Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 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 the Company 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 Company and the Trio shareholders became the controlling shareholders of Company, 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 Company, 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 Company shares to the TrioResources AG Inc. shareholders.
Under
the terms of the Share Exchange Agreement, the former sole director, officer, and principal shareholder of the Company (the “Principal
Shareholder”), cancelled all 1,500,000 shares of the Company’s common stock that he owned, which constituted 57.9%
of the issued and outstanding shares of the Company’s 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 closing of the Share Exchange Ageement,
the Company’s Board of Directors approved and authorized the Company to take the necessary steps to effect a forward stock
split of the Company’s issued and outstanding shares of common stock, such that each one (1) issued and outstanding share
of common stock automatically changed and converted into one hundred (100) shares of common stock (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 was December
14, 2012 and all of the necessary accounting adjustments have been fully reflected in these unaudited condensed consolidated interim
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 the processing of mineralized material on its property.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
1.
Organization, Nature of Business, Going Concern and Management Plans (continued)
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 June 30, 2014, the Company has not generated significant revenue. As at
June 30, 2014, the Company has a working capital deficiency of $2,710,184 and has accumulated deficit during the exploration stage
of $3,413,927. 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 June 30, 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 June 30, 2014. In addition,
on August 7, 2014, the Company
closed its private placement offering with certain accredited investors for 27,250,000 shares of the Company’s common stock
at an offering price of $0.02 per share for gross proceeds of $545,000. As of the date of this filing, these shares have not been
issued.
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 the Company acquired 100% of the issued
and outstanding equity securities of TrioResources AG Inc., which became its wholly owned subsidiary. In connection with the Share
Exchange, Ihar Yaravenka, the former, sole officer, director and controlling shareholder of the Company was paid $250,000, which
was expensed during the Company’s previous year ended September 30, 2013, in exchange for Mr. Yaravenka’s surrendering
and the Company canceling 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.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
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.
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.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
2.
Summary of Significant Accounting Policies (continued)
Recently
Issued Accounting Standards (continued)
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.
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.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
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:
|
|
|
June 30, 2014
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
216,243
|
|
|
$
|
224,067
|
|
|
Less: Accumulated depreciation
|
|
|
(18,445
|
)
|
|
|
(14,057
|
)
|
|
Net equipment
|
|
|
197,798
|
|
|
|
210,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
31,232
|
|
|
|
32,363
|
|
|
Less: Accumulated depreciation
|
|
|
(4,555
|
)
|
|
|
(3,497
|
)
|
|
Net buildings
|
|
|
26,677
|
|
|
|
28,866
|
|
|
|
|
$
|
224,475
|
|
|
$
|
238,876
|
|
Depreciation
expense of $1,984 and $5,986 were charged for the three and nine month periods ended June 30, 2014, respectively (2013 - $3,640
and $10,662). 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
June 30, 2014 and September 30, 2013, the Company had mining property patent claims of $9,555 and $9,900, respectively (CDN$10,200
as of June 30, 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 a purchase price of CDN$10,200 (4,000MT of concentrate
and book value of related party). No amortization has been charged since the date of purchase because amortization is based on
units of production and the Company’s production volume through June 30, 2014 was very insignificant.
4.
Stockholders’ Deficit:
The
Company’s authorized capital stock consists of 400,000,000 shares of common stock. At June 30, 2014, there were 339,162,500
shares of common stock issued and outstanding (at September 30, 2013 there were 338,650,000 shares of common stock issued and
outstanding). (See Note 1 - Acquisition).
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
4.
Stockholders’ Deficit (continued):
Pursuant
to a consulting agreement entered into on May 17, 2012 with Seagel Investments Corp., the Company issued to Seagel Investments
Corp., 16,100,000 shares of common stock valued at $26,833, such value being the fair value of the shares of common stock on the
date of issuance. The Company recorded this amount as a consulting expense during the previous year ended September 30, 2013.
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”).
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 $74,503 for the three and nine month periods ended June 30, 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”).
On
December 13, 2013, the Company issued 437,500 shares of common stock in consideration for certain consulting services. The shares
of common stock were valued at $0.02 per share (the price at which our common stock was trading on the date of issuance) and had
a value of $8,750, which was expensed during the previous quarter ended December 31, 2013.
On
December 31, 2013, the Company issued 75,000 shares of common stock in connection with that certain Stairs/Option Joint Venture
Agreement (see note 13). These shares were valued at $0.02 per share (the price at which our common stock was trading on the date
of issuance) 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 $126 and $252 for the three and nine month periods ended June 30, 2014 (as compared to $Nil and $Nil
for the three and nine month periods ended June 30, 2013).
The
total number of shares of common stock outstanding was 339,162,500 as of June 30, 2014 comprising of 229,612,500 restricted shares
and 109,550,000 non-restricted shares. The number of shares of common stock 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 placements, as start-up capital or as consideration for
professional services. These restricted shares will be available for sale under Rule 144 of the Securities Act of 1933, as amended,
when the conditions of Rule 144 have been met.
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 nine month periods
ended June 30, 2014 were 339,162,500 and 339,024,630, respectively (as compared to 338,650,000 and 310,142,491, for the three
and nine month periods ended June 30, 2013 respectively).
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
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 current
Chief Executive Officer, Mr. J. Duncan Reid, was the sole director. 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 paid by the Company
to the related party 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’ 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 for the three and nine month periods ended June 30, 2014 ( as compared to $20,000
and $60,000 for the three and nine month period ended June 30, 2013, respectively). As at June 30, 2014, the Company had advanced
to 2023682 Ontario Inc. $63,380 (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:
Loans
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)
As
at June 30, 2014
Expressed
in US Dollars
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 bears interest at the rate of 10% per annum. The Company may from time to time request
to draw down 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
completion of the one-year term, any outstanding principal and accrued interest remaining on the debt facility will 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 June 30, 2014 the amount outstanding under the draw down facility was $425,000 (as compared to $425,000 on September
30, 2013).
9.
Convertible Note Payable – Related Party:
As
of June 30, 2014, the Company has a convertible note payable of $444,128 (CDN $474,141) to 2023682 Ontario Inc. This note is due
two years from the date of issuance (June 15, 2012) and accrues interest at 3% per annum beginning on the one year anniversary
of issuance. The terms of this convertible note specified that if the Company was successful in a ‘going public’ transaction,
the convertible note would become convertible into shares of common stock of the Company at a conversion price equal to 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 $23,073 and $74,503 have been recognized for the three and nine months ended June 30, 2014 (2013 - $25,643 and $54,310,
respectively), which is included in interest expense in the unaudited condensed consolidated interim statements of operations.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
June 30, 2014
Expressed
in US Dollars
10.
Convertible Notes Payable:
|
|
|
June 30, 2014
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Convertible Note (a)
|
|
$
|
944,669
|
|
|
$
|
966,363
|
|
|
Convertible Note (b)
|
|
|
2,741
|
|
|
|
-
|
|
|
|
|
|
947,410
|
|
|
|
966,363
|
|
|
Current portion
|
|
|
(944,669
|
)
|
|
|
(482,655
|
)
|
|
|
|
$
|
2,741
|
|
|
$
|
483,708
|
|
|
(a)
|
The
total convertible notes of $944,169 issued and outstanding as at June 30, 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 June 30, 2014 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 $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 to above may be converted, at any time at the option of the holder, into shares of the common
stock 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 $36,508 and $114,091 have been recognized for the three and nine months ended June 30, 2014 (2013 - $30,768 and $85,603,
respectively)
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
10.
Convertible Notes Payable: (continued)
|
(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.
|
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 payment of 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 $1,200
and $2,741 were recorded for the three and nine month periods ended June 30, 2014, respectively. The total carrying values of
these Notes as of June 30, 2014 amounted to $2,741.
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As at
June 30, 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 June 30,
2014 and the amounts that were reflected in income related to derivatives for the three and nine months then ended:
|
|
|
As at June 30, 2014
|
|
|
|
|
Index shares
|
|
|
Fair values
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
|
8,043,875
|
|
|
$
|
(104,572
|
)
|
|
Warrant derivatives
|
|
|
75,000
|
|
|
|
(203
|
)
|
|
|
|
|
8,118,875
|
|
|
$
|
(104,775
|
)
|
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 nine months ended June 30, 2014:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
June
30, 2014
|
|
|
June
30, 2014
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
$
|
(1,288
|
)
|
|
$
|
(11,787
|
)
|
|
Warrant derivatives
|
|
|
-
|
|
|
|
1,455
|
|
|
Day-one derivative
losses
|
|
|
-
|
|
|
|
(8,295
|
)
|
|
Total gain (loss)
|
|
$
|
(1,288
|
)
|
|
$
|
(18,627
|
)
|
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.
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)
As
at June 30, 2014
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 Notes and classified in liabilities:
|
|
|
$50,000 Note
|
|
|
$25,000 Note
|
|
|
|
|
Inception date
|
|
|
30 June 2014
|
|
|
Inception date
|
|
|
30 June 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted market price on valution date
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
Contractual conversion rate
|
|
$
|
0.048
|
|
|
$
|
0.012
|
|
|
$
|
0.02
|
|
|
$
|
0.012
|
|
|
Contractual term to maturities
|
|
|
2
years
|
|
|
|
1.41
years
|
|
|
|
2
years
|
|
|
|
1.71
years
|
|
|
Implied expected term to maturity
|
|
|
1.612
years
|
|
|
|
0.886
years
|
|
|
|
1.612
years
|
|
|
|
1.452
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 nine months ended June 30, 2014.
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
Balances at October 1, 2013
|
|
$
|
-
|
|
|
Convertible Notes Financing
|
|
|
93,011
|
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
11,764
|
|
|
Balances at June 30, 2014
|
|
$
|
104,775
|
|
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 June 30, 2014:
|
|
|
June 30, 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
|
%
|
Trio
Resources, Inc. (An Exploration Stage Company)
Notes
to the Condensed Consolidated Interim Financial Statements (Unaudited)
As
at June 30, 2014
Expressed
in US Dollars
11.
Derivative Liabilities: (continued)
The
following table reflects the issuances of derivative warrants and changes in fair value inputs and assumptions related to the
derivative warrants during the nine months ended June 30, 2014.
|
|
|
June 30, 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 June 30, 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.
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 June 30, 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.
On
June 13, 2014, the Company entered into a two year rent agreement with the Regus Group of Companies at a monthly rent of $2,800
per month with monthly payments beginning in July 2014.
14.
Subsequent Events:
On
August 7, 2014, the Company closed its private placement offering with certain accredited investors for 27,250,000 shares of the
Company’s common stock at an offering price of $0.02 per share for gross proceeds of $545,000. As of the date of this filing,
these shares have not been issued.
