2.	As further discussed in our Form 8-K filed with the SEC on July 10, 2008.

 

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·

On July 3, 2008, our Board of Directors and stockholders adopted the Loreto Resources Corporation 2008 Equity Incentive Plan (the “2008 Plan”) which reserves a total of 16,000,0003 shares of Common Stock for issuance under the 2008 Plan.

·

We have changed the address of our principal executive offices to Av. Pardo y Aliaga 699 Of. 802, Lima, Peru, and our telephone number to + (511) 212-1880.  Our website address is www.loretoresources.com.

·

Effective July 24, 20084, our Board of Directors declared a 2 for 1 forward stock split in the form of a dividend.  The record date for the stock dividend was July 18, 2008, and the payment date was July 23, 2008.

·

On July 21, 20084, Magdalena Cruz, our then President, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary, submitted to us a letter of resignation from her positions as President and Chief Executive Officer effective as of that date.  Ms. Cruz’s resignation from these positions did not result from any disagreement between her and us.

·

On July 21, 20084, we entered into an employment agreement with Luis Saenz pursuant to which Mr. Saenz has served as our President and Chief Executive Officer (“CEO”) beginning as of that date.  Mr. Saenz also became a member of our Board of Directors as of July 21, 2008.

·

In September, 2008, we completed the closing of a private placement of 8,100,000 shares of our Common Stock at a price of $0.25 per share (split-adjusted) pursuant to which we raised $1,980,313 net of offering expenses.

·

We established a wholly owned subsidiary organized in the Cayman Islands, Loreto Resources Corporation – Peru (“Loreto – CI”), to own our planned operating entities in South America.

·

We established an operating subsidiary in Peru as a wholly owned subsidiary of Loreto - CI, Loreto Resources Peru S.R.L. Compania Minera (“Loreto – Peru”), and opened and began staffing our offices in Lima, Peru;

·

Effective February 2, 20095, our Board of Directors declared a 2 for 1 forward stock split in the form of a dividend.  The record date for the stock dividend was January 26, 2009, and the payment date was January 30, 2009;

·

On March 9, 20096, Magdalena Cruz, our then Chief Financial Officer, Treasurer and Secretary, submitted to us a letter of resignation from those positions. Ms. Cruz’s resignation from these positions did not result from any disagreement between her and us;

 

·

Effective March 9, 20096, we appointed Eric E. Marin as our Interim Chief Financial Officer. Mr. Marin will serve in this capacity until such time as his replacement is appointed.  On March 9, 2009, our Board of Directors approved the Company’s acceptance of an engagement letter with Marin Management Services (“MMS”), of which Mr. Marin is the President, pursuant to which MMS provided us with internal controls review, financial reports review, and internal control assessment report services;

 

3.	Adjusted for the July 24, 2008, February 2, 2009 and January 29, 2010 2 for 1 stock splits.

5.	As further discussed in our Form 8-K filed with the Securities and Exchange Commission on January 29, 2009.

 

5

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·

On January 15, 20107, our Board of Directors declared an additional 2 for 1 forward stock split in the form of a dividend.  The record date for the stock dividend was January 25, 2010, the payment date was January 28, 2010 and the “Ex” date was January 29, 2010; and

·

We have begun identifying and investigating mining investment opportunities in various South American countries.

Additionally, during 2010, we expect to:

·

Appoint three to five additional independent director(s) to our Board of Directors;

·

Hire geologists and a mining engineer, to form a strong technical team, as well as additional finance and administrative personnel; and

·

Enter into a material agreement to acquire gold mining rights where most advantageous for the Company.  (Although we have not yet finalized decisions to pursue any particular opportunities, we have begun to identify and evaluate potential prospects.)

Plan of Operation

 

During the year ended December 31, 2009, we entered into a number of letters of intent relating to the acquisition of various mining properties in Peru and other South American countries.  For commercial reasons, we decided not to pursue any of the acquisitions proposed in these letters.

We plan to build a substantial gold mining company focused in select countries around the world, with a preliminary focus in South America. We will concentrate our efforts initially in South America, where, we believe, good gold mining opportunities exist. At the same time, we will not preclude investing in one or more gold mining opportunities in other countries around the world if we deem the relevant considerations merit our investment. We plan to focus on gold mining opportunities through a variety of transactions.

 

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Our strategy is to own and operate assets at various stages of the mining life cycle ranging from exploration to production.  Our initial plan is to acquire producing mining operations.  Mining activity in South America has been very active historically and the current volatile market conditions may present us with opportunities. We seek to be opportunistic due to these market conditions and to acquire mining assets with positive cash flow.  We are actively identifying and evaluating potential acquisitions of mining assets in Peru and throughout South America, generally, although we have not yet finalized decisions to pursue any such particular opportunities.

Our management currently consists of our Chief Executive Officer, Luis F. Saenz, who has more than 18 years in the mining industry, and a number of professional advisors.  Mr. Saenz is building our management team and has hired a number of consultants with technical, managerial and financial skills in the mining sector.  Management is overseen by our Board of Directors currently comprised of Mr. Saenz and our Chairman, Nadine C. Smith, who has more than 20 years experience working with development stage public companies in various industries, including the oil and gas exploration and production sector in South America.  During this year, we expect to add additional persons to our Board of Directors and additional management personnel with the backgrounds and relationships necessary to assist us in achieving our goals and objectives.

Competition

The mining industry is highly competitive. We face competition from both local and international companies in matters such as acquiring and developing metal deposits and mining operations and securing trained personnel. Many of these competitors have financial and technical resources that exceed ours, and we believe that these companies have a competitive advantage in these areas. Others are smaller, and we believe our technical and managerial capabilities give us a competitive advantage over those companies.

Sustainability and Environment

Loreto Resources is committed to being a socially and environmentally responsible company. We plan to do our best to minimize all impact on the environment and local communities in order to harvest sustainability for future generations. Additionally, we will strive to improve every aspect of performance and meet all reasonable community expectations in order to stimulate local economies and to ensure that benefits and opportunities from our future expected operations flow into such communities. For Loreto Resources, protecting the environment and maintaining respectful relationships with local communities is held as a core value.

Because we have not begun any exploration or mining activities, we are not subject to any environmental laws or regulations at this time.

Research and Development

We have not spent any amounts on research and development activities during either of the last two fiscal years.

 

7

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Employees

 

As of April 15, 2010 our only full time employees were our sole executive officer and one administrative assistant.  We also employ two independent consultants on a part time basis.

 

Expected Split-Off of Legacy Business

 

In connection with the discontinuation of our Legacy Business and the redirecting of our business strategy to focus on mining opportunities in South America, we have decided to split off and sell all of the assets and liabilities of the Legacy Business (the “Split-Off”) to Magdalena Cruz, our founding stockholder.  The Split Off is expected to close sometime during 2010. We will contribute all of the assets and liabilities relating to the Legacy Business, whether accrued, contingent or otherwise, and whether known or unknown, to a newly organized, wholly owned subsidiary (“Split-Off Sub”), and immediately thereafter will sell all of the outstanding capital stock of Split-Off Sub to Ms. Cruz in exchange for the 20,000,000 (post-January 2010 stock split) shares of our Common Stock previously surrendered by Ms. Cruz, all of our Common Stock that Ms. Cruz currently owns, 24,000,000 (post-January 2010 stock split) shares, and the forgiveness by Ms. Cruz (which was effected as of June 30, 2008) of the $13,200 in loans she previously granted to us.  It is expected that Ms. Cruz will indemnify us and our officers and directors against any third party claims relating to the Legacy Business. It is expected that Split-Off Sub and Ms. Cruz will also agree to release us and our officers, directors, stockholders, employees and agents from all liabilities incurred by Split-Off Sub or Ms. Cruz arising from, relating to, or in any way connected with, any fact, event, transaction, action or omission that occurred or failed to occur on or prior to the closing date of the Split-Off.  Following the Split-Off, Ms. Cruz will no longer be one of our stockholders.

ITEM 1A.   RISK FACTORS

Because we are a “smaller reporting company” as that term is defined by the SEC, we are not required to present risk factors at this time.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.      PROPERTIES

We currently rent approximately 1,600 square feet of executive office space in Lima, Peru.

ITEM 3.      LEGAL PROCEEDINGS

No legal or governmental proceedings are presently pending or, to our knowledge, threatened, to which we are a party.

 

8

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ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is currently listed on the OTC Bulletin Board under the symbol “LRTC.OB”.

 

For the period from April 30, 2007 to December 31, 2009, the table sets forth the high and low closing bid prices based upon information obtained from inter-dealer quotations on the OTC Bulletin Board without retail markup, markdown, or commission and may not necessarily represent actual transactions.  Although our Common Stock was approved for listing on the OTC Bulletin Board on May 2, 2007, there has been minimal trading to date:

Fiscal Year Ended December 31, 2009
Quarter Ended		High Bid				Low Bid
January 2, 2009 through January 30, 2009		$	0.07			$	0.07
February 2, 2009 through March 31, 2009 (1)		$	0.05			$	0.05
June 30, 2009		$	None			$	None
September 30, 2009		$	None			$	None
December 31, 2009		$	0.40			$	0.40

Fiscal Year Ended December 31, 2008
Quarter Ended		High Bid				Low Bid
March 31, 2008		$	0.05			$	0.05
June 30, 2008		$	0.05			$	0.05
July 1, 2008 through July 23, 2008		$	0.05			$	0.05
July 24, 2008 through September 28, 2008 (2)		$	0.07			$	0.07
December 31, 2008		$	0.07			$	0.07

 

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(1)	Pricing from February 2, 2009 reflects the January 2009 2:1 forward stock split.

(2)	Pricing from July 24, 2008 reflects the July 2008 2:1 forward stock split.

 

9

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Because our Common Stock is thinly traded, bid information on our Common Stock does not necessarily represent its fair market value.

 

Holders

 

As of April 15, 2010, we had 70,100,000 shares of our Common Stock issued and outstanding held by 11 shareholders of record.

 

Securities Authorized For Issuance Under Equity Compensation Plans

 

On July 3, 2008, our Board of Directors and stockholders adopted the 2008 Plan which reserves a total of 16,000,0008 shares of Common Stock for issuance under the 2008 Plan.  If an incentive award granted under the 2008 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2008 Plan. As of December 31, 2008, we had granted two awards under the 2008 Plan to our employees, exercisable for 6,320,000 shares of our Common Stock at an exercise price of $0.25 per share (number of shares and exercise price adjusted for February 2009 and January 2010 stock splits), vesting in three equal annual installments beginning in 2009.

Dividends

We have never declared any cash dividends with respect to our Common Stock.  Future payment of dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements, financial condition and other relevant factors.  Although there are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our Common Stock, we presently intend to retain future earnings, if any, for use in our business and have no present intention to pay cash dividends on our Common Stock.

Recent Sales of Unregistered Securities

On September 17, 2008, we completed our private placement of our Common Stock (the “Private Placement”).  We completed an initial closing of the Private Placement on September 9, 2008.  We offered the shares of Common Stock in the Private Placement at a price of $0.25 per share9. We received proceeds of $1,980,313, net of offering costs of $44,687 from the sale of 8,100,000 shares of our Common Stock in the Private Placement.  The Private Placement was conducted pursuant to the exemption from the registration requirements of the federal securities laws provided by Regulation D and Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and Section 4(2) of the Securities Act. The Common Stock was offered and sold only to “accredited investors,” as that term is defined by Rule 501 of Regulation D, and/or to persons who were neither resident in, nor citizens of, the United States. No commissions were paid in connection with the Private Placement. The shares of Common Stock sold in the Private Placement carry “piggyback” registration rights.

 

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8.	Adjusted for the July 24, 2008, February 2, 2009 and January 29, 2010 2 for 1 stock splits.

 

10

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On February 7, 2008, we received a $50,000 investment from an investor for the sale of 2,000,000 shares of our Common Stock at a price of $0.025 per share.

In July 2007 we issued 24,000,000 shares of our Common Stock to Magdalena Cruz in consideration of her services as our then President, Chief Executive Officer, Chief Financial Officer and sole director, in the amount of $0.0001875 per share for a total value of $4,500. The issuance of these shares to Ms. Cruz was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(2) of the Securities Act as a transaction not involving a public offering. The certificate evidencing the shares bears a legend restricting its transfer.

ITEM 6.      SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.

 

The following discussion and analysis of the Company’s financial condition and results of operations are based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.

 

Results of Operations

Fiscal year Ended December 31, 2009 and 2008

We are still in our exploration stage and have generated no revenues to date.

 

We incurred operating expenses of $2,048,527 and $705,220 for the years ended December 31, 2009 and 2008, respectively. These expenses consisted of general operating expenses incurred in connection with the day to day operation of our business and the preparation and filing of our periodic reports.

 

Our net losses for years ended December 31, 2009 and 2008 were $2,045,633 and $699,020, respectively.

 

We have generated no revenues and our net operating loss from inception through December 31, 2009 was $2,789,048.

 

11

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Liquidity and Capital Resources

Our cash and cash equivalents balance as of December 31, 2009 was $148,013.

 

The Private Placement

 

On September 17, 2008, we completed the Private Placement of our Common Stock for net proceeds to us of $1,980,313. We have used the proceeds of the Private Placement for working capital purposes.

We presently do not have any available credit, bank financing or other external sources of liquidity, other than the remaining net proceeds from the Private Placement. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We believe that, at our current level of operation, we have sufficient cash to meet our expenses for the next nine to twelve months.  However, we expect that we will need to obtain additional capital in order to execute our business plan, build our operations and become profitable. In order to obtain capital, we may need to sell additional shares of our Common Stock or debt securities, or borrow funds from private lenders or banking institutions. We have not made any decisions with respect to any such financing.  There can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.  If we are unable to raise additional funding as necessary, we may have to suspend our operations temporarily or cease operations entirely.

10.  Adjusted for the July 24, 2008, February 2, 2009 and January 28, 2010 two for one stock splits.

 

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ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE

As of December 31, 2007, Magdalena Cruz, our then sole officer and director, had loaned us $13,200 with no specific terms of repayment and no interest.  As of June 30, 2008, Ms. Cruz had forgiven the $13,200 in loans she granted the Company, with no interest or penalties, as partial consideration for the prospective Split-Off to Ms. Cruz of the Legacy Business formerly operated by Ms. Cruz.  Additionally, Ms. Cruz agreed to the cancellation on July 18, 2008, of 5,000,000 (40,000,000 shares on a post-split basis) shares of restricted Common Stock held by her, as additional consideration towards the Split-Off.

 

In July 2007, we issued 24,000,000 shares of our Common Stock to Magdalena Cruz in consideration of her services as our then President, Chief Executive Officer, Chief Financial Officer and sole director, in the amount of $0.0001875 per share for a total value of $4,500. See “Item 5. - Recent Sales of Unregistered Securities” above.

Nadine C. Smith, our Chairman, purchased 2,000,000 shares of our Common Stock in the Private Placement for $500,000.  Ms. Smith owns an additional 3,020,000 shares of our Common Stock.  Luis F. Saenz, our President and Chief Executive Officer, purchased 400,000 shares of our Common Stock in the Private Placement for $100,000.  For a discussion of the Private Placement, see “Item 5. - Recent Sales of Unregistered Securities” above.

Director Independence

We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time required to (and we do not) have our Board of Directors comprised of a majority of “Independent Directors.”

Our Board of Directors has considered the independence of its directors in reference to the definition of “independent director” established by the Nasdaq Marketplace Rule 5605(a)(2).  In doing so, the Board of Directors has reviewed all commercial and other relationships of each director in making its determination as to the independence of its directors.  After such review, the Board of Directors has determined that Ms. Smith qualifies as independent under the requirements of the Nasdaq listing standards.

 

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ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees.

 

The aggregate fees billed to us by our principal accountant for services rendered during the fiscal years ended December 31, 2009 and 2008 are set forth in the table below:

Fee Category		Fiscal year ended  December 31, 2009				Fiscal year ended  December 31, 2008
Audit fees (1)		$	22,070			$	15,400
Audit-related fees (2)			-				750
Tax fees (3)			-				-
All other fees (4)			-				-
Total fees		$	22,070			$	16,150

(1)

Audit fees consists of fees incurred for professional services rendered for the audit of consolidated financial statements, for reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in connection with statutory or regulatory filings or engagements.

(2)	Audit-related fees consists of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements, but are not reported under “Audit fees.”

(3)	Tax fees consists of fees billed for professional services relating to tax compliance, tax planning, and tax advice.

(4)	All other fees consists of fees billed for all other services.

Audit Committee’s Pre-Approval Practice.

 

We do not have an audit committee.  Our board of directors performs the function of an audit committee.  Section 10A(i) of the Securities Exchange Act of 1934, as amended, prohibits our auditors from performing audit services for us as well as any services not considered to be audit services unless such services are pre-approved by our audit committee or, in cases where no such committee exists, by our board of directors (in lieu of an audit committee) or unless the services meet certain de minimis standards.

 

24

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedules

The consolidated financial statements of Loreto Resources Corporation are listed on the Index to Financial Statements on this annual report on Form 10-K beginning on page F-1.

Exhibits

The following Exhibits are being filed with this Annual Report on Form 10-K:

 

Exhibit No.		SEC Report Reference Number		Description
3.1		3.1		Amended and Restated Articles of Incorporation of Registrant as filed with the Nevada Secretary of State on July 3, 2008 (1)
3.2		3.2		By-Laws of Registrant (2)
10.1		10.1		Employment Agreement dated July 21, 2008 by and between Loreto Resources Corporation and Luis F. Saenz (3)
10.2		10.2		Stock Option Agreement dated July 21, 2008 between Loreto Resources Corporation and Luis F. Saenz (3)
10.3		10.1		Form of Subscription Agreement (4)
10.4		10.4		2008 Equity Incentive Plan (5)
14.1		14		Code of Ethics (6)
21		*		List of Subsidiaries
31.1		*		Certification of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		*		Certification of Interim Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		*		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

 

 

25

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Exhibit No.		SEC Report Reference Number		Description
32.2		*		Certification of Interim Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

 

(1)	Filed with the SEC on July 10, 2008 as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 333-140148) on Form 8-K, which exhibit is incorporated herein by reference.

 

(2)	Filed with the SEC on January 23, 2007 as an exhibit, numbered as indicated above, to the Registrant’s registration statement (SEC File No. 333-140148) on Form SB-2, which exhibit is incorporated herein by reference.

(3)	Filed with the SEC on July 24, 2008 as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 333-140148) on Form 8-K, which exhibit is incorporated herein by reference.

 

(4)	Filed with the SEC on September 15, 2008 as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 333-140148) on Form 8-K, which exhibit is incorporated herein by reference.

 

(5)	Filed with the SEC on April 14, 2009 as an exhibit, numbered as indicated above, to the Registrant’s annual report (SEC File No. 333-140148) on Form 10-K, which exhibit is incorporated herein by reference.

 

(6)	Filed with the SEC on March 31, 2008 as an exhibit, numbered as indicated above, to the Registrant’s annual report (SEC File No. 333-140148) on Form 10-KSB, which exhibit is incorporated herein by reference.

 

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* Filed herewith.

** This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

In reviewing the agreements included as exhibits and incorporated by reference to this Annual Report on Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:

 

26

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•

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

•

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LORETO RESOURCES CORPORATION
Dated:  April 15, 2010	By:	/s/ Luis F. Saenz
		Luis F. Saenz, President and Chief Executive Officer
	By:	/s/ Eric E. Marin
		Eric E. Marin, Interim Chief Financial Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE		TITLE		DATE
/s/ Nadine C. Smith		Director		April 15, 2010
Nadine C. Smith
/s/ Luis F. Saenz		Director		April 15, 2010
Luis F. Saenz

 

 

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PART IV – FINANCIAL INFORMATION

 

ITEM 15.     FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-3
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 and for the Period from June 28, 2006 (inception) through December 31, 2009		F-4
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the period from June 28, 2006 (inception) to December 31, 2009		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 and for the Period from June 28, 2006 (inception) through December 31, 2009		F-7
Notes to Consolidated Financial Statements		F-8 – F-14

 

 

F-1

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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

To the Board of Directors

Loreto Resources Corporation

(An Exploration Stage Company)

Houston, Texas

We have audited the accompanying consolidated balance sheets of Loreto Resources Corporation, (“Loreto”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the two years then ended and the period from June 28, 2006 (inception) through December 31, 2009.  The financial statements for the period from June 28, 2006 (inception) through December 31, 2007 were audited by other auditors whose report expressed an unqualified opinion on those financial statements.  The financial statements for the period from June 28, 2006 (inception) through December 31, 2009 include no revenue and a net loss of $2,789,048.  Our opinion on the statements of operations, stockholder’ equity, and cash flows for the period from June 28, 2006 (inception) through December 31, 2009, in so far as it relates to amounts for prior periods through December 31,2007 is based solely on the report of the other auditor.  These consolidated financial statements are the responsibility of Loreto’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. Loreto is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Loreto’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Loreto as of December 31, 2009 and 2008 and the consolidated results of its operations and its cash flows for the two years then ended and the period from June 28, 2006 (inception) through December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Loreto will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, Loreto has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

MALONEBAILEY, LLP

www.malone-bailey.com

Houston, Texas

April 15, 2010

 

F-2

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LORETO RESOURCES CORPORATION

(An Exploration Stage Company)

Consolidated Balance Sheets

		As of				As of
		December 31				December 31
		2009				2008
ASSETS
Current Assets
Cash		$	148,013			$	1,517,269
Prepaid expenses			61,644				50,742
Total Current Assets			209,657				1,568,011
Other Assets
Deposits			5,628				5,628
TOTAL ASSETS		$	215,285			$	1,573,639
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	82,374			$	59,429
Accounts payable related party			83,332				-
Insurance financing			31,282				-
Total Current Liabilities			196,988				59,429
Total Liabilities			196,988				59,429
Stockholders' Equity
Preferred stock, ($0.001 par value, 10,000,000 shares
authorized; 0 shares issued and outstanding) as of
December 31, 2009 and December 31, 2008			-				-
Common stock, ($0.001 par value, 300,000,000 shares
authorized; 70,100,000 shares issued and outstanding)
as of December 31, 2009 and December 31, 2008			70,100				70,100
Additional paid-in capital			2,737,245				2,187,525
Deficit accumulated during exploration stage			(2,789,048	)			(743,415	)
Total Stockholders' Equity			18,297				1,514,210
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	215,285			$	1,573,639

 

 

F-3

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LORETO RESOURCES CORPORATION

(An Exploration Stage Company)

Consolidated Statements of Operations

For the Years Ended December 31, 2009 and 2008 and

For the Period from June 28, 2006 (Inception) through December 31, 2009

										June 28, 2006
		Year				Year				(inception)
		Ended				Ended				through
		December 31,				December 31,				December 31,
		2009				2008				2009
Revenues
Revenues		$	-			$	-			$	-
Total Revenues			-				-				-
General & Administrative Expenses			2,048,527				705,220				2,798,142
Loss from operations			(2,048,527	)			(705,220	)			(2,798,142	)
Other Income (Expense):
Interest expense			(887	)			-				(887	)
Interest income			3,781				6,200				9,981
Total Other Income			2,894				6,200				9,094
Net Loss		$	(2,045,633	)		$	(699,020	)		$	(2,789,048	)
Basic loss per share		$	(0.03	)		$	(0.01	)
Weighted average number of
common shares outstanding			70,100,000				85,974,044

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

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LORETO RESOURCES CORPORATION

(An Exploration Stage Company)

Consolidated Statements of Stockholders’ Equity

From June 28, 2006 (Inception) through December 31, 2009

														Deficit
														Accumulated
						Common				Additional				During
		Common				Stock				Paid-in				Exploration
		Stock				Amount				Capital				Stage				Total
Balance, June 28, 2006			-			$	-			$	-			$	-			$	-
Stock issued for cash on October 3, 2006
at $0.00025 per share			40,000,000				40,000				(30,000	)			-				10,000
Net loss,  December 31, 2006															(877	)			(877	)
Balance, December 31, 2006			40,000,000				40,000				(30,000	)			(877	)			9,123
Stock issued for cash on February 23, 2007
at $0.0005 per share			36,000,000				36,000				(18,000	)			-				18,000
Stock issued for services on July 2, 2007
at $0.0001875 per share			24,000,000				24,000				(19,500	)			-				4,500
Net loss,  December 31, 2007															(43,518	)			(43,518	)
Balance, December 31, 2007			100,000,000				100,000				(67,500	)			(44,395	)			(11,895	)
Stock issued for cash on February 7, 2008
at $0.025 per share			2,000,000				2,000				48,000				-				50,000
Debt forgiveness from related party on June 30, 2008			-				-				13,200				-				13,200

 

F-5

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LORETO RESOURCES CORPORATION

(An Exploration Stage Company)

Consolidated Statements of Stockholders’ Equity

From June 28, 2006 (Inception) through December 31, 2009

														Deficit
														Accumulated
						Common				Additional				During
		Common				Stock				Paid-in				Exploration
		Stock				Amount				Capital				Stage				Total
Restricted stock cancelled on July 18, 2008			(40,000,000	)			(40,000	)			40,000				-				-
Stock-based compensation on July 21, 2008			-				-				181,612				-				181,612
Stock issued for cash on September 17, 2008
at $0.25 per share, net of offering costs			8,100,000				8,100				1,972,213				-				1,980,313
Net loss,  December 31, 2008			-				-				-				(699,020	)			(699,020	)
Balance, December 31, 2008			70,100,000				70,100				2,187,525				(743,415	)			1,514,210
Stock-based compensation			-				-				549,720								549,720
Net loss, December 31, 2009			-				-				-				(2,045,633	)			(2,045,633	)
Balance, December 31, 2009			70,100,000			$	70,100			$	2,737,245			$	(2,789,048	)		$	18,297

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

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LORETO RESOURCES CORPORATION

(An Exploration Stage Company)

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2009 and 2008 and

For the Period from June 28, 2006 (Inception) through December 31, 2009

										June 28, 2006
		Year				Year				(inception)
		Ended				Ended				through
		December 31,				December 31,				December 31,
		2009				2008				2009
Cash Flows from Operating Activities
Net loss		$	(2,045,633	)		$	(699,020	)		$	(2,789,048	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock option expense			549,720				181,612				731,332
Common stock issued for services			-				-				4,500
Changes in operating assets and liabilities:
Prepaid expenses			34,691				(55,870	)			(21,679	)
Other assets			-				-				-
Accounts payable related party			83,332				-				83,332
Accounts payable			22,945				59,429				82,374
Net cash used in operating activities			(1,354,945	)			(513,849	)			(1,909,189	)
Cash Flows from Financing Activities
Issuance of common stock, net of offering costs			-				2,030,313				2,058,313
Repayment of insurance financing			(14,311	)			-				(14,311	)
Loan from stockholder			-								13,200
Net cash provided by (used in) financing activities			(14,311	)			2,030,313				2,057,202
Net Increase (Decrease) in Cash			(1,369,256	)			1,516,464				148,013
Cash at Beginning of Period			1,517,269				805				-
Cash at End of Period		$	148,013			$	1,517,269			$	148,013
Supplemental Disclosures of Cash Flow Information
Cash paid during year for:
Interest		$	-			$	-			$	-
Income taxes		$	-			$	-			$	-
Non-Cash Financing Transactions
Forgiveness of debt by stockholder		$	-			$	-			$	13,200

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7

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NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Loreto Resources Corporation (the Company) was incorporated on June 28, 2006 in Nevada under the name Loreto Corporation. The Company pursued its original business plan to create, market, and sell greeting cards to wholesalers and retail customers in shopping malls in its own planned retail shops (the “Legacy Business”). However, recently the Company decided to redirect its business focus and strategy toward identifying and pursuing business opportunities in the mining sector in South America, more specifically in Peru, with primary focus on gold mining projects across the exploration and development stages.  The Company is in the development stage in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 915 (formerly Statement of Financial Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by Development Stage Enterprises”).

On July 3, 2008, the Company amended its articles of incorporation to (1) change its name to Loreto Resources Corporation and (2) increase its authorized capital stock to 310,000,000 shares of which 300,000,00 shares are common stock, par value $0.001 per share (the “Common Stock”), and 10,000,000 shares are preferred stock, par value $0.001 per share.

On August 25, 2008, by unanimous written consent of its directors, the Company resolved to form a wholly-owned subsidiary in Peru, South America. This subsidiary will be owned through the Company’s wholly-owned Cayman Island subsidiary, Loreto Resources Corporation-Peru, which was organized on August 27, 2008.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 100% owned subsidiary, Loreto Resources Corporation-Peru., after elimination of all significant inter-company accounts and transactions.

Cash Equivalents 

The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. The Company had no cash equivalents at December 31, 2009 and 2008.  The Company may, in the normal course of operations, maintain cash balances in excess of federally insured limits.  At December 31, 2008, cash and cash equivalents exceeded the federally insured limits by $1,267,269.

Mineral Exploration and Development Costs

 

All exploration expenditures are expensed as incurred.  Significant property acquisition payments for active exploration properties are capitalized.  If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned.  Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a unit of production basis over proven and probable reserves.

Income Taxes

In accordance with SFAS No. 109, ASC 740 “Accounting for Income Taxes”, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

 

F-8

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Basic Earnings per Share 

Basic and diluted earnings or loss per share (EPS) amounts in the financial statements are computed in accordance SFAS No. 128, ASC 260 – 10 “Earnings per Share”, which establishes the requirements for presenting EPS.  Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. Basic EPS is computed by dividing net income/loss available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Weighted average number of shares used to calculate basic and diluted loss per share is considered the same as the effect of dilutive shares is anti-dilutive.

Fair Value of Financial Instruments

The Company estimates the fair value of financial instruments using the available market information and valuation methods.  Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange. As of December 31, 2009 and 2008, the carrying value of the assets and liabilities approximated fair value due to the short-term nature and maturity of these instruments.

 Stock Split

On February 2, 2009 and January 15, 2010, the Company implemented 2 for 1 stock splits.  The par value of the common stock was not affected by the stock splits.  Upon effectiveness of the stock splits, each stockholder received two share of common stock for every share of common stock owned as of February 2, 2009 and again on January 25, 2010, the stock splits’ record dates.  The stock split does not affect the number of common stock authorized for issuance.  All share and per share information has been retroactively adjusted to reflect the reverse stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the stock split as if it occurred on the first day of the first period presented.

Stock-based Compensation 

The Company determines the fair value of stock option awards granted to employees in accordance with FASB ASC Topic No. 718 – 10 (formerly SFAS No. 123(R), Share-Based Payment) and to non-employees in accordance with FASB ASC Topic No. 505 – 50 (formerly EITF 96-18 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”).

 

F-9

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Recent accounting pronouncements

The Company does not expect that the adoption of recently issued accounting pronouncements will have a material impact on its financial position, results, of operations or cash flows.

 NOTE 3. GOING CONCERN

During the year ended December 31, 2009, Loreto has not generated any revenue and therefore has been unable to generate cash flows sufficient to support its operations and has been dependent on equity financing. In addition to negative cash flow from operations, Loreto has experienced recurring net losses, and has an accumulated deficit of approximately $2.79 million as of December 31, 2009.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if Loreto is unable to continue as a going concern.

NOTE 4. STOCK TRANSACTIONS

On October 3, 2006 the Company issued 40,000,000 common shares to a director for $10,000.

On February 23, 2007 the Company issued 36,000,000 common shares to 36 non-affiliated stockholders for a total of $18,000 pursuant to a SB-2 Registration Statement.

On July 2, 2007, the Company issued 24,000,000 common shares to Magdalena Cruz, President and CEO, in exchange for her services valued at $4,500.

On February 7, 2008, the company issued 2,000,000 common shares to Milestone Enhanced Fund Ltd. for $50,000.

On July 18, 2008, 40,000,000 common shares held by the director were cancelled.

On each of July 18, 2008, January 15, 2009, and January 15, 2010, the Company declared two for one (2 for 1) forward stock splits on each common share.  All share and per share amounts have been adjusted retroactively from inception to reflect these splits.

In September, 2008, the Company issued 8,100,000 shares through a private placement to various individuals and entities at the price of $0.25 per share.  Total proceeds were $1,980,313, net of offering costs of $44,687.

 

NOTE 5. OPTIONS AND WARRANTS

 

The 2008 Equity Incentive Plan

The Company’s 2008 Equity Incentive Plan (the “2008 Plan”) provides for the grant of incentive stock options to employees of the Company and of an affiliate or subsidiary of the Company and non-statutory stock options, restricted stock and stock appreciation rights to employees, directors and consultants of the Company and of an affiliate or subsidiary of the Company. A maximum of 16,000,000 shares of common stock are available for issuance under the 2008 plan. As of December 31, 2009, options had been granted under the 2008 Plan exercisable for an aggregate of 6,960,000.  Options granted under the 2008 Plan are generally granted with a strike price equal to market value and a ten year term.  The outstanding options vest over periods ranging from three months to three years.

Effective July 21, 2008, the President and CEO of the Company was granted an option to purchase 6,200,000 shares of Common Stock with a fair value of $1,237,539.  The options are exercisable at $0.25 per share, expire in ten years and 1/3 per year for 3 years.

On December 8, 2008, a consultant was granted 120,000 options with a fair value of $20,416.  The options are exercisable at $0.25 per share, expire in 10 years and vest over 3 months.

 

F-10

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On January 1, 2009, the Company granted 180,000 options to a consultant with a fair value of $30,546.  The options are exercisable at $0.25 per share, vest equally over 3 months and expire in 10 years.

On March 8, 2009, the Company granted 120,000 options to a consultant with a fair value of $21,224.  The options are exercisable at $0..25 per share, vest equally over 3 months and expire in 10 years.

On April 1, 2009, the Company granted 120,000 options to a consultant with a fair value of $21,108.  The options are exercisable at $0.25 per share, vest equally over 2 months and expire in 10 years.

On June 1, 2009, the Company granted options to purchase (i) 60,000 shares to a consultant with a fair value of $10,754, and (i) 40,000 shares to a consultant with a fair value of $7,053.  The 60,000 options are exercisable at $0.25 per share, vest equally over 3 months and expire in 10 years. The 40,000 options are exercisable at $0.25 per share, vest over 1 month and expire in 10 years.

On September 8, 2009, the Company granted 120,000 options to a consultant with a fair value of $21,683.  The options are exercisable at $0.25 per share, vest equally over 3 months and expire in 10 years.

 

F-11

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Stock option activity summary is presented in the table below:

		Number of Shares				Weighted- average Exercise Price				Weighted- average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at December 31, 2007			—				—				—				—
Granted			6,320,000				.25				8.56				—
Exercised			—				—				—				—
Expired/Forfeited			—				—				—				—
Outstanding at December 31, 2008			6,320,000				.25				8.56				—
Granted			640,000			$	.25				9.28				—
Exercised			—				—				—				—
Expired / Forfeited			—				—				—				—
Outstanding at December 31, 2009			6,960,000			$	.25				8.63			$	—
Exercisable at December 31, 2009			2,706,667				.25				8.69			$	—

As of December 31, 2009, 2,706,667 options are vested or exercisable.  During the year ended December 31, 2009, 640,000 options were granted with a weighted average grant date fair value of $0.25.  During the year ended December 31, 2009, the Company recognized stock-based compensation expense of $549,720 related to stock options.  As of December 31, 2009, there was approximately $640,808 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 1.55 years.

The fair value of the options granted during the twelve months ended December 31, 2009 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Market value of stock on grant date		$	.25	(1)
Risk-free interest rate			1.87%-3.28%	%
Dividend yield			0.00	%
Volatility factor			118.98%-129.45	%
Weighted average expected life		5.5		years (2)
Expected forfeiture rate			5	%

(1)	The market value of the stock was calculated based on the July 25, 2008 private placement that sold 8,100,000 shares at $0.25 per share.

(2)	Due to a lack of stock option exercise history, the Company uses the simplified method under SAB 107 to estimate expected term.

There are no warrants outstanding at December 31, 2009.

NOTE 6.  RELATED PARTY TRANSACTIONS

As of June 30, 2008, Magdalena Cruz, the sole officer, director and stockholder of the Company, forgave loans to the Company totaling $13,200, which was recorded as additional paid in capital.

As of July 18, 2008, 40,000,000 shares of restricted Common Stock held by Ms. Cruz were cancelled.

Effective July 21, 2008, Ms. Cruz resigned from her position as director of the Company, Luis Saenz was appointed the Company’s director, President and Chief Executive Officer. He was granted an option to purchase 6,200,000 shares of Common Stock at $0.25, vesting over three years.

 

F-12

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During the year ended December 31, 2008, Nadine C. Smith, our Chairman, purchased 2,000,000 shares of our common stock for $500,000.  Ms. Smith owns an additional 23,020,000 shares of our common stock.  Luis F. Saenz, our President and Chief Executive Officer, purchased 400,000 shares of our common stock for $100,000.

NOTE 7. INCOME TAXES

Loreto Resources Corporation, files a U.S. Federal income tax return.  The Company’s foreign subsidiary files income tax returns in its jurisdictions. The components of the consolidated taxable net loss before income tax benefit are as follows:

		2009			2008
U.S.		$	912,375		$	392,464
Non-U.S.			583,537			169,340
Total			1,495,912			561,804

The components of the Company’s deferred tax assets at December 31, 2009 and 2008 are as follows: 

 

		2009				2008
Deferred tax assets and liabilities:
Loss carry-forwards		$	508,610			$	175,919
Stock-based compensation			186,904				61,748
Total deferred tax assets			695,515				237,667
Valuation allowance			(695,515	)			(237,667	)

 

As of December 31, 2009, the Company had generated U.S. net operating loss carry-forwards of $1,304,842, which expire from 2027 to 2029 and net loss carry-forwards in certain non-U.S. jurisdictions of $367,742. These net operating loss carry-forwards are available to reduce future taxable income. However, a, change in ownership, as defined by federal income tax regulations, could significantly limit the Company’s ability to utilize its U.S. net operating loss carry-forwards. Additionally, because federal tax laws limit the time during which the net operating loss carry-forwards may be applied against future taxes, if the Company fails to generate taxable income prior to the expiration dates it may not be able to fully utilize the net operating loss carry-forwards to reduce future income taxes. As the Company has had cumulative losses and there is no assurance of future taxable income, valuation allowances have been recorded to fully offset the deferred tax asset at December 31, 2009 and 2008.

 

F-13

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NOTE 8. COMMITMENTS AND CONTINGENCIES

Leases

The Company has signed a three-year non-cancellable lease for approximately 1,600 square feet of office space in Lima, Peru to be paid in U.S. dollars, subject to a three-percent annual increase, expiring on September 30, 2011. 

 

The Company is amortizing this lease as it is paid rather than expensing it on a straight line basis. The difference between the two methods is not material.

Year		Total Lease Payment Amount
2010		$	41,529
2011		$	31,147

 

NOTE 9. GENERAL & ADMINISTRATIVE EXPENSES

The following table shows the major components of general and administrative expenses for the year ended December 31, 2009 and 2008:

		2009				2008
Compensation		$	892,362			$	285,777
Professional Fees (Accounting, Legal and Consulting)			766,318				164,721
Other general & administrative expenses			389,847				254,722
		$	2,048,527			$	705,220

NOTE 10. SUBSEQUENT EVENTS

On January 15, 2010, the Company’s Board of Directors approved a 2-for-1 forward split (the “Forward Split”) of the Company’s common stock, par value $0.001 per share.  The declaration date for the stock split was January 15, 2010, the record date was January 25, 2010, and the ‘ex” date is January 29, 2010.

The Forward Split will entitle each Loreto shareholder of record on January 25, 2010 to receive one additional share of common stock for each one share owned. The stock split does not affect the number of common stock authorized for issuance.  All share and per share information has been retroactively adjusted to reflect the reverse stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the stock split as if it occurred on the first day of the first period presented (see Note 2).

The Company evaluated subsequent events through April 15, 2010.

 

F-14

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