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EX-31.1 - EXHIBIT 31.1 - Trio Resources, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to __________

 

Commission file number: 333-178472

 

TRIO RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   99-0369568
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
     
100 King Street West,    
Suite 5600    
Toronto, ON   M5X 1C9
(Address of principal executive officers)   (Zip Code)

 

+416-409-2802

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 341,162,500 as of August 13, 2014.

  

 

 

 
 

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION   3
       
Item 1. Condensed Consolidated Interim Financial Statements (unaudited)   3
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   4
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   8
       
Item 4. Controls and Procedures   9
       
PART II OTHER INFORMATION   10
     
Item 1. Legal Proceedings   10
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   10
       
Item 3. Defaults Upon Senior Securities   10
       
Item 4. Mine Safety Disclosures   10
       
Item 5. Other Information   10
       
Item 6. Exhibits   10
       
  Signatures   11

 

2
 

 

PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Trio Resources, Inc.

(An Exploration Stage Company)

CONDENSED CONSOLIDATED

INTERIM FINANCIAL STATEMENTS

 

INDEX

 

Condensed Consolidated Balance Sheets as at June 30, 2014 and September 30, 2013 (unaudited)   F-1
     
Condensed Consolidated Interim Statements of Operations and Comprehensive Loss for the three months ended June 30, 2014 and 2013 (unaudited)   F-2
     
Condensed Consolidated Interim Statements of Operations and Comprehensive Loss for the nine months ended June 30, 2014 and 2013 and for the period from May 16, 2012 (inception) to June 30, 2014 (unaudited)   F-3
     
Condensed Consolidated Interim Statement of Stockholders’ Deficit for the period from May 16, 2012 (inception) to June 30, 2014 (unaudited)   F-4
     
Condensed Consolidated Interim Statements of Cash Flows for the nine months ended June 30, 2014 and 2013 and for the period from May 16, 2012 (inception) to June 30, 2014 (unaudited)   F-5
     
Notes to Condensed Consolidated Interim Financial Statements (unaudited)   F-6 - F-19

 

3
 

 

Trio Resources, Inc. (An Exploration Stage Company)

Condensed Consolidated Balance Sheets As At

Expressed in US Dollars

(Unaudited)

 

   June 30, 2014   September 30, 2013 
   $   $ 
CURRENT ASSETS          
Cash   1,547     
Prepaid expenses and other receivables (Note 4)   81,782    122,930 
Total current assets   83,329    122,930 
           
Loan receivable - related party   63,380    65,673 
Patented claims (Note 3)   9,555    9,900 
Property and equipment (Note 3)   224,475    238,876 
TOTAL ASSETS   380,739    437,379 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY          
CURRENT LIABILITIES          
Bank indebtedness       10,830 
Accounts payable and accrued liabilities   940,317    763,775 
Loans payable (Note 7)   483,527    257,399 
Convertible notes payable (Note 10)   944,669    482,655 
Convertible draw down loan payable (Note 8)   425,000     
Total current liabilities   2,793,513    1,514,659 
           
Convertible draw down loan payable (Note 8)       425,000 
Convertible note payable - related party (Note 9)   444,128    384,899 
Convertible notes payable (Note 10)   2,741    483,708 
Derivative liabilities (Note 11)   104,775     
TOTAL LIABILITIES   3,345,157    2,808,266 
           
STOCKHOLDERS’ DEFICIENCY          
Authorized:          
400,000,000 common stock, no par value          
Issued and outstanding:          
339,162,500 common stock as at June 30, 2014 (September 30, 2013 : 338,650,000 common stock) - (Note 4)   339,163    338,650 
Excess of purchase price over net asset value  (Notes 6 and 9)   (299,105)   (299,105)
Additional paid-in capital   320,763    312,683 
Accumulated other comprehensive income   88,688    23,159 
Deficit accumulated during the exploration stage   (3,413,927)   (2,746,274)
Total stockholders’ deficiency   (2,964,418)   (2,370,887)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY   380,739    437,379 

 

See accompanying notes        

       

F-1
 

 

Trio Resources, Inc. (An Exploration Stage Company)

Condensed Consolidated Interim Statements of Operations and Comprehensive Loss

Expressed in US Dollars

(Unaudited)

 

   Three Months Ended   Three Months Ended 
   June 30, 2014   June 30, 2013 
   $   $ 
         
REVENUE       172,016 
           
EXPENSES          
Corporate expenses   95,541    473,418 
Exploration and development costs   20,453    81,037 
Interest expense   63,731    59,718 
Changes in fair value of derivative liabilities (Note 11)   1,288     
Depreciation   1,984    3,640 
Total expenses   182,997    617,813 
           
Net loss for the period before income taxes   (182,997)   (445,797)
           
Income taxes        
NET LOSS FOR THE PERIOD   (182,997)   (445,797)
           
Foreign currency translation adjustment   (81,630)   57,800 
           
COMPREHENSIVE LOSS   (264,627)   (387,997)
           
Loss per share, basic and diluted   (0.0008)   (0.0013)
          
Weighted average number of common stock outstanding, basic and diluted   339,162,500    338,650,000 

 

See accompanying notes            

   

F-2
 

 

Trio Resources, Inc. (An Exploration Stage Company)

Condensed Consolidated Interim Statements of Operations and Comprehensive Loss

Expressed in US Dollars

(Unaudited)

 

         Cumulative from 
   Nine Months   Nine Months   May 16, 2012 
   Ended   Ended   (inception) to 
   June 30, 2014   June 30, 2013   June 30, 2014 
   $   $   $ 
             
REVENUE       338,315    219,385 
                
EXPENSES               
Corporate expenses   399,189    1,551,165    2,383,411 
Exploration and development costs   42,228    232,773    488,058 
Interest expense   201,623    166,279    442,352 
Changes in fair value of derivative liabilities (Note 11)   18,627        18,627 
Depreciation   5,986    10,662    23,830 
Total expenses   667,653    1,960,879    3,356,278 
                
Net loss for the period before income taxes   (667,653)   (1,622,564)   (3,136,893)
                
Income taxes            
NET LOSS FOR THE PERIOD   (667,653)   (1,622,564)   (3,136,893)
                
Foreign currency translation adjustment   65,529    70,670    88,688 
                
COMPREHENSIVE LOSS   (602,124)   (1,551,894)   (3,048,205)
                
Loss per share, basic and diluted   (0.0018)   (0.0052)     
                
Weighted average number of               
  common stock outstanding, basic and diluted   339,024,630    310,142,491      

 

See accompanying notes                        

 

F-3
 

 

Trio Resources, Inc. (An Exploration Stage Company)

Condensed Consolidated Interim Statements of Stockholders’ Deficit

Expressed in US Dollars

(Unaudited)

 

         Excess of      Deficit     
            purchase   Accumulated   accumulated    
           Additional   price over   other   during the     
   Common stock    paid-in   net asset   comprehensive   exploration     
   Shares   Amount    capital   value    (loss) income   stage    Total 
       $   $   $   $   $   $ 
May 16, 2012 (inception) issuance   213,000,000    213,000                (191,334)   21,666 
                                    
Excess of purchase price over net asset value               (299,105)           (299,105)
                                    
Cumulative translation adjustment                   (10,296)       (10,296)
                                    
Loss for the period                       (479,034)   (479,034)
As at September 30, 2012   213,000,000    213,000        (299,105)   (10,296)   (670,368)   (766,769)
                                    
Acquisition of Allied Technologies Group, Inc.   109,000,000    109,000                (85,700)   23,300 
                                    
Issuance of shares re: consulting agreement   16,650,000    16,650    312,683                329,333 
                                    
Cumulative translation adjustment                   33,455        33,455 
                                    
Loss for the year                       (1,990,206)   (1,990,206)
As at September 30, 2013   338,650,000    338,650    312,683    (299,105)   23,159    (2,746,274)   (2,370,887)
                                    
Issuance of shares re: consulting agreement   512,500    513    8,080                8,593 
                                    
Cumulative translation adjustment                   65,529        65,529 
                                    
Loss for the period                       (667,653)   (667,653)
As at June 30, 2014   339,162,500    339,163    320,763    (299,105)   88,688    (3,413,927)   (2,964,418)

 

Note 1: The former stock split for previously issued common shares resulted in negative Additional Paid-In Capital. This has been charged to Accumulated Deficit as an Appropriation of Capital. The stock split has been accounted for on a retrospective basis.

 

See accompanying notes

 

F-4
 

 

Trio Resources, Inc. (An Exploration Stage Company)

Condensed Consolidated Interim Statements of Cash Flows

Expressed in US Dollars

(Unaudited)

 

         Cumulative from 
   Nine Months   Nine Months   May 16, 2012 
   Ended   Ended   (inception) to 
    June 30, 2014    June 30, 2013   June 30, 2014 
   $   $   $ 
OPERATING ACTIVITIES               
Net loss for the period   (667,653)   (1,622,564)   (3,136,893)
                
Depreciation   5,986    10,662    23,830 
Stock based payment for services   8,875    312,683    238,421 
Accretion expense on convertible notes   74,503    54,310    176,358 
Change in fair value of derivative liabilities   18,627        18,627 
Net change in non-cash working capital balances:               
Prepaid expense and other assets   40,777    (294,108)   17,114 
Accounts payable and accrued liabilities   199,487    634,999    974,186 
Cash used in operating activities   (319,398)   (904,018)   (1,688,357)
                
INVESTING ACTIVITIES               
Purchase consideration (Note 6)           (99,510)
Loan receivable - related party           (67,331)
Purchase of Property and equipment       (14,760)   (174,699)
Cash used in investing activities       (14,760)   (341,540)
                
FINANCING ACTIVITIES               
(Decrease) increase in bank indebtedness   (10,519)   4,242    469 
Proceeds from issuance of common stock           21,196 
Proceeds from issuance of convertible notes   67,500    853,124    1,054,261 
Loans payable including draw down loan payable   246,833    53,326    939,152 
Cash provided by financing activities   303,814    910,692    2,015,078 
                
Net decrease in cash during the period   (15,584)   (8,086)   (14,819)
Effect of foreign currency translation   17,131        16,366 
Cash, beginning of the period       8,086     
Cash, end of period   1,547        1,547 
                
Non cash financial activities (Note 6)               
Increase in convertible note payable - related party           298,135 
Non-cash investing and financing activities           (299,105)
            (970)

 

See accompanying notes

 

F-5
 

 

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

 

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.

 

F-6
 

 

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.

 

F-7
 

 

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.

 

F-8
 

 

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.

 

F-9
 

 

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).

 

F-10
 

 

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).

 

F-11
 

 

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.

 

F-12
 

 

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.

 

F-13
 

 

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)

 

F-14
 

 

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.

 

F-15
 

 

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.

 

F-16
 

 

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%

 

F-17
 

 

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”).

 

F-18
 

 

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.

 

F-19
 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The information and financial data discussed below is derived from the unaudited condensed consolidated interim financial statements of Trio Resources, Inc.(“we,” “us” or the “Company”) for the three months ended June 30, 2014 and were prepared and presented in accordance with generally accepted accounting principles in the United States.

 

Forward Looking Statements

 

Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are “forward -looking statements” which can be identified by the use of the terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Quarterly Report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements to differ materially from those contemplated by such forward-looking statements include without limitation:

 

Our ability to raise capital when needed and on acceptable terms and conditions;
   
Our ability to attract and retain management;
   
Our ability to enter in to long-term supply agreements for the mineralized material;
   
General economic conditions; and
   
Other factors discussed in Risk Factors.

 

All forward looking statements made in connection with this Quarterly Report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements you are cautioned not to place undue reliance on such forward looking statements.

 

Overview

 

We operate as a milling and exploration company in the province of Ontario Canada. Our operations have been limited to acquiring our initial land holdings and patented claims and our initial milling and mining assets to allow us to begin to implement our plans to start small scale concentration of existing above ground mineral resources.

 

We are an exploration stage company and have not generated significant revenues to date. We are in the initial stages of developing our mineral properties, have very limited cash resources and are in need of substantial additional capital to execute our business plan. For these and other reasons, our independent auditors have raised substantial doubt about our ability to continue as a going concern.

 

As an exploration company we have not as yet generated significant operating revenues and have incurred operating losses of $3,413,927 from our inception, May 16, 2012, to June 30, 2014, and of $182,997 and $667,653 for the three and nine months ended June 30, 2014, respectively. To date we have funded our operations through advances from a related party and from private third party lenders utilizing convertible notes and loans payable including draw down loan payable totaling $2,300,065 as explained in detail in the section “Liquidity and Capital Resources”.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Property

 

The Company acquired the Duncan Kerr property in May 2012. This property is located in Ontario, Canada, approximately three kilometers southeast of the town of Cobalt. Main features of this property are summarized as below:

 

  The property is located in a region that is well known for its base and precious metal production. Past producing mines at Duncan Kerr have mined in excess of 32 million ounces of silver, and one of North America’s richest silver veins ever explored is located on the property per preliminary geologist report from TMK Associates on March 22, 2013.
     
  The Company’s plans include 5,000 meters of diamond drilling and other exploration at the Duncan Kerr project as well as upgrading its existing mill capacity to be able to process up to 360 tons per day.
     
  The Company has full rights and claims to this property including the existing mineralized material, onsite mill, other structures and equipment, and all surface and mineral rights.
     
  This property has a very strategic location in terms of its access to major highways, rail spurs, power and fresh water.
     
  Presence of estimated 1.3 million tons of mineralized material already located above ground.

 

Recent Development

 

Acquisition of TrioResources AG Inc.

 

On December 14, 2012, we entered into a share exchange agreement (the “Share Exchange Agreement”) with TrioResources AG Inc., pursuant to which we acquired 100% of the issued and outstanding equity securities of TrioResources AG Inc., which became our wholly owned subsidiary (the “Share Exchange”). Part of the consideration was a payment of $250,000, which was expensed during the year, 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. Prior to the completion of the Share Exchange, we had no assets or liabilities and we were a 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, we 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 our common stock. The result is that the shareholders of TrioResourcses AG Inc. own 66.15% of the total outstanding shares of the Company effective the date of the Share Exchange Agreement.

 

Plan of Operations

 

The Company’s intention is to conduct exploration initiatives, with the purpose of being cash-flow positive by processing precious metals, and other valuable minerals. The Company intends to utilize modern mining and exploration technology in conjunction with focusing on combining the right blend of experienced mining consultants and technological management in order to remain competitive.

 

We intend to conduct further exploration initiatives, in order to target additional high-concentration regions, which would be profitable to develop. Unlike other junior mining companies, we plan to have our exploration initiative coincide with our milling program, through which we are planning to be able to run a cash-flow positive business by producing precious metals, and other valuable minerals. By reinvesting the profits realized by capitalizing on our existing mineralized mineral stock piles, we anticipate having the ability to expedite our business plan, and fund some of the expansion of our operations, internally.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Results of Operations

 

We are an exploration stage company as defined in the SEC Guideline 7 (a) (4) (i). We have not generated significant revenue to date and consequently our operations are subject to all of the risks inherent in the establishment of a new business enterprise. Our operations have been limited to the purchase of our initial land position including 2 patented claims, and the acquisition of fixed assets which will be incorporated into our processing facility. Our analysis on the performance of the Company is as follows:

 

Balance sheet – As at June 30, 2014 and September 30, 2013

 

Cash/Bank indebtedness

 

At June 30, 2014 the Company had cash of $1,547 as compared to bank indebtedness of $10,830 as at September 30, 2013. The decrease in bank indebtedness was mainly due to issuance of $75,000 convertible notes during the nine months ended June 30, 2014.

 

Prepaid expenses and other receivables

 

At June 30, 2014 the Company had $81,782 of prepaid expenses and other receivables as compared to $122,930 as at September 30, 2013. The decrease of $41,148 during the nine month periods ended June 30, 2014 mainly represented amortization of prepaid expenses relating to consulting agreements, offset by an increase in prepaid rent.

 

Loan receivable – related party and patented claims

 

There was no change in the balance of loan from a related party in the amount of CDN 67,663 and patented claims of CAD 10,200. The variation in the balance as at June 30, 2014 as compared to September 30, 2013 reflected the change in foreign exchange rates.

 

Property and equipment

 

At June 30, 2014 the Company had $224,475 of net book value of property and equipment as compared to $238,876 as at September 30, 2013. The decrease of $14,401 represented amortization expense of $5,986 for the nine month periods ended June 30, 2014 and the effects of difference in foreign exchange rates during the nine month periods ended June 30, 2014.

 

Accounts payable and accrued liabilities

 

At June 30, 2014 the Company had $940,317 of accounts payable and accrued liabilities as compared to $763,775 as at September 30, 2013. The increase of $176,542 represented accruals of $134,384 during the nine months ended June 30, 2014 offset by the payments to suppliers amounting to $42,158.

 

Loans payable

 

At June 30, 2014 the Company had $483,527 of loans payable as compared to $257,399 as at September 30, 2013. The increase of $226,128 mainly represented interest free loans obtained from third parties to meet the day to day working capital requirement of the Company.

 

Convertible draw down loan payable

 

The Company entered into a one-year Convertible Draw Down Facility, dated as of November 1, 2012, with Seagel Investment Ltd. as lender, in the maximum amount of $500,000. As at June 30, 2014 and September 30, 2013 the amount outstanding under the Draw Down Facility was $425,000.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Convertible note payable – related party

 

At June 30, 2014 the Company had $444,128 of convertible note payable to a related party as compared to $384,899 as at September 30, 2013. The increase of $59,229 represented accretion expense of $74,503 for the nine month period ended June 30, 2014 offset by the effects of change in foreign exchange rates. The note was issued on June 15, 2012 for a term of two years and carries interest at 3% per annum. This note is interest free for the first twelve months.

 

Convertible notes payable – third parties and derivative liabilities

 

At June 30, 2014 the Company had $1,052,185 of convertible notes payable to third parties and derivative liabilities as compared to $966,363 as at September 30, 2013. The increase of $85,822 represented mainly the issuance of a $75,000 convertible notes during the nine month periods ended June 30, 2014. All these outstanding notes as at June 30, 2014 were issued under multiple funding arrangements with third party investors for a term of two years and carries interest ranging from 10% to 12% per annum.

 

Statement of Operations – For the three and nine months June 30, 2014 and 2013:

 

Expenses

 

Our expenses are classified primarily into the following categories.

 

  Corporate expenses;
     
  Exploration and development costs;
     
  Interest and derivative expense; and
     
  Depreciation

 

Corporate expenses and exploration and development costs

 

Corporate expenses and exploration and development costs for the three and nine months ended June 30, 2014 were $115,994 and $441,417 as compared to $554,455 and $1,783,938 for the three and nine months ended June 30, 2013, respectively. The expenses which are generally included in these categories are consulting, legal, professional and edgarization charges. TrioResources AG Inc. was operating as a private limited company up to December 14, 2012, when it became public through a reverse merger transaction. The increased corporate expenses and exploration and development costs in 2013 were mainly due to the reverse merger activities.

 

Interest expense, change in derivative liabilities and depreciation

 

Interest expense, changes in derivative liabilities and depreciation for the three ended June 30, 2014 were $63,731, $1,288 and $1,984 as compared to $59,718, $nil and $3,640, for the three months ended June 30, 2013, respectively. Interest expense, change in derivative liabilities and depreciation for the nine ended June 30, 2014 were $201,623, $18,627 and $5,986 as compared to $166,279, $nil and $10,662, for the nine months ended June 30, 2013, respectively. The increase in interest expense for the three and nine months ended June 30, 2014 as compared to three and nine months ended June 30, 2013 was mainly due to additional interest based financing obtained during the current period. Change in derivative liabiltities represented the derivative loss recognized resulting from the changes in fair values of promissory convertible notes as discussed in note 11 of the unaudited condensed consolidated interim financial statement.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Liquidity and Capital Resources

 

At June 30, 2014, the Company had a working capital deficit of $2,710,184 compared to a working capital deficit of $1,391,729 as at September 30, 2013. The Company is actively seeking various financing operations to meet the working capital requirements.

 

To date we have relied on third parties to provide financing for our operations by way of convertible notes and other loans. The proceeds may not be sufficient to effectively develop our business to the fullest extent to allow us to maximize our revenue potential, in which case, we will need additional capital. We will need capital to allow us to acquire additional properties to expand our exploration base. The Company anticipates that its future mill operations will generate positive cash flows in fiscal 2014 provided that it is successful in obtaining additional financing in the foreseeable future. The Company has negotiated a $500,000 Draw Down facility 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 the Company has obtained $75,000 at June 30, 2014. Further, 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 $500,000 through the subscription for issuance of 25,000,000 shares pursuant to this subscription agreement. In addition we will need to provide the Company with working capital. The amount and timing of capital required will depend on when we are able to conclude agreements either to purchase additional land and the associated patented claims and/or enter into licensing or other working relationships to allow the Company to have access to the largest mining asset base possible within the financial constraints of the Company. If we are unable to generate sufficient cash flow from operations we will be required to raise additional funds either in the form of capital or debt. There are no assurances that we will be able to generate the necessary capital or debt to carry out our current plan of operations.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Critical Accounting Policies

 

Critical accounting policies are described in the Company’s Form 10-K for the year ended September 30, 2013.

 

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.

 

Description Of Property

 

Our principal executive offices are located at 100 King Street West, Suite 5600, Toronto, Ontario M5X 1C9

 

The mining properties are located LOT 3, CON 4, Coleman Township, District of Temiskaming, Ontario.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Smaller reporting companies are not required to provide the information required by this item.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and chief financial officer each concluded that as of the Evaluation Date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes during the period ended June 30, 2014 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

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.

 

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

 

Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits:

 

31.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).*
     
32.1   Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.*
     
101.INS   XBRL Instance Document.**
     
101.SCH   XBRL Taxonomy Extension Schema Document.**
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.**
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.**
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.**
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.**

 

* Filed herewith.

** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”. 

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TRIO RESOURCES, INC.
     
Dated: August 13, 2014 By: /s/ J. Duncan Reid
    J. Duncan Reid, Chief Executive Officer and Chief Financial Officer

 

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