Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
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 consolidated interim financial
statements.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
1. Organization,
Nature of Business, Going Concern and Management Plans (continued)
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 March 31, 2014, the Company has not generated significant revenue. As at
March 31, 2014, the Company has a working capital deficiency of $2,479,253 and has accumulated deficit during the exploration
stage of $3,230,930. 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 2015 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 March 31, 2014. On November 27, 2013, the Company entered into a draw down facility in the
amount of $335,000 with a lender of which $75,000 has been obtained as at March 31, 2014. In addition, on July 3, 2014, the Company
entered into a subscription agreement with accredited investors for the issuance of maximum of 25,000,000 shares at an offering
price of $0.02 per share. As at the date of filing of this document, the Company raised $150,000 through the subscription for
issuance of 7,500,000 shares pursuant to this subscription agreement.
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 previous 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.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
1. Organization,
Nature of Business, Going Concern and Management Plans (continued)
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’ deficiency is translated at historical rates. Adjustments resulting from translating the unaudited
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)
As at
March 31, 2014
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.
On
May 28, 2014, the FASB issued a new financial accounting standard on revenue from contracts with customers,
Update
No. 2014-09—Revenue from Contracts with Customers (Topic 606)
. The standard outlines a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those
periods) beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of
this accounting standard”
Effective
June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915). Elimination of Certain Financial Reporting
Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The objective of the
amendments is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements
for development stage entities. As a result, the amendments in this Update remove all incremental financial reporting requirements
from U.S. GAAP for development stage entities.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
2. Summary
of Significant Accounting Policies (continued)
Recently
Issued Accounting Standards (continued)
The
amendments also eliminate an exception previously provided to development stage entities in Topic 810, Consolidation, for determining
whether an entity is a variable interest entity on the basis of the amount of investment equity at risk. The amendments in this
Update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification,
thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S.
GAAP. In addition, the amendments eliminate the requirements for development stage entities to:
1)
present inception-to-date information in the statements of income, cash flows, and shareholder equity;
2)
label the financial statements as those of a development stage entity;
3)
disclose a description of the development stage activities in which the entity is engaged; and
4)
disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the
development stage.
The
amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced
planned principal operations. The amendments related to the elimination of inception-to-date information and the other remaining
disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall
be applied prospectively. For public business entities, those amendments are effective for annual reporting periods beginning
after December 15, 2014, and interim periods therein.
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:
|
|
|
March 31, 2014
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
208,857
|
|
|
$
|
224,067
|
|
|
Less: Accumulated depreciation
|
|
|
(16,243
|
)
|
|
|
(14,057
|
)
|
|
Net equipment
|
|
|
192,614
|
|
|
|
210,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
30,980
|
|
|
$
|
32,363
|
|
|
Less: Accumulated depreciation
|
|
|
(4,017
|
)
|
|
|
(3,497
|
)
|
|
Net buildings
|
|
|
26,963
|
|
|
|
28,866
|
|
|
|
|
$
|
219,577
|
|
|
$
|
238,876
|
|
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
3. Property
and Equipment: (continued)
Depreciation
expense of $1,951 and $4,002 were charged for the three and six months period ended March 31, 2014, respectively (2013 - $3,686
and $7,022). 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
|
|
|
|
|
|
|
●
|
Buildings
20 years.
|
Patented
Claims:
At
March 31, 2014 and September 30, 2013, the Company also has mining property patent claims of $9,228 and $9,900, respectively (CDN$
10,200 as at March 31, 2014 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 March 31, 2014 is very insignificant.
4.
Stockholders’ Deficit:
The
Company’s authorized capital consists of 400,000,000 shares of common stock. At March 31, 2014, 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 and were recorded as prepaid expenses and are being amortized over the term of the respective agreements. The
Company has recorded an expense in the amount of $25,938 and $51,876 for the three and six months period ended March 31, 2014
(2013 – $99,687 and $126,520, respectively).
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”).
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
4.
Stockholders’ Deficit: (continued)
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 previous quarter ended December 31, 2013.
On
December 31, 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 were recorded as prepaid expenses and are being amortized over the term of the
agreement. The Company has recorded an expense in the amount of $125 and $126 for the three and six months period ended March
31, 2014 (2013 – $Nil and $Nil).
The
total amount of the common shares outstanding was 339,162,500 as of March 31, 2014 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.
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 three and six months period
ended March 31, 2014 were 339,162,500 and 338,952,847, respectively (2013 – 338,643,889 and 295,888,736, 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:
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
6. Related
Party Transactions: (continued)
|
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’ deficiency
|
|
$
|
(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.
No
consulting fees were paid to Mr. J. Duncan Reid (Director) for the three and six months period ended March 31, 2014 (2013 - $20,000
and $40,000, respectively). As at March 31, 2014, the Company had advanced to 2023682 Ontario Inc. $61,215 (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.
7. Loans
Payable:
Loan
payable represent unsecured and interest free financing provided by a third party. These loans are repayable on demand.
8. Convertible
Draw Down Loan Payable:
The
Company 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 March 31, 2014
the amount outstanding under the Draw Down Facility was $425,000 (September 30, 2013 - $425,000).
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
9. Convertible
Note Payable – Related Party:
As
of March 31, 2014, the Company has a convertible note payable of $405,560 (CDN $448,281) 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 $26,788 and $51,430 have been recognized for the three and six months ended March 31, 2014 (2013 - $25,643 and $51,728,
respectively), which is included in interest expense in the unaudited condensed consolidated interim statements of operations.
10. Convertible
Notes Payable:
|
|
|
March 31, 2014
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Convertible Note (a)
|
|
$
|
924,187
|
|
|
$
|
966,363
|
|
|
Convertible Note (b)
|
|
|
1,540
|
|
|
|
-
|
|
|
|
|
|
925,727
|
|
|
|
966,363
|
|
|
Current portion
|
|
|
(924,187
|
)
|
|
|
(482,655
|
)
|
|
|
|
$
|
1,540
|
|
|
$
|
483,708
|
|
|
(a)
|
The
total convertible notes of $924,187 issued and outstanding as at March 31, 2014 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 March 31, 2014 are as follows:
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
10. Convertible
Notes Payable: (continued)
On
September 30, 2012, the Company entered into convertible notes with Incendia Management Group Inc. in the amount of CDN $266,445
(US $241,053), Siderion Capital Group Inc. in the amount of CDN $295,163 (US $267,034), 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
$6,333), Siderion Capital Group Inc. in the amount of CDN $20,000 (US $18,094), Seagel Investment Corp. in the amount of CDN $2,500
(US $2,262), 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.
Interest
expense of $38,028 and $77,583 have been recognized for the three and six months ended March 31, 2014 (2013 - $30,768 and $54,835,
respectively)
|
(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%). Pursuant to this agreement, the Company received $50,000 (face value of $55,833) on November 27, 2013 and $25,000 (face
value of $27,917) on March 14, 2014. 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.
|
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
March 31, 2014
Expressed
in US Dollars
10. Convertible
Notes Payable: (continued)
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.
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
|
|
|
|
|
$50,000 Note
|
|
|
$25,000 Note
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivative
|
|
$
|
62,007
|
|
|
$
|
29,461
|
|
|
Financing costs expense
|
|
|
(5,000
|
)
|
|
|
(2,500
|
)
|
|
Day-one derivative loss
|
|
|
(7,007
|
)
|
|
|
(1,961
|
)
|
|
|
|
$
|
50,000
|
|
|
$
|
25,000
|
|
The
proceeds were allocated to between the compound embedded derivative and the financing costs expense. These resulted in a day-one
derivative losses and therefore, there were no value allocated to these notes on the inception date. These Notes will be accreted
up to its face value over the life of the Notes based on an effective interest rate of 21.15%. Amortization expense of $864 and
$676 were recorded for the three and six months period ended March 31, 2014, respectively. The total carrying values of these
Notes as of March 31, 2014 amounted to $1,541.
Trio Resources, Inc. (An Exploration Stage
Company)
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
As at March 31, 2014
Expressed in US Dollars
11.
Derivative Liabilities:
The following tables summarize the components
of the Company’s derivative liabilities and linked common shares as of March 31, 2014 and the amounts that were reflected
in income related to derivatives for the three and six months then ended:
|
|
|
As at March 31, 2014
|
|
|
|
Index shares
|
|
|
Fair values
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
|
8,043,875
|
|
|
$
|
(103,254
|
)
|
|
Warrant derivatives
|
|
|
75,000
|
|
|
|
(203
|
)
|
|
|
|
|
8,118,875
|
|
|
$
|
(103,457
|
)
|
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 and six months ended March 31, 2014:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
December 31, 2013
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
$
|
(7,707
|
)
|
|
$
|
(9,826
|
)
|
|
Warrant derivatives
|
|
|
1,455
|
|
|
|
1,455
|
|
|
Day-one derivative losses
|
|
|
(7,007
|
)
|
|
|
(8,968
|
)
|
|
Total gain (loss)
|
|
$
|
13,259
|
|
|
$
|
(17,339
|
)
|
The Company’s face value $55,833 and
$27,917 Convertible Promissory Notes issued on November 27, 2013 and March 14, 2014, respectively (Also refer Note 10), and Common
Stock Purchase Warrant issued on December 13, 2013 gave rise to derivative financial instruments. 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.
Trio Resources, Inc. (An Exploration Stage
Company)
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
As at March 31, 2014
Expressed in US Dollars
11.
Derivative Liabilities: (continued)
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.
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
Notes and classified in liabilities:
|
|
|
$50,000 Note
|
|
|
$25,000 Note
|
|
|
|
Inception date
|
|
|
31 March 2014
|
|
|
Inception date
|
|
|
31 March 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted market price on valution date
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
Contractual conversion rate
|
|
$
|
0.048
|
|
|
$
|
0.012
|
|
|
$
|
0.02
|
|
|
$
|
0.012
|
|
|
Contractual term to maturities
|
|
|
2
years
|
|
|
|
1.66
years
|
|
|
|
2
years
|
|
|
|
1.95
years
|
|
|
Implied expected term to maturity
|
|
|
1.612
years
|
|
|
|
0.992
years
|
|
|
|
1.612
years
|
|
|
|
1.527
years
|
|
|
Market volatility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of volatities
|
|
|
125.65%
- 183.52
|
%
|
|
|
127.09%
- 191.72
|
%
|
|
|
125.65%
- 183.52
|
%
|
|
|
127.09%
- 191.72
|
%
|
|
Equivalent volatility
|
|
|
145.90
|
%
|
|
|
148.49
|
%
|
|
|
145.90
|
%
|
|
|
148.49
|
%
|
|
Contractual interest rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
Equivalent market risk adjusted interest rate
|
|
|
9.43
|
%
|
|
|
9.43
|
%
|
|
|
9.43
|
%
|
|
|
9.43
|
%
|
|
Equivalent credit risk adjusted yield
|
|
|
6.53
|
%
|
|
|
6.53
|
%
|
|
|
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 six months ended March 31, 2014.
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
Balances at October 1, 2013
|
|
$
|
-
|
|
|
Convertible Notes Financing
|
|
|
93,011
|
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
10,446
|
|
|
Balances at March 31, 2014
|
|
$
|
103,457
|
|
Trio Resources, Inc. (An Exploration Stage
Company)
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
As at March 31, 2014
Expressed in US Dollars
11.
Derivative Liabilities: (continued)
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 March 31, 2014:
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
Linked common shares
|
|
|
75,000
|
|
|
Quoted market price on valuation date
|
|
$
|
0.01
|
|
|
Quoted market price on valuation date
|
|
$
|
0.598
|
|
|
Term (years)
|
|
|
1.230
|
|
|
Range of market volatities
|
|
|
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 six months
ended March 31, 2014.
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
Balances at October 1, 2013
|
|
$
|
-
|
|
|
Common stock purchase warrants
|
|
|
1,658
|
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
(1,455
|
)
|
|
Balances at March 31, 2014
|
|
$
|
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.
Trio Resources, Inc. (An Exploration Stage
Company)
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
As at March 31, 2014
Expressed in US Dollars
12.
Contingency
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 July 31, 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.
13.
Commitment
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 previous 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”).
Trio Resources, Inc. (An Exploration Stage
Company)
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
As at March 31, 2014
Expressed in US Dollars
13.
Commitment (continued)
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)
As at March 31, 2014
Expressed in US Dollars
14.
Subsequent Events:
On July 3, 2014, the Company entered into
a subscription agreement with accredited investors for the issuance of maximum of 25,000,000 shares at an offering price of $0.02
per share. As at the date of filing of this document, the Company raised $150,000 through the subscription for issuance of 7,500,000
shares pursuant to this subscription agreement.
