Note 1: The former stock split for previously issued common shares resulted in negative Additional Paid-In Capital. This has been charged to Accumulated Deficit as an Appropriation of Capital. The stock split has been accounted for on a retrospective basis.
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
1.
|
Organization, Nature of Business, Going Concern and Management Plans
|
Organization and Nature of Business
Trio Resources, Inc. (“Trio
Resources” or the “Company”), formerly Allied Technologies Group, Inc. (“Allied”), was incorporated
in the state of Nevada on September 22, 2011.
On December 14, 2012, Allied
entered into a share exchange agreement (the “Share Exchange Agreement”) with TrioResources AG Inc. (“Trio or
TrioResources AG Inc.”), pursuant to which Trio Resources acquired 100% of the issued and outstanding equity securities of
Trio (the “Share Exchange”). As a result of the Share Exchange, Trio became the wholly-owned subsidiary of Trio Resources
and the Trio shareholders became the controlling shareholders of Trio Resources, owning an aggregate of 66.15% of the issued and
outstanding shares of common stock of Trio Resources. The acquisition was accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions whereby the consolidated financial statements subsequent to the date of the acquisition
are presented as a continuation of TrioResources AG Inc. Under reverse acquisition accounting TrioResources AG Inc. (legal subsidiary)
will be treated as the accounting parent (acquirer) and Trio Resources, Inc. (legal parent) will be treated as the accounting subsidiary
(acquiree). All outstanding shares have been restated to reflect the effect of the reverse acquisition, which includes one for
one issuance of Trio Resources shares to the TrioResources AG Inc. shareholders.
Under the terms of the Share
Exchange, the former sole director, officer, and principal shareholder of Trio Resources (the “Principal Shareholder”),
cancelled all 1,500,000 shares of common stock that he owned, which constituted 57.9% of the issued and outstanding shares of common
stock prior to the Share Exchange.
On December 14, 2012, the Company
filed a Certificate of Amendment of its Articles of Incorporation (the “Charter Amendment”) with the Secretary of State
of Nevada to (1) change its name from Allied Technologies Group, Inc. to Trio Resources, Inc. (the “Name Change”) and
(2) increase its total authorized shares of common stock, from 75,000,000 shares to 400,000,000 shares (the “Authorized Share
Increase”). Additionally, as a condition to close the Share Exchange, the Company’s Board of Directors approved and
authorized the Company to take the necessary steps to effect a forward stock split of the issued and outstanding shares of common
stock, such that each lot of one (1) issued and outstanding share of common stock shall be automatically changed and converted
into one hundred (100) shares of common stock, payable to all holders of record of the common stock as of December 31, 2012 (the
“Forward Stock Split”).
The Share Exchange was accounted
for as a reverse takeover/recapitalization effected by a share exchange, wherein Trio is considered the acquirer for accounting
and financial reporting purposes. The effective date of the Share Exchange Agreement is December 14, 2012 and all of the necessary
accounting adjustments were fully reflected in these unaudited condensed interim consolidated financial statements.
The Company is considered to
be an exploration stage company as defined under U.S. Securities and Exchange Commission (“SEC”) Guide 7 (a) (4) (i)
Description of Property by Issuers Engaged or to be Engaged in Significant Mining. The Company’s principal business is the
exploration of mineral resources on the Company’s existing property and any new properties it may acquire and processing
of mineralized material on its property.
Going Concern
The unaudited condensed consolidated interim financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception on May 16, 2012 to December 31, 2013, the Company has not generated significant revenue. As at December 31, 2013, the Company has a working capital deficiency of $2,403,223 and has accumulated deficit during the exploration stage of $3,016,920. To date, the Company has not generated positive cash flows from operations and has primarily relied upon debt and equity financing from third parties and related parties to finance its operations. The Company anticipates that its future mill operations will generate positive cash flows in fiscal 2014 provided that it is successful in obtaining additional financing in the foreseeable future. The Company has negotiated a $500,000 Draw Down facility (Note 8) with Seagel Investments Corp. of which $425,000 has been drawn as at December 31, 2013. On November 27, 2013, the Company entered into a Draw Down Facility in the amount of $335,000 with a lender of which $50,000 has been obtained as at December 31, 2013.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
1.
|
Organization, Nature of Business, Going Concern and Management Plans (continued)
|
Going Concern (continued)
The Company is also pursuing additional
financing. However, there can be no assurance that the additional financing shall be available on terms or conditions acceptable
to the Company. These factors raise substantial doubt about its ability to continue as a going concern. No adjustment relating
to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the unaudited
condensed consolidated interim financial statements, which could be material if the current business plan is not successful and
when the Company is not able to continue as a going concern.
Acquisition
On December 14, 2012, the Company
completed a Share Exchange transaction pursuant to which it acquired 100% of the issued and outstanding equity securities of TrioResources
AG Inc., which became its wholly owned subsidiary. Part of the consideration was a payment of $250,000, which was expensed during
the year ended September 30, 2013, to Ihar Yaravenka, the former, sole officer, director and controlling shareholder for him to
surrender and cancel 1,500,000 shares of common stock of the Company. As at the close of the Share Exchange, the Company had no
assets or liabilities and it was a public shell company.
TrioResources AG Inc. was incorporated
on May 16, 2012 under the laws of the province of Ontario, Canada, is headquartered in Toronto, Ontario, Canada. This company is
an exploration stage company intending to focus on exploration, milling, and processing of mineralized material located on its
property.
Pursuant to the terms and conditions
of the Share Exchange Agreement, the Company acquired 100% of the capital stock, 2,130,000 common shares, of TrioResources AG Inc.
in exchange for the issuance of 2,130,000 shares of common stock of the Company. The result is that the shareholders of TrioResourcses
AG Inc. own 66.15% of the total shares of the Company outstanding effective the date of the Share Exchange Agreement.
The Share Exchange was accounted
for as a reverse takeover/recapitalization effected by a share exchange, wherein TrioResources AG Inc. is considered the acquirer
for accounting and financial reporting purposes.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”) for interim financial information and the rules and regulations of the SEC and are expressed
in US dollars. Accordingly, the unaudited condensed consolidated interim financial statements do not include all information and
footnotes required by US GAAP for complete annual consolidated financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring adjustments,
considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected
for the year ending September 30, 2014 or for any other interim period. The unaudited condensed consolidated interim financial
statements should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto
as of and for the year ended September 30, 2013.
The Company’s fiscal year-end is
September 30. The Company’s functional currency is Canadian (“CDN”) dollars. The Company’s reporting currency
is the U.S. dollar. Assets and liabilities are translated into the U.S. dollar using the exchange rates at each balance sheet date.
Revenue and expenses are translated at average rates prevailing during the reporting period. Stockholders’ equity is translated
at historical rates. Adjustments resulting from translating the condensed consolidated interim financial statements into the U.S.
dollar are recorded as a separate component of accumulated other comprehensive income (loss) in the statement of stockholders’
deficiency.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
2.
|
Summary of Significant Accounting Policies (continued)
|
Use of Estimates
The preparation of the unaudited condensed
consolidated interim financial statements in conformity with US GAAP 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 unaudited
condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates
may include those pertaining to valuation of inventories, stockpiles and mineralized material, the estimated useful lives and valuation
of plant and equipment, mineral rights, deferred tax assets, convertible debt notes, derivative liabilities, reclamation liabilities,
stock-based compensation and payments, and contingent liabilities. Actual results could materially differ from those estimates.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company
as of the specified effective date.
Effective October 1, 2013, the Company
adopted the amended guidance in ASC Topic 210, Balance Sheet. The amended guidance addresses disclosure of offsetting financial
assets and liabilities. It requires entities to add disclosures showing both gross and net information about instruments and transactions
eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement.
The updated disclosures have been implemented retrospectively and do not impact our financial position or results of operations.
Effective October 1, 2013, the Company adopted the amended guidance in ASC Topic 220, Comprehensive Income. The amended guidance
requires entities to disclose additional information about reclassification adjustments, including (1) changes in accumulated other
comprehensive income by component and (2) significant items reclassified out of accumulated other comprehensive income by presenting
the amount reclassified and the individual income statement line items affected. The updated disclosures have been implemented
prospectively and do not impact our financial position or results of operations.
|
|
3.
|
Property and Equipment:
|
On June 15, 2012, the Company acquired
property and equipment from 2023682 Ontario Inc., a commonly-controlled related party (see Note 6). The cost of these acquired
assets was recorded at the same historical carrying values reflected in the accounts of 2023682 Ontario Inc.
Equipment and buildings consist of the following:
|
|
|
December 31, 2013
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
217,051
|
|
|
$
|
224,067
|
|
|
Less accumulated depreciation
|
|
|
15,249
|
|
|
|
14,057
|
|
|
Net equipment
|
|
|
201,802
|
|
|
|
210,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
32,195
|
|
|
|
32,363
|
|
|
Less accumulated depreciation
|
|
|
3,779
|
|
|
|
3,497
|
|
|
Net buildings
|
|
|
28,416
|
|
|
|
28,866
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
230,218
|
|
|
$
|
238,876
|
|
Depreciation expense was $2,051 and $3,336
for the period ended December 31, 2103 and 2012, respectively.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed
in US Dollars
|
|
3.
|
Property and Equipment: (continued)
|
Equipment and buildings are depreciated
on a straight line basis, once they are put in use, over their estimated useful lives:
|
|
·
|
Equipment 15 years; and
|
Patented Claims:
At December 31, 2013 and September
30, 2013, the Company also has mining property patent claims of $9,590 and $9,900, respectively (CDN$ 10,200 as at December
31, 2013 and September 30, 2013). These patent claims provide the Company with mining rights to certain land located in Coleman
Township, District of Temiskaming, Ontario, Canada. On February 4, 2013 the Company made its first shipment of mineralized
material for refining.
The patented claim was purchased in May
2012, in a related party transaction at CDN$10,200 (4,000MT of concentrate and book value of related party). No amortization
has been charged since the date of purchase as amortization is based on units of production and the Company’s production
volume up to December 31, 2013 is very insignificant.
|
|
4.
|
Stockholders’
Deficit:
|
The Company’s authorized capital
consists of 400,000,000 shares of common stock. At December 31, 2013, there were 339,162,500 shares of common stock issued
and outstanding (September 30, 2013 - 338,650,000). (See Note 1 - Acquisition).
Pursuant to a consulting agreement entered
on May 17, 2012 with Seagel Investments Corp., the Company issued to Seagel Investments Corp., 16,100,000 common shares which were
valued at $26,833, being the fair value of the common shares. The Company recorded this amount as a consulting expense during the
previous year ended September 30, 2013.
In January 2013 the Company entered into
two consulting agreements which required the issuance of shares as part of the consideration. The first contact is for a 24 month
term for 250,000 common shares issued for a total value of $137,500. The second contract is for a 6 month term for 300,000 common
shares issued for a total value of $165,000. Both contracts were signed at the beginning of January 2013. The Company has recorded
an expense in the amount of $25,938 during the three months period ended December 31, 2013 (2012 – Nil) and cumulative from
inception to date $225,796 and $76,702 has been included in prepaid expenses and other receivables balance as of December 31, 2013
(September 30, 2013 - $99,687). The remaining value of the share-based considerations will be amortized over the term of the respective
agreements as services are performed.
Effective December 31, 2012 the number
of shares outstanding were forward-split 100 shares for each share of record prior to the split (“Stock Split”).
On December 13, 2013, the Company issued
437,500 shares in respect of consulting services valued at $0.02 per share (being the trading price) amounting to $8,750, which
was expensed during the current period ended December 31, 2013.
On December 13, 2013, the Company issued
75,000 shares in respect of Stairs/Option Joint Venture Agreement. These shares were valued at $0.02 per share (being the trading
price) and recorded as expense in the period.
The total amount of the common shares outstanding
was 339,162,500 as of December 31, 2013 comprising of 229,612,500 restricted shares and 109,550,000 non-restricted shares. The
number of common shares outstanding as at September 30, 2013 was 338,650,000 comprising of 229,100,000 restricted shares and 109,550,000
non-restricted shares.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
4.
|
Stockholders’
Deficit: (continued)
|
The restricted shares have been issued
to various parties through private placement, as start-up capital or as consideration for professional services under the terms
and conditions agreed with each party. These restricted shares will be available for sale under SEC Rule 144 when the conditions
have been met regarding the holding period, trading volume formula and restrictive legends.
|
|
5.
|
Earnings
(Loss) Per Share (“EPS”):
|
FASB ASC 260, Earnings Per Share provides
for calculations of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution
and is computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an
entity similar to fully diluted earnings per share. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
The weighted average number of shares outstanding for the period ended December 31, 2013 and 2012 were 338,694,583 and 273,459,140,
respectively.
|
|
6.
|
Related
Party Transactions:
|
On June 15, 2012, the Company purchased certain assets from 2023682 Ontario Inc., a related party in which the Company’s CEO was the sole director of 2023682 Ontario Inc. The value of the assets purchased by the Company was carried over at the historical carrying amounts that were recorded by the related party. The purchase consideration consisted of cash of CDN $100,000 ($99,510) and a promissory note in the amount of CDN $500,000 ($485,300). Because the purchase was from a commonly controlled related party, the excess of the purchase price over the carrying value of the assets purchased has been reflected as a deduction against Stockholders’ Deficit, equivalent to a distribution of equity to the stockholder. The assets purchased and consideration given is as follows:
|
Property and equipment
|
|
$
|
88,596
|
|
|
Patent claims
|
|
|
10,374
|
|
|
Inventory
|
|
|
1,770
|
|
|
Total assets purchased
|
|
|
100,740
|
|
|
|
|
|
|
|
|
Purchase price
|
|
|
(610,260
|
)
|
|
|
|
|
|
|
|
Discount on note payable (Note 7)
|
|
|
(210,415
|
)
|
|
|
|
|
|
|
|
Deduction in shareholders’ equity (deficit)
|
|
$
|
(299,105
|
)
|
This transaction was accounted for as a
transfer between entities under common control, and the cost of these assets is based on the transferor’s carrying value
of the asset. Management determined that the assets acquired did not meet the definition of a “business” as defined
by accounting standards, or as a “predecessor business”, as defined in SEC rules.
Consulting fees paid to Mr. J. Duncan Reid
(Director) for the period ended December 31, 2013 were Nil (2012: $20,000).
As at December 31, 2013, the Company had
advanced to 2023682 Ontario Inc. $63,617 (September 30, 2013 - $65,673). The amount is unsecured, non-interest bearing and is recorded
as a loan receivable with no specific terms of repayment.
Loan payable represent unsecured and interest
free financing provided by a third party. These loans are repayable on demand.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
8.
|
Convertible
draw Down Loan Payable:
|
The Company also entered into a
one-year Draw Down Facility, dated as of November 1, 2012, with Seagel Investment Ltd. as lender, in the maximum amount of
$500,000. The facility bear interest at the rate of 10% per annum. The Company may from time to time request draw downs on
this convertible debt facility subject to the discretion of the lender. The term of the Draw Down Facility is for one year
during which the Company may draw down up to $500,000.
After the one year term, any outstanding
principal and accrued interest shall be converted into a convertible note with an additional term of one (1) year. Pursuant
to the terms of this Draw Down Facility, this convertible debt obligation may, at the option of the creditor, be converted
into the common shares of the Company at the lower of $1.00 per share, the initial listing price of $0.55 less 20% discount
of the price of the public shares, or any financing that is done by the Company by way of a registration statement. The
Company has an option to convert at whichever price is the lowest of all options above. Through the completion of the reverse
takeover of Allied Technologies Group Inc. on December 14, 2012 the Company became public. As at December 31, 2013 the amount
outstanding under the Draw Down Facility was $425,000 (September 30, 2013 - $425,000).
|
|
9.
|
Convertible
Note Payable – Related Party:
|
As of December 31, 2013, the Company has
a convertible note payable of $470,100 (CDN $500,000) to 2023682 Ontario Inc. This note is due two years from the date of issue
(June 15, 2012) and accrues interest at 3% per annum. The terms of the convertible notes specified that should the Company be successful
in a ‘going public’ transaction it is convertible into common shares of the Company at the weighted average of the
Company’s share price based on the average 5 day bid price, within 30 days of the Company going public. If there are no trades
on any given day in the first 30 days after the Company’s stock begins to trade then the bid price will be used in determining
the weighted average price. This convertible note may be repaid at any time without penalty or bonus. This convertible note is
interest free for the first 12 months post-closing of the asset purchase, thereafter; it accrues interest at the rate of 3% per
annum.
This note was discounted resulting in an
effective interest rate of 27%. As a result, a $210,415 discount to the note was recorded which is being amortized to as accretion
expense over the term of the note. The Company completed its going public transaction and became public on December 14, 2012, the
first trades took place on January 11, 2013 at $0.55 per share; however, the holder has not requested for conversion into shares.
This has been classified as non-current as management has obtained a waiver for the next 12 months.
Accretion expense of $24,642 has been recognized
during the first quarter ended December 31, 2013 (2012 - $22,483), which is included in interest expense in the unaudited condensed
interim consolidated statements of operations.
|
|
10.
|
Convertible
Notes Payable:
|
|
|
|
December 31, 2013
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes (a)
|
|
$
|
946,910
|
|
|
$
|
966,363
|
|
|
Convertible Note (b)
|
|
|
676
|
|
|
|
-
|
|
|
|
|
|
947,586
|
|
|
|
966,363
|
|
|
Current portion
|
|
|
(946,910
|
)
|
|
|
(482,655
|
)
|
|
|
|
$
|
676
|
|
|
$
|
483,708
|
|
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
10.
|
Convertible
Notes Payable: (continued)
|
|
|
(a)
|
The total convertible notes of $946,910 issued and outstanding as at December 31, 2013 are classified
as current in accordance with their terms of maturity (Outstanding balances as at September 30, 2013 were $482,655 classified as
current and $483,708 as non-current).
|
The details of the convertible
notes outstanding as at December 31, 2013 are as follows:
On September 30, 2012, the Company
entered into convertible notes with Incendia Management Group Inc. in the amount of CDN $266,445 (US $258,675), Siderion Capital
Group Inc. in the amount of CDN $295,163 (US $286,415), and Seagel Investment Corp. in the amount of CDN $49,000 (US $47,559).
Each of these September 30, 2012 convertible notes have a two (2) year term and have an interest rate of 10% per annum.
On October 31, 2012 the Company
entered into convertible notes with Incendia Management Group Inc. in the amount of CDN $7,000 (US $6,794), Siderion Capital Group
Inc. in the amount of CDN $20,000 (US $19,412), Seagel Investment Corp. in the amount of CDN $2,500 (US $2,427), and Seagel Investment
Ltd. in the amount of US $345,081 . Each of these October 31, 2012 convertible notes has a term of two (2) years and bears an interest
rate of 10% per annum.
All of the convertible notes
referred above may be converted, at any time at the option of the holder, into the common shares of the Company, or in the event
that Debtor goes public into the shares of the public company at the lower of $1.00 per share, the initial listing price of $0.55
less 20% discount of the price of the public shares, or any financing that is done by the Company by way of a registration statement.
These convertible notes and
Drawn Down Loan Payable are secured against the assets of the TrioResources AG Inc. until the Company becomes publically traded
and the convertible notes are converted to shares or the convertible notes are redeemed. All of the convertible notes and the Draw
Down Facility remain outstanding and none have been converted to common shares.
The convertible notes may be
repaid at any time without penalty or bonus. Subsequent to year end and up to the date of this filing, none of the above notes
were either paid or converted into common stocks of the Company.
The total amount of interest
in respect of all convertible notes that has been expensed during the quarter ended December 31, 2013 is $39,555 (2012: $24,065).
|
|
(b)
|
On November 27, 2013, the Company entered into a convertible
promissory note agreement (the “Note”) whereby the investor may purchase up to $335,000 face value convertible notes.
The consideration is equal to $300,000 resulting in an original issue discount of $30,000 (approximately 10%). The initial consideration
(“Initial Tranche”) paid by the lender to the Company amounted to $50,000 (face value of $55,833). As of December
31, 2013, no additional consideration was paid. If the Company elects to repay the consideration received within 90 days from
the effective date of the consideration, there is no interest due on the note. However, if the consideration is not repaid within
90 days of the effective date, there is a one-time interest charge equal to 12% of the outstanding principal balance. The note
is convertible into common stock at the lender’s option, at the lower (a) $0.10 or (b) 60% of the lowest trade price in
the 25 trading days previous to the conversion. The Note provides for redemption upon the occurrence of an event of default. Default
conditions include non-servicing of the debt and certain other credit risk related conditions. Default conditions also include
certain equity indexed events including failures to file public information documents and failure to comply with Rule 144 requirements.
The remedy to the lender for an event of default is the greater of (i) the outstanding balance of the Note divided by the conversion
price on the date the default amount is either demanded or paid in full, whichever has a lower conversion price multiplied by
the VWAP on the date the default amount is either demanded or paid in full, whichever has a higher VWAP, or (ii) 150% of the outstanding
balance of the note.
|
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
10.
|
Convertible
Notes Payable: (continued)
|
Accounting Considerations
The Company has accounted
for the Initial Tranche issued for cash as a financing transaction, wherein the net proceeds that were received were
allocated to the financial instrument issued. Prior to making the accounting allocation, the Company evaluated the Initial
Tranche under ASC 815 Derivatives and Hedging (“ASC 815”). ASC 815 generally requires the analysis embedded terms
and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances
where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The
material embedded derivative features consisted of the conversion option and certain redemption rights that were indexed to
equity risks (“Default Put”). The conversion option along with the redemption features bearing risks of equity,
were not clearly and closely related to the host debt agreement and required bifurcation. Current accounting principles that
are also provided in ASC 815 do not permit an issuer to account separately for individual derivative terms and features that
require bifurcation and liability classification (see Note 11). Rather, such terms and features must be and were bundled
together and fair valued as a single, compound embedded derivative.
Based on the previous conclusions,
the Company allocated the cash proceeds first to the derivative component at its fair value with the residual allocated to the
host debt contract, as follows:
|
|
|
Allocation
|
|
|
Compound embedded derivative
|
|
$
|
62,007
|
|
|
Financing costs expense
|
|
|
(5,000
|
)
|
|
Day-one derivative loss
|
|
|
(7,007
|
)
|
|
|
|
$
|
50,000
|
|
The proceeds
were allocated to between the compound embedded derivative and the financing costs expense. This resulted in a day-one
derivative loss and therefore, there was no value allocated to the note on the inception date. The Note will be accreted up
to its face value of $55,833 over the life of Note based on an effective interest rate of 21.15%. Amortization expense for the
period amounted to $676. The carrying value of the Note as of December 31, 2013 amounted to $676.
|
|
11.
|
Derivative
Liabilities:
|
The following tables summarize the components
of the Company’s derivative liabilities and linked common shares as of December 31, 2013 and the amounts that were reflected
in income related to derivatives for the three months then ended:
|
|
|
December 31, 2013
|
|
|
The financings giving rise to derivative financial instruments
|
|
Indexed
Shares
|
|
|
Fair
Values
|
|
|
Compound embedded derivative
|
|
|
5,362,583
|
|
|
$
|
(69,714
|
)
|
|
Warrant derivatives
|
|
|
75,000
|
|
|
|
(203
|
)
|
|
|
|
|
5,437,583
|
|
|
$
|
(69,917
|
)
|
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
11.
|
Derivative
Liabilities: (continued)
|
The following table summarizes the effects
on the Company’s gain (loss) associated with changes in the fair values of the derivative financial instruments by type of
financing for the three months ended December 31, 2013:
|
The financings giving rise to derivative financial instruments and the income effects:
|
|
Three Months Ended
December 31, 2013
|
|
|
Compound embedded derivative
|
|
$
|
(7,707
|
)
|
|
Warrant derivatives
|
|
|
1,455
|
|
|
|
|
|
|
|
|
Day-one derivative loss
|
|
|
(7,007
|
)
|
|
Total gain (loss)
|
|
$
|
(13,259
|
)
|
The Company’s face
value $55,833 Convertible Promissory Note issued on November 27, 2013 and Common Stock Purchase Warrant issued on December
13, 2013 gave rise to derivative financial instruments. As more fully discussed in Note 10 the Company issued a face value
$55,833 Convertible Promissory Note on November 27, 2013. The Note embodied certain terms and conditions that were not
clearly and closely related to the host debt agreement in terms of economic risks and characteristics. These terms and
features consist of the embedded conversion option and default put.
Current accounting principles that are
provided in ASC 815 - Derivatives and Hedging require derivative financial instruments to be classified in liabilities and carried
at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual
derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as
derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound
embedded derivative. The Company has selected the Monte Carlo Simulations valuation technique to fair value the compound embedded
derivative because it believes that this technique is reflective of all significant assumption types, and ranges of assumption
inputs, that market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions
include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional
inputs for option models such as market trading volatility and risk free rates. The Company has selected Binomial Lattice to fair
value the warrant derivatives because it believes this technique is reflective of all significant assumption types market participants
would likely consider in transactions involving freestanding warrants derivatives. The Monte Carlo Simulations technique is a level
three valuation technique because it requires the development of significant internal assumptions in addition to observable market
indicators.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
11.
|
Derivative
Liabilities: (continued)
|
Significant inputs and results arising from the Monte Carlo
Simulations process are as follows for the compound embedded derivative that has been bifurcated from the Convertible Note and
classified in liabilities:
|
|
|
Inception date
|
|
|
December
31,
2013
|
|
|
Quoted
market price on valuation date
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
Contractual
conversion rate
|
|
$
|
0.048
|
|
|
$
|
0.012
|
|
|
Range
of effective contractual conversion rates
|
|
|
--
|
|
|
|
--
|
|
|
Contractual
term to maturity
|
|
|
2.00
Years
|
|
|
|
1.91
Years
|
|
|
Implied
expected term to maturity
|
|
|
1.612
Years
|
|
|
|
1.442
Years
|
|
|
Market
volatility:
|
|
|
|
|
|
|
|
|
|
Range of volatilities
|
|
|
125.65%
- 183.52
|
%
|
|
|
127.09%
- 191.72
|
%
|
|
Equivalent
volatility
|
|
|
145.90
|
%
|
|
|
148.49
|
%
|
|
Contractual
interest rate
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
Equivalent
market risk adjusted interest rate
|
|
|
9.43
|
%
|
|
|
9.43
|
%
|
|
Equivalent
credit risk adjusted yield
|
|
|
6.53
|
%
|
|
|
6.53
|
%
|
The following table reflects the issuances
of compound embedded derivatives and changes in fair value inputs and assumptions related to the compound embedded derivatives
during the quarter ended December 31, 2013.
|
|
|
December 31, 2013
|
|
|
Balances at October 1
|
|
$
|
--
|
|
|
Issuances:
|
|
|
|
|
|
Convertible Note Financing
|
|
|
62,007
|
|
Changes in fair value inputs and assumptions reflected
in income
|
|
|
7,707
|
|
|
Balances at December 31
|
|
$
|
69,714
|
|
The fair value of the compound embedded
derivative is significantly influenced by the Company’s trading market price, the price volatility in trading and the interest
components of the Monte Carlo Simulation technique.
The Common Stock Purchase Warrant issued
on December 13, 2013 contained a variable conversion price,
the Company has classified it as a derivative liability.
The Binomial Lattice technique is a level
three valuation technique because it requires the development of significant internal assumptions in addition to observable market
indicators. Significant assumptions utilized in the Binomial Lattice process are as follows for the warrants as of December 31,
2013:
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
|
|
11.
|
Derivative
Liabilities: (continued)
|
|
|
|
December 31, 2013
|
|
|
Linked common shares
|
|
|
75,000
|
|
|
Quoted market price on valuation date
|
|
$
|
0.02
|
|
|
Contractual exercise rate
|
|
$
|
0.598
|
|
|
Term (years)
|
|
|
1.73
|
|
|
Range of market volatilities
|
|
|
132.64% - 189.68
|
%
|
Risk free rates using zero coupon US Treasury
Security rates
|
|
|
0.07% - 0.38
|
%
|
The following table reflects the issuances
of derivative warrants and changes in fair value inputs and assumptions related to the derivative warrants during the quarter ended
December 31, 2013.
|
|
|
December 31, 2013
|
|
|
Balances at October 1
|
|
$
|
--
|
|
|
Issuances:
|
|
|
|
|
|
Common stock purchase warrants
|
|
|
1,658
|
|
Changes in fair value inputs and assumptions reflected
in income
|
|
|
(1,455
|
)
|
|
Balances at December 31
|
|
$
|
203
|
|
The fair value of all warrant derivatives
is significantly influenced by the Company’s trading market price, the price volatility in trading and the risk free interest
components of the Binomial Lattice technique.
On October 22, 2012, the previous owner
of the property, 2023682 Ontario Inc., owned by Duncan Reid (CEO of the Company), was fined CDN$56,265 by the Ontario Ministry
of the Environment under the Environmental Protection Act for failing to comply with a Court Order to remove specified waste materials
from the mill site. Under the terms of the Order, 2023682 Ontario Inc. had until January 15, 2014 to pay the fines and to comply
with the Court Order to remove the specified waste material and, in the interim, to ensure that there is no migration or discharge
of these materials into the ground or water. The liabilities and obligations with respect to this fine are with 2023682 Ontario
Inc. Nevertheless, the Company has obtained a contractual indemnity from 2023682 Ontario Inc. in respect of this matter and
any related liabilities in the event that 2023682 Ontario Inc. does not duly satisfy its obligations and an agreement that 2023682
Ontario Inc. will hold harmless the Company for any fines, legal actions or penalties associated with this matter. In addition,
the Company has an agreement with 2023682 Ontario Inc. pursuant to which 2023682 Ontario Inc. has undertaken to dispose, at its
cost, of the material as required in the court order within the specified time. In the event that 2023682 Ontario Inc. defaults
with respect to any of these obligations, the Company may be subject to liability and exposure, including the disposal of these
materials, any interim discharge from these materials (which are not currently in a permitted tailings pond) and related fines.
If our business is involved in one or more of these hazards, we may be subject to claims of a significant size that could force
us to cease our operations. There has been a Notice of Garnishment served against Trio Resources, Inc. in the amounts of $45,874
CAD and $47,863 USD in respect of a claim against the Company’s CEO in his other business ventures. Currently, the motion
is returnable in fiscal year 2014 and hence, the management cannot assess the likelihood of any outcome.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
On September 25, 2013, the Company entered
into a “Stairs Option/Joint Venture Agreement (the “Agreement”) with Teck Resources Limited (“Teck”),
a corporation incorporated under the laws of Canada. Teck is the registered and beneficial owner of a 100% undivided leasehold
interest (the “Teck Interest”) in the Stairs property located in Ontario (the “Property”).
Teck has agreed to grant the Company an
option to acquire the Teck Interest, subject only to the Back-in Right and the NSR royalty reserved to Teck, upon and subject to
the terms of the Agreement. If the Company exercises the Option and Teck exercises its Back-in Right, then the NSR Royalty will
be extinguished and Trio and Teck will participate as joint venture partners for any further exploration or, if deemed warranted,
development of the Property upon the terms set out in the Agreement.
In consideration for the grant of the Option,
the Company issued 75,000 Units (the “First Units”), to Teck during the current quarter ended December 31, 2013. Each
“Unit” (First Units and Second Units) shall be comprised of one common share in the capital of the Company (a “Share”)
and one non-transferable share purchase warrant (a “Warrant”). Each Warrant that comprises the First Units shall entitle
Teck to purchase one Share for a period of 24 months from the date of issue of the First Units at the price per common share equal
to $0.60. The terms and conditions which govern the Warrants will be referred to on the certificates representing the Warrants,
the terms of such certificates to be acceptable to Teck, acting reasonably, and will contain, among other things, anti-dilution
provisions. Each Warrant that comprises the Second Units shall be exercisable for a period of 24 months from the date of issue
of the Second Units at a price per share equal to $0.75.
Under the Agreement, Teck has granted to
the Company the sole, exclusive and irrevocable right and option (the “Option”) to earn, subject to Teck’s Back-in
Right and the NSR royalty reserved out of the grant, which rights and royalty were reserved from the Option. The Company may exercise
the Option by:
|
|
c)
|
Incurring an aggregate $1,500,000 in Expenditures as follows:
|
|
On or Before
|
|
Cumulative
Expenditures
|
|
|
September 30, 2014
|
|
$
|
300,000
|
|
|
September 30, 2015
|
|
$
|
1,000,000
|
|
|
September 30, 2016
|
|
$
|
1,500,000
|
|
The Expenditure of $300,000 due to be incurred on
or before September 30, 2014 is a commitment, whereas the balance of the Expenditures are optional; and
|
|
d)
|
Issuing and delivering to Teck a further 25,000 Units (the “Second Units”) on completion of the Expenditures necessary to exercising the Option.
|
Upon the Company expending an aggregate
of $1,500,000 in Expenditures and satisfying the other obligations under the Agreement, the Company shall forthwith provide Teck
Notice (the “Option Expenditure Notice”), which shall include a statement in reasonable detail evidencing such Expenditures
and a technical report on the results obtained from such Expenditures. On the date on which the Option Expenditure Notice is delivered,
the Company will have exercised the Option and earned the Teck Interest subject to the Back-in Right and NSR royalty. As of such
date, the Property shall be held in trust by Teck for the Company and, forthwith upon the Company exercising the Option unless
Teck delivers the Back-in Notice, Teck will forthwith take all necessary steps to transfer registered title to the Company. If
the Company has not incurred the requisite Expenditures as noted above, the Company may pay in cash to Teck, within 30 days of
the listed due date, the amount of the deficiency and such amount shall thereupon be deemed to have been Expenditures duly and
timely incurred by the Company.
As at the date of this filing, no expenditure was incurred by
the Company.
Trio Resources, Inc.
(An Exploration Stage Company)
Notes to the Condensed Consolidated Interim
Financial Statements
(Unaudited)
Expressed in US Dollars
The Company’s management has
evaluated subsequent events through the filing date of these unaudited condensed consolidated interim financial statements
and has determined there are no material subsequent events to report.
