Annual Report and Financial Statements 2014 Contents Chairman’s Statement Company Information Report of the Directors Statement of Directors’ Responsibilities Corporate Governance Statement Independent Auditors’ Report Statement of Financial Position 2 5 6 9 10 11 13 Income Statement 14 Statement of Comprehensive Income Statement of Changes in Equity 14 15 Cash Flow Statement 16 Notes to the Financial Statements 17 2 Chairman’s Statement The recovery of high concentrations, Your Company has for some time for the Karelian Craton, of kimberlitic been following up the diamondiferous indicator minerals (“KIMs”) in Riihivaara kimberlitic indicator mineral trains that indicates the nearby presence of a new we have discovered on our Riihivaara kimberlite source in the Kuhmo region of target. The board is hopeful that we are Finland. getting very close to or immediately over Laboratory results from a sample the source. collected on the Company’s The Riihivaara claim reservation lies Riihivaara target in the Kuhmo region approximately 10km southeast of the show high concentrations of over Company’s Seitaperä kimberlite target 100 kimberlitic indicator minerals. in the Kuhmo municipality in Eastern The results included 48 purple to red Finland where your Company has peridotitic garnets (G9/10 Cr-pyrope) outlined the largest diamondiferous and 46 orange mantle garnets which are pipe yet discovered in Finland. between 0.25 and 0.5mm in size, plus 5 purple to red peridotitic garnets (G9/10 Cr-pyrope) and 3 orange mantle garnets in the 0.5 to 1.0mm size range. G9/10 garnets are considered significant as they are formed at the same temperatures and pressures as diamonds. Orange mantle garnets can include eclogitic pyrope-almandine garnets (G3) and if eclogite mantle materials are present it is significant, as it tends to be associated with richer diamond grades. The garnets will be tested to establish whether eclogite mantle materials are present. In the Kuhmo region of Finland, high numbers of Claims Reservations Granted After year-end TUKES (The Finnish Mining Authority) granted Karelian three further exploration Claim Reservations located in the Kuhmo and Kuopio-Kaavi regions. The Claim Reservation in the Kuhmo region is up ice from kimberlitic indicator minerals recovered previously by your Company at its Rihiivaara diamond exploration target. The possibility of new discoveries in the Kuusamo area complements the positive results at your Company’s Riihivaara target area. Other targets in the Kuhmo kimberlitic indicator minerals are typically area include the Havukkasuo and Lentiira only seen either directly over or within a kimberlite pipes. hundred metres of a kimberlite source. The indicator minerals have recently been sent for analysis by scanning electron microscopy for precise classification which will determine whether any of the sample material is derived from the diamond stability field. Kuopio-Kaavi is situated in Central Finland and is an established diamondiferous region. In both of the Claim Reservations granted in the Kuopio-Kaavi region, diamondiferous kimberlite bodies have been reported. These Claim Reservations were applied for with a view to re-evaluating known kimberlite bodies and following up on indicator mineral trains. Professor Richard Conroy Chairman I have pleasure in presenting your Company’s Annual Report and Financial Statements for the year ended 31 May 2014. During the year, further highly encouraging progress has been made towards achieving your Company’s objective of discovering a world class diamond deposit in Finland, comparable to those which have been found in similar geology nearby in Russia. Excellent results have been achieved at your Company’s exploration target at Riihivaara, both during the year to 31 May and since. Positive results at other targets have led to several new claim applications. Financially a series of successful Placings raised in total £2,725,000. Also, your Company’s Confidentiality Agreement (with Back in Rights) with Rio Tinto has been extended to 2020, post period. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc KARELIAN CRATON Lomonosov Diamond Mine 3 Legend Diamondiferous deposits and diamondiferous kimberlites discovered to date in the Karelian Craton In Russia: Lomonosov diamond mine Grib Pipe – Archangels’sk Terskii Kostamuksha Kemozero In Finland: Seitaperä – Kuhmo Kuopio – Kaavi kimberlites Karelian Craton Five kimberlite bodies are known to be Agreement with Rio Tinto the direct cash expenditures incurred present in the Claim Reservation areas. Malmikaivos oy reported that four of these bodies contain diamonds, including Kimberlite body 21, a sample containing 128 diamonds of greater than 0.8 mm and also a large single stone of 1.126 ct. We are delighted that we have secured these diamond bearing kimberlite bodies as part of our ongoing diamond exploration programme in Finland and our re-evaluation of the Kuopio-Kaavi area. The Company’s agreement with Rio Tinto has been extended to 2020. Under the in developing the project subject to the following conditions: agreement, Rio Tinto discloses to Karelian 1. For diamond projects the option will confidential information and physical be triggered if Karelian completes 10 geological samples relating to exploration tons or more of bulk sampling for in Finland for the purpose of Karelian diamond exploration; and considering that information in relation to Karelian’s potential and existing exploration programmes in Finland. As consideration for Rio Tinto disclosing the confidential information to it, Karelian has agreed that Rio Tinto will have the option to earn a 51 per cent. interest in any project identified by Karelian in Finland by Rio Tinto paying 2. For all other minerals the option will be triggered if Karelian discovers a resource with an in situ value that is equal to or greater than the in situ value of 3 million ounces of gold in a JORC compliant resource calculation. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 4 Chairman’s Statement continued MANTLE XENOLITHS AT SEITAPERÄ Mantle Xenoliths Site of diamond formation at Seitaperä Finance Auditors Future Outlook The loss after taxation for the year ended 31 May 2014 was €198,891 (2013: €179,955) and the net assets as at 31 May 2014 were €8,406,643 (2013: €4,422,130). I would like to take the opportunity to Your Company has made significant thank the partners and staff of Deloitte progress in its diamond exploration and Touche for their services to your programme in Finland and we Company during the course of the year. look forward to building on these As in previous years, I have supported the working capital requirements of the Directors, Consultants and Staff Company. The balance of the loans and I would also like to express my deep appreciation of the support and dedication of the directors, consultants and staff, which has made possible the continued progress which your Company has achieved. interest due to me at the period end was €309,589. The loans have been made on standard commercial terms. The other Directors consider, having consulted with the Company’s Nominated Adviser and the Company’s ESM Adviser, that the terms of these loans are fair and reasonable in so far as the Company’s shareholders are concerned. achievements. We have had excellent sample results and are hopefully getting very close to a kimberlite source. Professor Richard Conroy Chairman 20 November 2014 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc Company Information 5 Directors Professor Richard Conroy Chairman* Roger I Chaplin Non-Executive Director§ Seamus P. Fitzpatrick Non-Executive Director+§ Maureen T.A. Jones Managing Director* James P. Jones FCA Finance Director* Louis J. Maguire Non-Executive Director*+§ * Member of the Executive Committee + Member of the Remuneration Committee § Member of the Audit Committee Company Secretary and Registered Office James P. Jones FCA 10 Upper Pembroke Street Dublin 2 Statutory Audit Firm Deloitte & Touche Chartered Accountants & Statutory Audit Firm Deloitte & Touche House Charlotte Quay Limerick Registrars Capita Asset Services Shareholder Solutions (Ireland) 2 Grand Canal Square Dublin 2 www.capitaassetservices.ie Nominated Adviser Sanlam Securities UK Limited 10 King William Street London, EC4N 7TW UK Principal Banker Allied Irish Bank 1 Lower Baggot Street Dublin 2 ESM Adviser IBI Corporate Finance 2 Burlington Plaza Burlington Road Dublin 2 Broker Hume Capital Securities plc 1 Carey Lane London EC2V 8AE UK Legal Advisers William Fry Solicitors Fitzwilton House Wilton Place Dublin 2 Roschier-Holmberg Keskuskatu 7A 00 100 Helsinki Finland Head Office Karelian Diamond Resources PLC 10 Upper Pembroke Street Dublin 2 Tel: +353-1-661 8958 Fax: +353-1-662 1213 For further information visit the Company’s website at: www.kareliandiamondresources.com or contact: Lothbury Financial Services 36 Old Jewry London EC2R 8DD UK Tel: +44 20 3440 7620 Professor Richard Conroy Chairman Maureen T.A. Jones Managing Director Louis J. Maguire Non-Executive Director James P. Jones Finance Director Seamus P. FitzPatrick Non-Executive Director Roger I. Chaplin Non-Executive Director Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 6 Report of the Directors The Directors present their annual report, together with the audited financial statements of Karelian Diamond Resources plc for the year ended 31 May 2014. Principal Activities and Business Review The company is a London Stock Exchange AIM-listed and an Irish Stock Exchange ESM- listed natural resource company incorporated in Ireland, which is focused on the discovery of potential world-class diamond deposits in Finland. The company is presently exploring for diamonds and evaluating an existing diamond prospect (diamondiferous kimberlite pipe) in the Karelian Craton of Finland. The company has a number of projects at various stages of development throughout the diamond-prospective Karelian Craton. Future Development of the Business It is the intention of the directors to continue to develop the activities of the company concentrating particularly on diamonds. Further strategic opportunities in mineral resources, both in Finland and elsewhere, will be sought by the company. Risks and Uncertainties The company’s activities are directed towards the discovery, evaluation and development of diamond and other mineral deposits. Exploration for and development of mineral deposits is speculative. Whilst the rewards can be substantial, there is no guarantee that exploration on the company’s properties will lead to the discovery of commercially extractable mineral deposits. The future net asset value is therefore, inter alia, dependent on the success or otherwise of the company’s exploration programmes. Whether a mineral deposit will be commercially viable in a mining operation depends on a number of factors, such as the grade of the deposit, prices of the commodities being exploited, currency fluctuations, proximity to infrastructure, financing costs and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, import and export regulations and environmental protection. Key Performance Indicator Details of Directors Currently the company’s main KPI is in relation to the estimated resource potential on discovery and development of economic deposits of diamonds in Finland. In addition, the company reviews expenditure incurred on exploration projects together with an on- going review of operating costs. Results for the Year and State of Affairs at 31 May 2014 During the year the Company issued equity of €4,173,943 (net of expenses). The statement of financial position as at 31 May 2014 and the income statement for the year are set out on pages 13 and 14 respectively. The company recorded a loss of €198,891 (2013: €179,955) for the year ended 31 May 2014 and has net current assets of €1,386,835 (2013: net current liabilities of €1,207,778) at that date. Important Events Since Year End For important events which have occurred since year end, refer to Note 20 which accompanies these financial statements. Directors The Directors who served during the year are as follows: R.T.W.L. Conroy J.P. Jones S.P. FitzPatrick M.T.A. Jones L.J. Maguire R.I. Chaplin In accordance with the company’s Articles of Association, Mr Roger Chaplin and Miss Maureen Jones will retire by rotation and, being eligible, will offer themselves for re- election at the Annual General Meeting. Professor Richard Conroy, Chairman of the Board, has been involved in natural resources for many years. He established Trans-International Oil, which was primarily involved in Irish offshore oil exploration, and initiated the Deminex Consortium (which included Deminex, Mobil, Amoco and DSM). Trans-International Oil was merged with Aran Energy in 1979 (which was later acquired by Statoil). Professor Conroy founded Conroy Petroleum and Natural Resources which (as well as being involved in oil production and exploration) in 1986 discovered the Galmoy zinc deposit in Ireland. Conroy Petroleum was also a founding member of the Stone Boy consortium, an exploration group which discovered the Pogo gold deposit in Alaska, now a major producing gold mine. Conroy Petroleum acquired Atlantic Resources in 1992 and was renamed ARCON International Resources. Professor Conroy was Chairman and Chief Executive of Conroy Petroleum/ARCON from 1980 to 1994 before founding Conroy Gold and Natural Resources in 1995. An Emeritus Professor of Physiology in the Royal College of Surgeons in Ireland, Professor Conroy served in the Irish Parliament as a Member of the Senate and was at various times front bench spokesman for the government party in the Upper House on Energy, Industry and Commerce; Foreign Affairs; and Northern Ireland. Miss Maureen Jones, Managing Director, has over 20 years’ experience at senior level in the natural resource sector. She has been Managing Director of Conroy Gold since 1998 and was a founding director of the Company. She joined Conroy Petroleum and Natural Resources Plc on its foundation in 1980 and was a director and board member of Conroy Petroleum/ARCON from 1986 to 1994. Ms. Jones has a medical background and specialised in the radiographic aspects of Nuclear Medicine before becoming a manager with International Medical Corporation in 1977. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 7 Mr. James Jones, Finance Director, has been associated with the natural resources industry for many years. A Chartered Accountant, he was finance director of Conroy Petroleum and Natural Resources/ARCON from its formation until 1994. He was a founding director of Conroy Gold and Natural Resources and has served as Finance Director and secretary of the company since its inception. He joined Conroy Petroleum and Natural Resources Plc on its foundation in 1980 and was finance director of Conroy Petroleum/ARCON from 1980 to 1994. Mr. Séamus Fitzpatrick, Non-executive Director, has worked in both corporate finance and private equity in London and New York with Morgan Stanley, JP Morgan and Banker’s Trust. In 1999 he co-founded CapVest of which he is Managing Partner (which has raised funds in excess of £2.0 billion). He is Chairman of the Mater Private Hospital and of Valeo Foods and is a board member of Reno Norden. He is also a director and Deputy Chairman of Conroy Gold and Natural Resources Plc. Mr. Roger Chaplin, Non-executive Director, has over twenty five years’ experience in mining analysis, gained initially in a major South African mining house and latterly in the City of London. He was Senior Vice President and Mining Analyst at T. Hoare and Co., which later became Canaccord Capital (Europe) Limited in London from 1993 to 2003. Since 2003 he has worked as an independent analyst and as Head of Research for M. Horn & Co. He gained a particular interest in diamonds through following the development of the Canadian diamond mines over the past fifteen years. Mr. Louis Maguire, Non-executive Director, is an Auctioneer by profession and land valuation expert with particular expertise in the purchase of mineral rights and in land acquisition for mining. He is a founding director of the Company. He is also a director of Conroy Gold and Natural Resources plc. Directors’ and Secretary’s Shareholdings and Other Interests The interests of the Directors and Secretary, all of which were beneficially held, in the ordinary share capital and warrants of the company at 31 May 2014 and 31 May 2013 were as follows: At 31 May 2014 At 1 June 2013 Ordinary shares of €0.01 each Warrants Ordinary shares of €0.01 each Warrants R.T.W.L. Conroy 76,806,168* 8,354,382 37,031,701* 8,354,382 M.T.A. Jones J.P. Jones R. I. Chaplin S.P. FitzPatrick L.J. Maguire 6,110,875 4,941,275 125,836 4,941,275 3,814,873 3,104,689 20,000 922,426 51,668 271,262 432,201 432,201 58,335 20,000 666 51,668 3,104,689 271,262 432,201 432,201 * Of the 76,806,168 (2013: 37,031,701) Ordinary Shares beneficially held by Professor Richard Conroy 30,815,030, (2013: 30,815,030) are held by Conroy plc a company in which Professor Conroy has a controlling interest. Details of warrants, all of which are exercisable currently, are as follows: Directors At 31 May 2014 Granted During Year At 1 June 2013 R.T.W.L. Conroy 1,000,000 R.T.W.L. Conroy 5,521,049 M.T.A. Jones M.T.A. Jones J.P. Jones J.P. Jones R.I. Chaplin R.I. Chaplin S.P. FitzPatrick S.P. FitzPatrick L.J. Maguire L.J. Maguire 750,000 4,191,275 500,000 2,604,689 200,000 71,262 200,000 232,201 200,000 232,201 – – – – – – – – – – – – 1,000,000 5,521,049 750,000 4,191,275 500,000 2,604,689 200,000 71,262 200,000 232,201 200,000 232,201 Price 5p stg €0.10 5p stg €0.10 5p stg €0.10 5p stg €0.10 5p stg €0.10 5p stg €0.10 Expiry Date 1 September 2015 16 November 2017 1 September 2015 16 November 2017 1 September 2015 16 November 2017 1 September 2015 16 November 2017 1 September 2015 16 November 2017 1 September 2015 16 November 2017 Except as disclosed above, neither the Directors nor their families had any beneficial interest in the share capital of the company. Apart from loans from a shareholder, who is also a director (see Note 13 to the financial statements), there have been no contracts or arrangements during the financial year in which a director of the company was materially interested and which were significant in relation to the company’s business. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 8 Report of the Directors continued Substantial Shareholdings Books of Account So far as the Board is aware, no person or company, other than the Directors’ interests disclosed above and the shareholder’s listed below, held 3% or more of the issued ordinary share capital of the company at 31 May 2014. Name Number of ordinary shares % R.T.W.L. Conroy 76,806,168 26.81 Political Donations No political donations were made during the year. The measures taken by the Directors to secure compliance with the Company’s obligation to keep proper books of accounts in accordance with Section 202 of the Companies Act, 1990, are the use of appropriate systems and procedures and employment of competent persons. The books of account are kept at the Company’s registered office at 10 Upper Pembroke Street, Dublin 2. Auditor The auditors, Deloitte and Touche, Chartered Accountants, continue in office in accordance with Section 160 (2) of the Companies Act, 1963. Signed on behalf of the Board R.T.W.L. Conroy Director J.P. Jones Director 20 November 2014 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 9 Statement of Directors’ Responsibilities Irish company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: n select suitable accounting policies for the Company Financial Statements and then apply them consistently; n make judgements and estimates that are reasonable and prudent; and n prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union and comply with Irish statute comprising the Companies Acts, 1963 to 2013. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 10 Corporate Governance Statement the effectiveness of the Company’s internal control and risk management systems. It also considers the need for an internal audit function, which it believes is not required at present because of the company’s limited operations. The members of the committee have agreed to make themselves available should any member of staff wish to make representations to them about the conduct of the affairs of the company. The committee advises the board on the appointment of external auditors and on their remuneration and discusses the nature and scope of the audit with the external auditors. It meets formally at least once a year with the Company’s external auditors. An analysis of the fees payable to the external audit firm in respect of audit services during the year is set out in Note 5 to the financial statements. The audit committee also undertakes a formal assessment of the auditors’ independence each year which includes: a review of any non-audit services provided to the Company; discussion with the auditors of all relationships with the Company and any other parties that could affect independence or the perception of independence; and a review of the auditors’ own procedures for ensuring the independence of the audit firm and partners and staff involved in the audit. Executive Committee The Executive Committee comprises of Professor Richard Conroy, Miss Maureen Jones, Mr. James P. Jones and Mr. Louis Maguire. Its purpose is to support the Managing Director in carrying out the duties delegated to her by the board. It also ensures that regular financial reports are presented to the board, that effective internal controls are in place and functioning, and that there is an effective risk management process in operation throughout the company. Internal Control The board of directors is responsible for, and annually reviews, the company’s systems of internal control, financial and otherwise. Such systems provide reasonable but not absolute assurance of the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information. There are inherent limitations in any system of internal control and, accordingly, even the most effective system can provide only reasonable and not absolute assurance with respect to the preparation of financial information and the safeguarding of assets. Communication with Shareholders Extensive information about the company and its activities is given in the annual report and financial statements. Further information is available on the company’s website, www.kareliandiamondresources.com, which is promptly updated whenever announcements or press releases are made. The company encourages communication with shareholders throughout the year and welcomes their participation at general meetings. All Board members attend the Annual General Meeting and are available to answer questions. Separate resolutions are proposed on substantially different issues and the agenda of business to be conducted at the Annual General Meeting includes a resolution to receive and consider the Annual Report and financial statements. The chairmen of the Board’s committees will also be available at the Annual General Meeting. The Board regards the Annual General Meeting as a particularly important opportunity for shareholders, directors and management to meet and exchange views. Introduction The Board of Directors is accountable to the Company’s shareholders for good corporate governance. Board of Directors The board supports standards in corporate governance and endeavours to implement such standards constructively and in a sensible and pragmatic fashion with the objective of enhancing and protecting shareholder value. Regular board meetings are scheduled to take place throughout the year. During the year five meetings were held. All major policies are approved by the board. All directors are subject to re-election. A Statement of Directors’ Responsibilities in relation to the annual financial statements is set out at page 9. Remuneration Committee The remuneration committee comprises Mr. Louis Maguire and Mr. Séamus FitzPatrick. It is responsible for making recommendations to the board on the company’s executive remuneration. The committee determines any contract terms, remuneration and other benefits, including share options, for each of the executive directors. The board itself determines the remuneration of the non- executive directors. Audit Committee The committee’s terms of reference have been approved by the board. The audit committee comprises Mr. Louis Maguire, Mr. Roger Chaplin and Mr. Séamus FitzPatrick. The audit committee reviews the interim and annual financial statements before they are presented to the board, focusing in particular on accounting policies and areas of management judgement and estimation. The committee is responsible for monitoring the controls which are in force to ensure the information reported to the shareholders is accurate and complete. The committee considers internal control issues and contributes to the board’s review of Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 11 Independent Auditors’ Report To the Members of Karelian Diamond Resources plc We have audited the financial statements of Karelian Diamond Resources plc for the year ended 31 May 2014 which comprise the Statement of Financial Position, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity, the Cash Flow Statement and the related notes 1 to 22. The financial reporting framework that has been applied in their preparation is Irish law and International Financial Reporting Standards (IFRS) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Section 193 the Companies Act, 1990. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the financial statements giving a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Financial Statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: n give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the affairs of the company as at 31 May 2014 and of the loss for the year then ended; and n have been properly prepared in accordance with the Companies Acts, 1963 to 2013. Emphasis of Matter – Realisation of Intangible Assets and Going Concern In forming our opinion on the Financial Statements, which is not modified, we draw your attention to: n The disclosures made in Notes 2 and 8 to the financial statements concerning the realisation of exploration and evaluation assets included as intangible assets in the Statement of Financial Position. The realisation of these assets is dependent on the successful further development and ultimate production of the mineral reserves and the availability of adequate finance. The financial statements do not include any adjustments in relation to these uncertainties and the ultimate outcome cannot at present be determined. n The disclosures in notes 2 and 12 to the financial statements which indicate that the company incurred a loss of €198,891 during the year. The directors have reviewed the projected cash flows for the company and on the basis of the projected cash flow information, the funds raised during the year, the prospects for raising additional equity as required and taking into account the high potential of the acreage under licence, they consider it appropriate to prepare the financial statements on a going concern basis. The financial statements do not include any adjustments to the carrying amount, or classification of assets and liabilities, if the company was unable to continue as a going concern in the future. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 12 Independent Auditors’ Report continued Matters on which we are required to report by exception We have nothing to report in respect of the provisions in the Companies Acts, 1963 to 2013 which require us to report to you if, in our opinion, the disclosures of directors’ remuneration and transactions specified by law are not made. Gerard Casey For and on behalf of Deloitte & Touche Chartered Accountants and Statutory Audit Firm Limerick 20 November 2014 Matters on which we are required to report by the Companies Acts, 1963 to 2013 n We have obtained all the information and explanations which we consider necessary for the purposes of our audit. n In our opinion proper books of account have been kept by the company. n The financial statements are in agreement with the books of account. n In our opinion the information given in the directors’ report is consistent with the financial statements. n The net assets of the company, as stated in the Statement of Financial Position are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 May 2014 a financial situation which under Section 40(1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc Statement of Financial Position At 31 May 2014 13 Note 2014 € 2013 € ASSETS Non-current Assets Intangible assets Financial assets Property, plant and equipment Current Assets Trade and other receivables Cash and cash equivalents Total Assets EQUITY AND LIABILITIES Capital and Reserves Called up share capital Share premium Share based payments reserve Retained deficits Total Equity Non-current Liabilities 8 9 10 11 14 14 Trade and other payables: Amounts falling due after more than one year 13 Total non-current liabilities Current Liabilities Trade and other payables: Amounts falling due within one year 12 Total Current Liabilities Total Liabilities Total Equity and Liabilities The financial statements were approved by the Board of Directors on and signed on its behalf by: R.T.W.L. Conroy Director J.P. Jones Director 7,329,228 6,801,539 4 165 4 333 7,329,397 6,801,876 55,779 2,105,041 2,160,820 9,490,217 2,865,350 6,786,177 525,275 11,691 2,506 14,197 6,816,073 922,083 4,621,158 450,157 (1,770,159) (1,571,268) 8,406,643 4,422,130 309,589 309,589 773,985 773,985 1,083,574 9,490,217 1,171,968 1,171,968 1,221,975 1,221,975 2,393,943 6,816,073 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 14 Income Statement For the year ended 31 May 2014 OPERATING EXPENSES Finance income – bank interest receivable Finance costs – interest on shareholder loan LOSS BEFORE TAX Taxation LOSS RETAINED FOR THE YEAR Basic and diluted loss per share Note 4 13 5 6 7 2014 € (191,139) 699 (8,451) (198,891) – 2013 € (165,604) – (14,351) (179,955) – (198,891) (179,955) (€0.0013) (€0.0019) Statement of Comprehensive Income For the year ended 31 May 2014 LOSS FOR THE YEAR Total income and expense recognised in other comprehensive income TOTAL COMPREHENSIVE INCOME FOR THE YEAR Signed on behalf of the Board R.T.W.L. Conroy Director J.P. Jones Director 2014 € 2013 € (198,891) (179,955) – – (198,891) (179,955) Annual Report and Financial Statements 2014 Karelian Diamond Resources plc Statement of Changes in Equity For the year ended 31 May 2014 15 Retained Deficits € Total Equity € (1,391,313) 4,526,967 Share Capital € Share Premium € 922,083 4,621,158 – – – – Share-based Payment Reserve € 375,039 75,118 – (179,955) – 75,118 (179,955) 922,083 4,621,158 450,157 (1,571,268) 4,422,130 922,083 1,943,267 – – – 4,621,158 2,417,230 (252,211) – – 450,157 (1,571,268) – – 75,118 – – – – (198,891) 4,422,130 4,360,497 (252,211) 75,118 (198,891) 2,865,350 6,786,177 525,275 (1,770,159) 8,406,643 At 1 June 2012 Share-based payments Loss for the year At 31 May 2013 At 1 June 2013 Share issues Share issue expenses Share-based payments Loss for the year At 31 May 2014 Share Capital The share capital comprises of the nominal value share capital issued for cash and non-cash consideration. Share Premium The share premium reserve comprises of the excess consideration received in respect of share capital over the nominal value of share issued. Share Based Payment Reserve The share based payment reserve represents the amount expensed to the income statement and the amount capitalised as part of intangible assets of share-based payments granted which are not yet exercised and issued as shares. Retained Deficits This reserve represents the accumulated losses absorbed by the company to the Statement of Financial Position date. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 16 Cash Flow Statement For the year ended 31 May 2014 Cash flows from operating activities Cash generated used in operations Net cash used in operating activities Cash flows from investing activities Investment in exploration and evaluation Net cash used in investing activities Cash flows from financing activities Issue of share capital (net of share issue expenses) Increase in accrued director’s remuneration (Repayment)/advances of shareholder loans Interest received Net cash generated from financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Note 15 2014 € (147,489) (147,489) (432,548) (432,548) 3,025,788 – (343,915) 699 2,682,572 2,102,535 2,506 2,105,041 2013 € (50,768) (50,768) (292,105) (292,105) – 242,325 93,000 – 335,325 (7,548) 10,054 2,506 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 17 Notes to the Financial Statements For the year ended 31 May 2014 1. ACCOUNTING POLICIES The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and interpretations adopted by the International Accounting Standards Board. These financial statements have also been prepared in accordance with the Companies Acts, 1963 to 2013. The financial statements are prepared under the historical cost convention. Adoption of New and Revised Standards Standards and Interpretations not affecting the reported results nor the financial position In the current year, the following new and revised Standards have been adopted. Their adoption has not had any material impact on the amounts reported in these financial statements but they may affect the accounting for future transactions and arrangements. The adoption of these Standards has not led to any changes in the Group’s accounting policies. Amendments to IFRS 1 (March 2012) Government Loans (effective for accounting dates beginning on or after 1 January 2013) Amendments to IFRS 7 (Dec 2011) Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities (effective for accounting periods beginning on or after 1 January 2013) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective for accounting periods beginning on or after 1 January 2013) Amendments to IAS 1 (June 2011) Presentation of Items of Other Comprehensive Income (effective for accounting periods beginning on or after 1 July 2012) IAS 19 (revised June 2011) Employee Benefits (effective for accounting periods beginning on or after 1 January 2013) IFRS 13 Fair Value Measurement (effective for accounting periods beginning on or after 1 January 2013) Amendments to IAS 12 (Dec 2010) Deferred Tax: Recovery of Underlying Assets (effective for accounting periods beginning on or after 1 January 2013) Amendments to IFRS 1 (Dec 2010) Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for accounting periods beginning on or after 1 January 2013) Annual Improvements to IFRSs: 2009-2011 Cycle (May 2012): Annual Improvements to IFRSs: 2009-2011 Cycle (effective for accounting periods beginning on or after 1 January 2013) Standards and Interpretations in Issue Not Yet Effective At the date of authorisation of these financial statements, other than the Standards and Interpretations adopted by the Group in advance of their effective dates, the following Standards were in issue but not yet effective and in some cases had not been adopted by the European Union: Amendments to IFRS 10 and IAS 28 (Sept 2014) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective date to be confirmed) Amendments to IAS 27 (Aug 2014) Equity Method in Separate Financial Statements (effective date to be confirmed) IFRS 9 Financial Instruments (effective date to be confirmed) Amendments to IAS 16 and IAS 41 (Jun 2014) Agriculture: Bearer Plants (effective date to be confirmed) IFRS 15 Revenue from Contracts with Customers (effective date to be confirmed) Amendments to IAS 16 and IAS 38 (May 2014) Clarification of Acceptable Methods of Depreciation and Amortisation (effective date to be confirmed) Amendments to IFRS 11 (May 2014) Accounting for Acquisitions of Interests in Joint Operations (effective date to be confirmed) IFRS 14 Regulatory Deferral Accounts (effective date to be confirmed) Amendments to IAS 19 (Nov 2013) Defined Benefit Plans: Employee Contributions (effective date to be confirmed) Amendments to IAS 39 (Jun 2013) Novation of Derivatives and Continuation of Hedge Accounting (effective for accounting periods beginning on or after 1 January 2014) Amendments to IAS 36 (May 2013) Recoverable Amount Disclosures for Non-Financial Assets (effective for accounting periods beginning on or after 1 January 2014) Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 18 Notes to the Financial Statements continued 1. ACCOUNTING POLICIES continued IFRIC 21 Levies (effective for accounting periods beginning on or after 17 June 2014) Amendments to IFRS 10, IFRS 12 and IAS 27 (Oct 2012) Investment Entities (effective for accounting periods beginning on or after 1 January 2014) Amendments to IAS 32 (Dec 2011) Offsetting Financial Assets and Financial Liabilities (effective for accounting periods beginning on or after 1 January 2014) IFRS 12 Disclosure of Interests in Other Entities (effective for accounting periods beginning on or after 1 January 2014) IFRS 11 Joint Arrangements (effective for accounting periods beginning on or after 1 January 2014) IFRS 10 Consolidated Financial Statements (effective for accounting periods beginning on or after 1 January 2014) IAS 28 (revised May 2011) Investments in Associates and Joint Ventures (effective for accounting periods beginning on or after 1 January 2014) IAS 27 (revised May 2011) Separate Financial Statements (effective for accounting periods beginning on or after 1 January 2014) Annual Improvements to IFRSs: 2012-2014 Cycle: Annual Improvements to IFRSs: 2012-2014 Cycle (effective date to be confirmed) Annual Improvements to IFRSs: 2011-13 Cycle (Dec 2013): Annual Improvements to IFRSs: 2011-13 Cycle (effective date to be confirmed) Annual Improvements to IFRSs: 2010-12 Cycle (Dec 2013): Annual Improvements to IFRSs: 2010-12 Cycle (effective date to be confirmed) A. Intangible Assets The Company accounts for mineral expenditure in accordance with International Financial Reporting Standard 6 – Exploration For and Evaluation of Mineral Resources. (i) Capitalisation Certain costs (other than payments to acquire the legal rights to explore) incurred prior to acquiring the rights to explore are charged directly to the income statement. Exploration, appraisal and development expenditure incurred on exploring, and testing exploration prospects are accumulated and capitalised as intangible exploration and evaluation (E&E) assets. Capitalised costs include geological and geophysical costs, and other direct costs of exploration (drilling, trenching, sampling and technical feasibility and commercial viability activities). In addition, capitalised costs includes an allocation from operating expenses, including share based payments, all such costs are directly related to exploration and evaluation activities. E&E costs are not amortised prior to the conclusion of appraisal activities. At completion of appraisal activities if technical feasibility is demonstrated and commercial reserves are discovered, then the carrying amount of the relevant E&E asset will be reclassified as a development and production asset, once the carrying value of the asset has been assessed for impairment. If following completion of appraisal activities in an area, it is not possible to determine technical feasibility and commercial viability, or if the right to explore expires, then the costs of such unsuccessful exploration and evaluation is written off to the income statement in the period in which the event occurred. (ii) Impairment If facts and circumstances indicate that the carrying value of an E&E asset may exceed its recoverable amount, an impairment review is performed. The following are considered to be key indicators of impairment. n The right to explore in an area has expired, or will expire in the near future, without renewal. n No further exploration or evaluation is planned or budgeted for. n A decision has been made to discontinue exploration and evaluation in an area, because of the absence of commercial reserves. n Sufficient data exists to indicate that the carrying amount will not be fully recovered from future development and production. For E&E assets, where the above indicators exist, an impairment test is carried out. The E&E assets are categorised into Cash Generating Units (“CGU”). The carrying value of the CGU is compared to its recoverable amount and any resulting impairment loss is written off to the income statement. The recoverable amount of the CGU is assessed as the higher of its fair value, less costs to sell, and its value in use. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 19 1. ACCOUNTING POLICIES continued B. Transaction Costs Transaction costs arising on the issue of equity securities are accounted for as a deduction from equity against the share premium account. C. Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a straight line basis to write off the cost less estimated residual value of the assets over their estimated useful lives as follows: Plant and office equipment 10 years D. Taxation The tax expense represents the sum of the current and deferred tax charge. The tax currently payable is based on taxable profits for the year. Taxable profit differs from net profit or loss as reported in the income statement because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are not taxable or deductible. The company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit and is accounted for using the statement of financial position liabilities method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also taken directly to equity. E. Share Based Payments For equity-settled share based payment transactions (i.e. the granting of share options and share warrants), the company measures the services and the corresponding increase in equity at fair value at the measurement date (which is the grant date) using a recognised valuation methodology for the pricing of financial instruments (Binomial Lattice Model). Given that the share options, and warrants granted do not vest until the completion of a specified period of service the fair value is determined on the basis that the services to be rendered by employees as consideration for the granting of share options and warrants will be received over the vesting period, which is assessed as the grant date. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight line basis over the vesting period, based on the company’s estimate of equity instruments that will eventually vest. The amount expensed to the income statement excludes the amount capitalised as part of intangible assets. F. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. G. Trade and other receivables and payables Trade and other receivables and payables are measured at initial recognition at fair value, and subsequently measured at amortised cost. H. Cash and cash equivalents Cash and cash equivalents consist of cash at bank held by the company and short term bank deposits with a maturity of three months or less. Cash and cash equivalents are held for the purpose of meeting short term cash commitments. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 20 Notes to the Financial Statements continued 1. ACCOUNTING POLICIES continued I. Pension costs The company provides for certain employees through defined contribution pension schemes. The amounts charged to the income statement and statement of financial position is the contribution payable in that year. Any difference between amounts charged and contributions paid to the pension scheme is included in receivables or payables at the statement of financial position. J. Foreign Currencies Transactions denominated in foreign currencies relating to revenues, costs and non-monetary assets are translated into Euro at the rates of exchange ruling on the dates on which the transactions occurred. Monetary assets and liabilities denominated in foreign currencies are translated into Euro at the rate of exchange ruling at the statement of financial position date. The resulting profits or losses are dealt with in the income statements. K. Shareholder Loan Shareholder loan is initially measured at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount of initial recognition. L. Critical accounting judgments and key sources of estimation uncertainty Critical judgments in applying the company’s accounting policies In the process of applying the company’s accounting policies above, management has identified the judgmental areas that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below): Exploration and evaluation The assessment of whether general administration costs and salary costs are capitalised or expensed involves judgement. Management considers the nature of each cost incurred and whether it is deemed appropriate to capitalise it within intangible assets. In addition there is uncertainty as to whether the exploration activity will yield any economical viable discovery. Impairment of intangible assets If an indicator of impairment exists (as outlined in the Intangible Assets accounting policy), the exploration and evaluation assets need to be allocated into Cash Generating Units (“CGU”). The determination of what constitutes a cash generating unit requires judgment. Once this is decided, the carrying value of each cash generating unit is compared to its recoverable amount. The recoverable amount of the CGU is assessed as the higher of its fair value, less costs to sell, and its value in use. The determination of value in use requires the following judgments: n Estimation of future cash flows expected to be derived from the asset. n Expectation about possible variations in the amount or timing of the future cash flows. n The determination of an appropriate discount rate. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 21 1. ACCOUNTING POLICIES continued Going concern The preparation of the financial statements requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on finance being available for the continuing working capital requirements of the company and finance for the development of the company’s projects becoming available. The directors have reviewed the projected cash flows for the company and on the basis of the projected cash flow information, the funds raised during the year, the prospects for raising additional equity as required and taking into account the high potential of the acreage under licence, they consider it appropriate to prepare the financial statements on a going concern basis. Should the going concern basis not be appropriate, adjustments would have to be made to reduce the value of the company’s assets, in particular the intangible fixed assets, to their realisable values. Key sources of estimation uncertainty The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the statement of financial position date and the amounts reported for revenues and expenses during the year. The nature of estimation means that actual outcomes could differ from those estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Share-based payments The estimation of share-based payment costs requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. The Company has made estimates as to the volatility of its own shares, the probable life of options granted and the time of exercise of those options. The model used by the Company is the Binomial Lattice Model. In addition, the directors consider that 80% of their activity is primarily focused on the company’s diamond prospects and therefore, the directors consider it appropriate to capitalise 80% of such costs to exploration and evaluation assets. Deferred tax No deferred tax asset has been recognised in respect of tax losses as it cannot be considered probable that future taxable profits will be available against which the related temporary differences can be utilised. 2. GOING CONCERN Mineral exploration and evaluation costs capitalised as intangible assets amounted to €7,329,228 (2013: €6,801,539) (Note 8) at the statement of financial position date. The directors recognise that the future realisation of intangible assets is dependent on the successful further development and ultimate production of the mineral reserves and the availability of sufficient finance to bring the reserves to economic maturity and profitability. The company made a loss of €198,891 (2013: €179,955) for the year ended 31 May 2014. During the year, the company issued equity of €4,173,943 (net of expenses) and at the balance sheet date had net current assets of €1,386,835. The directors have reviewed the projected cash flows for the company and on the basis of the projected cash flow information, the funds raised during the year, the prospects for raising additional equity as required and taking into account the high potential of the acreage under licence, they consider it appropriate to prepare the financial statements on a going concern basis. The financial statements do not include any adjustments to the carrying amount, or classification of assets and liabilities, if the company was unable to continue as a going concern in the future. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 22 Notes to the Financial Statements continued 3. SEGMENTAL REPORTING Operating segments have been identified on the basis of internal reports about components of the Company that are regularly reviewed by the Chief Operating Decision Maker, being the Board of Directors, in order to allocate resources to segments and to assess their performance. The Company has one class of business, diamond exploration, and operates within one geographical market, Finland. Accordingly, the income statement and statement of financial position represents the activity of the Company’s sole business segment. 4. OPERATING EXPENSES Operating expenses Transfer to intangible assets (Note 8) Operating expenses are analysed as follows: Wages and salaries Share based payments Depreciation Auditor’s remuneration Other operating expenses 2014 € 521,634 (330,495) 191,139 2014 € 256,531 75,118 168 10,000 179,817 521,634 2013 € 456,047 (290,443) 165,604 2013 € 251,771 75,118 168 10,000 118,990 456,047 Of the above costs, a total of €330,495 (2013: €290,443) is allocated to intangible assets, based on a review of the nature and quantum of the underlying costs. (a) Wages and salaries as disclosed above is analysed as follows: Wages and salaries Social welfare costs Pension costs 2014 € 231,281 1,250 24,000 256,531 2013 € 227,771 – 24,000 251,771 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 23 4. OPERATING EXPENSES continued (b) An analysis of remuneration for each director (prior to amounts capitalised as part of intangible assets) of the company in the current financial year is as follows: Prof. R.T.W.L. Conroy M.T.A. Jones J.P. Jones L.J. Maguire S.P. Fitzpatrick R.I. Chaplin Fees € 20,000 10,000 10,000 10,000 10,000 10,000 Salary € 65,000 50,000 30,000 – – – Share Based Payments € Pension Contributions € 28,687 21,730 13,679 2,019 2,019 1,333 – 15,000 9,000 – – – Total € 113,687 96,730 62,679 12,019 12,019 11,333 70,000 145,000 69,467 24,000 308,467 An analysis of remuneration for each director (prior to amounts capitalised as part of intangible assets) of the company in the prior financial year is as follows: Prof. R.T.W.L. Conroy M.T.A. Jones J.P. Jones L.J. Maguire S.P. Fitzpatrick R.I. Chaplin Fees € 20,000 10,000 10,000 10,000 10,000 10,000 Salary € 65,000 50,000 30,000 – – – Share Based Payments € Pension Contributions € 28,687 21,730 13,679 2,019 2,019 1,333 – 15,000 9,000 – – – Total € 113,687 96,730 62,679 12,019 12,019 11,333 70,000 145,000 69,467 24,000 308,467 The total share based payment charge of €75,118 (2013: €75,118) is accounted for as shown below: Share based payment charge expensed to income statement Share based payment charge transferred to intangible assets 2014 € 13,781 61,337 75,118 2013 € 13,781 61,337 75,118 In the opinion of the directors, approximately eighty per cent of the share based payment charge is directly related to exploration and evaluation activities, and has been capitalised within intangible assets. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 24 Notes to the Financial Statements continued 5. LOSS BEFORE TAX The loss before tax is arrived at after charging the following items, which are stated at amounts prior to the transfer to intangible assets: Directors’ remuneration – Fees for services as directors – Remuneration for management services – Share based payments Depreciation Auditor’s remuneration – Audit of individual accounts – Other assurance services – Tax advisory services – Other non-audit services 6. TAXATION (a) Analysis of the taxation charge for the year Irish corporation tax Total current tax 2014 € 70,000 169,000 69,467 168 2013 € 70,000 169,000 69,467 168 10,000 10,000 – – – 2014 € – – – – – 2013 € – – No taxation charge arises in the current or prior financial year due to losses being incurred. (b) Factors affecting the tax charge for the year: The tax due for the year is different to the standard rate of Irish corporation tax. This is due to the following: Loss on ordinary activities before tax Loss on ordinary activities multiplied by the standard rate of Irish corporation tax of 12½% (2013: 12½%) Effects of: Losses carried forward for future utilisation Tax charge for the year 2014 € 2013 € (198,891) (179,955) (24,861) (22,494) 24,861 – 22,494 – No deferred tax asset has been recognised on accumulated tax losses as it cannot be considered probable that future taxable profit will be available against which the deferred tax asset can be utilised. The amount not recognised amounts to €654,345 (2013: €629,484). Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 25 7. LOSS PER SHARE The calculation of the basic and diluted loss per share of €0.0013 (2013: €0.0019) is based on the loss for the financial year of €198,891 (2013: €179,955) and the weighted average number of ordinary shares on a basic and fully diluted basis during the year of 157,942,015 (2013: 92,308,242). The effect of share options and warrants is anti-dilutive. 8. INTANGIBLE ASSETS Exploration and evaluation: Cost At 1 June Expenditure during the year – licence and appraisal cost – other operating costs (Note 4) – equity settled share based payments (Note 4) – loan interest (Note 13) 2014 € 2013 € 6,801,539 6,390,694 163,391 269,157 61,338 33,803 62,999 229,106 61,337 57,403 At 31 May 7,329,228 6,801,539 Exploration and evaluation assets relate to expenditure incurred in the development of mineral exploration opportunities. The directors are aware that by its nature there is an inherent uncertainty in exploration and evaluation, and, consequently, in relation to the carrying value of capitalised exploration and evaluation assets. The directors have considered the proposed work programmes for these mineral reserves. They are satisfied that there are no indications of impairment, but nonetheless recognise that future realisation of the intangible assets, is dependent on further successful exploration and appraisal activities and the subsequent economic production of the mineral reserves and the availability of sufficient finance to bring the resources to economic maturity and profitability. 9. FINANCIAL ASSETS Investment in subsidiaries 2014 € 4 2013 € 4 Financial assets represent investments of €2 in each of the company’s wholly owned subsidiary undertakings, Karelian Diamonds Limited and Nordic Diamonds Limited. The net assets of each entity is €2. Certain diamond claims in Finland are held in the name of the company’s subsidiaries. The registered office of both non-trading subsidiaries is 10 Upper Pembroke Street, Dublin 2. The above subsidiaries have not been consolidated on the basis that they are not trading, and the net assets of each entity is €2. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 26 Notes to the Financial Statements continued 10. PROPERTY, PLANT AND EQUIPMENT Plant & Office Equipment Cost At 1 June At 31 May Accumulated Depreciation At 1 June Charge for the year At 31 May At 31 May 11. TRADE AND OTHER RECEIVABLES VAT receivable Prepayments Amounts due from group companies (Note 17) 12. TRADE AND OTHER PAYABLES (Amounts falling due within one year) Accrued directors’ remuneration – fees and other emoluments – pension contributions Amounts owed to group companies (note 17) Accruals PAYE/PRSI 2014 € 1,677 1,677 1,344 168 1,512 165 2014 € 18,865 3,187 33,727 55,779 2013 € 1,677 1,677 1,176 168 1,344 333 2013 € 8,505 3,186 – 11,691 2014 € 2013 € 94,179 156,000 – 68,744 455,062 773,985 942,264 132,000 119,306 28,405 – 1,221,975 It is the company’s normal practice to agree terms of transactions, including payment terms, with suppliers and provided suppliers perform in accordance with the agreed terms, it is the company’s policy that payment is made according to the agreed terms. The company has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. The carrying value of the trade and other payables approximates to their fair value. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 13. NON-CURRENT FINANCIAL LIABILITIES (Amounts falling due after more than one year) Shareholder loans Opening balance Converted to shares (Note 14(a)) Funds (repaid)/advanced Interest charge for the year 27 2014 € 2013 € 1,171,968 1,007,214 (560,718) (343,915) 42,254 – 93,000 71,754 309,589 1,171,968 Prior to the placing of shares in December 2013, the immediate funding requirements of the company had been financed by advances from Prof. R.T.W.L. Conroy (executive chairman and major shareholder). Interest at a rate of 8.25% per annum is accrued on the outstanding principal. The accrued interest at 31 May 2014 is €308,557 (2013: €266,303). The accrued interest is included within shareholder loans above. Of the €42,254 interest charge for the year (2013: €71,754), €8,451 (2013: €14,351) has been expensed to the income statement, with the remaining charge of €33,803 (2013: €57,403) being transferred to intangible assets (Note 8). 14. CALLED UP SHARE CAPITAL AND PREMIUM Authorised: 500,000,000 ordinary shares of €0.01 each Issued and Fully Paid – current financial year At start of year Share issue (a) Share issue (b) Share issue (c) Share issue (d) Issue expenses At end of year 2014 € 2013 € 5,000,000 5,000,000 Number 92,208,342 77,991,666 37,500,000 27,500,000 51,335,026 – Share Capital € Share Premium € 922,083 779,917 375,000 275,000 513,350 – 4,621,158 616,134 528,000 385,000 888,096 (252,211) 286,535,034 2,865,350 6,786,177 Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 28 Notes to the Financial Statements continued 14. CALLED UP SHARE CAPITAL AND PREMIUM continued (a) On 11 December 2013, 46,666,666 ordinary shares of €0.01 each were placed for cash raising £700,000 before expenses and £469,875 of the shareholder’s loan was converted into 31,325,000 ordinary shares of €0.01 shares. The shares were issued at 1.5p sterling (€0.0179) resulting in a premium of €0.0079 per share (Note 13). (b) On 7 January 2014, 37,500,000 ordinary shares of €0.01 each were placed for cash raising £750,000 before expenses. The shares were issued at 2.0p sterling (€0.0248) resulting in a premium of €0.0148 per share. (c) On January 2014, 27,500,000 ordinary shares of €0.01 each were placed for cash raising £550,000 before expenses. The shares were issued at 2.0p sterling (€0.0240) resulting in a premium of €0.014 per share. (d) On 2 May 2014, 32,222,222 ordinary shares of €0.01 each were placed for cash raising £725,000 before expenses and certain directors converted accrued salaries and fees totalling £430,038 into 19,112,804 ordinary shares of €0.01 each. The shares were issued at 2.25p sterling (€0.0273) resulting in a premium of €0.0173 per share (Note 17 (d)). (e) On 16 December 2010 warrants to subscribe for 3,888,888 shares were granted. The warrants are exercisable at 5p at any time up to 23 December 2013. These warrants lapsed during the year. (f) At 31 May 2013 and 31 May 2014 warrants over 4,000,000 shares exercisable at 5p sterling at any time up to 1 September 2015 were outstanding. (g) At 31 May 2013 and 31 May 2014, warrants over 12,852,677 shares exercisable at 10p sterling at any time up to 16 November 2017 were outstanding. (h) At 31 May 2013 and 31 May 2014, 1,000,000 options were outstanding and are exercisable at prices ranging from €0.0761 to €0.0975 and expire between 16 April 2017 and 14 January 2018. (i) The share price at 31 May 2014 was 2.15p sterling. During the year the price ranged from 0.62p to 4.4p sterling. Issued and Fully Paid – previous financial year Number Share Capital € Share Premium € At start and end of year 92,208,342 922,083 4,621,158 (a) On 16 December 2010 warrants to subscribe for 3,888,888 shares were granted. The warrants are exercisable at 5p at any time up to 23 December 2013 and all were outstanding at 31 May 2013. (b) On 6 April 2012 warrants to subscribe for 6,666,666 shares were granted. The warrants are exercisable at 6p at any time up to 13 April 2013. These warrants lapsed during the year ended 31 May 2013. (c) At 31 May 2012 and 31 May 2013 warrants over 4,000,000 shares exercisable at 5p sterling at any time up to 1 September 2015 were outstanding. (d) At 31 May 2012 and 31 May 2013, warrants over 12,852,677 shares exercisable at 10p sterling at any time up to 16 November 2017 were outstanding. (e) At 31 May 2011 and 31 May 2013 1,000,000 options were outstanding and are exercisable at prices ranging from €0.0761 to €0.0975 and expire between 16 April 2017 and 14 January 2018. (f) The share price at 31 May 2013 was 0.575p sterling. During the year ended 31 May 2013 the price ranged from 0.50p to 1.02p sterling. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 15. NOTE TO THE CASHFLOW STATEMENT Reconciliation of operating loss to Net Cash generated (used in) Operations: Operating Loss Depreciation Expense recognised in income statement in respect of equity settled share based payments Increase in creditors (Increase)/decrease in debtors Net cash used in operations 29 2014 € (191,139) 168 13,780 73,790 (44,088) 2013 € (165,604) 168 13,781 65,196 35,691 (147,489) (50,768) 16. COMMITMENTS AND CONTINGENCIES At 31 May 2014 there were no capital commitments or contingent liabilities (2013: €Nil). 17. RELATED PARTY TRANSACTIONS (a) Details as to shareholder loans and share capital transactions and transactions with Prof. R.T.W.L Conroy are outlined in Notes 13 and 14 to the financial statements. (b) The company shares accommodation with Conroy Gold and Natural Resources plc which has certain common shareholders and directors. For the year ended 31 May 2014, Conroy Gold and Natural Resources plc, incurred costs totalling €205,768 (2013: €84,950) on behalf of the company. These costs were recharged to the company by Conroy Gold & Natural Resources plc. The costs are analysed as follows: Wages and salaries Rent and rates Travel and subsistence Legal and professional Other operating expenses Exploration Costs 2014 € 28,713 13,463 17,805 40,906 42,329 62,552 205,768 2013 € 9,446 4,920 6,311 21,116 12,701 30,456 84,950 At 31 May 2014, €33,727 was paid in advance and at 31 May 2013, €119,306 was outstanding in relation to recharges between the related parties. (c) Details of key management compensation which comprises directors’ remuneration including short term employee benefits €215,000 (2013: €215,000), post-employment benefits €24,000 (2013: €24,000), other long term benefits €Nil (2013: €Nil), share based payment €69,467 (2013: €69,467) and termination benefits €Nil (2013: €Nil) are outlined in Note 4 to the financial statements. (d) During the year, certain directors converted accrued salaries and fees totalling £430,038 sterling into 19,112,804 ordinary shares of €0.01 each. The shares were issued at 2.25p sterling (€0.0273) resulting in a premium of €0.0173 per share. The shares issued as a result of the conversion are set out hereunder: Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 30 Notes to the Financial Statements continued 17. RELATED PARTY TRANSACTIONS continued Director R.T.W.L. Conroy M. Jones J. Jones S. Fitzpatrick No. of shares 8,449,467 5,985,039 3,756,538 921,760 19,112,804 Amount Converted € 230,670 163,392 102,554 25,164 521,780 18. SHARE BASED PAYMENTS The company operates a share option scheme for employees who devote a substantial amount of their time to the business of the company. Options granted generally have a vesting period of ten years. Details of the share options outstanding during the year are as follows: 2014 2013 No. of Share Options Weighted Average Exercise Price € No. of Share Options Weighted Average Exercise Price € 1,000,000 0.0803 1,000,000 0.0803 – – – – – – – – – – – – 1,000,000 0.0803 1,000,000 0.0803 1 June Granted during year Exercised during year Lapsed during year 31 May Warrants granted generally have a vesting period of ten years. Details of the warrants outstanding during the year are as follows: 2014 2013 No. of Share Warrants Weighted Average Exercise Price € No. of Share Warrants Weighted Average Exercise Price € 18,686,010 0.0872 18,686,010 0.0872 – – – – – – – – – – – – 18,686,010 0.0872 18,686,010 0.0872 1 June Granted during year Exercised during year Lapsed during year 31 May The company estimated the fair value of employee stock options and warrants awards using the Binomial Lattice Model. The determination of the fair value of share based payment awards on the date of grant using the Binomial Lattice Model is affected by Karelian Diamond Resources Plc stock price as well as assumptions regarding a number of subjective variables. These variables include the expected term of the awards, the expected stock price volatility over the term of the awards, the risk free interest rate associated with the expected term of the awards and the expected dividends. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 31 18. SHARE BASED PAYMENTS continued The company’s Binomial Lattice Model included the following weighted average assumptions for the company’s employee stock option and warrants. Dividend yield Expected volatility Risk free interest rate Expected life (in years) 2014 Stock options 2014 Stock warrants 2013 Stock options 2013 Stock warrants 0% 70% 4.2% 10 0% 70% 4.1% 10 0% 70% 4.2% 10 0% 70% 4.1% 10 This calculation results in a share based payments reserve movement of €75,118 (2013: €75,118). 19. SUBSTANTIAL SHAREHOLDINGS Substantial shareholding in Karelian Diamond Resources plc is held by the following shareholder: Name Professor Conroy Number of ordinary shares 76,806,168 % 26.81% * Of the 76,806,168 ordinary shares held by Professor Conroy, 30,815,030 are held by Conroy Plc, a company in which Professor Conroy has a controlling interest. 20. SUBSEQUENT EVENTS There are no important events since year end which need to be disclosed within these financial statements. 21. FINANCIAL INSTRUMENTS The company’s financial assets and liabilities stated at carrying amount and fair value are as follows at 31 May 2014: Trade and other receivables Cash and cash equivalents Trade and other payables and financial liabilities Carrying Amount 2014 € Fair Value 2014 € Carrying Amount/ Fair Value 2013 € 55,779 2,105,041 1,083,574 55,779 2,105,041 1,083,574 11,691 2,506 2,393,943 The following sets out the methods and assumptions used in estimating the fair value of financial assets and liabilities. Trade and Other Receivables/Payables and Financial Liabilities As both trade and other receivables and trade and other payables have a remaining life of less than one year, the carrying value is deemed to reflect fair value. The company has received confirmation that payment of the shareholder loan will not be demanded for a period of 12 months from the date of approval of the financial statements. The directors consider that its carrying value reflects its fair value as no fixed repayment arrangements attached to same. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc 32 Notes to the Financial Statements continued 21. FINANCIAL INSTRUMENTS continued Cash and Cash Equivalents As cash and cash equivalents have a remaining maturity of less than three months, the nominal amount is deemed to reflect the fair value. Risk Management The company is exposed to a variety of financial risks as a result of its activities. These risks include credit risk, liquidity risk and market risk (including interest rate risk). Credit Risk Credit risk is the risk that a counterparty will default on its contractual obligations resulting in financial loss to the company. The company has a policy of dealing only with credit worthy counterparties. The company’s exposure to credit risk relates to the carrying value of cash and cash equivalents and trade and other receivables which at 31 May 2014 amounted to €2,160,820 (2013: €14,197). At 31 May 2014 and 31 May 2013 all trade and other receivables were not past due. Liquidity Risk Liquidity risk is the risk that the company will not be able to meet its obligations as they fall due. The company’s policy is to monitor cash flow and consider whether available cash resources are sufficient to meet its ongoing exploration programme. The nature of the company’s activities can result in differences between actual and expected cash flows. This risk was managed by the directors during the year by way of raising sufficient finance so that the company has sufficient resources to carry out its forthcoming work programme. Market Risk – Interest Rate Risk The company’s exposure to changes in interest rates relates primarily to the shareholder loan balance. If the interest rate rose by 1%, the company’s loss would increase by €9,057. A decrease in the interest rate would result in a corresponding decrease in the same amount. 22. APPROVAL OF FINANCIAL STATEMENTS These financial statements were approved by the Board on 20 November 2014. Annual Report and Financial Statements 2014 Karelian Diamond Resources plc