanaca oxide copper project located northeast of the town of Inca de Oro, Chanaral Province, Atacama Region 3, Chile. This property, which consists of approximately 300 hectares of exploration concessions, is road-accessible and was previously explored in the mid-1990’s through geophysical methods, sampling and drilling by Empresa Nacional de Mineria (“ENAMI”) a Chilean nationally-owned mining enterprise.  The Guanaca Lease is for a term of 5 years and is renewable automatically for additional 5-year periods.  The owners of the La Guanaca property will receive US$2,000 per month in cash during the term of the agreement. The Guanaca Lease was relinquished during calendar year 2012.

On February 12, 2008, the Company’s subsidiary, Pacific LTDA, entered into an Operator Agreement (the “Chile Operator Agreement”) with Sociedad Gareste Limitada, a limited liability partnership organized under the laws of Chile (“Gareste”).  Pursuant to the Chile Operator Agreement Gareste will prepare and submit proposed annual work programs and accompanying budgets to Pacific LTDA covering the exploration and, if warranted, development of certain mineral concessions held by Pacific LTDA.  Gareste will provide comprehensive management services and contract for transportation, labor, insurance and logistical services for all approved programs.  Gareste’s overhead reimbursement and compensation will be specified in each proposed budget and subject to approval by Pacific LTDA.  The Chile Operator Agreement is terminable by either party upon 90-days’ prior notice.  Harold Gardner, a member of the Company’s board of directors, is a 50% owner and co-managing partner in Gareste.

 
15

 

PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
9.
Commitments and Contingencies-Cont’d

On February 12, 2008 The Company’s subsidiary, Peru SRL entered into an Operator Agreement (the “Peru Operator Agreement”) with Inversiones Mineras Stiles, a limited liability partnership organized under the laws of Peru (“Stiles”).  Pursuant to the Peru Operator Agreement Stiles will prepare and submit proposed annual work programs and accompanying budgets to Peru SRL covering the exploration and, if warranted, development of certain mineral concessions held by Peru SRL.  Stiles will provide comprehensive management services and contract for transportation, labor, insurance and logistical services for all approved programs.  Stiles’ overhead reimbursement and compensation will be specified in each proposed budget and subject to approval by Peru SRL.

The Company, through Pacific LTDA, also executed a letter of intent dated September 9, 2009 with Gareste to acquire its interest in the “Yerbas Buenas” oxide copper property located 130 km southeast of the city of Copiapo, Atacama Region III, Chile (the “Yerbas Buenas LOI”). By letter agreement dated February 22, 2010, the Company agreed with Gareste to terminate the Yerbas Buenas LOI.  In exchange for the release of this property back to Gareste, and in consideration of exploration efforts expended by the Company during the pendency of the Yerbas Buenas LOI, Gareste has agreed to convey to Pacific Copper a 2% Net Smelter Return royalty on mineral production from the property, capped at US$250,000.

Pacific Copper Corp. through its Chilean subsidiary Pacific LTDA, entered into a mineral property acquisition agreement (“MPAA”) with Gareste to purchase the San Enrique property located in Atacama RegionIII, Chile and comprising 100 hectares. Gareste is the private Chilean limited liability partnership in which one of the Company’s directors, Harold Gardner, is a 50% owner and co-managing partner. In consideration Pacific Copper was to issue 7 million shares of its capital stock and grant a 2% Net Smelter Return (NSR) royalty to Gareste, capped at US$6 million, one half (1/2) of which can be repurchased by Pacific Copper or its subsidiary at any time prior to commencement of any commercial production by making a payment of US$2 million to Gareste. On February 22, 2010, the Company, its subsidiary Pacific LTDA and Gareste amended (the “Amendment”) the MPAA.   Under the terms of the Amendment, Gareste agreed to include in the purchase additional mineral exploration concessions adjacent to San Enrique, comprising 160 hectares, and applications for another 2,000 hectares of adjacent concessions that overstake current concessions with senior rights in third-parties. The parties also extended the Closing Date of the MPAA to June 30, 2010 and granted and extended to Gareste a specific right of rescission (“Rescission Right”) of the transaction, which after closing, and if exercised, would have obligated the Company and Pacific LTDA to convey the mineral titles back to Gareste if the Company does not raise and add to its treasury the net sum of US$1.6 million dollars within six (6) months of the Effective Date of the Amendment, or if US$1 million is not expended by Pacific Copper Chile and the Company on the Property and related project overhead within eighteen (18) months of the Effective Date. The share portion of the consideration payable by the Company to the vendor, under the MPAA and the Amendment, amounting to 7 million shares of the Company, was to be placed in escrow pending the satisfaction of closing conditions and the further satisfaction of the conditions that would otherwise give rise to the Rescission Right. In the case that the Rescission Right is exercised, Gareste is obligated to release from escrow and return any share consideration received for this transaction back to the Company. The other terms of the MPAA were unchanged.

The parties failed to close the purchase of San Enrique under the terms of the amended MPAA by June 30, 2010, and the agreement has therefore lapsed and has expired.


 
16

 


PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

10.      Related Party Transactions

Three month period ended January 31, 2012

The following transactions were undertaken in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

 
A)
A director of the Company provided consulting geological services to the Company and a total of $22,500 was expensed to a private Company with a director in common. $316,500 was owed to this private company as of January 31, 2012.

 
B)
A director of the Company provided consulting services to the Company and a total of $22,500 was expensed to a private company with director in common.  $609,960 was owed to this private company as of January 31, 2012 which also includes non-reimbursed expenses.

 
C)
The Company expensed $22,500 being the amount payable to Kriyah, including benefits charged to the Company, relating to compensation payable to the former CEO and Director of the Company. As of January 31, 2012, $392,263 was owed which also included non-reimbursed expenses.

 
D)
The Company incurred a total of $62,634 to a private Chilean company that provides exploration services to the Company in Chile, and has a director in common, of which $975,801 was owed at January 31, 2012 with such costs recorded as project costs.

 
E)
The Company owed $14,170 to the CFO as of January 31, 2012 for services rendered to the Company.
















 
17

 


PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

10.      Related Party Transactions-Cont’d

Three month period ended January 31, 2011

The following transactions were undertaken in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

 
A)
A director of the Company provided consulting geological services to the Company and a total of $22,500 was expensed to a private Company with director in common. $226,500 was owed to this private company as of January 31, 2011.

 
B)
A director of the Company provided consulting services to the Company and a total of $22,500 was expensed to a private company with director in common.  $425,867 was owed to this private company as of January 31, 2011 which also includes non-reimbursed expenses.

 
C)
The Company expensed $35,344 being the amount payable to Kriyah, including benefits charged to the Company, relating to compensation payable to the President, CEO, Director and Chairman of the Board of Directors of the Company. As of January 31, 2011, $281,125 was owed which also included non-reimbursed expenses.

 
D)
The Company incurred a total of $74,511 to a private Chilean company that provides exploration services to the Company in Chile, and has a director in common, of which $728,721 was owed at January 31, 2011 with such costs recorded as project costs.

 
E)
The Company owed $11,650 to the CFO as of January 31, 2011 for services rendered to the Company.
 
 
 
 
 

 
 
18

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)

11.      Deferred Stock Compensation

In February 2010, the Company issued 300,000 restricted common shares to a consultant valued at $30,000 pursuant to a consulting agreement for a period of service of 24 months. The Company has expensed $3,750 during the three month period ended January 31, 2012 leaving a balance of $1,583.
 
12.      Advances to a related party

Advance to a related party includes a receivable of $48,555 as of October 31, 2011. This was advanced free of interest and was repaid back in full to the Company during the three month period ended January 31, 2012.
 
13.      Advances from non-related parties

On June 20, 2008, the Company received an unsecured advance of $247,000 from a non-related party which bears interest at an annual rate of 8% and is due and payable within ninety days from receipt thereof.  The Company received a further advance of an additional $5,100 on September 30, 2008 from the same party.  The Company received additional advances totaling $18,500 from this party during the twelve month period ended October 31, 2009. The Company received additional advances totaling $12,264 during the quarter ended April 30, 2010. The total amount due including interest as of January 31, 2012 is $362,051.
 
On November 28, 2008, the Company received an unsecured advance of $100,000 from another non related party which bears interest at an annual rate of 10% and is due within twelve months from receipt thereof. The Company received additional advances totaling $16,000 from this party during the three month period ended January 31, 2010. The total amount due as of January 31, 2012, including interest is $155,830.
 
On February 17, 2009, the Company issued a promissory note (the “War Eagle Note”) to War Eagle Mining Company, Inc. a Canadian Corporation (“War Eagle”).  War Eagle and the Company no longer share a common director.  Under the terms of the War Eagle Note, a total of $100,000 has been advanced; all amounts advanced are due and payable on June 30, 2009 with interest at 15% per annum.  The War Eagle Note was to be secured by a blanket security interest in all real, personal, and intangible interests of Pacific Copper associated with each of the La Guanaca, El Corral, La Mofralla and Venado projects (the Company’s South American oxide copper properties, as described in this report).  In February 2009, War Eagle notified the Company that it would not fund the full amounts contemplated in the War Eagle Note, leaving a funding shortfall of $55,000.  The Company has notified War Eagle that it considers this failure to fully fund the War Eagle Note to be a breach, has denied the security interest, and has reserved all of its legal rights.  The total amount due as of January 31, 2012, including interest is $151,247.  The Company received a letter from War Eagle dated October 21, 2010, demanding payment of the Note, and is currently in discussions with War Eagle to potentially resolve these issues. As of January 31, 2012 there have been no changes in the status of the note payable.
 
 
 

 
 
19

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
14.
Convertible notes
 
Convertible notes consist of the following as of January 31, 2012:

   
Net carrying amount
 
       
a)   $100,000 face value, 6% convertible note, due October 31, 2010
 
$
100,000
 
b)   $166,500 face value, 12% convertible note, due July 27, 2011
   
166,500
 
c)  $20,000 face value, 12% convertible note, due October 26, 2011
   
20,000
 
     
286,500
 

a) On October 27, 2008, the Company issued a $100,000 face value, 6% convertible note, due October 31, 2010.  The principal amount of the note and interest is payable on October 31, 2010.  While the note is outstanding, the investor has the option to convert the principal balance and interest, into conversion units at a conversion price of $0.16 per unit.  Each conversion unit is convertible into one share of common stock and one warrant to purchase one share of common stock.  Further, the terms of the convertible note provide for certain redemption features. If, in the event of certain defaults on the terms of the note, certain of which are indexed to equity risks, the holder can accelerate the payment of outstanding principal and interest.  The financing transaction also provided the holder with Additional Investment Rights (“AIR”) to purchase up to $800,000 face value convertible notes under the same terms and conditions as the $100,000 convertible note which expired in October 2010.
 
The Company has evaluated the terms and conditions of the convertible note and the AIR under the guidance of ASC 815.  The embedded conversion option, indexed to a share of stock and a warrant, does not meet the conventional convertible exemption.  The warrant element of the conversion unit does not otherwise fall within the scope of the “indexed to the company’s own stock” exemption provided in ASC 815 and required bifurcation.  Further, certain redemption features that are indexed to equity risks are not clearly and closely related to the host debt agreement.  Accordingly, a compound embedded derivative was bifurcated from the contract and has been recorded as a derivative liability.  Similarly, the AIR embodies similar features that did not meet equity classification and accordingly derivative liability classification of the compound feature is also reflected in liabilities.
 
 
 

 

 
20

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
14.      Convertible notes-Cont’d

Fair value of the compound embedded derivative and embedded warrants in the additional investment right were measured using the Monte Carlo Simulation technique. The common share element of the conversion option did not require treatment as derivative financial instruments, the Company was required to evaluate the feature as potentially embodying a beneficial conversion feature under ASC 470. A beneficial conversion feature is present when the fair value of the underlying common share exceeds the effective conversion price of the conversion option. The effective conversion price is calculated as the basis in the financing arrangement allocated to the hybrid convertible debt agreement, divided by the number of shares into which the instrument is indexed. As a result of this evaluation under the aforementioned standards, the Company concluded that a beneficial conversion feature was not present in the $100,000 face value convertible note. The amount is amortized using the effective interest method.
 
The derivative liabilities as of January 31, 2012 and October 31, 2011 consisted of the following:
 
   
January 31, 2012
   
October 31, 2011
 
  Derivative financial instrument
           
     Compound embedded derivative
   
-
     
-
 
     Additional investment rights
   
-
         
     
-
     
-
 
 
b) On July 27, 2009, the Company issued 12% convertible notes to multiple investors with an aggregate face value of $166,500. The principal amount of the notes and interest is payable on July 27, 2011. While the note is outstanding, the investor has the option to convert the principal balance and interest, into common stock at a fixed conversion price of $0.10. In the event of certain defaults on the terms of the note, certain of which are indexed to equity risks, the holder can accelerate the payment of outstanding principal and interest (the “Default Put”).
 
The Company evaluated the notes for accounting purposes under ASC 815 and has determined that the conversion feature meets the conventional-convertible exemption and, accordingly, bifurcation and fair-value measurement of the conversion feature is not required. The notes were issued with a beneficial conversion feature, having a value of $49,950.
 
In conjunction with the offering the Company issued warrants to the investors indexed to 1,665,000 shares of common stock with an exercise price of $0.25 per share. The fair value of the warrants was determined to be $86,414 using the Black-Scholes-Merton valuation technique and they were recorded at their relative fair value of $46,085 in accordance with ASC 470. As a result of allocating a portion of the proceeds to the warrants and the beneficial conversion feature, the notes were recorded net of a discount of $98,024.  The beneficial conversion feature is recorded in paid-in capital, and the discount on the notes will be amortized through periodic charges to interest expense over the term of the notes using the effective interest method. Amortization of debt discounts amounted to $46,599 during the year ended October 31, 2011. There was no amortization for the three months ended January 31, 2012.
 
c) On October 26, 2009, the Company issued 12% convertible notes to two investors with an aggregate face value of $20,000. The principal amount of the notes and interest is payable on October 26, 2011. While the note is outstanding, the investor has the option to convert the principal balance and interest, into common stock at a fixed conversion price of $0.10. In the event of certain defaults on the terms of the note, certain of which are indexed to equity risks, the holder can accelerate the payment of outstanding principal and interest (the “Default Put”).

 
21

 

 
PACIFIC COPPER CORP.
(AN EXPLORATION STAGE MINING COMPANY)
Condensed Notes to Interim Consolidated Financial Statements
January 31, 2012
(Amounts expressed in US Dollars)
(Unaudited-Prepared by Management)
 
14.      Convertible notes-Cont’d

The Company evaluated the notes for accounting purposes under ASC 815 and have determined that the conversion feature meets the conventional-convertible exemption and, accordingly, bifurcation and fair-value measurement of the conversion feature is not required. The notes were issued with a beneficial conversion feature, having a value of $6,000.
 
In conjunction with the offering the Company issued warrants to the investors indexed to 1,665,000 shares of common stock with an exercise price of $0.25 per share. The fair value of the warrants was determined to be $10,380 using the Black-Scholes-Merton valuation technique and they were recorded at their relative fair value of $6,014 in accordance with ASC 470. As a result of allocating a portion of the proceeds to the warrants and the beneficial conversion feature, the notes were recorded net of a discount of $12,014.  The beneficial conversion feature is recorded in paid-in capital, and the discount on the notes will be amortized through periodic charges to interest expense over the term of the notes using the effective interest method. Amortization of debt discounts amounted to $7,285 during the year ended October 31, 2011. There was no amortization for the three months ended January 31, 2012.
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
22

 

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

FOR THE THREE MONTH PERIOD ENDED JANUARY 31, 2012

Discussion of Operations & Financial Condition
Three month period ended January 31, 2012

The Company is in the exploration stage and has not yet realized revenues from any operations.  The Company has incurred a loss of $200,336 for the three month period ended January 31, 2012. At January 31, 2012, the Company had an accumulated deficit during the exploration stage of $19,414,170.  During the year ended October 31, 2008 the Company raised capital of $1,475,815 (net of offering costs). Further, during the year ended October 31, 2008 the Company raised an additional $100,000 being subscription for convertible notes (See note 15-“Convertible Note Financing Transaction”). The Company raised an additional $186,500 during the year ended October 31, 2009 from issue of convertible notes. Management's plan is to continue raising capital through future equity or debt financing until it achieves profitable operations from mineral extraction activities. There is no assurance that we will be successful in obtaining such financing.
 
As of the date of the filing of this report, the Company has very little cash.  As of the three month period ended January 31, 2012, the Company’s current liabilities were $4,246,158 while current assets were $1,184.  Management has taken steps to reduce operating costs.  These steps include deferral of salaries for senior management, deferral of payments to consultants and service providers, and reduction of all exploration activities.

Due to current difficult economic conditions and increased competition among small mineral exploration stage companies for available sources of capital, it has become more difficult to raise financing than in the previous operating years of the Company.  The continued depletion of current cash and cash equivalents to meet ongoing administrative expenses and other continuing obligations is a material concern of management.  The continued operation of the Company is dependent on raising additional financing to meet commitments and obligations and there can be no assurance that such financing can be obtained on a timely basis or on favorable terms or at all.  If we fail to obtain financing, the Company may be forced to cease doing business.

SELECTED INFORMATION
 
   
Three months ended
   
Three months ended
 
   
January 31, 2012
   
January 31, 2011
 
             
Revenues
 
$
Nil
   
$
Nil
 
Net Loss attributable to Pacific Corp.
               
stockholders
 
$
200,336
   
$
222,093
 
Loss per share-basic and diluted
 
$
(0.00
)
 
$
(0.00
)
                 
   
As at
   
As at
 
   
January 31, 2012
   
October 31, 2011
 
Total Assets
 
$
44,189
   
$
104,030
 
Total Liabilities
 
$
4,246,158
   
$
4,109,413
 
Cash dividends declared per share
 
Nil
   
Nil
 

Total assets as of January 31, 2012 includes cash of $1,184, plant and equipment of $42,205 and mining claims of $800. Total assets as of October 31, 2011 includes cash of $1,322, advances to related party of $48,555, plant & equipment of $53,353 and mining claims of $800.


 
23

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
Revenues

No revenue was generated by the Company’s operations during the three month period ended January 31, 2012 and January 31, 2011.

Net Loss

The Company’s expenses are reflected in the Statements of Operation under the category of Expenses. The Company is an exploration stage mining company and has not yet realized any revenue from its operations.  The Company is primarily engaged in the acquisition and exploration of mining properties.  Mineral property exploration costs are expensed as incurred.  Mineral property payments are capitalized only if the Company is able to allocate any economic value beyond proven and probable reserves.  When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs incurred to develop such property will be capitalized.  For the purpose of preparing financial information, the Company is unable to allocate any economic value beyond proven and probable reserves and hence all property payments are considered to be impaired and accordingly written off to project expense.  All costs associated with a property that has the potential to add to the Company’s proven and probable reserves are expensed until a final feasibility study demonstrating the existence of proven and probable reserves is completed.  No costs have been capitalized in the periods covered by these financial statements.  Once capitalized, such costs will be amortized using the units-of-production method over the estimated life of the probable reserve.  Mineral property acquisition costs will also be capitalized in accordance with the FASB Emerging Issues Task Force ("EITF") Issue 04-2 when management has determined that probable future benefits consisting of a contribution to future cash inflows have been identified and that adequate financial resources are available or are expected to be available as required to meet the terms of property acquisition and budgeted exploration and development expenditures.  Mineral property payments are expensed as incurred if the criteria for capitalization is not met.

To date, mineral property exploration costs have been expensed as incurred.  As of the date of these financial statements, the Company has incurred only property payments and exploration costs which have been expensed.  To date the Company has not established any proven or probable reserves on its mineral properties.

The significant components of expense that have contributed to the total operating expense are discussed as follows:

(a) General and Administrative Expense

Included in operating expenses for the three month period ended January 31, 2012 is general and administrative expense of $24,868, as compared with $55,800 for the three month period ended January 31, 2011.  General and administrative expense represents approximately 14.5% of the total operating expense for the three month period ended January 31, 2012. This expense for the three month period ended January 31, 2012 includes professional, consulting and office and general and non cash expense relating to the amortization of deferred stock compensation relating to issue of stock to consultants for $3,750 (Jan. 31, 2011: $3,750).

(b) Project Expense

Included in operating expenses for the three month period ended January 31, 2012 is project expenses of $135,819 as compared with $125,912 for the three month period ended January 31, 2011.  Project expense represents approximately 79% of the total operating expense for the three month period ended January 31, 2012. This expense includes consulting, claims, equipment rentals, contract labor, field wages, drilling and other project related expenses incurred during the period primarily on the mineral claims in Chile.


 
24

 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
(c) Mineral claims acquisition cost expense

(1)           On December 17, 2007, Pacific Copper acquired Pacific Copper Peru SRL (“Pacific Peru”), a limited liability partnership organized under the laws of Peru pursuant to the Share Exchange Agreement among the Company, Peru SRL and the former partners of Peru SRL dated as of April 11, 2007, as amended (the “Peru Agreement”).  Pursuant to the Peru Agreement, the Company issued 4,850,000 shares of the Company’s common stock (the “Peru Consideration Shares”) to the former partners of Peru SRL as consideration for the acquisition of 99% of Peru SRL.  Dr. David Hackman, our current President, CEO and a director, was among the former partners of Peru SRL and received 2,425,000 Peru Consideration Shares.  Mr. Andrew Brodkey, one of our directors, holds a 1% interest in Peru SRL for the benefit of our Company.  Mr. Brodkey holds this 1% interest in order to comply with the requirement under Peruvian law that limited partnerships in Peru have at least two partners.  The 1% minority interest was credited with $24,495.  As a result of the acquisition, Peru SRL became a subsidiary of the Company.  The Company expensed $2,449,295, relating to the issue of 4,850,000 common shares calculated at $0.50 per common share and the allocation of minority interest for $24,495 net of capitalization for $200 for mineral property claims. Property acquisition costs relating to the exploration properties were expensed as the assets were considered impaired.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims.  The Company does not consider any of the mineral claim groups to be acquired in the transaction (Don Javier, Tonalia and Tenospa) to be material assets at this time, but our assessment may change after further work is done on the properties.  Pursuant to the closing of this acquisition the Company through Pacific Peru will acquire interests in these mineral claim groups which were capitalized at $100 each.

Pursuant to the terms of the Closing Agreement, the former partners of Pacific Peru must satisfy certain post-closing items, prior to the release of the Peru Consideration Shares from escrow.  As of the date of this report, the Peru Consideration Shares remain in escrow.

(2)           On January 8, 2008, Pacific Copper acquired Sociedad Pacific Copper Chile Limitada, a limited liability partnership organized under the laws of Chile (“Pacific LTDA”) pursuant to a Share Exchange Agreement entered into as of April 11, 2007 (the “Chile Agreement”), as amended, between the Company and the former partners of Pacific LTDA.  Pursuant to the Chile Agreement the Company issued 6,088,452 of its common shares (the “Chile Consideration Shares”) to the former partners of Pacific LTDA as consideration for the acquisition of 99% of Pacific LTDA.  Mr. Harold Gardner, our current VP of Business Development and a director, was among the former partners of Pacific LTDA and received 2,425,000 Chile Consideration Shares in escrow.  Mr. Eduardo Esteffan, a director and co-managing partner of Pacific LTDA retained a 1% partnership interest in Pacific LTDA in order to comply with Chilean law requiring that a limited liability partnership have at least two members.  The 1% minority interest was credited with $30,750.  As a result of the acquisition, Pacific LTDA became a subsidiary of the Company.  The Company expensed $3,074,576, relating to the issue of 6,088,452 common shares calculated at $0.50 per common share and the allocation of minority interest for $30,750 net of capitalization for $400 for mineral property claims.  Property acquisition costs relating to the exploration properties are being expensed until the economic viability of the project is determined and proven and probable reserves quantified.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims. The Company does not consider any of the mineral claims acquired in the transaction (as listed below) to be material assets at this time, but our assessment may change after further work is done on the properties.  Pursuant to this acquisition the Company acquired interest in the following mineral claims which were capitalized at $100 each:

Carrera Pinto
Carrizal
Cerro Blanco
La Guanaca

The conditions under the Chile Agreement have been satisfied or waived, and the Chile Consideration shares were issued to the former partners of Pacific LTDA in 2009.

On February 3, 2011, the Board resolved to discontinue exploration at the Cerro Blanco project and instructed Pacific LTDA to let lapse all concession fees associated with this project, effectively dropping these claims.
 
 
 
 
25

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
(3)           As of February 27, 2009 the Company, through its wholly owned subsidiary, Pacific LTDA, entered into a definitive mineral property acquisition agreement (the "Gareste Agreement") with Sociedad Gareste Limitada (“Gareste”) pursuant to which the Company acquired a 100% interest in the following copper oxide properties located in Atacama Region III, Chile: the "Venado Property" (also known as the "Venapai Property") consisting of approximately 4,900 hectares of exploration concessions, located roughly 45 kilometers from the city of Copiapo, the "El Corral Property", consisting of approximately 3600 hectares of exploration concessions, located roughly 60 kilometers from the city of Copiapo, and the adjacent "La Mofralla Property", consisting of approximately 250 hectares of exploration concessions also located roughly 60 kilometers from the City of Copiapo.  These properties were subject to separate letters of intent entered into during July and October of 2008, as previously disclosed. Under the Gareste Agreement the Company issued a total of 5,000,000 shares of its common stock to Gareste on October 12, 2009, allocable as follows: 2,000,000 shares of common stock as consideration for the Venado Property, 2,000,000 shares of common stock as consideration for the El Corral Property and 1,000,000 shares of common stock as consideration for the La Mofralla Property (collectively, the "Gareste Oxide Shares").  In addition, the Venado Property is subject to a 2% net smelter return royalty, capped at $10,000,000, 50% of which can be repurchased by the Company at any time prior to the commencement of production for $3,000,000, and the El Corral Property is subject to a 2% net smelter return royalty, capped at $10,000,000, 50% of which can be repurchased by the Company at any time prior to the commencement of production for $2,000,000.  The Company expensed $749,700, relating to the issue of 5,000,000 common shares calculated at $0.15 per common share net of capitalization for $300 for mineral property claims.  Property acquisition costs relating to the exploration properties were expensed as the assets were considered impaired.  In the absence of proven and probable reserves, the Company is unable to allocate any economic values to the claims groups acquired in the transaction (as listed below).  Pursuant to this acquisition the Company acquired interest in the following mineral claims which were capitalized at $100 each:
 
Venado
El Corral
La Mofralla

(4)           In addition, due to lack of working capital during our fiscal year ended October 31, 2011, Pacific LTDA was forced to allow certain mineral concessions to lapse as Pacific LTDA was unable to pay the annual payments for the pedimento or mensuras concessions or to convert the pedimento concessions (initial exploration claim) to mensuras concessions (patented claim).  As a result, Pacific LTDA lost the rights to: (i) the La Guanaca project; (ii) 10 mineral concessions in the El Corral/La Mofralla project; (iii) all the mineral concessions in the Venapai/Venado Project; and (iv) 11 mineral concessions in the Carrera Pinto project.  Furthermore, due to restrictions in Pacific LTDA’s bylaws, it was not able to re-stake such lost mineral concessions unless Pacific LTDA had an approved work program and budget.  However, Gareste, a related party through Harold Gardner who is a director of both our Company and Gareste, was able to overstake the 10 mineral concessions in the El Corral/La Mofralla project that were lost, 4 of the mineral concessions in the Venapai/Venado project that were lost and 7 of the 11 mineral concessions in the Carrera Pinto project that were lost.  According to a letter agreement (the “Letter Agreement”) between Gareste and our Company dated February 3, 2012, Gareste confirmed that it was holding such overstaked mineral concession in trust and for the benefit of us and we confirmed our indebtedness in the amount of $35,000 owing to Gareste for overstaking and preserving such mineral concessions.  In addition, according to the Letter Agreement, all of the overstaked mineral concessions held in trust by Gareste will be transferred to us once such mineral concessions are constituted by the National Mining and Geological Service of Chile and we will reimburse Gareste for the expenses related to such transfers.  In addition, we agreed to grant to Gareste a 2% net smelter return (“NSR”) royalty on production from such mineral concessions capped at an amount of US$6 million on a per property basis with the right to purchase one-half of the NSR royalty (an undivided 1%) for a price of US$2 million on a per property basis.  A copy of such Letter Agreement was attached as an exhibit to our Form 10-K filed with the SEC on February 14, 2012.

Liquidity and Capital Resources

The following table summarizes the company’s cash flows and cash in hand as of January 31, 2012 and January 31, 2011:

   
January 31, 2012
   
January 31, 2011
 
Cash
  $ 1,184     $ 3,431  
Working capital (deficit)
  $ (4,244,974 )   $ (3,292,706 )
Cash used in operating activities
  $ (138 )   $ (2,138 )
Cash used in investing activities
 
$nil
      -  
Cash provided by financing activities
 
$nil
      -  

As at January 31, 2012, the Company had a working capital deficit of $4,244,974.  During the three month period ended January 31, 2012, the Company did not spend any funds on investment activity.

 
26

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
Critical Accounting Policies

The preparation of financial statements in accordance with US GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, the reported amount of revenues and expenses during the reporting period and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and judgments.  To the extent actual results differ from those estimates, our future results of operations may be affected.  Besides this critical accounting policy on use of estimates, we believe the following critical accounting policy affects the preparation of our financial statements.
 
Acquisition, Exploration and Evaluation Expenditures
 
Our Company is an exploration stage mining company and has not yet realized any revenue from its operations. It is primarily engaged in the acquisition and exploration of mining properties. Mineral property exploration costs are expensed as incurred. Mineral property acquisition costs are initially capitalized when incurred. Our Company assesses the carrying costs for impairment under Accounting Standards 930 Extractive Activities – Mining (AS 930) at each fiscal quarter end. An impairment is recognized when the sum of the expected undiscounted future cash flows is less than the carrying amount of the mineral property. Impairment losses, if any, are measured as the excess of the carrying amount of the mineral property over its estimated fair value. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs then incurred to develop such property, are capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the proven and probable reserves. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.

To date, mineral property exploration costs have been expensed as incurred. As of the date of these financial statements, our Company has incurred only property payments and exploration costs which have been expensed. To date our Company has not established any proven or probable reserves on its mineral properties.
 
Recent Accounting Pronouncements

On November 1, 2010, the Company adopted ASU 2010-06. ASU 2010-06 updates FASB ASC 820, Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. There was no material impact on the Company’s financial statements related to the adoption of this guidance.

Business Combinations: In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” The new guidance specifies that when comparative financial statements are presented, the revenue and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The new guidance applies prospectively to us for business combinations which occur on or after November 1, 2011. The impact of these new provisions on our consolidated financial statements will depend upon the nature, terms and size of the acquisitions we consummate in the future.

Fair Value: In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The new guidance does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within GAAP or International Financial Reporting Standards (“IFRSs”). The new guidance also changes the working used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements and it clarifies the FASB’s intent about the application of existing fair value measurements. The new guidance applies prospectively and is effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Comprehensive Income: In June 2011, the FASB issued ASU 2011-05 (including ASU 2011-12 update), “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The new guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both cases, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. If presented in a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with a total of comprehensive income in that statement. If presented in the two-statement approach, the first statement which is the statement of net income, should present components of net income and total net income followed consecutively by a second statement which is the statement of other comprehensive income, that should present the components of other comprehensive income, total other comprehensive income and a total amount for comprehensive income. Regardless of the method used, the entity if required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The new guidance is effective retrospectively for fiscal years, and interim periods within those fiscal years beginning after December 15, 2011. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
 
 
 
27

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
Off-Balance Sheet Arrangement

We have no off- balance sheet arrangements.

Contractual Obligations and Commercial Commitments

On April 19, 2007, the Company executed an agreement dated as of April 11, 2007 with David Hackman, a director of the Company, on behalf of a corporation to be formed in Peru which, prior to closing, would then own certain mineral claims located in Peru.  On December 17, 2007, Pacific Copper completed the acquisition of Peru SRL, pursuant to the Share Exchange Agreement among the Company, Peru SRL and the former partners of Peru SRL dated as of April 11, 2007. The 4,850,000 shares of the Company’s common stock issued in connection with the closing of this transaction are held in escrow subject to the satisfaction of certain post-closing conditions.

On August 22, 2007 the Company entered into an agreement with Kriyah for the performance of certain administrative and management services.   The Kriyah Agreement has an initial term of two years and is then automatically renewable.  Either party may terminate the Kriyah Agreement upon 60 days prior written notice.  Under the Kriyah Agreement, Kriyah received an initial payment of $57,504 and was to receive payments of $4000 each month thereafter.  Commencing in January of 2009, this amount was reduced to $2,500 per month, and as of March, 2009, to $250 per month.  In order to facilitate the retaining of Kriyah, the Company guaranteed a lease agreement for the office space used by Kriyah in Tucson, Arizona.  The Company’s maximum obligation under the lease guarantee, as of July 31, 2009, is $212,774 in the event of a lease default with full acceleration of rent. The lease which was executed by War Eagle Mining Corporation, a Canadian corporation which at the time of execution was related to the Company through common directors, (“War Eagle”) as Lessee, is now in default and Kriyah subsequently moved its office location. The War Eagle lease is also guaranteed by Zoro Mining Corp. (a related Company).  Kriyah’s Manager, Andrew A. Brodkey, is also the President and CEO of the Company. The potential liability as a result of this default is not determinable at this time. Expense, if any, will be recorded in the period in which any liability becomes known.

On January 24, 2008, the Company, through its subsidiary Pacific LTDA entered into an exclusive exploration, mining and exploitation agreement (the “Guanaca Lease”) for the La Guanaca oxide copper project located northeast of the town of Inca de Oro, Chanaral Province, Atacama Region 3, Chile. This property, which consists of approximately 300 hectares of exploration concessions, is road-accessible and was previously explored in the mid-1990’s through geophysical methods, sampling and drilling by Empresa Nacional de Mineria (“ENAMI”) a Chilean nationally-owned mining enterprise.  The Guanaca Lease is for a term of 5 years and is renewable automatically for additional 5-year periods.  The owners of the La Guanaca property will receive US$2,000 per month in cash during the term of the agreement. The Guanaca Lease was relinquished during calendar year 2012 as described in the Note immediately above.

On February 12, 2008, the Company’s subsidiary, Pacific LTDA, entered into an Operator Agreement (the “Chile Operator Agreement”) with Sociedad Gareste Limitada, a limited liability partnership organized under the laws of Chile (“Gareste”).  Pursuant to the Chile Operator Agreement Gareste will prepare and submit proposed annual work programs and accompanying budgets to Pacific LTDA covering the exploration and, if warranted, development of certain mineral concessions held by Pacific LTDA.  Gareste will provide comprehensive management services and contract for transportation, labor, insurance and logistical services for all approved programs.  Gareste’s overhead reimbursement and compensation will be specified in each proposed budget and subject to approval by Pacific LTDA.  The Chile Operator Agreement is terminable by either party upon 90-days’ prior notice.  Harold Gardner, a member of the Company’s board of directors, is a 50% owner and co-managing partner in Gareste.
 
 

 
 
28

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued
 
On February 12, 2008 The Company’s subsidiary, Peru SRL entered into an Operator Agreement (the “Peru Operator Agreement”) with Inversiones Mineras Stiles, a limited liability partnership organized under the laws of Peru (“Stiles”).  Pursuant to the Peru Operator Agreement Stiles will prepare and submit proposed annual work programs and accompanying budgets to Peru SRL covering the exploration and, if warranted, development of certain mineral concessions held by Peru SRL.  Stiles will provide comprehensive management services and contract for transportation, labor, insurance and logistical services for all approved programs.  Stiles’ overhead reimbursement and compensation will be specified in each proposed budget and subject to approval by Peru SRL.

The Company, through Pacific LTDA, also executed a letter of intent dated September 9, 2009 with Gareste to acquire its interest in the “Yerbas Buenas” oxide copper property located 130 km southeast of the city of Copiapo, Atacama Region III, Chile (the “Yerbas Buenas LOI”). By letter agreement dated February 22, 2010, the Company agreed with Gareste to terminate the Yerbas Buenas LOI.  In exchange for the release of this property back to Gareste, and in consideration of exploration efforts expended by the Company during the pendency of the Yerbas Buenas LOI, Gareste has agreed to convey to Pacific Copper a 2% Net Smelter Return royalty on mineral production from the property, capped at US$250,000.

Pacific Copper Corp. through its Chilean subsidiary Pacific LTDA, entered into a mineral property acquisition agreement (“MPAA”) with Gareste to purchase the San Enrique property located in Atacama Region III, Chile and comprising 100 hectares. Gareste is the private Chilean limited liability partnership in which one of the Company’s directors, Harold Gardner, is a 50% owner and co-managing partner. In consideration Pacific Copper was to issue 7 million shares of its capital stock and grant a 2% Net Smelter Return (NSR) royalty to Gareste, capped at US$6 million, one half (1/2) of which can be repurchased by Pacific Copper or its subsidiary at any time prior to commencement of any commercial production by making a payment of US$2 million to Gareste. On February 22, 2010, the Company, its subsidiary Pacific LTDA and Gareste amended (the “Amendment”) the MPAA.   Under the terms of the Amendment, Gareste agreed to include in the purchase additional mineral exploration concessions adjacent to San Enrique, comprising 160 hectares, and applications for another 2,000 hectares of adjacent concessions that overstake current concessions with senior rights in third-parties. The parties  also  extended the Closing Date of the MPAA to June 30, 2010 and  granted and extended to Gareste a specific right of rescission (“Rescission Right”) of the transaction, which after closing, and if exercised, would have  obligated the Company and Pacific LTDA to convey the mineral titles back to Gareste if the Company does not raise and add to its treasury the net sum of US$1.6 million dollars within six (6) months of the Effective Date of the Amendment, or if US$1 million is not expended by Pacific Copper Chile and the Company on the Property and related project overhead within eighteen (18) months of the Effective Date. The share portion of the consideration payable by the Company to the vendor, under the MPAA and the Amendment, amounting to 7 million shares of the Company, was to be placed in escrow pending the satisfaction of closing conditions and the further satisfaction of the conditions that would otherwise give rise to the Rescission Right. In the case that the Rescission Right is exercised, Gareste is obligated to release from escrow and return any share consideration received for this transaction back to the Company. The other terms of the MPAA were unchanged.
 
The parties failed to close the purchase of San Enrique under the terms of the amended MPAA by June 30, 2010, and the agreement has therefore lapsed and has expired.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are a smaller reporting company as defined by Rule 12b–2 of the Exchange Act and are not required to provide the information required under this item
 
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Based on an evaluation our Chief Executive Officer and Chief Financial Officer conducted of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(e), they concluded that our disclosure controls and procedures were effective as of January 31, 2012, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are:
 
 
1.
recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and
     
 
2.
accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 

 

 
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ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES - continued

Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting that occurred during the period ended January 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

 
PART II: OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS:

The Company is not a party to any pending legal proceeding or litigation and none of the Company’s property is the subject of a pending legal proceeding.

ITEM 1A:  RISK FACTORS

Much of the information included in this report includes or is based upon estimates, projections or other “forward looking statements”.  Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations.  While these forward looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein.  We undertake no obligation to update forward looking statements to reflect events or circumstances occurring after the date of such statements.
 
Such estimates, projections or other “forward looking statements” involve various risks and uncertainties as outlined below.  We caution readers of this report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward looking statements”.  In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
 
Risks Related to Our Company

We have no source of operating revenue and expect to incur significant expenses before establishing an operating company, if it is able to establish an operating company at all.
 
Currently, we have no source of revenue, and no commitments to obtain additional financing.  We will require significant additional working capital to carry out its exploration programs.  We have no operating history upon which an evaluation of its future success or failure can be made.  The ability to achieve and maintain profitability and positive cash flow is dependent upon:
 
 
-
further exploration of our properties and the results of that exploration;
 
 
-
raising the capital necessary to conduct this exploration; and
 
 
-
raising capital to fund our exploration and develop our properties.
 
Because our Company has no operating revenue, we expect to incur operating losses in future periods as we continue to spend funds to explore our properties.  Failure to raise the necessary capital to continue exploration could cause our Company to go out of business.
 
We will need to raise additional financing to complete further exploration.
 
We will require significant additional financing in order to continue our exploration activities and our assessment of the commercial viability of our properties in South America. Furthermore, if the costs of our planned exploration programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with corporate partners. There can be no assurance that we will be successful in our efforts to raise these require funds, or on terms satisfactory to us. The continued exploration of current and future mineral properties and the development of our business will depend upon our ability to establish the commercial viability of our properties and to ultimately develop cash flow from operations and reach profitable operations. We currently are in the exploration stage and we have no revenue from operations and we are experiencing significant negative cash flow. Accordingly, the only other sources of funds presently available to us are through the sale of equity. Alternatively, we may finance our business by offering an interest in any of our mineral properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions, neither of which is presently intended. If we are unable to obtain this additional financing, we will not be able to continue our exploration activities and our assessment of the commercial viability of our precious metal and mineral properties. Further, if we are able to establish that development of our precious metal and mineral properties is commercially viable, our inability to raise additional financing at this stage would result in our inability to place our mineral properties into production and recover our investment. We may not discover commercially exploitable quantities of precious metals or minerals on our properties that would enable us to enter into commercial production, and achieve revenues and recover the money we spend on exploration.
 
 
 
 
 
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ITEM 1A:  RISK FACTORS - continued
 
Our properties do not contain reserves in accordance with the definitions adopted by the Securities and Exchange Commission, and there is no assurance that any exploration programs that we out will establish reserves. All of our mineral properties are in the exploration stage as opposed to the development stage and have no known body of economic mineralization. The known mineralization at these projects has not yet been determined, and may never be determined to be economic. We plan to conduct further exploration activities on our properties, which future exploration may include the completion of feasibility studies necessary to evaluate whether a commercial mineable mineral exists on any of our properties. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable quantities of minerals. Any determination that our properties contain commercially recoverable quantities of minerals may not be reached until such time that final comprehensive feasibility studies have been concluded that establish that a potential mine is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that our mineral properties can be commercially developed.
 
Substantial portions of our South American copper oxide exploration property assets have been pledged to secure a short-term note and could be lost if we cannot repay the note.
 
On February 17, 2009, we issued a promissory note (the “War Eagle Note”) to War Eagle Mining Company, Inc. a Canadian corporation (“War Eagle”).  The War Eagle Note has a face amount of $155,000.  All amounts advanced under the War Eagle Note are due and payable on June 30, 2009 with interest at 15% per annum.  By its terms, the War Eagle Note was to be secured by a blanket security interest in all real, personal, and intangible interests of our Company associated with each of the La Guanaca, El Corral, La Mofralla and Venado projects (our Company’s South American oxide copper properties, as described herein).  We have declared a breach by War Eagle under the War Eagle Note for failure by War Eagle to fully fund advances under the War Eagle Note, and have denied the security interest.  While we believe we have a strong legal position with respect to the dispute with War Eagle, it is possible that since our Company has not repaid the War Eagle Note on June 30, 2009 (the maturity date), it could lose its interest in the properties securing the War Eagle Note. (See Note 13 to the financial statements).
 
Because of the unique difficulties and uncertainties inherent in mineral exploration ventures and current deterioration in equity markets, we face a high risk of business failure.
 
Investors should be aware of the difficulties normally encountered by new mineral exploration companies and the high rate of failure of such enterprises. Our prospects are further complicated by a pronounced deterioration in equity markets and constriction in equity capital available to finance and maintain our exploration activities. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the exploration of the mineral properties that we plan to undertake and the difficult economy and market volatility that we are experiencing. Moreover, most exploration projects do not result in the discovery of commercially mineable deposits.
 
Our Company is highly dependent upon its officers and directors.  Because of their involvement in other similar business which may be competitors, they may have a conflict of interest.
 
None of our Company’s officers or directors works for our Company on a full-time basis.  Some of our directors are officers or directors of other companies in similar exploration businesses.  Such business activities may be considered a conflict of interest because these individuals must continually make decisions on how much of their time they will allocate to our Company as against their other business projects, which may be competitive.  Also, we have no key man life insurance policy on any of our senior management or directors.  The loss of one or more of these officers or directors could adversely affect the ability of our Company to carry on business.


 
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ITEM 1A:  RISK FACTORS - continued
 
Our Company could encounter regulatory and permitting delays.
 
We could face further delays in obtaining title to properties under contract with our subsidiary in Peru, as well as delays in obtaining permits to explore on the properties covered by our claims or permits to develop the projects.  Such delays could jeopardize financing, if any is available, which could result in having to delay or abandon work on some or all of the properties.
 
Risks associated with properties in South America.
 
We are currently pursuing investments and exploration projects in Chile and Peru. These investments and projects, as well as any other investments or projects made or undertaken in the future in other developing nations, are subject to the risks normally associated with conducting business in such countries, including labor disputes and uncertain political and economic environments, as well as risks of disturbances or other risks which may limit or disrupt the projects, restrict the movement of funds or result in the deprivation of contract rights or the taking of property by nationalization or expropriation without fair compensation laws or policies, foreign taxation, limitations on ownership and on repatriation of earnings, and foreign exchange controls and currency fluctuations.  Foreign investments may also be adversely affected by changes in United States laws and regulations relating to foreign trade, investment and taxation.  If our Company’s operations in a particular foreign country were halted, delayed or interfered with, our Company’s business could be adversely affected.
 
Our exploration activities on our mineral properties may not be commercially successful, which could lead us to abandon our plans to develop the property and our investments in exploration.
 
Our long-term success depends on our ability to establish commercially recoverable quantities of ore on our mineral properties that can then be developed into commercially viable mining operations. Mineral exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of mineral exploration is determined in part by the following factors:
 
 
-
identification of potential mineralization based on superficial analysis;
  
-
availability of government-granted exploration permits;
  
-
the quality of management and geological and technical expertise; and
 
-
the capital available for exploration.
 
Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, to develop processes to extract minerals, and to develop the mining and processing facilities and infrastructure at any chosen site. Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if it is unable to identify commercially exploitable mineral reserves. The decision to abandon a project may reduce the trading price of our common stock and impair our ability to raise future financing. We cannot provide any assurance to investors that we will discover or acquire any mineralized material in sufficient quantities on any of our properties to justify commercial operations. Further, we will not be able to recover the funds that we spend on exploration if we are not able to establish commercially recoverable quantities of precious metals or minerals on our properties.

Our business is difficult to evaluate because we have limited operating history.
 
In considering whether to invest in our common stock since there is only limited historical financial and operating information available on which to base your evaluation of our performance.  In addition, we have only recently acquired or will acquire our primary minerals exploration prospects located in South America with limited experience in early stage exploration efforts.
 
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, and we must be considered to be in the exploration stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses totaling $19,414,170 from inception to January 31, 2012. As of January 31, 2012, we had an accumulated deficit of $19,414,170 and incurred losses of $200,336 during three months ended January 31, 2012. 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 mineral exploration claims are more than we currently anticipate or (ii) exploration and or future potential mining costs for additional claims increase beyond our expectations;
 
 
 
32

 
 
ITEM 1A:  RISK FACTORS - continued
 
Costs associated with environment liabilities and compliance may increase with an increase in future scale and scope of operations.
 
We believe that our operations currently comply, in all material respects, with all applicable environmental regulations. However, we are not fully insured at the current date against possible environmental risks.
 
Any change in government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.
 
The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in South America or any other applicable jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
 
Our planned mineral exploration efforts are highly speculative; we have not yet established any proven or probable reserves.
 
Mineral exploration is highly speculative.  It involves many risks and is often nonproductive.  Even if we believe we have found a valuable mineral deposit, it may be several years before production is possible. During that time, it may become no longer feasible to produce those minerals for economic, regulatory, political, or other reasons.  Additionally, we may be required to make substantial capital expenditures and to construct mining and processing facilities.  As a result of these costs and uncertainties, we may be unable to start, or if started, to finish our exploration activities.  In addition, we have not to date established any proven or probable reserves on our mining properties and there can be no assurance that such reserves will ever be established.

Mining operations in general involve a high degree of risk, which we may be unable, or may not choose to insure against.
 
Our operations are subject to all of the hazards and risks normally encountered in the exploration, development and production of minerals. These include unusual and unexpected geological formations, rock falls, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, damage to life or property, environmental damage and possible legal liability.  Although we plan to take adequate precautions to minimize these risks, and risks associated with equipment failure or failure of retaining dams which may result in environmental pollution, there can be no assurance that even with our precautions, damage or loss will not occur and that we will not be subject to liability which will have a material adverse effect on our business, results of operation and financial condition.
 
Because of the inherent dangers involved in mineral exploration, there is a risk that we may incur liability or damages as we conduct our business.
 
The search for valuable minerals involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure against. At the present time, we may not have sufficient coverage to insure against these hazards.  Incurring such liabilities could result in our going out of business.
 
Going Concern Qualification
 
We have included a “going concern” qualification in the Consolidated Financial Statements to the effect that we are an exploration stage company and have no established sources of revenue. In the event that we are unable to raise additional capital and/or locate mineral resources, and ultimately develop proven and probable reserves, as to which in each case there can be no assurance, we may not be able to continue our operations. In addition, the existence of the “going concern” qualification in our auditor’s report may make it more difficult for us to obtain additional financing. If we are unable to obtain additional financing, you may lose all or part of your investment.
 
 
 
33

 
 
ITEM 1A:  RISK FACTORS - continued
 
Our Business is Affected by Changes in Commodity Prices.
 
Our ability to develop our mineral properties and the future profitability of our Company is directly related to the market price of certain minerals, including but not limited to copper. Our Company is negatively affected by the decline in commodity prices.
 
Risks Related to our Common Stock
 
Our Common Stock is a Penny Stock.
 
Our Common Stock is classified as a penny Stock, which is traded on the OTC Bulletin Board.  As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the Common Stock.  In addition, the “penny stock” rules adopted by the Securities and Exchange Commission subject the sale of the shares of the Common Stock to certain regulations which impose sales practice requirements on broker-dealers.  For example, broker-dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer’s account by obtaining information concerning the customer’s financial situation, investment experience and investment objectives.  The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission’s rules may result in the limitation of the number of potential purchasers of the shares of the Common Stock.  In addition, the additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market of our Company’s Common Stock.

Additional issuances of equity securities may result in dilution of our existing stockholders.
 
Our Articles of Incorporation authorize the issuance of 200,000,000 shares of common stock and 50,000,000 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, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control.
 
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
 
A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Since our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

ITEM 2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

                  None
 
ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

                  None.


 
34

 

ITEM 4: MINE SAFETY DISCLOSURES

                  Not applicable.

ITEM 5:  OTHER INFORMATION

                  None.

ITEM 6:  EXHIBITS

Exhibit No.
 
Description