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2023 ReportAnnual Report and Financial Statements 2015 Contents Chairman’s Statement Company Information Report of the Directors Directors’ Responsibilities Statement Corporate Governance Statement Independent Auditors’ Report Statement of Financial Position 2 5 6 9 10 11 13 Income Statement 14 Statement of Comprehensive Income 14 Statement of Changes in Equity 15 Cash Flow Statement 16 Notes to the Financial Statements 17 2 Chairman’s Statement The diamond prospectivity of the Karelian Orange mantle garnets can include Craton is indicated by presence of the eclogitic pyrope-almandine garnets (G3) world class Lomonosova and Grib Pipe and if eclogite mantle materials are diamond deposits in the Russian Sector present it is significant, as they may be of the Craton. Indeed, ALROSA Group, associated with richer diamond grades. the Russian company which is the world’s largest diamond miner, has indicated that this new diamond region will represent almost all of its future growth. The indicator minerals were sent for analysis by Scanning Electron Microscopy (“SEM”) for precise classification which would determine whether any of the Your Company’s objective is to search for sample material was derived from the diamond deposits in similar geology on diamond stability field. Professor Richard Conroy Chairman the Finnish side of the Karelian Craton. To this end your Company has for some I have pleasure in presenting your Company’s Annual Report and Financial Statements for the financial year ended 31 May 2015. The year has been an excellent one for your Company culminating in the discovery of a new kimberlite body at Rihiivaara near Kuhmo in Eastern Finland close to the Russian border. This discovery is a major step forward in your Company’s diamond exploration programme in the Karelian Craton. years been conducting an extensive exploration programme for diamonds in Finland. Finland is recognised by the prestigious Fraser Institute as the most attractive jurisdiction in the world for mining investment. Discovery of New Kimberlite Body The recovery of high concentrations of kimberlitic indicator minerals (“KIMs”) during exploration at Rihiivaara in the Kuhmo region suggested the possible presence in the area of a new kimberlite source. Laboratory results from a sample collected from the Rihiivaara target in the area showed high concentrations of over 100 KIMs. The results included 48 purple to red peridotitic garnets (G9/10 Cr-pyrope) and 46 orange mantle garnets 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. The results confirmed that the sample material had been derived from the diamond stability field and that eclogitic grains were also present in the sample and raised the prospect of a new kimberlite discovery in an area where your Company, at Seitaperä, has already outlined the largest diamondiferous pipe so far discovered in Finland. Early in 2015 your Company was delighted to announce that it had discovered a new kimberlite body during follow-up pitting in the area of Rihiivaara where the samples containing high concentrations of kimberlite indicator minerals had been found during our previous exploration work. The material recovered from the pit was confirmed as being kimberlitic by Dr Hugh O’Brien of the Geological Survey of Finland (GTK), an acknowledged expert in the field. Subsequent analyses by Rio Tinto Mining and Exploration in their Melbourne Laboratories of samples collected by your Company close to this newly discovered kimberlite body identified high category rating diamondiferous kimberlite indicator minerals in the samples. The results included G10(D) Garnets which as they are low calcium chrome pyropes that form within the diamond stability field of the upper mantle, where the Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 3 temperature and pressure is suitable for Kuopio-Kaavi is situated in Central Under the agreement, Rio Tinto discloses the formation of diamonds, is particularly Finland. Five kimberlite bodies are known to Karelian confidential information and encouraging. to be present in the Claim Reservations physical geological samples relating to The discovery of a new kimberlite body opens up the possibility of a new diamond source in the area and is very exciting news for your Company. held by your Company in the area. As exploration in Finland for the purpose part of our re-evaluation of the Kuopio- of Karelian considering that information Kaavi area, we are reassessing these in relation to Karelian’s potential and kimberlite bodies, four of which are existing exploration programmes in known to be diamond bearing. Finland. Exploration Elsewhere in Finland Exploration work is also continuing elsewhere on your Company’s other exploration licences in Finland, particularly on those located in the Kuopio Kaavi region, a known diamondiferous area. Agreement with Rio Tinto Your Company has a Confidentiality Agreement (with Back in Rights) with Rio Tinto Mining and Exploration Limited (“Rio Tinto”). I am delighted that this agreement with Rio Tinto has been extended to 2020. In consideration of 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 the direct cash expenditures incurred in developing the project. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 4 Chairman’s Statement continued On Site in Finland Discovery Pit New Kimberlite Discovery at Riihivaara Finance Auditors Future Outlook The loss after taxation for the year ended 31 May 2015 was €121,551 (2014: €198,891) and the net assets as at 31 May 2015 were €8,330,073 (2014: €8,406,643). As in previous years, I have supported the working capital requirements of the Company and the balance of the loans due to me at the period end was €309,589. The loans have been made on normal 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. I would like to take this opportunity to Your Company has made highly thank the partners and staff of Deloitte significant progress in its diamond for their services to your Company exploration programme in Finland during the course of the financial year. during the past year. We look forward to building on this success in the coming year. Professor Richard Conroy Chairman Date: 20 November 2015 Directors, Consultants and Staff 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. I would like in particular to thank Roger Chaplin, who is retiring, for his excellent contribution to your Company over the years and to wish him well in his retirement. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc Company Information 5 Directors Professor Richard Conroy Chairman* Seamus P. FitzPatrick Non-Executive Director+§ Roger I. Chaplin Non-Executive Director§ Dr. Sorċa C. Conroy 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 9 Merrion Square North Dublin 2 EO2 WN50 Statutory Audit Firm Deloitte Chartered Accountants Deloitte 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 AIB 1-4 Lower Baggot Street Dublin 2 ESM Adviser IBI Corporate Finance 2 Burlington Plaza Burlington Road Dublin 2 Broker Beaufort Securities Limited 131 Finsbury Pavement London EC2A 1NT U.K. Legal Advisers William Fry Solicitors 2 Grand Canal Square Dublin 2 Roschier-Holmberg Keskuskatu 7A 00 100 Helsinki Finland Head Office Karelian Diamond Resources plc 9 Merrion Square North Dublin 2 EO2 WN50 Tel: +353-1-661 8958 Fax: +353-1-662 1213 For further information visit the Company’s website at: www.kareliandiamondresources.com Lothbury Financial Services 17 St Swithins Lane London EC4N 8AL U.K. Tel: +44 20 3290 0707 Professor Richard Conroy Chairman Seamus P. FitzPatrick Non-Executive Director Roger I. Chaplin Non-Executive Director Dr. Sorċa Conroy Non-Executive Director Maureen T.A. Jones Managing Director James P. Jones Finance Director Louis J. Maguire Non-Executive Director Annual Report and Financial Statements 2015 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 financial year ended 31 May 2015. 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 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 Plc 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. 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 2015 The statement of financial position as at 31 May 2015 and the income statement for the financial year are set out on pages 13 and 14 respectively. The company recorded a loss of €121,551 (2014: €198,891) for the financial year ended 31 May 2015 and has net current assets of €610,526 (2014: €1,386,835) at that date. The company has confirmed to Conroy Gold and Natural Resources plc (a company with common directors) that it will not seek repayment of amounts owed by Conroy Gold and Natural Resources plc at 31 May 2015, noting that it would not call in amounts owing of €370,720 for a period of at least 12 months from the date of approval of the financial statements of the accounts of Conroy Gold and Natural Resources plc. Post Statement Of Financial Position Events For important events which have occurred since the financial year end, refer to Note 21 to the financial statements. Directors The Directors who served during the year are as follows: Prof. Richard Conroy, Miss. Maureen Jones, Mr. James Jones, Mr. Louis Maguire, Mr. Séamus Fitzpatrick, Mr. Roger Chaplin, & Dr. Sorċa Conroy (appointed 21 November 2014). In accordance with the company’s Articles of Association, Mr James Jones and Mr Séamus FitzPatrick will retire by rotation and, being eligible, will offer themselves for re-election at the Annual General Meeting. Mr. Roger Chaplin is also retiring, and is not seeking re-election Dr. Sorċa Conroy was appointed as a director of the company on 21 November 2014. Annual Report and Financial Statements 2015 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 Scandza A.S. 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. Dr. Sorċa Conroy, Non-executive Director, was recruited to ING Bank in 2006 and whilst there was ranked second in the Extel Survey for Biotechnology Specialist Sales. She had previously been specialist sales for life sciences and institutional equities at Canaccord Adams (2005-2006), where she ranked fourth in the 2006 Extel survey and Hoodless Brennan (2004-2005). A medical graduate of The Royal College of Surgeons in Ireland, she held a number of clinical positions in between her graduation in 1995 and joining Hoodless Brennan. 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 2015 and 1 June 2014 were as follows: At 31 May 2015 At 1 June 2014 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 76,806,168* 8,354,382 M.T.A. Jones J.P. Jones R. I. Chaplin S.P. Fitzpatrick L.J. Maguire S.C. Conroy 6,110,875 4,941,275 6,110,875 4,941,275 3,814,873 3,104,689 3,814,873 3,104,689 20,000 922,426 51,668 470,000 271,262 432,201 432,201 - 20,000 922,426 51,668 470,000 271,262 432,201 432,201 - * Of the 76,806,168 (2014: 76,806,168) Ordinary Shares beneficially held by Professor Richard Conroy, 30,815,030 (2014: 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 2015 Granted During Year At 1 June 2014 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 2022 1 September 2015 16 November 2022 1 September 2015 16 November 2022 1 September 2015 16 November 2022 1 September 2015 16 November 2022 1 September 2015 16 November 2022 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 8 Report of the Directors continued 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 14 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. Substantial Shareholdings So far as the Board is aware, no person or company, other than the Directors’ interests disclosed and the shareholder’s listed below, held 3% or more of the issued ordinary share capital of the company at 31 May 2015. Name Number of ordinary shares % R.T.W.L. Conroy 76,806,168 26.81 Political Donations No political donations were made during the financial year. Accounting Records The measures that the directors have taken to secure compliance with the requirements of sections 281 to 285 of the Companies Act, 2014 with regard to the keeping of accounting records, are the employment of appropriately qualified accounting personnel and the maintenance of computerised accounting systems. The company’s accounting records are maintained at the company’s registered office at 9 Merrion Square North, Dublin 2. Auditor The auditors, Deloitte, Chartered Accountants and Statutory Audit Firm, continue in office in accordance with Section 383 (2) of the Companies Act 2014. Signed on behalf of the Board Richard Conroy Director Maureen Jones Director Date: 20 November 2015 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc Directors’ Responsibilities Statement 9 The directors are responsible for ensuring that the company keeps or causes to be kept adequate accounting records which correctly explain and record the transactions of the company, enable at any time the assets, liabilities, financial position and profit or loss of the company to be determined with reasonable accuracy, enable them to ensure that the financial statements and directors’ report comply with the Companies Act, 2014 and enable the financial statements to be audited. 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. The directors’ are responsible for preparing the directors’ report and the financial statements in accordance with the Companies Act, 2014 and the applicable regulations. Irish company law requires the directors to prepare financial statements for each financial year. Under the law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (“relevant financial reporting framework”). Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position of the company as at the financial year end date and of the profit or loss of the company for the financial year and otherwise comply with the Companies Act, 2014. 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; n state whether the financial statements have been prepared in accordance with applicable accounting standards, identify those standards, and note the effect and the reasons for any material departure from those standards; and n prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. Annual Report and Financial Statements 2015 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 financial 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 financial year is set out in Note 5 to the financial statements. The audit committee also undertakes a review of any non-audit services provided to the company; and a discussion with the auditors of all relationships with the company and any other parties that could affect independence or the perception of independence. 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 private shareholders throughout the financial 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 financial year. During the financial year five meetings were held. All major policies are approved by the board. All directors are subject to re-election. A Directors’ Responsibilities Statement 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 2015 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 financial year ended 31 May 2015 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 23. The relevant financial reporting framework that has been applied in their preparation is the Companies Act 2014 and International Financial Reporting Standards (IFRS) as adopted by the European Union (“relevant financial reporting framework”). This report is made solely to the company’s members, as a body, in accordance with Section 391 of the Companies Act 2014. 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 Directors’ Responsibilities Statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view and otherwise comply with the Companies Act 2014. Our responsibility is to audit and express an opinion on the financial statements in accordance with the Companies Act 2014 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 Reports 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 of the assets, liabilities and financial position of the company as at 31 May 2015 and of the loss for the financial year then ended; and n have been properly prepared in accordance with the relevant financial reporting framework and, in particular, with the requirements of the Companies Act 2014. 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 Note 2 and Note 9 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 intangible assets amounting to €8,029,132 at the financial year end 31 May 2015, is dependent on the further successful development and ultimate production of the mineral reserves and the availability of adequate finance to bring the reserves to economic maturity and profitability. The financial statements do not include any adjustments in relation to these uncertainties and the ultimate outcome cannot at present be determined. n The disclosure made in Note 2 to the financial statements which indicates that the company incurred a loss of €121,551 during the financial year ended 31 May 2015. The directors have reviewed the projected cash flows for the company and on the basis of the projected cash flow information, the prospects for raising additional equity as required and taking into account the high potential of the acreage under license, 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 that would be necessary if the company was unable to continue as a going concern. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 12 Independent Auditors’ Report continued Matters on which we are required to report by the Companies Act 2014 n We have obtained all the information and explanations which we consider necessary for the purposes of our audit. n In our opinion the accounting records of the company were sufficient to permit the financial statements to be readily and properly audited. n The financial statements are in agreement with the accounting records. n In our opinion the information given in the directors’ report is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the provisions in the Companies Act 2014 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 Chartered Accountants and Statutory Audit Firm, Limerick Date: 20 November 2015 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc Statement of Financial Position At 31 May 2015 13 Note 2015 € 2014 € 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 presented as equity Share premium Share based payments reserve Retained deficits Total Equity Non-current Liabilities 9 10 11 12 15 15 Trade and other payables: Amounts falling due after more than one year 14 Total non-current liabilities Current Liabilities Trade and other payables: Amounts falling due within one year 13 Total Current Liabilities Total Liabilities Total Equity and Liabilities 8,029,132 7,329,228 4 – 4 165 8,029,136 7,329,397 402,122 474,026 876,148 8,905,284 2,865,350 6,786,177 570,256 55,779 2,105,041 2,160,820 9,490,217 2,865,350 6,786,177 525,275 (1,891,710) (1,770,159) 8,330,073 8,406,643 309,589 309,589 265,622 265,622 575,211 8,905,284 309,589 309,589 773,985 773,985 1,083,574 9,490,217 The financial statements were approved by the Board of Directors on 20 November 2015 and authorised for issue on 20 November 2015. They were signed on its behalf by: Richard Conroy Director Maureen Jones Director Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 14 Income Statement For the financial year ended 31 May 2015 OPERATING EXPENSES Finance income – bank interest receivable Finance costs – interest on shareholder loan LOSS BEFORE TAXATION Income tax expense LOSS RETAINED FOR THE FINANCIAL YEAR Basic and diluted loss per share Note 4 5 7 8 2015 € (124,488) 2,937 – (121,551) – 2014 € (191,139) 699 (8,451) (198,891) – (121,551) (198,891) (€0.0004) (€0.0013) Statement of Comprehensive Income For the financial year ended 31 May 2015 LOSS FOR THE FINANCIAL YEAR Total income and expense recognised in other comprehensive income TOTAL COMPREHENSIVE EXPENSE FOR THE FINANCIAL YEAR 2015 € 2014 € (121,551) (198,891) – – (121,551) (198,891) Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 15 Statement of Changes in Equity For the financial year ended 31 May 2015 At 1 June 2013 Share issues Share issue expenses Share-based payments Loss for the financial year Share Capital € 922,083 1,943,267 – – – Share Premium € 4,621,158 2,417,230 (252,211) – – Share-based Payment Reserve € Retained Deficits € 450,157 (1,571,268) – – 75,118 – – – – (198,891) Total Equity € 4,422,130 4,360,497 (252,211) 75,118 (198,891) At 31 May 2014 2,865,350 6,786,177 525,275 (1,770,159) 8,406,643 At 1 June 2014 Share-based payments Loss for the financial year 2,865,350 6,786,177 – – – – 525,275 44,981 (1,770,159) 8,406,643 – (121,551) – 44,981 (121,551) At 31 May 2015 2,865,350 6,786,177 570,256 (1,891,710) 8,330,073 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 2015 Karelian Diamond Resources plc 16 Cash Flow Statement For the year ended 31 May 2015 Cash flows from operating activities Cash 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) Repayment of shareholder loans Interest received Net cash generated from financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of financial year Note 16 2015 € 2014 € (971,118) (971,118) (662,834) (662,834) – – 2,937 2,937 (1,631,015) 2,105,041 (147,489) (147,489) (432,548) (432,548) 3,025,788 (343,915) 699 2,682,572 2,102,535 2,506 Cash and cash equivalents at end of financial year 474,026 2,105,041 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 17 Notes to the Financial Statements For the year ended 31 May 2015 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, 2014. 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 financial 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 company’s accounting policies. Amendments to IAS 39 (June 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). Amendments to IFRS 10, IFRS 12 and IAS 27 (October 2012) Investment Entities (effective for accounting periods beginning on or after 1 January 2014). Amendments to IAS 32 (December 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). 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 Company 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, IFRS 12 and IAS 28 (December 2015) Investment Entities: Applying the consolidation exception (effective date to be confirmed) Amendments to IAS 27 (August 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 (June 2014) Agriculture: Bearer Plants (effective date to be confirmed) IFRS 15 Revenue from Contracts with Customers (effective date to be confirmed) Amendments to IFRS 10 and IAS 28 (September 2014) Sale or contribution of assets between an investor and its Associate or Joint Venture (effective date to be confirmed) Amendments to IAS1 (December 2015) Disclosure Initiative (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 (November 2013) Defined Benefit Plans: Employee Contributions (1 February 2015) IFRIC 21 Levies (effective for accounting periods beginning on or after 17 June 2014) Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 18 Notes to the Financial Statements continued 1. ACCOUNTING POLICIES continued Annual Improvements to IFRSs: 2012-2014 Cycle (September 2014): Annual Improvements to IFRSs: 2012-2014 Cycle (effective date to be confirmed) Annual Improvements to IFRSs: 2011-2013 Cycle (December 2013): Annual Improvements to IFRSs: 2011-2013 Cycle (1 January 2015) Annual Improvements to IFRSs: 2010-2012 Cycle (December 2013): Annual Improvements to IFRSs: 2010-2012 Cycle (1 February 2015) 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 2015 Karelian Diamond Resources plc 19 1. ACCOUNTING POLICIES continued B. Transaction Costs Transaction costs expenses 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 financial 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 2015 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 financial 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 statement. 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 assets 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 2015 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 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 financial 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 €8,029,132 (2014: €7,329,228) as disclosed in Note 9 at the financial year end 31 May 2015. The directors recognise that the future realisation of intangible assets is dependent on the further successful development and ultimate production of the mineral reserves and the availability of adequate finance to bring the reserves to economic maturity and profitability. During the financial year, the company issued equity of €Nil (2014: €4,173,943 net of expenses). The company incurred a loss of €121,551 (2014: €198,891) during the financial year ended 31 May 2015 The directors have reviewed the projected cash flows for the company and on the basis of the projected cash flow information, 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 2015 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 9) Operating expenses are analysed as follows: Wages and salaries Share based payments Depreciation Auditor’s remuneration Other operating expenses 2015 € 484,980 (360,492) 124,488 2015 € 279,092 44,981 165 10,000 150,742 484,980 2014 € 521,634 (330,495) 191,139 2014 € 256,531 75,118 168 10,000 179,817 521,634 Of the above costs, a total of €360,492 (2014: €330,495) 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 2015 € 253,042 2,050 24,000 279,092 2014 € 231,281 1,250 24,000 256,531 Annual Report and Financial Statements 2015 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 Dr. S.C. Conroy L.J. Maguire S.P. Fitzpatrick R.I. Chaplin Fees € 20,000 10,000 10,000 5,068 10,000 10,000 10,000 Salary € 65,000 50,000 30,000 – – – – Share Based Payments € Pension Contributions € 15,033 11,389 7,165 – 1,039 1,039 676 – 15,000 9,000 – – – – Total € 100,033 86,389 56,165 5,068 11,039 11,039 10,676 75,068 145,000 36,341 24,000 280,409 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 €44,981 (2014: €75,118) is accounted for as shown below: Share based payment charge expensed to income statement Share based payment charge transferred to intangible assets 2015 € 7,911 37,070 44,981 2014 € 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 2015 Karelian Diamond Resources plc 24 Notes to the Financial Statements continued 5. LOSS BEFORE TAXATION The loss before taxation is arrived at after charging the following items, which are stated at amounts prior to the transfer to intangible assets: Depreciation Auditor’s remuneration – Audit of individual accounts – Other assurance services – Tax advisory services – Other non-audit services 6. DIRECTORS’ REMUNERATION 2015 € 165 2014 € 168 10,000 10,000 – – – – – – 2015 € 2014 € Aggregate emoluments paid to or receivable by directors in respect of qualifying services 220,068 215,000 Aggregate amount of money or value of other assets including shares, but excluding share options, paid to or receivable by the directors under long term incentive schemes in respect of qualifying services - - 2015 Number of DIrectors 2015 € 2014 Number of DIrectors 2014 € Aggregate contributions paid, treated as paid, or payable during the financial year to a retirement benefit scheme in respect of qualifying services of directors: – Defined contribution schemes – Defined benefit schemes 2 – 24,000 – Compensation paid, or payable, or other termination payments, in respect of loss of office to directors of the company in the financial year: – Office of director of the company – Other offices Total 2 – 2015 € – – – 24,000 – 2014 € – – – Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 25 2014 € – – – 2014 € – – – 2014 € – – 2015 € – – – 2015 € – – – 2015 € – – Amounts paid or payable to past directors of the company or its holding undertaking: – For retirement benefits in relation to services as directors – For other retirement benefits Total for retirement benefits Compensation paid or payable for loss of office or other termination benefits: – Office of director – Other offices Total 7. INCOME TAX EXPENSE (a) Analysis of the taxation charge for the financial year Irish corporation tax Total current tax No taxation charge arises in the current or prior financial year due to losses being incurred. (b) Factors affecting the tax charge for the financial year: The tax due for the financial 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% (2014: 12½%) Effects of: Losses carried forward for future utilisation Tax charge for the financial year 2015 € 2014 € (121,551) (198,891) (15,194) (24,861) 15,194 – 24,861 – 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 €669,539 (2014: €654,345). Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 26 Notes to the Financial Statements continued 8. LOSS PER SHARE The calculation of the basic and diluted loss per share of €0.0004 (2014: €0.0013) is based on the loss for the financial year of €121,551 (2014: €198,891) and the weighted average number of ordinary shares on a basic and fully diluted basis during the financial year of 286,535,034 (2014: 157,942,015). The effect of share options and warrants is anti-dilutive. 9. INTANGIBLE ASSETS Exploration and evaluation: Cost At 1 June Expenditure during the financial year – licence and appraisal cost – other operating costs (Note 4) – equity settled share based payments (Note 4) – loan interest (Note 14) 2015 € 2014 € 7,329,228 6,801,539 339,412 323,422 37,070 – 163,391 269,157 61,338 33,803 At 31 May 8,029,132 7,329,228 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 development and ultimate production of the mineral reserves and the availability of adequate finance to bring the resources to economic maturity and profitability. 10. FINANCIAL ASSETS Investment in subsidiaries 2015 € 4 2014 € 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 9 Merrion Square North, 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 2015 Karelian Diamond Resources plc 11. PROPERTY, PLANT AND EQUIPMENT Plant & Office Equipment Cost At 1 June At 31 May Accumulated Depreciation At 1 June Charge for the financial year At 31 May At 31 May 12. TRADE AND OTHER RECEIVABLES VAT receivable Prepayments Amounts due from related parties (Note 18) 27 2014 € 1,677 1,677 1,344 168 1,512 165 2014 € 18,865 3,187 33,727 55,779 2015 € 1,677 1,677 1,512 165 1,677 – 2015 € 28,443 2,959 370,720 402,122 The company has confirmed to Conroy Gold and Natual Resources plc (a company with common directors) that it will not seek repayment of amounts owed by Conroy Gold and Natural Resources plc at 31 May 2015 of €370,720 for a period of at least 12 months from the date of approval of the financial statements of Conroy Gold and Natural Resources plc. 13. TRADE AND OTHER PAYABLES (Amounts falling due within one year) Accrued directors’ remuneration – fees and other emoluments – pension contributions Accruals PAYE/PRSI 2015 € 17,578 180,000 52,669 15,375 265,622 2014 € 94,179 156,000 68,744 455,062 773,985 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 2015 Karelian Diamond Resources plc 28 Notes to the Financial Statements continued 14. NON-CURRENT FINANCIAL LIABILITIES (Amounts falling due after more than one year) Shareholder loans Opening balance Converted to shares (Note 15(a)) Funds repaid Interest charge for the financial year R.L.T.W. Conroy 2015 € 2014 € 309,589 1,171,968 – – – 309,589 (560,718) (343,915) 42,254 309,589 Prior to the placing of shares in December 2014, the immediate funding requirements of the company had been financed by advances from Prof. R.T.W.L. Conroy (executive chairman and major shareholder). The accrued interest at 31 May 2015 is €309,589 (2014: €309,589). 15. CALLED UP SHARE CAPITAL AND SHARE PREMIUM Authorised: 500,000,000 ordinary shares of €0.01 each Issued and Fully Paid – current financial year 2015 € 2014 € 5,000,000 5,000,000 Share Capital Presented as Equity € Number Share Premium € At start and end of financial year 286,535,034 2,865,350 6,786,177 (a) At 31 May 2014 and 31 May 2015 warrants over 4,000,000 shares exercisable at 5p sterling at any time up to 1 September 2015 were outstanding and have now lapsed. (b) At 31 May 2014 and 31 May 2015, warrants over 12,852,677 shares exercisable at 10p sterling at any time up to 16 November 2022 were outstanding. These warrants previously had been exercisable anytime up to 16 November 2017. At the annual general meeting on 15 December 2014 the exercise period was extended by five years from 2017 to 2022. (c) At 31 May 2014 and 31 May 2015, 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. (d) The share price at 31 May 2015 was 1.15p sterling. During the financial year the price ranged from 0.85p to 1.725p sterling. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 29 15. CALLED UP SHARE CAPITAL AND PREMIUM continued Issued and Fully Paid – previous financial year At start of financial year Share issue (a) Share issue (b) Share issue (c) Share issue (d) Issue expenses Share Capital Presented as Equity € 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) Number 92,208,342 77,991,666 37,500,000 27,500,000 51,335,026 – At end of financial year 286,535,034 2,865,350 6,786,177 (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. (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. (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 financial 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 financial year the price ranged from 0.62p to 4.4p sterling. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 30 Notes to the Financial Statements continued 16. 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 (Decrease)/increase in creditors Increase in debtors Net cash used in operations 17. COMMITMENTS AND CONTINGENCIES At 31 May 2015 there were no capital commitments or contingent liabilities (2014: €Nil). 2015 € 2014 € (124,488) (191,139) 165 7,911 (508,363) (346,343) (971,118) 168 13,780 73,790 (44,088) (147,489) 18. 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 14 and 15 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 financial year ended 31 May 2015, Conroy Gold and Natural Resources plc, incurred costs totalling €301,992 (2014: €205,768) on behalf of the company. These costs were recharged to the company by Conroy Gold and 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 2015 € 26,823 21,843 43,587 25,902 69,298 114,539 301,992 2014 € 28,713 13,463 17,805 40,906 42,329 62,552 205,768 At 31 May 2015, €370,720 (2014: €33,727) was paid in advance in relation to recharges between the related parties. (c) Details of key management compensation which comprises directors’ remuneration including short term employee benefits €220,068 (2014: €215,000), post-employment benefits €24,000 (2014: €24,000), other long term benefits €Nil (2014: €Nil), share based payment €36,341 (2014: €69,467) and termination benefits €Nil (2014: €Nil) are outlined in Note 6 to the financial statements. Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 31 (d) During the financial year, the date of expiry of warrants originally granted to directors on 16 November 2007 which were due to expire on 16 November 2017 was extended to 16 November 2022. The extension was approved at the company’s Annual General Meeting on 15 December 2014. The number of warrants for which the date of expiry has been extended for each director is as follows: R.T.W.L. Conroy M.T.A. Jones J.P. Jones R.I. Chaplin S.P. Fitzpatrick L.J. Maguire Number of warrants 5,521,049 4,191,275 2,604,689 71,272 232,201 232,201 As a result of the foregoing, an additional charge has been recognised in the financial statements of €5,692, of which €4,554 has been included in the share based payment charge transferred to intangible assets and €1,138 included in the income statement. 19. 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 financial year are as follows: 2015 2014 No. of Share Options Weighted Average Exercise Price € No. of Share Options Weighted Average Exercise Price € 1 June 1,000,000 0.0803 1,000,000 0.0803 Granted during financial year Exercised during financial year Lapsed during financial year – – – – – – – – – – – – 31 May 1,000,000 0.0803 1,000,000 0.0803 Warrants granted generally have a vesting period of ten years. Details of the warrants outstanding during the year are as follows: 2015 2014 No. of Share Warrants Weighted Average Exercise Price € No. of Share Warrants Weighted Average Exercise Price € 1 June 18,686,010 0.0872 18,686,010 0.0872 Granted during financial year Exercised during financial year Lapsed during financial year – – – – – – – – – – – – 31 May 18,686,010 0.0872 18,686,010 0.0872 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 32 Notes to the Financial Statements continued 19. SHARE BASED PAYMENTS continued 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. During the financial year the date of expiry of warrants originally granted to the directors on 16 November 2007, which were due to expire on 16 November 2017 was extended to 16 November 2022. The extension was approved at the company’s Annual General Meeting on 15 December 2014. 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) 2015 Stock options 2015 Stock warrants 2014 Stock options 2014 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 €44,981 (of which €5,692 relates to the extension of the date of expiry of warrants) (2014: €75,118). 20. SUBSTANTIAL SHAREHOLDINGS 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 2015. 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. 21. SUBSEQUENT EVENTS There are no important events since financial year end which need to be disclosed within these financial statements. 22. FINANCIAL INSTRUMENTS The company’s financial assets and liabilities stated at carrying amount and fair value are as follows at 31 May 2015: Trade and other receivables Cash and cash equivalents Trade and other payables and financial liabilities Carrying Amount 2015 € 402,122 474,026 575,211 Fair Value 2015 € 402,122 474,026 575,211 Carrying Amount/ Fair Value 2014 € 55,779 2,105,041 1,083,574 Annual Report and Financial Statements 2015 Karelian Diamond Resources plc Annual Report and Financial Statements 2015 Karelian Diamond Resources plc 33 22. FINANCIAL INSTRUMENTS continued 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 financial 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. 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 2015 amounted to €876,148 (2014: €2,160,820). At 31 May 2015 and 31 May 2014 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 financial 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 €3,096. A decrease in the interest rate would result in a corresponding decrease in the same amount. 23. APPROVAL OF FINANCIAL STATEMENTS These financial statements were approved by the Board on 20 November 2015.
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