Karelian Diamond Resources
Annual Report 2021

Plain-text annual report

Annual Report and Financial Statements 2021 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 1 Contents Chairman’s Statement Directors, Officers and Other Information Board of Directors Directors’ Report Independent Auditor’s Report Income Statement Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to and Forming part of the Financial Statements 2 5 6 8 17 23 24 25 26 27 28 2 Chairman’s Statement Professor Richard Conroy Chairman Dear Shareholder, I have great pleasure in presenting your Company’s annual report and financial statements for the year ended 31 May 2021. The year has been one of further progress at the Company’s two major diamond projects in Finland. The process of gaining a full mining permit to develop the company’s diamond deposit at Lahtojoki, with its potential for pink diamond production, continued. Work regarding ground rental compensation on behalf of TUKAS (The Finnish Mining Authority) is now in its final stages and vehicular access to the deposit has been granted. Post period, an amended preliminary economic assessment (“PEA”) was compiled and showed a 77% increase on the 2017 PEA NPV. Despite delays related to the COVID-19 pandemic, exploration has continued on the Company’s exploration acreage in the Kuhmo region of Finland, which the Company believes could be a new kimberlite province and, in Ireland, sample results suggest the presence of nickel, copper and platinum targets within the Karelian licence area. During the year, as a consequence of Brexit, an extraordinary general meeting (“EGM”) was required to ensure that the Company’s shares could continue to be settled electronically on the AIM market. The Lahtojoki Diamond Mining Project The Lahtojoki diamond mining project comprises a mining concession covering 71 hectares which includes a kimberlite pipe over a surface area of 16 hectares. A full mining permit to enable development of the deposit is currently being processed although delays have occurred due to COVID-19 restrictions. It appears that the deposit, as well as containing high quality colourless gem diamonds, also contains coloured diamonds, including pink diamonds. Pink diamonds are highly sought after and are extremely scarce, typically commanding a price up to 20 times that of normal colourless diamonds. The presence of pink diamonds in the Lahtojoki diamond deposit could, therefore, substantially increase the potential profitability of any future mining operation. An example of the financial implications of the presence of pink diamonds is that, although pink diamonds made up less than 5% of production volumes, revenues from pink diamonds at the Rio Tinto-operated Argyle diamond mine in Australia accounted for 50% of the mine’s revenue until its closure in late 2020. It is also relevant that production at the Rio Tinto-operated Argyle diamond mine in Australia accounted for 90% of global pink diamonds, so its closure has also had important implications on the supply side. In relation to the Lahtojoki diamond deposit, PEA in 2017, based on a non-JORC resource of 2.25 million carats, estimated the deposit contained a value of $225m, with an NPV8 of $39m, with a nine year mine life. Post period, the 2017 PEA was amended by First Equity Limited, who act as broker to the Company, assuming 3% of recovered diamonds at Lahtojoki will be pink, with a pink diamond price 10 times that of colourless equivalents. Their unrisked NPV8, in the amended PEA, came to $69m, representing a 77% increase on the 2017 PEA PPV8 of $39 million. The overall outlook for diamonds is encouraging with demand currently strong in China and the US, the two biggest diamond markets, with supply and inventories down. The Argyle mine is closed and the Directors are only aware of one major new mine currently being developed (LUAXE in Angola). In the view of ALROSA, the leading Russian diamond producer, a long term diamond deficit is developing so it may well be a very good time for the Company to be developing a new diamond mine in an excellent location. Diamond Exploration Programmes Kuhmo The Kuhmo region of Finland, next to the border with Russia, lies within the Karelian Craton (or Baltic Shield) which overlies north and eastern Finland, along with the northwest tip of Russia. On the Russian side of the Craton, two world class diamond deposits, Lomonsov and the Grib Pipe, have been discovered and ALROSA, the world’s largest diamond miner, has indicated that, in its view, this diamond region will represent almost all its future growth. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc3 UAV ready for a take-off for Anomaly 5 magnetic survey. Stream Sediment Sampling – Fermanagh. The Board of Karelian believes that given the similar geology on the Finnish side of the Craton to that on the Russian side, the presence already demonstrated in Finland of the Company’s Lahtojoki diamond deposit and the discoveries which the Company has made, the potential exists for similar world class diamond discoveries in Finland. To date, Karelian has discovered a new kimberlite body at Riihivaara and a series of kimberlite anomalies, including Anomaly 5, where the Company has discovered a green diamond, together with numerous kimberlite indicator minerals in till. Immediately post year end, an Unmanned Aerial Vehicle (“UAV”) geophysical survey was completed in the Anomaly 5 target area. The results are now undergoing analysis and a follow up drilling programme is planned. Lahtojoki The Company is also carrying out exploration in the vicinity of the Lahtojoki diamond deposit. Kimberlites tend to occur in clusters and kimberlite boulders have been discovered to the south of Lahtojoki which cannot be derived from the Lahtojoki kimberlite. This encourages the belief that further diamondiferous kimberlites may exist adjacent to Lahtojoki. Brookeborough, Ireland The Colebrook River in County Fermanagh in Northern Ireland was the reported location of the discovery in 1816 of a diamond which became known as the Brookeborough diamond. No serious exploration for the source of this diamond was carried out until 1996, when a regional heavy mineral sediment sampling survey was carried out in Counties Fermanagh and Tyrone. The recovery of some chromites was reported. Such chromites could indicate the possible presence of kimberlite source rocks in the vicinity of where the Brookeborough diamond was discovered. However, no follow up work was ever conducted. Following a review of these regional sampling survey results, together with analysis of airborne geophysical data from the Tellus survey in Northern Ireland and an overall geological assessment, it was decided by the Company that a detailed heavy mineral stream sediment survey at sample sites on the Colebrook River around the reported discovery location of the diamond was merited. Sediment samples were taken and have been dispatched to Canada for mineral concentrating, picking and analysis. The results of the sediment sample analysis showed highly anomalous amounts of chromite in all samples. Forsterite olivine and metamorphic massive sulphide indicator minerals (“MMSIM’s”) were also reported. Initial interpretation suggests a non- kimberlite source rock which is indicative of additional targets for mineralisation – nickel, copper and platinum, within Karelian’s licence area. Relating the results with other sampling programmes in known areas of Nickel–Copper–Platinum mineralisation globally indicates the Company’s data should be considered as highly anomalous. Platinum Group Metals are classified as critical metals. Nickel and copper are important metals in the energy transition. These exciting results heighten the prospectivity of the Company’s exploration programme in Northern Ireland and add an additional dimension to the Company’s exploration interests. COVID-19 The Company has taken necessary measures in accordance with government guidelines to protect the health, safety, and wellbeing of its employees, contractors, and partners in Finland and Ireland. COVID-19 continues to limit field and laboratory work but, despite these restrictions on operations, work has continued in relation to the Company’s exploration and development programmes. COVID-19 has also delayed the due process in relation to the granting of a mining permit over the Lahtojoki diamond process. In relation to COVID-19, Directors and executives took a reduction in salaries and fees in line with technical and field staff taking a reduction in salaries over a 9 month period. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc4 Chairman’s Statement continued Lahtojoki Diamond. Green Diamond – Anomaly 5. Environmental, Social, and Governance issues Great emphasis is placed by the Company on Environmental, Social and Governance issues. The Company is committed to high standards of corporate governance and integrity in all of its activities and operations including rigorous health and safety compliance and environmental consciousness and promotes a culture of good ethical values and behaviour. The Company conducts its business with integrity, honesty and fairness and requires its partners, contractors and suppliers to meet similar ethical standards. Individual staff members must ensure that they apply and maintain these standards in all their actions. It is a requirement that the Chairman of the Board regularly monitors and reviews the Company’s ethical standards and cultural environment and where necessary takes appropriate action to ensure proper standards are maintained. The Company is fully committed to complying with all relevant health, safety and environment rules and regulations as these apply to its operations and all individuals working for the Company are aware of their responsibilities in providing a safe and secure working environment. Extraordinary General Meeting and Migration to Euroclear An EGM was held on the 17th February 2021 to maintain electronic trading in the Company’s shares post-Brexit. The settlement system relating to the Company’s shares needed, as a consequence of Brexit, to move from CREST in London to Euroclear Bank in Belgium. At the EGM, the necessary resolutions were passed enabling the Company’s shares to continue to be settled electronically on the AIM market in London. This will be the Company’s first AGM since migration of the holding and settlement of uncertificated shares in the Company from CREST to the Euroclear Bank system. The processes and timelines for submitting proxy appointments or voting instructions for the AGM will differ from the comparable processes and timelines that applied in CREST for previous shareholder meetings. Additional explanatory information is included in the Notice of Annual General Meeting, and it will be important for relevant shareholders to confirm the procedures with their stockholder, custodian, or other intermediary as they may vary depending on the specific arrangements that are in place for individual shareholders. Finance The loss after taxation from continuing operations for the financial year ended 31 May 2021 was €422,192 (2020: €446,710) and the net assets of the Company at 31 May 2021 were €9,495,866 (2020: €9,126,781). In August 2020 the Company raised £420,000 through a placing of 10,500,000 ordinary shares at a price of 4 pence per ordinary share. In May 2021 a further financing of £600,000 was carried out through a placing and subscription of 13,000,000 ordinary shares at a price of 4 pence per ordinary share, to raise £520,000 and a further 2,000,000 shares were issued at the same time in conjunction with the conversion of £80,000 of existing debt owed to the Managing Director, Maureen Jones, and myself, also at a price of 4 pence per ordinary share. Directors and Staff I would like to express my very deep appreciation of the support and dedication of Directors, staff, and consultants which has made possible the continued progress and success which the Company has achieved. Future Outlook I look forward to continued success both in relation to progress in the development of a diamond mine at Lahtojoki and in the Company’s exploration programmes. Professor Richard Conroy Chairman 30 November 2021 Annual Report and Financial Statements 2021 Karelian Diamond Resources PlcCompany Information 5 Directors Professor Richard Conroy Chairman* Seamus P. FitzPatrick Deputy Chairman Non-Executive Director +§ Maureen T.A. Jones Managing Director* Howard M. Bird Non-Executive Director *+§ (Appointed 17 September 2019) Dr. Sorċa C. Conroy Non-Executive Director *§ Brendan McMorrow Non-Executive Director *+§ * Member of the Executive Committee + Member of the Remuneration Committee § Member of the Audit Committee Company Registration Number 382499 Company Secretary and Registered Office Maureen T.A. Jones 3300 Lake Drive Citywest Business Campus Dublin 24, D24 TD21, Ireland Statutory Audit Firm Deloitte Ireland LLP Chartered Accountants and Statutory Audit Firm 6 Lapp’s Quay Cork, T12 VY7W, Ireland London Stock Exchange AIM Symbol: KDR SEDOL: BD09HK6 ISIN number: IE00BD09HK61 Nominated Adviser (NOMAD) Allenby Capital Limited 5 St. Helen’s Place 5th Floor London, EC3A 6AB, UK Registrars Avenir Registrars Limited (Appointed on 15 March 2021) No. 1 Main Street, Blessington Co Wicklow, W91 V82T, Ireland www.avenir-registrars.ie Link Registrars Limited (Ceased on 14 March 2021) 2 Grand Canal Square, Grand Canal Harbour Dublin 2, D02 A342, Ireland Legal Advisers William Fry Solicitors 2 Grand Canal Square Dublin 2, D02 A342, Ireland Roschier, Attorneys Ltd. Kasarmikatu 21 A FI-00130, Helsinki, Finland HPP Attorneys Ltd Bulevardi 1 A FL-00100, Helsinki, Finland www.linkassetservices.com enquiries@linkgroup.ie Bankers AIB 1-4 Lower Baggot Street Dublin 2, D02 X342, Ireland Nordea Satamaradankatu 5, Helsinki, Finland Broker First Equity Ltd. (Appointed on 12 April 2021) Salisbury House, Finsbury London, EC2 M5QQ, UK Brandon Hill Capital Ltd. (Ceased on 11 April 2021) 1 Tudor Street, London, EC4Y 0AH, UK Head Office Karelian Diamond Resources plc 3300 Lake Drive Citywest Business Campus Dublin 24, D24 TD21, Ireland For further information visit the Company’s website at: www.kareliandiamondresources.com or contact: Hall Communications 1 Northumberland Road Dublin 4, D04 F578, Ireland Tel: +353 1 6609377 or Lothbury Financial Services Floor 6, 131 Cannon Street London, EC4N 5AX, UK Tel: +44 20 3290 0707 Professor Richard Conroy Chairman . Seamus P. FitzPatrick Deputy Chairman Dr. Sorċa C. Conroy Non-Executive Director Maureen T.A. Jones Managing Director Howard M. Bird Non-Executive Director Brendan McMorrow Non-Executive Director Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 6 Board of Directors Karelian Diamond Resources P.L.C. Board of Directors Professor Richard Conroy - Chairman of the Board of Directors Professor Richard Conroy is responsible for leading the Board and ensuring it operates in an effective manner whilst promoting communication with shareholders. He has over 40 years’ experience of founding and growing companies in the natural resources industry with a track record in making discoveries of global significance. Experience Professor Richard Conroy has been involved in natural resources for many years. He established Trans-International Oil, which was primarily involved in Irish offshore oil exploration. Trans-International Oil initiated the Deminex Consortium which included Deminex, Mobil, Amoco and DSM. Trans-International Oil was merged with Aran Energy P.L.C. in 1979, which was later acquired by Statoil. Professor Richard Conroy founded Conroy Petroleum and Natural Resources P.L.C. (“Conroy Petroleum”). Conroy Petroleum was involved in both onshore and offshore oil production and exploration and also in mineral exploration. Conroy Petroleum, in 1986, made the significant discovery of the Galmoy zinc deposits in County Kilkenny which was later developed as a major zinc mine. The discovery at Galmoy led to the revival of the Irish base metal industry and to Ireland becoming an international zinc province. Conroy Petroleum was also a founding member of the Stoneboy consortium, which included Sumitomo Metal Mining Co. Ltd., an exploration group which discovered the world class Pogo gold deposit in Alaska, now in production as a major gold mine. Conroy Petroleum acquired Atlantic Resources P.L.C. in 1992 and subsequently changed its name to ARCON International Resources P.L.C. (“ARCON”). The oil and gas interests in ARCON were transferred to form Providence Resources P.L.C. ARCON was later acquired by Lundin Mining Corporation. Professor Richard Conroy was Chairman and Chief Executive of Conroy Petroleum/ARCON from 1980 to 1994. He founded Karelian Diamond Resources P.L.C. in 1995. Since then, Professor Richard Conroy has utilised his extensive experience in the exploration industry in his role as Chairman of the Board. Professor Richard Conroy served in the Irish Parliament as a Member of the Senate. He 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. Professor Richard Conroy is Emeritus Professor of Physiology in the Royal College of Surgeons in Ireland. Professor Richard Conroy’s research included pioneering work on jet lag, shift working and decision making in business after intercontinental flights. He co-authored the first textbook on human circadian rhythms. Séamus P. FitzPatrick - Deputy Chairman/Non-executive Director Séamus P. FitzPatrick is the Managing Partner and co-founder of CapVest, a private equity investment firm established in London in 1999. He is currently chairman of Valeo Foods and is a Director of Eight Fifty Food Group. He was formerly chairman of Findus, Vaasan & Vaasan, Mater Private, Youngs Bluecrest, and a Director of Scandi Standard and Curium Pharma. Experience Prior to the founding of CapVest, Séamus P. FitzPatrick worked in M&A at Morgan Stanley in London. Thereafter, he worked for Chase Capital Partners in New York. Séamus P. FitzPatrick holds an honours degree in English and Psychology from Trinity College Dublin. 7 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc7 Karelian Diamond Resources P.L.C. Board of Directors (continued) Maureen T.A. Jones - Managing Director Maureen T.A. Jones oversees all of the Company’s business and is responsible for formulating the Company’s objectives and strategy. She is also the Company Secretary for the Company. Experience Maureen T.A. Jones joined Conroy Petroleum on its foundation in 1980 and was a Director and a member of the Board of Directors of Conroy Petroleum/ARCON from 1986 to 1994. Maureen T.A. Jones has a medical background and specialised in the radiographic aspects of nuclear medicine before becoming a manager of International Medical Corporation in 1977. Maureen T.A. Jones has over twenty years’ experience at senior level in the natural resource sector. She is Managing Director of Karelian Diamond Resources P.L.C. and was a founding Director of the Company. Maureen T.A. Jones brings a vast amount of managerial experience to the Board along with extensive experience of the exploration industry. Dr. Sorċa Conroy - Non-executive Director Dr. Sorċa Conroy brings a broad range of knowledge to bear on the Company through her capital markets experience and her experience in the natural resources sector. Experience Dr. Sorċa Conroy was recruited to ING Bank in 2006 and whilst there was ranked second in the Extel Survey for Biotechnology Specialist Sales. Dr. Sorċa Conroy had previously worked in 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, Dr. Sorċa Conroy held a number of clinical positions between her graduation in 1995 and joining Hoodless Brennan and was a director of Conroy Gold and Natural Resources P.L.C. for over 10 years. Brendan McMorrow - Non-executive Director Brendan McMorrow brings a broad range of knowledge gained through holding senior financial roles in a variety of listed public companies in the natural resources sector. He was appointed to the Board on 15 November 2018. Experience Brendan McMorrow has over 25 years’ experience in a number of public companies in the oil and gas and base metals mining sectors listed in London, Toronto and Dublin where he held senior executive finance roles. He is currently Finance Director of Dunraven Resources P.L.C., an oil and gas exploration and development company. Prior to that he was Chief Financial Officer of Circle Oil P.L.C. from 2005 to 2015, an AIM listed oil and gas exploration, development and production company, with operations in North Africa and the Middle East. Brendan is a Fellow of the Chartered Association of Certified Accountants. Howard Bird - Non-executive Director Howard Bird brings a broad range of knowledge gained through holding senior positions in a variety of different roles in the natural resources sector. He was appointed to the Board on 17 September 2019. Experience Howard Bird is an internationally experienced Professional Geoscientist (diamonds, gold, platinum and base metals) and has over 30 years’ diverse junior and senior mining company exploration, development and mining experience, including over 15 years at senior executive management level. Howard has extensive worldwide experience and was involved in programmes that have led to the discovery of over 100 kimberlites, working in Canada, Australia, Brazil, South Africa, Angola, Zimbabwe, Democratic Republic of Congo, Botswana and Gabon. 8 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc8 Directors’ Report Karelian Diamond Resources P.L.C. Directors’ Report The Board of Directors submit their annual report together with the audited financial statements of Karelian Diamond Resources P.L.C. (the “Company”) for the financial year ended 31 May 2021. Principal activities, business review and future developments Information with respect to the Company’s principal activities and the review of the business and future developments as required by Section 327 of the Companies Act 2014 is contained in the Chairman’s statement on pages 2 to 4. The Company is a mineral exploration and development company whose objective and strategy is to discover and develop world class diamond projects in politically stable and geographically attractive countries such as Finland and Ireland in order to create value for shareholders. During the financial year under review, the principal focus of management was to continue to develop the activities of the Company, concentrating particularly on diamond exploration and evaluation. The challenges facing the Company in achieving this strategy are world commodity prices and general economic activity, ensuring compliance with governmental and environmental legislation and meeting work commitments under exploration permits and licences sufficient to maintain the Company’s interest therein. To accomplish its strategy and manage the challenges involved, the Company employs experienced individuals with a track record of success of discovering world class ore bodies together with suitably qualified technical personnel and consultants, experienced drilling and geophysical and other contractors and uses accredited international laboratories and technology to interpret and assay technical results. Additionally, the Company ensures as far as possible to obtain adequate working capital to carry out its work obligations and commitments. Please refer to the section on risks and uncertainities on pages 14 and 15 for further details. By co-ordinating all of the above, this should result in a satisfactory return and value for shareholders. Results for the year and state of affairs at 31 May 2021 The income statement for the financial year ended 31 May 2021 and the statement of financial position at that date are set out on pages 23 and 25 respectively. The loss for the financial year amounted to €422,192 (2020: a loss of €446,710) and net assets at 31 May 2021 were €9,495,866 (2020: €9,126,781). No interim or final dividends have been or are recommended by the Board of Directors. The Company is not yet in a production stage and so has no income. Consequently, the Company is not expected to report profits until it disposes of or is able to profitably develop or otherwise turn to account its exploration projects. The Directors monitor the activities and performance of the Company on a regular basis and uses both financial and non-financial indicators to assess the Company’s performance. Important events since the year-end On 6 October 2021, the Company announced that results from analysis undertaken from the Lahtojoki South exploration area indicate potential for the presence of diamonds from the kimberlite source. On 27 July 2021, the Company announced that it carried out a detailed heavy mineral stream sediment sampling programme focused on the Colebrooke river in County Fermanagh in Northern Ireland. Directors Please refer to pages 5, 6 and 7 for a listing of Directors and further details. Dr. Sorċa Conroy resigned from the Board of Directors by rotation and, being eligible, offered herself for re-election at an Annual General Meeting of the Company and was successfully re-elected in the current financial year. 9 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 9 Karelian Diamond Resources P.L.C. Directors’ Report (continued) Directors (continued) Except as disclosed in the following tables, neither the Directors nor their families had any beneficial interest in the share capital of the Company. Apart from Directors’ remuneration (detailed in Note 2 and Note 4) and loans from shareholders (who are also Directors which are detailed in Note 12), there here have been no contracts or arrangements entered into during the financial year in which a Director of the Company had a material interest. Refer to Note 15 for further details. Company secretary Maureen T.A. Jones served as Company Secretary throughout the year. Directors’ shareholdings and other interests The interests of the Directors and their spouses and children in the share capital of the Company were as follows: Director Date of signing financial statements Date of signing financial statements Warrants 31 May 2021 31 May 2021 Warrants 1 June 2020 (or date of appointment if later) Warrants Ordinary Shares of €0.00025 each 10,263,912* 1,129,911 789,990 481,341 285,000 Ordinary Shares of €0.00025 each 10,263,912 1,129,911 789,990 481,341 285,000 Professor Richard Conroy Dr. Sorċa Conroy Maureen T.A. Jones Séamus P. FitzPatrick Brendan McMorrow 220,841 - 167,651 9,288 - * Of the 10,263,912 (2020: 8,413,912) ordinary shares beneficially held by Professor Richard Conroy at 31 May 2021, 1,232,601 (2020: 1,232,601) are held by Conroy P.L.C., a company in which Professor Richard Conroy has a controlling interest. 2,070,841 - 317,651 9,288 - 2,070,841 - 317,651 9,288 - 1 June 2020 (or date of appointment if later) Ordinary Shares of €0.00025 each 8,413,912* 1,129,911 639,990 481,341 285,000 Director Details of warrants, all of which are exercisable currently, are as follows: Date of signing financial statements Warrants 1,850,000 220,841 150,000 167,651 9,288 Professor Richard Conroy Professor Richard Conroy Maureen T.A. Jones Maureen T.A. Jones Séamus P. FitzPatrick Date of signing financial statements Price £ 0.08 2.20 0.08 2.20 2.20 1,850,000 220,841 150,000 167,651 9,288 31 May 2021 Warrants 31 May 2021 1 June 2020 1 June 2020 Expiry Date Price £ Warrants 0.08 2.20 0.08 2.20 2.20 - 220,841 - 167,651 9,288 Price £ - 2.20 - 2.20 2.20 09 December 2023 16 November 2022 09 December 2023 16 November 2022 16 November 2022 Substantial shareholdings So far as the Board of Directors are aware, no person or company, other than the shareholders listed below, held 3% or more of the issued ordinary share capital of the Company. Shareholder Date of signing financial statements % 31 May 2021 31 May 2021 31 May 2020 31 May 2020 % % Professor Richard Conroy Mr. Kevin Taylor Martello Holdings Limited Mr. Steven Coomber Spreadex Limited Mr. Fredrik Björnberg 19.55 7.02 9.13 4.07 - 6.97 * Of the 10,263,912 (2020: 8,413,912) ordinary shares beneficially held by Professor Richard Conroy at 31 May 2021, 1,232,601 (2020: 1,232,601) are held by Conroy P.L.C., a company in which Professor Richard Conroy has a controlling interest. 14.97 8.02 6.10 5.00 4.91 4.38 14.97 7.82 5.73 3.36 8.55 4.38 Ordinary Shares of €0.00025 each 8,413,912* 3,022,939 3,928,571 1,750,000 - 3,000,000 Ordinary Shares of €0.00025 each 10,263,912 5,360,000 3,928,571 2,300,000 5,861,939 3,000,000 Date of signing financial statements Ordinary Shares of €0.00025 each 10,263,912* 5,500,000 4,178,571 3,428,772 3,366,336 3,000,000 10 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc10 Directors’ Report (continued) Karelian Diamond Resources P.L.C. Directors’ Report (continued) Compliance policy statement of Karelian Diamond Resources P.L.C. The Directors, in accordance with Section 225(2) of the Companies Act 2014, acknowledge that they are responsible for securing the Company’s compliance with certain obligations specified in that section (‘relevant obligations’). The Directors confirm that: • • • a compliance policy statement has been drawn up setting out the Company’s policies that in their opinion are appropriate with regard to compliance with relevant obligations; appropriate arrangements and structures have been put in place that, in their opinion, are designed to provide reasonable assurance of compliance in all material respects with those relevant obligations; and a review has been conducted, during the financial year, of those arrangements and structures. It is the policy of the Company to review during the course of each financial year the arrangements and structures referred to above which have been implemented with a view to determining if they provide a reasonable assurance of compliance in all material respects with relevant obligations. Statement of Directors’ responsibilities in respect of the annual report and the financial statements The Directors are responsible for preparing the annual report, including 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 that law, they have elected to prepare the Company’s financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU and applicable law. Under company law, the Directors must not approve the Company financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position of the Company and of the Company’s profit or loss for that year and otherwise comply with the Companies Act 2014. In preparing the Company’s financial statements, the Directors are required to: select suitable accounting policies for the Company’s financial statements and then apply them consistently; • • make judgements and estimates that are reasonable and prudent; • state whether the financial statements have been prepared in accordance with the applicable accounting standards, identify those standards, and note the effect and the reason for any material departure from these standards; and 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 adequate accounting records which disclose with reasonable accuracy at any time the assets, liabilities, financial position and profit or loss of the Company and which enable them to ensure that the financial statements of the Company are prepared in accordance with the relevant accounting framework and comply with the provisions of the Companies Act 2014. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The Directors are also responsible for preparing a Directors’ Report that complies with the requirements of the Companies Act 2014. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Going concern The Company incurred a loss of €422,192 (2020: a loss of €446,710) for the financial year ended 31 May 2021. The Company had net assets of €9,495,866 (2020: €9,126,781) at that date. The Company had net current liabilities of €721,166 (2020: net current liabilities of €1,247,702) at that date. The Company had cash and cash equivalents of €61,778 (2020: €15,942) at 31 May 2021. The cash figure as at 31 May 2021 does not include the net cash funds of £520,000 received from the financing announced on 28 May 2021 which settled in June 2021. 11 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc11 Karelian Diamond Resources P.L.C. Directors’ Report (continued) Going concern (continued) The Directors, namely Professor Richard Conroy, Séamus P. FitzPatrick, Maureen T.A. Jones, Dr. Sorċa Conroy, Howard Bird, Brendan McMorrow, and former Directors, namely James P. Jones and Louis J. Maguire, have confirmed that they will not seek repayment of amounts owed to them by the Company of €921,969 (2020: €902,805) for a minimum period of 12 months from the date of approval of the financial statements, unless the Company has sufficient funds to repay. The Board of Directors have considered carefully the financial position of the Company and in that context, have prepared and reviewed cash flow forecasts for the period to 30 November 2022. As set out in the Chairman’s statement, the Company expects to incur capital expenditure in 2021 and 2022, consistent with its strategy as an exploration company. In reviewing the proposed work programme for exploration and evaluation assets, the results obtained from the exploration programme and the prospects for raising additional funds as required, the Board of Directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis. Corporate governance The Board adopted the QCA Corporate Governance Code (“QCA Code”), which is derived from the 2018 UK Corporate Governance Code and the Guidance on Board Effectiveness (the “Code”) but adapted to the needs of smaller quoted companies. The Company agrees that good governance contributes to sustainable success and recognises the renewed emphasis on business building trust by forging strong relationships with key stakeholders. The Company understands the importance of a corporate culture that is aligned with the Company’s purpose and business strategy, and which promotes integrity and includes diversity. The Company conducts its business with integrity, honesty and fairness and requires its partners, contractors and suppliers to meet similar ethical standards. The Board is satisfied that its corporate culture and culture of its employees aligns the Company’s objectives, strategy and business model. It is an objective of the Company that all individuals are aware of their responsibilities in applying and maintaining these standards in all their actions. The Board ensures that support is available in the form of staff training and updating its employee handbook such that staff members understand what is expected of them. The Company’s Statement of Compliance with the QCA Code is available on the Company’s website www.kareliandiamondresources.com/corporate- governance. Board of Directors The Board of Directors is made up of two executive and four non-executive Directors. Biographies of each of the Directors are set out on pages 6 and 7. The Board of Directors agrees a schedule of regular meetings to be held in each calendar year and also meets on other occasions as necessary. Meetings are usually held at the head office in 3300 Lake Drive, Citywest Business Campus, Dublin 24, D24 TD21, Ireland. Due to COVID-19 a number of these meetings were held by way of Zoom and teleconference calls. Board of Directors’ meetings were held on 11 occasions from 1 June 2020 to 31 May 2021 and attendance at these meetings is set out in the table below. An agenda and supporting documentation were circulated in advance of each meeting. Meetings held during the year Professor Richard Conroy Séamus P. FitzPatrick Maureen T.A. Jones Dr. Sorċa Conroy Brendan McMorrow Howard Bird 12 Board 11 11 8 11 11 11 10 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 12 Directors’ Report (continued) Karelian Diamond Resources P.L.C. Directors’ Report (continued) Board of Directors (continued) There is an agreed list of matters which the Board of Directors has formally reserved to itself for decision, such as approval of the Company’s commercial strategy, trading and capital budgets, financial statements, Board of Directors’ membership, major capital expenditure and risk management policies. Responsibility for certain matters is delegated to Board of Directors’ committees. Executive Directors spend as much time on Company’s matters as is necessary for the proper performance of their duties. Non-executive Directors are expected to spend a minimum of one day a month on Company’s activities in addition to preparation for and attendance at Board and sub-committee meetings. There is an agreed procedure for Directors to take independent legal advice. The Company Secretary is responsible for ensuring that Board of Director’s procedures are followed, and all Directors have direct access to the Company Secretary. All Directors receive regular reports and full Board of Directors’ papers are sent to each Director in sufficient time before Board of Director’s meetings, and any further supporting papers and information are readily available to all Directors on request. The Board of Director’s papers include the minutes of all committees of the Board of Directors which have been held since the previous Board of Director’s meeting, and, the Chairman of each committee is available to give a report on the committee’s proceedings at Board of Director’s meetings if appropriate. The Board of Directors has a process whereby each year every Director may meet the Chairman to review the conduct of Board of Director’s meetings and the general corporate governance of the Company. The non-executive Directors (other than Dr. Sorċa Conroy) are regarded as independent by the Board of Directors and have no material interest or other relationship with the Company (Dr. Sorċa Conroy is a daughter of Professor Richard Conroy). The Board, having fully considered the corporate needs of the Company, is satisfied that it has an appropriate balance of experience and skills to carry out its duties. The Chairman of the Company oversees this process and reviews the Board composition to ensure it has the necessary experience, skills and capabilities. The current non-executive Directors have a wide range of financial and technical skills based on both qualifications and experience; including significant fundraisings, financial management, technical expertise and the discovery and bringing into production of operating mines. Each board member keeps their skills up to date through a combination of courses, continuing professional development through professional bodies and reading. The Company Secretary provides Directors with updates on key developments relating to the Company, the sector in which the Company operates, legal and governance matters including advice from the Company’s broker, lawyers and advisors. Board performance The Board, through its Chairman, will, in the coming year evaluate its ongoing performance, based on the requirements of the business and corporate governance standards. It is envisaged that the review process will include the use of internal reviews and periodic external facilitation. The results of such reviews will be used to determine whether any alterations are needed at either a board or senior management level or whether any additional training would be beneficial. It is intended that with effect from the end of the next financial year, these evaluations will be undertaken annually, after the end of each financial year but prior to the publication of the respective annual report and accounts. Director’s performance will be measured by way of such matters as: • • • • • • Commitment; Independence; Relevant experience; Impartiality; Specialist knowledge; and Effectiveness on the Board. 13 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc13 Karelian Diamond Resources P.L.C. Directors’ Report (continued) Board of Directors (continued) Board performance (continued) As set out in the Constitution of the Company, each year, one third of the Directors with the exception of the Chairman and the Managing Director, retire from the Board of Directors by rotation. Effectively, therefore, each such Director will retire by rotation within a three-year period. Ethical values and behaviours The Board of Directors is committed to high standards of corporate governance and integrity in all its activities and operations and promotes a culture of good ethical values and behaviour. The Company conducts its business with integrity, honesty and fairness and requires its partners, contractors and suppliers to meet similar ethical standards. Individual staff members must ensure that they apply and maintain these standards in all their actions. The Chairman of the Board of Directors regularly monitors and reviews the Company’s ethical standards and cultural environment and where necessary takes appropriate action to ensure proper standards are maintained. Due to the size and available resources of the Company, the Chairman of the Board of Directors carries out executive functions. The Company is fully committed to complying with all relevant health, safety and environment rules and regulations as these apply to its operations. It is an objective of the Company that all individuals are aware of their responsibilities in providing a safe and secure working environment. Board Committees The Board of Directors has implemented an effective committee structure to assist in the discharge of its responsibilities. The committees and their members are listed on page 5 of this report. Membership of the Audit and Remuneration Committees is comprised exclusively of non-executive Directors. Attendance at the Audit and Remuneration Committee meetings is set out in the table below: Meetings held during the year Séamus P. FitzPatrick Brendan McMorrow** Dr. Sorca Conroy* Howard Bird** Audit Committee 3 2 3 3 n/a Remuneration Committee - - - n/a - *Dr. Sorca Conroy was appointed as a member of the Audit Committee on 28 August 2020 **Brendan McMorrow and Howard Bird were both appointed as members of the Remuneration Committee on 28 August 2020 Audit Committee The Audit Committee’s terms of reference have been approved by the Board of Directors. The Audit Committee, constituted in accordance with Section 1097 of the Companies Act 2014, comprises three non-executive Directors and is chaired by Séamus P. FitzPatrick. The Audit Committee reviews the accounting principles, policies and practices adopted, and areas of management judgement and estimation during the preparation of the interim and annual financial statements and discusses with the Company’s Auditor the results and scope of the audit. The external auditor has the opportunity to meet with the members of the Audit Committee alone at least once a year. The Audit Committee also advises the Board of Directors on the appointment of the external auditor and on their remuneration. An analysis of the fees payable to the external audit firm in respect of audit services during the financial year is detailed in Note 3 to the financial statements. The Audit Committee also undertakes a review of any non-audit services provided to the Company. There were no such non-audit services provided during the period under review. The Audit Committee is responsible for monitoring the controls which are in force to ensure the information reported to the shareholders is accurate and complete. The Audit Committee also reviews internal controls and reviews the effectiveness of the Company’s internal controls and risk management systems. It also considers the need for an internal audit function, which it believes is not primarily required at present because of the size of the Company’s operations. The members of the Audit 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. 14 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 14 Directors’ Report (continued) Karelian Diamond Resources P.L.C. Board of Directors Professor Richard Conroy - Chairman of the Board of Directors Professor Richard Conroy is responsible for leading the Board and ensuring it operates in an effective manner whilst promoting communication with shareholders. He has over 40 years’ experience of founding and growing companies in the natural resources industry with a track record in making discoveries of global significance. Experience Professor Richard Conroy has been involved in natural resources for many years. He established Trans-International Oil, which was primarily involved in Irish offshore oil exploration. Trans-International Oil initiated the Deminex Consortium which included Deminex, Mobil, Amoco and DSM. Trans-International Oil was merged with Aran Energy P.L.C. in 1979, which was later acquired by Statoil. Professor Richard Conroy founded Conroy Petroleum and Natural Resources P.L.C. (“Conroy Petroleum”). Conroy Petroleum was involved in both onshore and offshore oil production and exploration and also in mineral exploration. Conroy Petroleum, in 1986, made the significant discovery of the Galmoy zinc deposits in County Kilkenny which was later developed as a major zinc mine. The discovery at Galmoy led to the revival of the Irish base metal industry and to Ireland becoming an international zinc province. Conroy Petroleum was also a founding member of the Stoneboy consortium, which included Sumitomo Metal Mining Co. Ltd., an exploration group which discovered the world class Pogo gold deposit in Alaska, now in production as a major gold mine. Conroy Petroleum acquired Atlantic Resources P.L.C. in 1992 and subsequently changed its name to ARCON International Resources P.L.C. (“ARCON”). The oil and gas interests in ARCON were transferred to form Providence Resources P.L.C. ARCON was later acquired by Lundin Mining Corporation. Professor Richard Conroy was Chairman and Chief Executive of Conroy Petroleum/ARCON from 1980 to 1994. He founded Karelian Diamond Resources P.L.C. in 1995. Since then, Professor Richard Conroy has utilised his extensive experience in the exploration industry in his role as Chairman of the Board. Professor Richard Conroy served in the Irish Parliament as a Member of the Senate. He 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. Professor Richard Conroy is Emeritus Professor of Physiology in the Royal College of Surgeons in Ireland. Professor Richard Conroy’s research included pioneering work on jet lag, shift working and decision making in business after intercontinental flights. He co-authored the first textbook on human circadian rhythms. Séamus P. FitzPatrick - Deputy Chairman/Non-executive Director Séamus P. FitzPatrick is the Managing Partner and co-founder of CapVest, a private equity investment firm established in London in 1999. He is currently chairman of Valeo Foods and is a Director of Eight Fifty Food Group. He was formerly chairman of Findus, Vaasan & Vaasan, Mater Private, Youngs Bluecrest, and a Director of Scandi Standard and Curium Pharma. Experience Prior to the founding of CapVest, Séamus P. FitzPatrick worked in M&A at Morgan Stanley in London. Thereafter, he worked for Chase Capital Partners in New York. Séamus P. FitzPatrick holds an honours degree in English and Psychology from Trinity College Dublin. 7 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc15 Karelian Diamond Resources P.L.C. Directors’ Report (continued) Risks and uncertainties (continued) General Industry Risk The Company’s business may be affected by the general risks associated with all companies in the diamond exploration industry. These risks (the list of which is not exhaustive) include: general economic activity, the world diamond prices, government and environmental regulations, permits and licenses, fluctuating metal prices, the requirement and ability to raise additional capital through future financings and price volatility of publicly traded securities. As such there is no guarantee that future market conditions will permit the raising of the necessary funds by way of issue of new equity, debt financing or farming out of interests. To mitigate this risk, the Board regularly reviews Company cash flow projections and considers different sources of funds. Environmental Risk Environmental and safety legislation may change in a manner that may require stricter or additional standards than those now in effect. These could result in heightened responsibilities for the Company and could cause additional expense, capital expenditures, restrictions and delays in the activities of the Company, the extent of which cannot be predicted. The primary area that is expected to impact the Company is in the area of climate change. Management will continue to closely monitor this area and its potential impact on the Company. The Company employs staff experienced in the requirements of the relevant environmental authorities and seeks, through their experience, to mitigate the risk of non-compliance with accepted best practice. Exploration Risk All drilling to establish productive diamond resources is inherently speculative, and, therefore, a considerable amount of professional judgement is involved in the selection of any prospect for drilling. In addition, in the event drilling successfully encounters diamonds, unforeseeable operating problems may arise which render it uneconomic to exploit such finds. Estimates of potential resources include substantial proportions which are undeveloped. These resources require further capital expenditure in order to bring them into production. No guarantee can be given as to the success of drilling programmes in which the Company has an interest. The Company employs highly competent experienced staff and uses a range of techniques to minimise risk prior to drilling and utilises independent experts to assess the results of exploration activity. Financial Risk Refer to Note 17 in relation to the use of financial instruments by the Company, the financial risk management objectives of the Company and the Company’s exposure to inflation, interest rate risk, foreign currency risk, liquidity risk and credit risk. Management is authorised to achieve best available rates in respect of each forecast currency requirement. Pandemic Risk The COVID-19 pandemic impacted on the the Company’s activities during the financial year. Since the outbreak of the COVID-19 pandemic, the Company has taken necessary measures in accordance with Government’s guidelines to protect the health, safety and wellbeing of its employees, contractors and partners in Finland and Ireland including for a period, staff working remotely. COVID-19 continues to limit field and laboratory work given the restrictions on operations and movement. However, the Company’s exploration and development programme has nonetheless continued. Communication with shareholders The Company gives high priority to communication with both shareholders and all other stakeholder groups. This is achieved through publications such as the annual and interim report, and news releases on the Company’s website www.kareliandiamondresources.com, which is regularly updated. The Company encourages shareholders to attend the Annual General Meeting (AGM) to meet, exchange views and discuss the progress of the Company. The Directors are available after the conclusion of the formal business of the AGM to meet, listen to shareholders and discuss any relevant matters arising. 16 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc16 Directors’ Report (continued) Karelian Diamond Resources P.L.C. Directors’ Report (continued) Political donations There were no political donations during the financial year (2020: €Nil). Accounting records The Board of Directors are responsible for ensuring adequate accounting records, as outlined in Sections 281 to 285 of the Companies Act 2014, are kept by the Company. The Board of Directors, through the use of appropriate procedures and systems and the employment of competent persons have ensured that measures are in place to secure compliance with these requirements. The accounting records are maintained at the Company’s business address, 3300 Lake Drive, Citywest Business Campus, Dublin 24, D24 TD21, Ireland. Disclosure of information to auditor So far as each of the Directors in office at the date of approval of the financial statements is aware: • • There is no relevant audit information of which the Company’s auditor are unaware; and The Directors have taken all steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor are aware of that information. This information is given and should be interpreted in accordance with the provisions of Section 330 of the Companies Act 2014. Auditor Deloitte Ireland LLP will continue in office in accordance with Section 383 (2) of the Companies Act 2014. Shareholders will be asked to authorise the Directors to fix their remuneration. On behalf of the Directors: Professor Richard Conroy (Chairman) Maureen T.A. Jones (Managing Director) 30 November 2021 17 Annual Report and Financial Statements 2021 Karelian Diamond Resources PlcIndependent Auditor’s Report Deloitte Ireland LLP Chartered Accountants & Statutory Audit Firm 17 IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc RReeppoorrtt oonn tthhee aauuddiitt ooff tthhee ffiinnaanncciiaall ssttaatteemmeennttss OOppiinniioonn oonn tthhee ffiinnaanncciiaall ssttaatteemmeennttss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc ((tthhee ‘‘ccoommppaannyy’’)) In our opinion the financial statements: • • give a true and fair view of the assets, liabilities and financial position of the company as at 31 May 2021 and of the loss of the company for the financial year then ended; and have been properly prepared in accordance with the relevant financial reporting framework and, in particular, with the requirements of the Companies Act 2014. The financial statements we have audited comprise: • • • • • • the Income Statement; the Statement of Comprehensive Income; the Statement of Financial Position; the Statement of Changes in Equity; the Statement of Cash Flows; and the related notes 1 to 19, including a summary of significant accounting policies as set out in note 1. 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 (“the relevant financial reporting framework”). BBaassiiss ffoorr ooppiinniioonn We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our responsibilities under those standards are described below in the “Auditor's responsibilities for the audit of the financial statements” section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority, as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. MMaatteerriiaall uunncceerrttaaiinnttyy rreellaatteedd ttoo ggooiinngg ccoonncceerrnn In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. We draw your attention to Note 1 in the financial statements, which indicates that the company incurred a net loss of €422,192 during the financial year ended 31 May 2021 and, as of that date, the Company had net current liabilities of €721,166. Our evaluation of the directors’ assessment of the company’s ability to continue to adopt the going concern basis of accounting included: • Obtained an understanding of the company’s controls over the preparation of cash flow forecasts and approval of the projections and assumptions used in cash flow forecasts to support the going concern assumption, assessed the design and determined the implementation of these controls; Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 18 Independent Auditor’s Report (continued) IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc • Evaluated directors’ plans and their feasibility by challenging the key assumptions used in the cash flow forecast provided by agreeing the inputs to expenditure commitments and other supporting documentation; • Obtained an understanding of directors’ plans to enable the company to raise the funds required to • meet the expenditure commitments of the company; Inspected confirmations received by the company from the directors and former directors that they will not seek repayment of amounts owed to them by the Company within 12 months of the date of approval of the financial statements, unless the Company has sufficient funds to repay; • Assessed the mechanical accuracy of the cash flow forecast model; • Assessed the adequacy of the disclosures made in the financial statements As stated in Note 1, these events or conditions along with other matters as set forth in Note 1 indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. SSuummmmaarryy ooff oouurr aauuddiitt aapppprrooaacchh KKeeyy aauuddiitt mmaatttteerrss The key audit matters that we identified in the current year were: • Going concern (see material uncertainty related to going concern section). • Valuation of Intangible Assets. MMaatteerriiaalliittyy SSccooppiinngg Within this report, any new key audit matters are identified with and any key audit matters which are the same as the prior year identified with . The materiality that we used in the current year was €300,000 which was determined on the basis of approximately 3% of Shareholder’s Equity. We determined the scope of our audit by obtaining an understanding of the company and its environment and assessing the risks of material misstatement. SSiiggnniiffiiccaanntt cchhaannggeess oouurr aapppprrooaacchh iinn There were no significant changes in our approach. KKeeyy AAuuddiitt MMaatttteerrss Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current financial year and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the material uncertainty relating to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 19 IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc VVaalluuaattiioonn ooff IInnttaannggiibbllee AAsssseettss KKeeyy aauuddiitt mmaatttteerr ddeessccrriippttiioonn As at 31 May 2021, the carrying value of Exploration and evaluation assets included in Intangible assets in the Statement of financial position amounted to €10,766,576 We draw your attention to the disclosures made in Notes 1 and 7 to the financial statements concerning the valuation of Intangible assets held. The valuation of intangible assets by the company is dependent on the further successful development and ultimate production of the mineral resources and the availability of sufficient finance to bring the resources to economic maturity and profitability. The valuation of Intangible assets in the Statement of financial position was assessed as a significant risk and is therefore considered a key audit matter. HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee kkeeyy aauuddiitt mmaatttteerr We performed the following procedures: • We evaluated the directors’ procedures for assessing indicators of impairment of intangible assets in line with the accounting policies; • We evaluated the design and determined the implementation of controls in place over the capitalisation and subsequent valuation of Intangible assets. • We inspected documentation in respect of licences held and considered and challenged the directors’ assessment of indicators of impairment in relation to exploration and evaluation assets; • We performed a review of the proposed exploration programme in respect of the Company’s assets; including: - discussing and challenging the allocation of capitalised costs for their reasonableness, assessing the reasonableness of the assets capitalised in the current year, and reviewing and considering indicators of impairment. - - • We obtained a listing of intangible asset additions in the financial year and selected a sample of additions to ensure the capitalisation was in line with accounting policies. • We performed a review of Board of Directors Meeting Minutes and press releases issued by the company in relation to the status of exploration and evaluation assets; • We performed a review of budgeted expenditure for the next 12 months; and • We also considered the adequacy of the disclosure in the financial statements. KKeeyy oobbsseerrvvaattiioonnss A significant uncertainty exists in relation to the ability of the company to realise the exploration and evaluation assets capitalised to intangible assets. As noted above, we draw your attention to the disclosures made in Notes 1 and 7 to the financial statements concerning the valuation of intangible assets. The valuation of intangible assets by the company is dependent on the further successful development and ultimate production of the mineral resources and the availability of sufficient finance to bring the resources 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. Our opinion is not modified in respect of this matter. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 20 Independent Auditor’s Report (continued) IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters. OOuurr aapppplliiccaattiioonn ooff mmaatteerriiaalliittyy We define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Company to be €300,000 which is approximately 3% of Shareholder’s Equity. We have considered Shareholder’s Equity to be the critical component for determining materiality as we determined the Shareholder’s Equity position to be of most importance to the principal external users of the financial statements. Raising equity funding is of key importance to the company in continuing its current operations and is reflective of the current business life cycle of the company. We have considered quantitative and qualitative factors such as understanding the entity and its environment, history of misstatements, complexity of the company and reliabity of control environment. Shareholder's Equity €10mln Shareholder's Equity Materiality Materialty €300,000 Audit Committee Reporting Threshold €15,000 We agreed with the Audit Committee that we would report to them any audit differences in excess of €15,000, as well as differences below that threshold which, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. AAnn oovveerrvviieeww ooff tthhee ssccooppee ooff oouurr aauuddiitt We determined the scope of our audit by obtaining an understanding of the company and its environment and assessing the risks of material misstatement. OOtthheerr iinnffoorrmmaattiioonn The other information comprises the information included in the Annual Report and Financial Statements, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the Annual Report and Financial Statements. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 21 IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc RReessppoonnssiibbiilliittiieess ooff ddiirreeccttoorrss As explained more fully in the Directors’ Report, 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, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. AAuuddiittoorr’’ss rreessppoonnssiibbiilliittiieess ffoorr tthhee aauuddiitt ooff tthhee ffiinnaanncciiaall ssttaatteemmeennttss Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs (Ireland), we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may cause the entity (or where relevant, the group) to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. For listed entities and public interest entities, the auditor also provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements regarding independence, including the Ethical Standard for Auditors (Ireland), and communicates with them all relationships and other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable, related safeguards. Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 22 Independent Auditor’s Report (continued) IInnddeeppeennddeenntt aauuddiittoorr’’ss rreeppoorrtt ttoo tthhee mmeemmbbeerrss ooff KKaarreelliiaann DDiiaammoonndd RReessoouurrcceess PPllcc Where the auditor is required to report on key audit matters, from the matters communicated with those charged with governance, the auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. The auditor describes these matters in the auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, the auditor determines that a matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. RReeppoorrtt oonn ootthheerr lleeggaall aanndd rreegguullaattoorryy rreeqquuiirreemmeennttss OOppiinniioonn oonn ootthheerr mmaatttteerrss pprreessccrriibbeedd bbyy tthhee CCoommppaanniieess AAcctt 22001144 Based solely on the work undertaken in the course of the audit, we report that: • We have obtained all the information and explanations which we consider necessary for the purposes of our • • • audit. In our opinion the accounting records of the company were sufficient to permit the financial statements to be readily and properly audited. The financial statements are in agreement with the accounting records. In our opinion the information given in the directors’ report is consistent with the financial statements and the directors’ report has been prepared in accordance with the Companies Act 2014. MMaatttteerrss oonn wwhhiicchh wwee aarree rreeqquuiirreedd ttoo rreeppoorrtt bbyy eexxcceeppttiioonn Based on the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the directors' report 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. UUssee ooff oouurr rreeppoorrtt 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 auditor’s 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. KKeevviinn BBuuttlleerr For and on behalf of Deloitte Ireland LLP Chartered Accountants and Statutory Audit Firm No. 6 Lapp’s Quay Cork Date: 30 November 2021 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc23 Karelian Diamond Resources P.L.C. Income statement for the financial year ended 31 May 2021 Continuing operations Operating expenses - other Operating expenses - Share-based payment expense Movement in fair value of warrants Loss before finance costs and taxation Interest expenses Net finance cost Loss before taxation Income tax expense Loss for the financial year Loss per share Basic and diluted loss per share Note 2 16 16 3 11 5 6 2021 € (370,370) (46,519) 5,250 (411,639) (10,553) (10,553) (422,192) - 2020 € (443,448) - - (443,448) (3,262) (3,262) (446,710) - (422,192) (446,710) (0.0082) (0.0111) The total loss for the financial year is entirely attributable to equity holders of the Company. ______________________ Professor Richard Conroy Chairman ___________________ Maureen T.A. Jones Managing Director 24 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc24 Karelian Diamond Resources P.L.C. Statement of comprehensive income for the financial year ended 31 May 2021 Loss for the financial year 2021 € 2020 € (422,192) (446,710) Income recognised in other comprehensive income - - Total comprehensive loss for the financial year (422,192) (446,710) The total comprehensive loss for the financial year is entirely attributable to equity holders of the Company. 25 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc Karelian Diamond Resources P.L.C. Statement of financial position as at 31 May 2021 25 Assets Non-current assets Intangible assets Financial assets Total non-current assets Current assets Cash and cash equivalents Other receivables Total current assets Total assets Equity Capital and reserves Share capital presented as equity Share premium Share-based payments reserve Retained deficit Total equity Liabilities Non-current liabilities Warrant liabilities Convertible loan Derivative liability Total non-current liabilities Current liabilities Trade and other payables Related party loans Total current liabilities Total liabilities Total equity and liabilities Note 7 8 9 10 13 13 16 11 11 12 12 31 May 2021 € 10,766,576 4 10,766,580 61,778 652,957 714,735 31 May 2020 € 10,523,570 4 10,523,574 15,942 118,991 134,933 11,481,315 10,658,507 3,191,807 9,959,181 450,658 (4,105,780) 9,495,866 389,904 159,498 146 549,548 1,435,901 - 1,435,901 1,985,449 3,185,432 9,150,829 456,624 (3,666,104) 9,126,781 - 148,945 146 149,091 1,288,973 93,662 1,382,635 1,531,726 11,481,315 10,658,507 The financial statements were approved by the Board of Directors on 30 November 2021 and authorised for issue on 30 November 2021. They are signed on its behalf by: ______________________ Professor Richard Conroy Chairman __________________ Maureen T.A. Jones Managing Director 26 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc26 Karelian Diamond Resources P.L.C. Statement of changes in equity for the financial year ended 31 May 2021 Balance at 1 June 2020 Share issue Warrant issue Share issue costs Transfer from share- based payment reserve to retained deficit Loss for the financial year Balance at 31 May 2021 Balance at 1 June 2019 Share issue Share issue costs Loss for the financial year Balance at 31 May 2020 Share capital € 3,185,432 6,375 - - - - 3,191,807 3,183,294 2,138 - - 3,185,432 Share premium € 9,150,829 1,156,987 (348,635) - - - 9,959,181 8,768,276 382,553 - - 9,150,829 Share-based payment reserve € 456,624 - - - Retained deficit € (3,666,104) - - (23,450) (5,966) - 450,658 5,966 (422,192) (4,105,780) 456,624 - - - 456,624 (3,218,415) - (979) (446,710) (3,666,104) Total equity € 9,126,781 1,163,362 (348,635) (23,450) - (422,192) 9,495,866 9,189,779 384,691 (979) (446,710) 9,126,781 Share capital The share capital comprises of the nominal value share capital issued for cash and non-cash consideration. The share capital also comprises deferred share capital. The deferred share capital arose through the restructuring of share capital which was approved at the Annual General Meeting held on 9 December 2016. A detailed breakdown of the share capital figure is included in Note 13. Share premium The share premium reserve comprises of the excess consideration received in respect of share capital over the nominal value of shares issued. Share-based payment reserve The share-based payment reserve comprises of the fair value of all share options and warrants which have been charged over the vesting period, net of amounts relating to share options and warrants forfeited or lapsed during the year, which are reclassified to retained deficit. Retained deficit This reserve represents the accumulated losses absorbed by the Company to the statement of financial position date. 27 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc27 Karelian Diamond Resources P.L.C. Statement of cash flows for the financial year ended 31 May 2021 Cash flows from operating activities Loss for the financial year Adjustments for: Expense recognised in income statement in respect of equity settled share-based payments Movement in fair value of warrants Interest expense Increase in trade and other payables Increase in other receivables Advances from/(repayments to) Conroy Gold and Natural Resources P.L.C. 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 Share issue costs Repayment on loans Proceeds from convertible loan issue Net cash provided by financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of financial year Cash and cash equivalents at end of financial year 2021 € 2020 € (422,192) (446,710) 46,519 (5,250) 10,553 (370,370) 146,927 (762,367) 228,402 (757,408) (243,006) (243,006) 1,068,988 (23,450) 712 - 1,046,250 45,836 15,942 61,778 - - 3,262 (443,448) 350,280 (11,774) (4,228) (109,170) (370,837) (370,837) 320,266 (979) - 145,829 465,116 (14,891) 30,833 15,942 28 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc28 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 1 Accounting policies Reporting entity Karelian Diamond Resources P.L.C. (the “Company”) is a company domiciled in Ireland. The Company is a public limited company incorporated in Ireland under registration number 382499. The registered office is located at 3300 Lake Drive, Citywest Business Campus, Dublin 24, D24 TD21, Ireland. Basis of preparation The financial statements are presented in Euro (“€”). The € is the functional currency of the Company. The financial statements are prepared under the historical cost basis except for derivative financial instruments which, if any, are measured at fair value at each reporting date. The preparation of financial statements requires the Board of Directors and management to use judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Details of significant judgements are disclosed in the accounting policies. The financial statements were authorised for issue by the Board of Directors on 30 November 2021. Going concern The Company incurred a loss of €422,192 (2020: a loss of €446,710) for the financial year ended 31 May 2021. The Company had net assets of €9,495,866 (2020: €9,126,781) at that date. The Company had net current liabilities of €721,166 (2020: net current liabilities of €1,247,702) at the statement of financial position date. The Directors, Professor Richard Conroy, Séamus P. FitzPatrick, Maureen T.A. Jones, Dr. Sorċa Conroy, Brendan McMorrow, Howard Bird and former Directors James P. Jones and Louis J. Maguire, have confirmed that they will not seek repayment of amounts owed to them by the Company of €921,969 (2020: €902,805) within 12 months of the date of approval of the financial statements, unless the Company has sufficient funds to repay. The Board of Directors have considered carefully the financial position of the Company and in that context, have prepared and reviewed cash flow forecasts for the period to 30 November 2022. As set out further in the Chairman’s statement, the Company expects to incur capital expenditure in 2021 and 2022, consistent with its strategy as an exploration company. The Directors recognise that net current liabilities of €721,166 is a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. In reviewing the proposed work programme for exploration and evaluation assets and, on the basis of the equity raised during the financial year, the results obtained from the exploration programme and the prospects for raising additional funds as required, the Board of Directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis. The financial statements do not include any adjustments to the carrying value and classification of assets and liabilities that would arise if the Company was unable to continue as going concern. Statement of compliance The Company’s financial statements have been prepared in accordance with IFRS as adopted by the European Union (“EU”) and the requirements of the Companies Act 2014. 29 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 29 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) Recent accounting pronouncements (i) New and amended standards adopted by the Company The Company has adopted the following amendments to standards for the first time for its annual reporting year commencing 1 June 2020: • • • • • Amendments to references to the Conceptual Framework in IFRS Standards – Effective date 1 January 2020; Amendments to IFRS 3 Business Combinations – Definition of a Business – Effective date 1 January 2020; Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform – Effective date 1 January 2020; Amendment to IFRS 16 about providing lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification – Effective date 1 June 2020; and Amendments to IAS 1 and IAS 8 regarding definition of material used in the Conceptual Framework – Effective date 1 January 2020. The adoption of the above amendments to standards had no significant impact on the financial statements of the Company either due to being not applicable or immaterial. (ii) New standards and interpretations not yet adopted by the Company Certain new accounting standards and interpretations have been published that are not mandatory for 31 May 2021 reporting periods and have not been early adopted by the Company. The following amendments to standards adopted and endorsed by the EU have been issued by the International Accounting Standards Board to date and are not yet effective for the financial year from 1 June 2020. The Board of Directors is currently assessing whether these standards once adopted by the Company will have any impact on the financial statements of the Company. • • Amendments to IFRS 4, IFRS 7, IFRS 9, IFRS 16, and IAS 39 regarding replacement issues in the context of the IBOR reform – Phase 2 - Effective date 1 January 2021; and IFRS 4 amendments regarding the expiry date of the deferral approach – Effective date 1 January 2023. The following new standards and amendments to standards have been issued by the International Accounting Standards Board but have not yet been endorsed by the EU, accordingly, none of these standards have been applied in the current year. The Board of Directors is currently assessing whether these standards once endorsed by the EU will have any impact on the financial statements of the Company. • • • • • • • • Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an investor and its associate or joint venture – Postponed indefinitely; IFRS 1 amendments resulting from Annual Improvements to IFRS Standards 2018–2020 (subsidiary as a first- time adopter) – Effective date 1 January 2022; IFRS 3 amendments updating a reference to the Conceptual Framework – Effective date 1 January 2022; IFRS 9 amendments resulting from Annual Improvements to IFRS Standards 2018–2020 (fees in the ‘’10 per cent’’ test for derecognition of financial liabilities) – Effective date 1 January 2022; Amendment to IFRS 16 about providing lessees with an extension of one year to exemption from assessing whether a COVID-19-related rent concession is a lease modification – Effective date 1 April 2021; IFRS 17 Insurance contracts – Effective date deferred to 1 January 2023; IAS 1 amendments regarding the classification of liabilities - Effective date 1 January 2023; IAS 1 amendments regarding the disclosure of accounting policies - Effective date 1 January 2023; 30 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc30 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) Recent accounting pronouncements (continued) (ii) New standards and interpretations not yet adopted by the Company (continued) • • IAS 8 amendments regarding the definition of accounting estimates – Effective date 1 January 2023; Amendments to IAS 12 Income taxes: Deferred tax related to assets and liabilities arising from a single transac- tion – Effective date 1 January 2023; IAS 16 amendments prohibiting a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use – Effective date 1 January 2022; and IAS 37 amendments regarding the costs to include when assessing whether a contract is onerous – Effective date 1 January 2022. • • (a) Intangible assets The Company accounts for mineral expenditure in accordance with IFRS 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 in- curred on exploring, and testing exploration prospects are accumulated and capitalised as intangible exploration and evaluation (“E&E”) assets. E&E 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, E&E capitalised costs include an allocation from operating expenses, including share-based payments. All such costs are necessary for exploration and evaluation activities. E&E capitalised costs are not amortised prior to the conclusion of appraisal activities. At completion of appraisal activities if technical feasibility is demonstrated and commercial resources 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 are 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 in relation to E&E assets: • • • The period for which the entity has the right to explore in the specific area has expired or will expire in the near future and is not expected to be renewed. Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned. Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area. 31 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc31 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) (a) Intangible assets (continued) (ii) Impairment (continued) • Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. For E&E assets, where the above indicators exist or on an annual basis, an impairment test is carried out. The E&E assets are categorised into Cash Generating Units (“CGU”) on a country-by-country basis (31 May 2021 and 31 May 2020). 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. (b) Income taxation expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive loss, in which case it is recognised in the statement of comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities on a net basis or their tax assets and liabilities will be settled simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (c) Share-based payments The Company classifies instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. When the warrants issued (see note 16 for details) have an exercise price in sterling, they are derivative in nature and are liability classified. They do not qualify for equity classification as any cash settlement on exercise of these warrants will be received in a foreign currency. Where warrants are issued in the functional currency of the Company they are recognised as equity instruments. The warrant liabilities are recognised at their fair value on initial recognition and subsequently are measured at fair value through profit or loss. Any incremental direct costs associated with the issuance of warrants are taken as an immediate charge to finance costs through the income statement. See note 11 for further details. 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 or Black Scholes Model). 32 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc32 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) (d) Trade and other receivables and payables Trade and other receivables are measured at their transaction price and subsequently measured at amortised cost. Trade and other payables are measured at initial recognition at fair value, and subsequently measured at amortised cost. (e) Earnings per share The Company presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all potentially dilutive ordinary shares. (f) 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. (g) Pension costs The Company provides for pensions for certain employees through a defined contribution pension scheme. The amount charged to the income statement 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 in the statement of financial position. (h) Foreign currencies Transactions denominated in foreign currencies relating to costs and non-monetary assets are translated into € 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 € 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. (i) Directors’ Loans The Directors’ loans are initially measured at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest method, with interest expense recognised on the effective interest rate method. The effective interest 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. (j) Convertible loan As the convertible loan is made up of both liability and derivative components, it is considered to be a compound financial instrument. At initial recognition, the carrying amount of a compound financial instrument is allocated to its liability and derivative components. The fair value of the liability, which is the difference between the transaction price and the fair value of the conversion feature, and derivative is recognised as a liability in the statement of financial position. The conversion feature is subsequently measured at fair value with changes recognised in profit or loss. The liability is subsequently measured at amortised cost. The Company accounts for the interest expense of the convertible loan note at the effective interest rate. The difference between the effective interest rate and interest rate attached to the convertible loan increases the carrying amount of the liability so that, on maturity, the carrying amount is equal to the capital cash repayment that the Company may be required to pay. 33 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc33 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) (k) Ordinary shares Ordinary shares are classified as equity. Costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from retained earnings, net of any tax effects. (l) Impairment - financial assets are measured at amortised cost Financial assets measured at amortised cost are reviewed for impairment loss at each reporting date. The Company applies the simplified approach in accordance with IFRS 9. The Company measures the loss allowance at an amount equal to the lifetime expected credit losses as required under a simplified approach for trade receivables that do not contain a financing component. The Company’s approach to expected credit losses (“ECL”) reflects a probability-weighted outcome, the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Significant financial difficulties of the counterparty, probability that the counterparty will enter bankruptcy or financial re- organisation and default in payments are all considered indicators for increases in credit risks. If the credit risk increases to the point that it is considered to be credit impaired, interest income will be calculated based on the gross carrying amount adjusted for the loss allowance. Any contractual payment which is more than 90 days past due is considered credit impaired. (m) Significant accounting judgements and key sources of estimation uncertainty Significant judgements in applying the Company’s accounting policies The preparation of the financial statements requires the Board of Directors to make judgements and estimates and form assumptions that affect the amounts of assets, liabilities, contingent liabilities, revenues and expenses reported in the financial statements. On an ongoing basis, the Board of Directors evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. The Board of Directors bases its judgements and estimates on historical experience and on other factors it believes to be reasonable under the circumstances, the results of which form the basis of the reported amounts that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. In the process of applying the Company’s accounting policies above, the Board of Directors have identified the judgemental areas that have the most significant impact on the amounts recognised in the financial statements (apart from those involving estimations), which are dealt with as follows: Exploration and evaluation assets The assessment of whether operating costs and salary costs are capitalised to exploration and evaluation costs or expensed involves judgement. The Board of Directors consider the nature of each cost incurred and whether it is deemed appropriate to capitalise it within exploration and evaluation assets. Given that the activity of management and the resultant administration and salary costs are primarily focused on the Company’s diamond prospects, the Board of Directors consider it appropriate to capitalise a portion of such costs. These costs are reviewed on a line by line basis with the resultant calculation of the amount to be capitalised being specific to the activities of the Company in any given year. Cash generating units As outlined in the intangible assets accounting policy, the exploration and evaluation assets should be allocated to CGUs. The determination of what constitutes a CGU requires judgement. 34 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc34 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 1 Accounting policies (continued) (m) Significant accounting judgements and key sources of estimation uncertainty (continued) Significant judgements in applying the Company’s accounting policies (continued) The carrying value of each CGU 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 judgements: • Estimation of future cash flows expected to be derived from the asset. • Expectation about possible variations in the amount or timing of the future cash flows. • The determination of an appropriate discount rate. Going concern The preparation of financial statements requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on the successful further development and ultimate production of the mineral resources and the availability of sufficient finance to bring the resources to economic maturity and profitability. The Board of Directors have reviewed the proposed programme for exploration and evaluation assets and, on the basis of the equity raised after the financial year, the results from the exploration programme and the prospects for raising additional funds as required, consider it appropriate to prepare the financial statements on the going concern basis. Refer to page 28 for further details. Deferred tax No deferred tax asset has been recognised in respect of tax losses as it is not considered probable that future taxable profit will be available against which the related temporary differences can be utilised. Key sources of estimation uncertainty 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. Exploration and evaluation assets The carrying value of exploration and evaluation assets was €10,766,576 (2020: €10,523,570) at 31 May 2021. The Board of Directors carried out an assessment, in accordance with IFRS 6: Exploration for and Evaluation of Mineral Resources relating to the remaining licence or claim terms, likelihood of renewal, likelihood of further expenditure, possible discontinuation of activities over specific claims and available data which may suggest that the recoverable value of an exploration and evaluation asset is less than its carrying amount. Based on this assessment, the Board of Directors is satisfied as to the carrying value of these assets and is satisfied that these are recoverable, acknowledging however that their recoverability is dependent on future successful exploration efforts. Employee benefits – Share-based payment transactions The Company operates equity-settled share-based payment arrangements with non-market performance conditions which fall within the scope of and are accounted for under the provisions of IFRS 2: Share-based Payment. Accordingly, the grant date fair value of the options under these schemes is recognised as an operating expense with a corresponding increase in the “Share-based payment reserve”, within equity, where the exercise price is granted in EUR or recognised as a liability where a different currency is quoted as the exercise price over the vesting period. 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. The fair value of these options is measured using an appropriate option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except where forfeiture is only due to share prices not achieving the threshold for vesting. 35 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 35 2 Operating expenses Analysis of operating expenses Operating expenses Transfer to intangible assets Operating expenses are analysed as follows: Professional fees Wages and salaries Other operating expenses Personnel costs Auditor’s remuneration 2021 € 449,671 (79,301) 370,370 184,846 99,721 97,056 49,048 19,000 449,671 2020 € 605,907 (162,459) 443,448 209,407 161,113 129,108 80,144 26,135 605,907 Of the above costs, a total of €79,301 (2020: €162,459) is capitalised to intangible assets based on a review of the nature and quantum of the underlying costs. Refer to Note 1(a)(i) for further details. The costs capitalised to intangible assets mainly relate to the costs of geological and on-site personnel together with an appropriate portion of executive management salaries. €54,039 is charged to the Statement of Comprehensive Income in relation to Directors’ salaries. Wages, salaries and related costs as disclosed above is analysed as follows: Wages and salaries and personnel costs Social insurance costs 2021 € 144,111 4,658 148,769 2020 € 237,512 7,007 244,519 The amount of wages, salaries and related costs capitalised to intangible assets during the financial year was €72,369 (2020: €131,280). The average number of persons employed during the year (including executive Directors) by activity was as follows: Corporate management and administration Exploration and evaluation 2021 2020 2 - 2 2 - 2 36 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc36 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 2 Operating expenses (continued) An analysis of remuneration for each Director of the Company in the current financial year (prior to amounts transferred to intangible assets) is as follows: Professor Richard Conroy Maureen T.A. Jones Brendan McMorrow Séamus P. FitzPatrick Dr. Sorċa Conroy Howard Bird Fees € 12,500 6,250 6,250 6,250 6,250 6,250 43,750 Salary € 40,625 31,250 - - - - 71,875 Share-based payment € - - - - - - - Pension contributions € - - - - - - - Total € 53,125 37,500 6,250 6,250 6,250 6,250 115,625 An analysis of remuneration for each Director of the Company in the prior financial year (prior to amounts transferred to intangible assets) is as follows: Professor Richard Conroy Maureen T.A. Jones Brendan McMorrow Séamus P. FitzPatrick Dr. Sorċa Conroy Howard Bird Louis J. Maguire Fees € 17,500 8,750 8,750 8,750 8,750 5,833 5,417 63,750 Salary € 56,875 43,750 - - - - - 100,625 Share-based payment € - - - - - - - - Pension contributions € - - - - - - - - Total € 74,375 52,500 8,750 8,750 8,750 5,833 5,417 164,375 37 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc37 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 3 Loss before taxation The loss before taxation is arrived at after charging the following items: Auditor’s remuneration The analysis of the auditor’s remuneration is as follows: • Audit of financial statements 2021 € 2020 € 19,000 26,135 No fees were incurred for other assurance; tax advisory or other non-audit services in respect of the current or prior financial years. 4 Directors’ remuneration Aggregate emoluments paid to or receivable by Directors in respect of qualifying services 2021 € 2020 € 115,625 164,376 During the year ended 31 May 2021 and 31 May 2020, one Director was a member of a defined contribution scheme but no amounts were paid and accordingly, no other disclosures are required by Section 305 of the Companies Act 2014. No compensation has been paid or is payable for the loss of office or other termination benefit in respect of the loss of office of Director or other offices (2020: €Nil). 5 Income tax expense No taxation charge arose in the current or prior financial year due to losses incurred. Factors affecting the tax charge for the financial year: The total tax charge 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 taxation Irish standard tax rate Tax credit at the Irish standard rate Effects of: Losses carried forward for future utilisation Tax charge for the financial year 2021 € (422,192) 12.50% (52,774) 52,774 - 2020 € (446,710) 12.50% (55,839) 55,839 - 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. Unutilised losses may be carried forward from the date of the origination of the losses but may only be offset against taxable profits earned from the same trade. Unutilised losses carried forward amounted to €12,450,544 at 31 May 2020 and €12,003,834 at 31 May 2019. 38 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc38 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 6 Loss per share Basic loss per share Loss for the year attributable to equity holders of the Company Number of ordinary shares at start of the financial year Number of ordinary shares issued during the financial year Number of ordinary shares at end of the financial year 2021 € (422,192) 43,042,749 25,500,000 68,542,749 2020 € (446,710) 34,489,178 8,553,571 43,042,749 Weighted average number of ordinary shares for the purposes of basic and diluted loss per share 51,434,530 40,243,826 Basic and diluted loss per ordinary share (0.0082) (0.0111) Diluted loss per share The effect of share options and warrants is anti-dilutive. 7 Intangible assets Exploration and evaluation assets Finland Cost At 1 June Expenditure during the financial year: • • Other operating expenses (Note 2) At 31 May Licence and appraisal costs 31 May 2021 € 10,523,570 163,705 79,301 10,766,576 31 May 2020 € 10,152,733 208,378 162,459 10,523,570 Exploration and evaluation assets relate to expenditure incurred in the development of mineral exploration opportunities. These assets are carried at historical cost and have been assessed for impairment in particular with regard to the requirements of IFRS 6: Exploration for and Evaluation of Mineral Resources relating to remaining licence or claim terms, likelihood of renewal, likelihood of further expenditure, possible discontinuation of activities as a result of specific claims and available data which may suggest that the recoverable value of an exploration and evaluation asset is less than its carrying amount. The Board of Directors have considered the proposed work programmes for the underlying mineral resources. They are satisfied that there are no indications of impairment. The Board of Directors note that the realisation of the intangible assets is dependent on further successful development and ultimate production of the mineral resources and the availability of sufficient finance to bring the resources to economic maturity and profitability. 39 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc39 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 8 Financial assets Investment in subsidiaries 31 May 2021 € 4 31 May 2020 € 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 asset 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 3300 Lake Drive, Citywest Business Campus, Dublin 24, D24 TD21, Ireland. The above subsidiaries have not been consolidated on the basis that they are immaterial as the net asset of each entity is €2. The subsidiaries are not trading and have no contingencies or commitments other than intercompany balances of €2. 9 Cash and cash equivalents Cash held in bank accounts 10 Other receivables Share subscriptions receivable Vat receivable Other receivables PAYE receivable Amount due from related party 31 May 2021 € 61,778 61,778 31 May 2021 € 604,651 31,283 16,838 185 - 652,957 31 May 2020 € 15,942 15,942 31 May 2020 € - 37,957 22,379 186 58,469 118,991 Share subscriptions receivable at year end relate to the share issue that took place on 27 May 2021. All monies were received shortly after year end. See note 13 for further details of this share issue and allotment. 11 Non-current liabilities Warrant liabilities During the year ended 31 May 2021, 16,775,000 warrants were issued with a sterling exercise price and expiry of thirty months. The fair value amount at grant date was valued using the Black Scholes Model and recorded as warrant liabilities. At 31 May 2021, the warrants in issue were fair valued with the movement in fair value being recorded in the income statement. Convertible loan On 10 December 2019, the Company entered into a convertible loan note agreement for a total amount of €145,829 (£120,000) with one of its shareholders. The convertible loan note is unsecured, has a term of three years and attracts interest at a rate of 5% per annum which is payable on the maturity or conversion of the convertible loan. The conversion price is 10 pence. The shareholder has the right to seek conversion of the principal amount outstanding on the convertible loan note and all interest accrued at any time during the term. 40 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 40 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 11 Non-current liabilities (continued) Convertible loan (continued) Any conversion of the convertible loan note will be a for a minimum of €60,761 (£50,000) of loan notes. The amount of €146 (2020: €146) relates to derivative liability attached to the convertible loan note. The convertible loan amounting to €159,498 (2020: €148,945) at 31 May 2021. Opening Balance Loan issued on 10 December 2019 Derivative liability element Interest payable 12 Current liabilities Trade and other payables Accrued Directors’ remuneration Fees and other emoluments Pension contributions Other creditors and accruals Amount due to related party (see note 15 (c)) 31 May 2021 € 148,945 - - 10,553 159,498 31 May 2021 € 658,720 263,250 343,998 169,933 1,435,901 31 May 2020 € - 145,829 (146) 3,262 148,945 31 May 2020 € 639,555 263,250 386,168 - 1,288,973 It is the Company’s practice to agree terms of transactions, including payment terms with suppliers. It is the Company’s policy that payment is made according to the agreed terms. The carrying value of the trade and other payables approximates to their fair value. Related party loans Opening balance 1 June Loan conversion to equity* Loan repayment Loan advances** Closing balance 31 May 31 May 2021 € 93,662 (92,950) (712) - - 31 May 2020 € 158,087 (71,425) - 7,000 93,662 Prior to the various placings of shares, the immediate funding requirements of the Company had been financed by advances from Professor Richard Conroy (Director, executive chairman and major shareholder) and Maureen T.A. Jones (Director, Managing Director and shareholder). There is no interest payable in respect of these loans, no security has been attached to these loans and there is no repayment or maturity terms. *On 27 May 2021, Professor Richard Conroy capitalised loans amounting to €85,979 (£74,000) into 1,850,000 new ordinary shares of nominal value €0.00025 each. On 27 May 2021, Maureen Jones capitalised loans amounting to €6,971 (£6,000) into 150,000 new ordinary shares of nominal value €0.00025 each. **This amount relates to a loan provided by Maureen T.A. Jones to the Company. 41 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc 41 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 13 Called up share capital and share premium Authorised: 182,532,751,034 ordinary shares of €0.00001 each 7,301,310,041 consolidated ordinary shares of €0.00025 each 317,785,034 deferred shares of €0.00999 each 31 May 2021 € - 1,825,328 3,174,672 5,000,000 31 May 2020 € - 1,825,328 3,174,672 5,000,000 The deferred shares do not entitle the holder to receive a dividend or other distribution. Furthermore, the deferred shares do not entitle the shareholder to receive notice of or vote at any general meeting of the Company, and do not entitle the shareholder to any proceeds on a return of capital or winding up of the Company. Issued and fully paid – Current financial year Number of ordinary shares Called up share capital € Called up deferred share capital € Share premium € Start of current financial year – shares of €0.00025 each 43,042,749 10,760 3,174,672 9,150,829 Share issue (a) Share issue (b) 10,500,000 13,000,000 Warrants issued (see note 16) - Loan conversion into shares (c) 2,000,000 2,625 3,250 - 500 - - - - 463,136 601,401 (348,635) 92,450 End of current financial year 68,542,749 17,135 3,174,672 9,959,181 Issued and fully paid – Prior financial year Start of prior financial year – shares of €0.00025 each Share issue (d) Loan conversion into shares (e) Share issue (f) Share issue (g) Number of ordinary shares Called up share capital € Called up deferred share capital € Share premium € 34,489,178 8,622 3,174,672 8,768,276 2,500,000 1,625,000 1,428,571 3,000,000 625 405 358 750 - - - - 110,752 71,019 55,703 145,079 End of prior financial year 43,042,749 10,760 3,174,672 9,150,829 42 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc42 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 13 Called up share capital and share premium (continued) (a) On 25 August 2020, the Company raised €465,761 (£420,000) through the issue of 10,500,000 ordinary shares of €0.00025 in the capital of the Company at a price of £0.04 per Subscription Share. (b) On 27 May 2021, the Company raised €604,651 (£520,000), through the issue of 13,000,000 ordinary shares of €0.00025 in the capital of the Company at a price of £0.04 per Subscription Share. (c) On 27 May 2021, Professor Richard Conroy capitalised loans amounting to €85,979 (£74,000) into 1,850,000 new ordinary shares of nominal value €0.00025 each. On 27 May 2021, Maureen Jones capitalised loans amounting to €6,971 (£6,000) into 150,000 new ordinary shares of nominal value €0.00025 each. (d) On 16 July 2019, the Company raised €111,377 (£100,000), through the issue of 2,500,000 ordinary shares of €0.00025 in the capital of the Company at a price of £0.04 per Subscription Share resulting in a total premium of €110,752 per issue. (e) On 3 September 2019, Professor Richard Conroy capitalised loans amounting to €71,424 into 1,625,000 new ordinary shares of nominal value €0.00025 each resulting in a total premium of €71,019 per issue. (f) On 7 October 2019, the Company raised €56,061 (£50,000), through the issue of 1,428,571 ordinary shares of €0.00025 in the capital of the Company at a price of £0.035 per Subscription Share resulting in a total premium of €55,703 per issue. (g) On 10 December 2019, the Company raised €291,659 (£240,000), through the issue of 3,000,000 ordinary shares of €0.00025 in the capital of the Company and the issue of an unsecured convertible loan note resulting in a total premium of €145,079 per issue. Warrants: At 31 May 2021, warrants over 17,286,250 (31 May 2020: 900,139) shares exercisable at prices varying from £0.04 to £0.08 and €0.10 at any time up to 27 November 2023 were outstanding. There were 16,775,000 warrants issued during the year ended 31 May 2021. Options: At 31 May 2021 and 31 May 2020, there are no options outstanding. Share price: The share price at 31 May 2021 was £0.0475 (2020: £0.0395). The share price ranged from £0.0230 to £0.0650 (2020: £0.0172 to £0.0470) during the year under review. 14 Commitments and contingencies At 31 May 2021, there were no capital commitments or contingent liabilities (2020: €Nil) recognised at the reporting date. Should the Company decide to further develop the Lahtojoki project, an amount of €40,000 is payable by the Company to the vendors of the Lahtojoki mining concession. 15 Related party transactions (a) Details of Directors’ loans advanced by Professor Richard Conroy and Maureen T.A. Jones are outlined in Note 12 of the financial statements. (b) The Company shares office accommodation with Conroy Gold and Natural Resources P.L.C. which has certain common Directors and shareholders. For the financial year ended 31 May 2021, Conroy Gold and Natural Resources P.L.C. incurred costs totalling €54,872 (2020: €40,818) on behalf of the Company. These costs were recharged to the Company by Conroy Gold and Natural Resources P.L.C. These costs are analysed as follows: Office salaries Other operating expenses Rent and rates *This amount is rechargeable to Conroy Gold and Natural Resources P.L.C. 2021 € 49,048 5,824 - 54,872 2020 € 80,144 9,851 (49,177)* 40,818 43 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc43 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 15 Related party transactions (continued) (c) At 31 May 2021, the Company owed €169,933 to Conroy Gold and Natural Resources P.L.C. (2020: €58,469 owed from). Amounts owed to Conroy Gold and Natural Resources P.L.C. were included within trade and other payables during the current year. Amounts owed from Conroy Gold and Natural Resources P.L.C. were included within other receivables in the prior year. During the financial year ended 31 May 2021, €173,530 was received from (2020: €45,046 was paid to) Conroy Gold and Natural Resources P.L.C. During the financial year ended 31 May 2021, the Company was charged €54,872 (2020: €40,818) by Conroy Gold and Natural Resources P.L.C. in respect of the allocation of certain costs as detailed in Note 15(b). (d) At 31 May 2021, Brendan McMorrow was owed €24,167 (2020: €20,417) in respect of his services and also an amount of €13,700 (2020: €10,200) payable to him for other services rendered. These amounts are included in the trade and other payables balance in the statement of financial position. (e) An analysis of remuneration for each Director of the Company in the current financial year (prior to amounts transferred to intangible assets) is as follows: Professor Richard Conroy Maureen T.A. Jones Brendan McMorrow Séamus P. FitzPatrick Dr. Sorċa Conroy Howard Bird Fees € 12,500 6,250 6,250 6,250 6,250 6,250 43,750 Salary € 40,625 31,250 - - - - 71,875 Total € 53,125 37,500 6,250 6,250 6,250 6,250 115,625 An analysis of remuneration for each Director of the Company in the prior financial year (prior to amounts transferred to intangible assets) is as follows: Professor Richard Conroy Maureen T.A. Jones Brendan McMorrow Séamus P. FitzPatrick Dr. Sorċa Conroy Howard Bird Louis J. Maguire Fees € 17,500 8,750 8,750 8,750 8,750 5,833 5,417 63,750 Salary € 56,875 43,750 - - - - - 100,625 Total € 74,375 52,500 8,750 8,750 8,750 5,833 5,417 164,375 (f) Details of share capital transactions with the Directors are disclosed in the Directors’ Report. (g) Apart from Directors’ remuneration (detailed in Note 2 and Note 4), loans from two shareholders (who are also Directors which is detailed in Note 12), convertible loan from a shareholder (which is detailed in Note 11) and share capital transactions (which are detailed within the Directors’ Report), there have been no contracts or arrangements entered into during the financial year in which a Director of the Company had a material interest. 44 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc44 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 16 Share-based payments Warrants granted generally have a vesting period of two and half years. Details of the warrants outstanding during the financial year are as follows: 2021 No. of Share Warrants 900,139 16,775,000 (388,889) 17,286,250 2021 Weighted Average Exercise Price € 0.0815 0.09 (0.06) 0.0918 2020 No. of Share Warrants 900,139 - - 900,139 2020 Weighted Average Exercise Price € 0.0815 - - 0.0815 At 1 June Granted during the financial year Lapsed during the financial year At 31 May The Company estimated the fair value of 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 and on revaluation at each year end using the Binomial Lattice Model is affected by Karelian Diamond Resources P.L.C. stock price, share price volatility 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. The Company’s Binomial Lattice Model included the following weighted average assumptions for the Company’s warrants: Dividend yield Expected volatility Risk free interest rate Expected life (in years) 2021 Warrants 0% 90% 0.1% 2.0 2020 Warrants 0% 50% 0.7% 2.5 During the year, warrants were granted to the broker as part of the share issuances in August 2020 and May 2021. An amount of €46,519 was recognised in the income statement based on the fair value of these warrants at grant date. Amounts relating to share warrants which lapsed during the year and which are reclassified to retained deficit were €5,966 (2020: €Nil). 17 Financial instruments Financial risk management objectives, policies and processes The Company has exposure to the following risks from its use of financial instruments: (a) Inflation; (b) Interest rate risk; (c) Foreign currency risk; (d) Liquidity risk; and (e) Credit risk. 45 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc45 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 17 Financial instruments (continued) Financial risk management objectives, policies and processes (continued) The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company’s Audit Committee oversees how management monitors compliance with the Company’s risk management policies and procedures and framework in relation to the risks faced. (a) Inflation The Company is exposed to the risk associated with inflation such as the impact of increased operating expenses including rent, light & heat and wages and salaries. The Chairman and Managing Director monitor costs on an ongoing basis. (b) Interest rate risk The Company currently finances its operations through shareholders’ funds and loan finance. Short term cash funds are invested, if appropriate, in short-term interest-bearing bank deposits at 31 May 2021 and 2020. The Company did not enter into any hedging transactions with respect to interest rate risk. (c) Foreign currency risk The Company is exposed to currency risk on purchases, loans and bank deposits that are denominated in a currency other than the functional currency of the Company. As the exercise prices for warrants are denominated in sterling, the risk-free rate assumption is based on a sterling gilts zero-coupon yield curve at the date of issue. It is the Company’s policy to ensure that foreign currency risk is managed wherever possible by matching foreign currency income and expenditure. During the years ended 31 May 2021 and 31 May 2020, the Company did not utilise foreign currency forward contracts or other derivatives to manage foreign currency risk. The Company’s foreign currency risk exposure in respect of the principal foreign currencies in which the Company operates was as follows at 31 May 2021: Cash and cash equivalents Subscriptions receivable Amount due to related party Other receivables Convertible loan Derivative liability Trade and other payables Total exposure Sterling exposure denominated in € 10,294 604,651 - - (159,498) (146) (30,132) 425,169 46 Not at risk € 51,484 - (169,933) 16,838 - - (1,405,769) (1,507,380) Total € 61,778 604,651 (169,933) 16,838 (159,498) (146) (1,435,901) (1,082,211) Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc46 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 17 Financial instruments (continued) Financial risk management objectives, policies and processes (continued) (c) Foreign currency risk (continued) The Company’s foreign currency risk exposure in respect of the principal foreign currencies in which the Company operates was as follows at 31 May 2020: Cash and cash equivalents Amount due from related party Other receivables Convertible loan Derivative liability Related party loans Trade and other payables Total exposure Sterling exposure denominated in € 409 - - (148,945) (146) - (41,493) (190,175) Not at risk € 15,533 58,469 22,379 - - (93,662) (1,247,480) (1,244,761) Total € 15,942 58,469 22,379 (148,945) (146) (93,662) (1,288,973) (1,434,936) The following are the significant exchange rates that applied against €1 during the financial year: Average Rate 2021 Average Rate 2020 Spot Rate 31 May 2021 Spot Rate 31 May 2020 GBP 0.888 0.875 0.860 0.899 Sensitivity analysis A 10% strengthening of the Euro against Sterling, based on outstanding financial assets and liabilities at 31 May 2021 would have decreased the reported loss by €17,930 (2020 decreased by: €19,018) as a consequence of the retranslation of foreign currency denominated financial assets at those dates. A weakening of 10% of the Euro against Sterling would have had an equal and opposite effect. It is assumed that all other variables, especially interest rates, remain constant in the analysis. (d) Liquidity risk Liquidity is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and adverse conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. The Company manages liquidity risk by regularly monitoring cash flow projections. The nature of the Company’s exploration and appraisal activities can result in significant differences between expected and actual cash flows. 47 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc47 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 17 Financial instruments (continued) Financial risk management objectives, policies and processes (continued) (d) Liquidity risk (continued) Contractual maturities of financial liabilities as at 31 May 2021 were as follows: Trade and other payables (including amounts owed to related party) Derivative liability Convertible loan Carrying amount € Contractual cash flows € 6 months or less € 6-12 months € 1-2 years € 2-5 years € 1,435,901 146 159,498 1,435,901 146 167,835 1,595,545 1,603,882 513,932* - - 513,932* - - - - 921,969** - - 159,498*** - 146*** 921,969** 159,644*** Contractual maturities of financial liabilities as at 31 May 2020 were as follows: Carrying amount € Contractual cash flows € 6 months or less € 6-12 months € 1-2 years € 2-5 years € Trade and other payables (including related party loans) Derivative liability Convertible loan 1,382,635 146 148,945 1,382,635 146 167,835 386,168* - - - 93,662** 902,805** - 146*** - 148,945*** - - 1,531,726 1,550,616 386,168* 93,662** 902,805** 149,091*** *The amount of €513,932 (2020: €386,168) relates to other creditors and accruals (including amounts owed to Conroy Gold and Natural Resources plc). **The Directors, Professor Richard Conroy, Séamus P. FitzPatrick, Maureen T.A. Jones, Dr. Sorċa Conroy, Howard Bird and Brendan McMorrow, and former Directors James P. Jones and Louis J. Maguire, have confirmed that they will not seek repayment of amounts owed to them by the Company of €921,969 (2020: €902,805) within 12 months of the date of approval of the financial statements, unless the Company has sufficient funds to repay. The related party loans amounts consist of monies owed to Professor Richard Conroy amounting to €Nil (2020: €86,583) and Maureen T.A. Jones amounting to €Nil (2020: €7,079). ***On 10 December 2019, the Company has entered into a convertible loan note agreement for a total amount of €145,829 (£120,000) with one of its shareholders. Please refer to Note 11 for further details. The Company had cash and cash equivalents of €61,778 at 31 May 2021 (2020: €15,942). 48 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc48 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 17 Financial instruments (continued) Financial risk management objectives, policies and processes (continued) (e) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge its obligation. Credit risk is the risk of financial loss to the Company if a cash deposit is not recovered. Company deposits are placed only with banks with appropriate credit ratings. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk was as follows: Cash and cash equivalents Share subscriptions receivable Other receivables Amount due from related party 2021 € 61,778 604,651 16,838 - 683,267 2020 € 15,942 - 22,379 58,469 96,790 The Company’s cash and cash equivalents are held at AIB Bank which has a credit rating of “BBB” as determined by Fitch. Expected credit loss The Company measures credit risk and expected credit losses on financial assets measured at amortised cost using probability of default, exposure at default and loss given default. Management consider both historical analysis and forward-looking information in determining any expected credit loss. At 31 May 2021 and 31 May 2020, all cash is accessible on demand and held with counterparties with a credit rating of BBB or higher. Management consider the probability of default to be close to zero as these instruments have a low risk of default and the counterparties have a strong capacity to meet their contractual obligations in the near term. (f) Fair values versus carrying amounts Due to the short-term nature of the majority of the Company’s financial assets and liabilities at 31 May 2021 and 31 May 2020, the fair value equals the carrying amount in each case. The carrying value of non-current financial assets and liabilities is a reasonable approximation of fair value. (g) Capital management The principal activities of the Company are concentrating particularly on diamond exploration and evaluation. The Company has historically funded its activities through share issues and placings and loans. The Company’s capital structure is kept under review by the Board of Directors and it is committed to capital discipline and continues to maintain flexibility for future growth. The capital structure of the Company consists of equity of the Company (refer to the statement of changes in equity and Note 13). The Company is not subject to any externally imposed capital requirements. 49 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc49 Karelian Diamond Resources P.L.C. Notes to and forming part of the financial statements for the financial year ended 31 May 2021 (continued) 18 Post balance sheet events COVID-19 continues to limit field and laboratory work given the restrictions on operations and movement and other work also continues in relation to the Company’s exploration and development programme. There were no other material events subsequent to the reporting date which necessitate revision of the figures or disclosures included in the financial statements. 19 Approval of the audited financial statements for the financial year ended 31 May 2021 These audited financial statements were approved by the Board of Directors on 30 November 2021. A copy of the audited financial statements will be available on the Company’s website www.kareliandiamondresources.com and will be available from the Company’s registered office at 3300 Lake Drive, Citywest Business Campus, Dublin 24, D24 TD21, Ireland. 50 Annual Report and Financial Statements 2021 Karelian Diamond Resources Plc

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