Knaus Tabbert
Annual Report 2014

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& Controlled Entities Annual Report For the year ended 30 June 2014 Krakatoa Resources Limited & Controlled Entities CONTENTS CORPORATE DIRECTORY .............................................................................................................. 3 DIRECTORS’ REPORT ..................................................................................................................... 4 AUDITOR’S INDEPENDENCE DECLARATION ............................................................................... 14 STATEMENT OF COMPREHENSIVE INCOME .............................................................................. 15 STATEMENT OF FINANCIAL POSITION ........................................................................................ 16 STATEMENT OF CHANGES IN EQUITY ........................................................................................ 17 STATEMENT OF CASH FLOWS ..................................................................................................... 18 NOTES TO THE FINANCIAL STATEMENTS .................................................................................. 19 DIRECTORS’ DECLARATION ......................................................................................................... 36 INDEPENDENT AUDITOR’S REPORT............................................................................................ 37 CORPORATE GOVERNANCE STATEMENT .................................................................................. 39 ASX INFORMATION ....................................................................................................................... 44 SCHEDULE OF MINERAL TENEMENTS ........................................................................................ 47 – 2 – Krakatoa Resources Limited & Controlled Entities CORPORATE DIRECTORY PRINCIPAL REGISTERED OFFICE Level 11, 216 St Georges Terrace Perth WA 6000 Tel: +61 8 9481 0389 Fax: +61 8 9463 6103 Email: info@krakatoaresources.com Web: www.krakatoaresources.com DIRECTORS Aryo Bimo – Executive Director Roger Pooley - Non-Executive Director Brian Varndell – Non-Executive Director COMPANY SECRETARY David Palumbo SHARE REGISTRAR Computershare Investor Services Pty Ltd Level 2, 45 St Georges Terrace Perth WA 6000 Tel: +61 8 9323 2000 Fax: +61 8 9323 2033 Web: www.computershare.com.au AUDITORS RSM Bird Cameron Partners 8 St Georges Terrace PERTH WA 6000 LAWYERS Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street Perth WA 6000 – 3 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT Your directors present the following report on Krakatoa Resources Limited and controlled entities (referred to hereafter as “the Group”) for the financial year ended 30 June 2014. DIRECTORS The names of directors in office at any time during the financial year and up to the date of this report are: Kevin Kwok (Managing Director) - Resigned 1 July 2014 Aryo Bimo (Executive Director) - Appointed 18 December 2013 Brian Varndell (Non-Executive Director) - Appointed 5 December 2013 - - - - Roger Pooley (Non-Executive Director) - Appointed 30 July 2013 - - Kent Hunter (Non-Executive Director) - Resigned 5 December 2013 Stephen Brockhurst (Non-Executive Director) - Resigned 15 November 2013 Unless noted above, all directors have been in office since the start of the financial year to the date of this report. COMPANY SECRETARY The following persons held the position of company secretary during the financial year: - David Palumbo Details of Mr Palumbo’s experience are set out below under ‘Information on Directors’. PRINCIPAL ACTIVITIES The principal activity of the Group during the financial year was the acquisition and exploration of precious and base metal projects in Indonesia. OPERATING RESULTS The loss of the Group after providing for income tax amounted to $1,884,114 (2013: $619,264). FINANCIAL POSITION As at 30 June 2014, the Company had a cash balance of $61,796 (2013: $1,773,444) and a net asset position of $1,882,835 (2013: $2,444,957). DIVIDENDS PAID OR RECOMMENDED No dividends have been paid, and the directors do not recommend the payment of a dividend for the financial year ended 30 June 2014. SIGNIFICANT CHANGES IN STATE OF AFFAIRS The following significant changes in the state of affairs occurred during the financial year: • On 10 December 2013, Krakatoa Resources Limited signed a Share Purchase and Sale Agreement (“Purchase Agreement”) with PT. Sitasa Resources to acquire 99.8% of the issued shares of PT. Bina Citra Sawita, which holds a 100% Izin Usaha Pertambangan Eksplorasi No. 540/23/IUP/DESDM/Bup-2010, dated 7 July 2010, issued by the Regent of South Solok (“BCS Tenement”). Krakatoa completed the transaction through payment of US$150,000 on signing of the Purchase Agreement and the issue of 5,000,000 fully paid ordinary shares on 12 March 2014. interest in • On 12 March 2014, the Group issued 1,000,000 fully paid ordinary shares to Executive Director Aryo Bimo, pursuant to shareholder approval at the general meeting held on 7 March 2014. – 4 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) REVIEW OF OPERATIONS On 20 November 2013, Krakatoa Resources Limited announced that the exploration license covering Krakatoa’s 80% owned Donggala Project has been extended by the Regency of Donggala until 8 April 2016. On 10 December 2013, Krakatoa Resources Limited signed a Share Purchase and Sale Agreement (“Purchase Agreement”) with PT. Sitasa Resources to acquire 99.8% of the issued shares of PT. Bina Citra Sawita, which holds a 100% interest in Izin Usaha Pertambangan Eksplorasi No. 540/23/IUP/DESDM/Bup-2010, dated 7 July 2010, issued by the Regent of South Solok (“BCS Tenement”). The transaction was completed on 12 March 2014 with the total consideration for the acquisition being USD$150,000 and 5 million fully paid Krakatoa shares. PT. Sitasa Resources, is a holding company for the Sitasa Group of Companies (“Sitasa Group”), a well- established and highly successful exploration and mining company with a proven track record of success in Indonesian resource projects. Specifically, Sitasa Group is one of Indonesia’s largest high grade iron ore producers. Krakatoa will gain exclusive access to Sitasa Group’s pipeline of iron ore projects over the next two years. The Company also secured up to AUD$5 million in funds to progress the development of its exploration projects in Indonesia. The funding arrangement consists of a AUD$5 million Standby Subscription Agreement (“the Facility”) from Gurney Capital Nominees Pty Ltd (“Investor”), a Melbourne based Investment Company. On 16 April 2014, Krakatoa Resources Limited, via its wholly owned Indonesian subsidiary PT. Bumi Pratama, signed a Memorandum of Understanding (“MOU”) for the acquisition of 80% of the Shares in PT. Rio Jaya Persada (“PT. Rio Jaya”). PT. Rio Jaya holds two promising gold exploration licenses in Central Sulawesi. Krakatoa has the exclusive right, for a period of 18 months, to acquire an 80% interest in PT. Rio Jaya Persada through: • Payment of Rp600,000,000 (~AUD$55,996) within 15 working days after the MOU is signed (paid); • Subject to successful due diligence and early stage exploration, payment of Rp2,400,000,000 (~AUD$223,985). The Company has continued to evaluate additional tenements of strategic importance to expand the land area held. This work is ongoing as Krakatoa seeks to acquire further value accretive assets. – 5 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) INFORMATION ON DIRECTORS Kevin Kwok (BCom, CPA) Managing Director (resigned 1 July 2014) Prior to joining the Company, Mr Kwok was a CFO at the Milken Institute overseeing all financial aspects of a large investment portfolio. He has extensive strategic business management experience involving complex financial transactions and operations. These past several years he has served as a financial advisor, providing financial and accounting services to the mining industry. He was senior vice-president of finance and operations at Antar Investments, where Mr Kwok focused on the direct financial management of a $3 billion international portfolio. Mr Kwok began his private career as vice-president and corporate controller for Watt Realty Advisors, Mr Kwok’s primary responsibilities included direction of the accounting department, and overseeing the the accounting and Company’s $11 billion AUS Centro-Watt REIT portfolio. Before joining Watt Realty Advisors, Mr Kwok spent five years at Ernst & Young, where he specialized in both tax consulting and financial reporting, for both private and publicly held clients. functions associated with financial reporting An active member of the community Mr Kwok’s involvements include: membership in The American Institute of Certified Public Accountants (AICPA), Loyola High School Alumni Association, Board Member of the Oregon Community Solar Project and Heal the Bay. Interest in Shares (at resignation) 1,000,000 Fully paid ordinary shares Directorships held in other listed entities (at resignation) None Aryo Bimo Executive Director (Appointed 18 December 2013) Mr Bimo is the current Director of Operations at PT. Sitasa Resources and its operating mines, PT. Sitasa Energi and PT. Tambang Sunai Sanur. He has led the development of Sitasa Group, one of Indonesia’s most successful Iron Ore Mining Companies, from its roots as an exploration Company in 2008 to a significant producer at two separate mines in less than 5 years. Mr Bimo graduated from The Institute of Technology Surabaya with a degree in Civil Engineering. He is fluent in English and Bahasa Indonesia. Interest in Shares 1,000,000 Fully paid ordinary shares Directorships held in other listed entities None – 6 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) INFORMATION ON DIRECTORS (CONT) Brian Varndell (Bsc) Non-Executive Director (appointed 5 December 2013) Mr Varndell is a Fellow Member of the Australasian Institute of Mining & Metallurgy (“AusIMM”) and has over 40 years of experience including managerial roles and consulting in the capacity of Acting or Chief Geologist. His experience encompasses all aspects of the resource sector including exploration, development and mining. Mr Varndell has worked in the Indonesian mining industry since 1988 and was permanently based in Indonesia between 1994-1999 where he was the Regional Exploration Manager for Aurora Gold Limited and helped guide the exploration team to identify over 600,000oz Au resources which converted into over 350,000oz of reserves at the Indo Muro Kencana Mt Muro operation and 2.5Moz Au resources at the Meares Soputan Mining Toka Tindung Project in N. Sulawesi. He has recently maintained working contact with Indonesia mainly with involvement in the coal sector. Interest in Shares Directorships held in other listed entities Nil None Roger Pooley (Bsc) Non-Executive Director (appointed 30 July 2013) Mr Pooley has over forty years’ experience in the mining industry. He has worked in Australia, Ghana, UK, Iran and Indonesia. For the first fifteen years of his career, Mr Pooley worked in operations, in both line management and staff positions. Following this, he moved into project management for twelve years. For the past eighteen years as a consultant, he has been involved mainly in studies, valuations, reserves estimates, and appraisals. The latter part of his experience has been mainly in Indonesia, although in that time he has also completed assignments in Australia, the Philippines, Cameroon, Brazil, Kyrgyzstan and Vietnam. Mr Pooley has worked on open pit, underground, and alluvial properties in gold, coal, base metals and non-metallics. This wide experience, together with his expertise in economics, helps him to competently assess a variety of solutions to mining, treatment, logistical and environmental problems. Previous to joining the Board of Krakatoa, Mr Pooley worked at SRK Consulting (Australasia) Pty Ltd as a Senior Consultant based in the Perth and Jakarta offices from 2007 to June of 2013. Previous to working at SRK, Mr Pooley worked in Jakarta from 1994 to 2007 at PT Simapertama Minindo as an Independent Consultant. Mr Pooley holds a BSc (Mining Engineering) - Royal School of Mines in London, is a member of The Australasian Institute of Mining and Metallurgy, a Chartered Professional Engineer, and a member of MICA. He holds a WA Quarry Manager’s Certificate of Competency. Mr Pooley is bilingual, speaking English and Bahasa Indonesia. Interest in Shares Directorships held in other listed entities Nil None – 7 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) INFORMATION ON DIRECTORS (CONT) Stephen Brockhurst (BCom) Non-Executive Director (resigned 15 November 2013) Mr Brockhurst has 12 years’ experience in the finance and corporate advisory industry and has been responsible for the preparation of the due diligence process and prospectuses on a number of initial public offerings and significant transactions. Mr Brockhurst’s experience includes corporate and capital structuring, corporate advisory and company secretarial services, capital raising, ASX and ASIC compliance requirements. Mr Brockhurst is currently a director of Red Emperor Resources NL, Jacka Resources Limited and Plymouth Minerals Limited and company secretary of Plymouth Minerals Limited, Raptor Resources Limited and Terrace Resources Limited. Interest in Shares (at resignation) 250,001 Fully paid ordinary shares 125,000 options exercisable at $0.20 on or before 30 June 2015 Directorships held in other listed entities (at resignation) Red Emperor Resources NL Jacka Resources Limited Plymouth Minerals Limited Kent Hunter (BCom, CA) Non-Executive Director (resigned 5 December 2013) Kent Hunter is a chartered accountant with over 16 years corporate and company secretarial experience. He has been involved in the listing of over 30 companies on ASX in the past 9 years. He has experience in capital raisings, ASX compliance and regulatory requirements and is currently a director of Cazaly Resources Limited, Carbon Conscious Ltd and Stratum Metals Ltd and is company secretary of two other ASX listed entities. Commencing with Hall Chadwick Chartered Accountants in 1990, Mr Hunter completed his professional year and became chartered in 1993. Mr Hunter joined Ord Partners Chartered Accountants in 1995 and became corporate and audit manager for a range of listed and unlisted entities. Mr Hunter founded Mining Corporate in 2000 and established a business of identifying projects requiring a route to commercialization including industrial, technology, mining and exploration companies. Interest in Shares (at resignation) 1,183,334 Fully paid ordinary shares 591,667 options exercisable at $0.20 on or before 30 June 2015 Directorships held in other listed entities (at resignation) Cazaly Resources Limited Carbon Conscious Limited COMPANY SECRETARY David Palumbo (BCom, CA) David Palumbo is a chartered accountant with over six years’ experience in the auditing and financial reporting of ASX listed and unlisted companies. Mr Palumbo provides corporate advisory and financial management advice to clients of Mining Corporate and specialises in corporate compliance, statutory reporting and financial accounting services. Mr Palumbo is currently company secretary for ASX listed companies Western Mining Network Limited and Strike Resources Limited. – 8 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) REMUNERATION REPORT (AUDITED) This report details the nature and amount of remuneration for each director of Krakatoa Resources Limited and for the executives receiving the highest remuneration. 1. Employment Agreements Mr Aryo Bimo currently works for the Group in an executive capacity as Executive Director. Mr Bimo’s contract is for a term of 2 years with the option to extend for a further 1 year. Under the terms of the agreement, Mr Bimo’s annual salary is $90,000 plus superannuation. The Group may terminate Mr Bimo’s contract by giving Mr Bimo a minimum of 3 months written notice or by paying Mr Bimo 3 months’ salary in lieu of notice. Mr Bimo may terminate the contract by giving 3 months written notice to the Group. Appointments of non-executive directors Brian Varndell and Roger Pooley are formalised in the form of service agreements between themselves and the Group. Their engagements have no fixed term but cease on their resignation or removal as a director in accordance with the Corporations Act 2001. They are each entitled to receive directors’ fees of $30,000 per annum (exclusive of superannuation). 2. Remuneration policy The Group’s remuneration policy has been designed to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific long-term incentives based on key performance areas affecting the Group’s financial results. The board believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the Group, as well as create goal congruence between directors, executives and shareholders. The board’s policy for determining the nature and amount of remuneration for board members and senior executives of the Group is as follows: • The remuneration policy, setting the terms and conditions for the executive directors and other senior executives, was developed by the board. • All executives receive a base salary (which is based on factors such as length of service and experience), • superannuation and are entitled to the issue of share options. Incentive paid in the form of share options are intended to align the interests of directors and Group with those of the shareholders. The performance of executives is measured against criteria agreed annually with each executive and is based predominantly on the forecast growth of the Group’s shareholders’ value. The board may, however, exercise its discretion in relation to approving incentives, bonuses and options, and can recommend changes to the committee’s recommendations. Any changes must be justified by reference to measurable performance criteria. The policy is designed to attract the highest calibre of executives and reward them for performance that results in long-term growth in shareholder wealth. Executives are also entitled to participate in the employee share and option arrangements. The executive director receives a superannuation guarantee contribution required by the government, which was 9.25% for the year ended 30 June 2013, increasing to 9.50% effective 1 July 2014. No other retirement benefits are paid. All remuneration paid to directors and executives is valued at the cost to the Group and expensed, or capitalised to exploration expenditure if appropriate. Options, if given to directors and executives in lieu of remuneration, are valued using the Black-Scholes methodology. The board policy is to remunerate non-executive directors at market rates for time, commitment and responsibilities. The remuneration committee determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders at the Annual General Meeting. Fees for non-executive directors are not linked to the performance of the Group. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the Group and are able to participate in the employee share option plan. – 9 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) REMUNERATION REPORT (AUDITED) (CONT) 3. Performance-based remuneration There is currently no performance-based remuneration policy in place. 4. Details of remuneration for the year ended 30 June 2014 The remuneration for each key management personnel of the Group during the financial year ended 30 June 2014 was as follows: 2014 Key Management Person Directors Kevin Kwok Aryo Bimo Brian Varndell Roger Pooley Stephen Brockhurst Kent Hunter Short- term Benefits Cash, salary & commissions $ Post- employment Benefits Super- annuation Other Long-term Benefits Other Share based Payment Total Perfor- mance Related Value of Options Re- muneration Equity Options $ $ $ $ $ % % 90,000 52,500 17,097 27,500 15,000 32,500 - - 1,581 2,543 1,387 - - - - 220,000 - - - - - - - - - - - - - - 90,000 272,500 18,678 30,043 16,387 32,500 234,597 5,511 - 220,000 - 460,108 - - - - - - - - - - - - - - The remuneration for each key management personnel of the Group during the financial year ended 30 June 2013 was as follows: 2013 Key Management Person Directors Kevin Kwok Stephen Brockhurst Kent Hunter Short- term Benefits Cash, salary & commissions $ Post- employment Benefits Super- annuation Other Long-term Benefits Other Share based Payment Total Perfor- mance Related Value of Options Re- muneration Equity Options $ $ $ $ $ % % 45,000 17,320 17,500 - 1,559 - 79,820 1,559 - - - - - - - - - - - 45,000 18,879 17,500 - 81,379 - - - - - - - - – 10 – Krakatoa Resources Limited & Controlled Entities 5. Equity holdings of key management personnel DIRECTORS’ REPORT (CONT.) Shareholdings Number of shares held by key management personnel during the financial year ended 30 June 2014 was as follows: 2014 Balance 1.7.2013 No. Received as Compensation No. Options Exercised No. Net Change Other No. Balance 30.6.2014 No. Directors Kevin Kwok Aryo Bimo Brian Varndell Roger Pooley Stephen Brockhurst Kent Hunter Total 1,000,000 - - - 250,001 1,183,334 2,433,335 - 1,000,000 - - - - 1,000,000 - - - - - - - - - - - (250,001)* (1,183,334)* (1,433,335) 1,000,000 1,000,000 - - - - 2,000,000 Option holdings Number of options held by key management personnel during the financial year ended 30 June 2014 was as follows: 2014 Balance 1.7.2013 No. Received as Compensation No. Options Exercised No. Net Change Other No. Balance 30.6.2014 No. Directors Kevin Kwok Aryo Bimo Brian Varndell Roger Pooley Stephen Brockhurst Kent Hunter Total - - - - 125,000 591,667 716,667 * Balance held at date of resignation - - - - - - - - - - - - - - - - - - (125,000)* (591,667)* (716,667) - - - - - - - 6. Other transactions with key management personnel The Group incurred the following transactions with related parties: - During the year ended 30 June 2014, Mining Corporate Pty Ltd, an entity which Kent Hunter and Stephen Brockhurst are directors and have a beneficial interest, was paid $56,090 (2013: $163,650) in Group secretarial and IPO compliance fees up until the resignation of Kent Hunter from the board of directors on 5 December 2013. No amount (2013: $nil) was outstanding at year end. - During the year ended 30 June 2013, Stellar Securities Pty Ltd, an entity which Kent Hunter is a director and has a beneficial interest, was issued 933,333 ordinary fully paid shares and paid $102,667 under the co-lead broker mandate. No amount was outstanding for the year ended 30 June 2013. All transactions were made on normal commercial terms and condition and at market rates. 7. Equity instruments granted as compensation Details of ordinary shares in the Company that were granted as compensation to each key management person and details of options that were vested are as follows: Director/Key Management Personnel Number of Shares Granted Grant Date Fair Value per Share at Grant Date Aryo Bimo 1,000,000 7 March 2014 0.22 “End of Remuneration Report (Audited)” – 11 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) MEETINGS OF DIRECTORS The number of Directors' meetings (including committees) held during the financial year and the number of meetings attended by each Director are: Director Kevin Kwok Stephen Brockhurst Kent Hunter Roger Pooley Aryo Bimo Brian Varndell Directors’ Meetings Number eligible to attend 1 1 1 - - - Number attended 1 1 1 - - - EVENTS AFTER THE REPORTING PERIOD On 22 August 2014, the Company issued 1,000,000 fully paid ordinary shares and 1,000,000 Options exercisable at $0.20 on or before 30 June 2015, raising $100,000. No matters or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial periods. INDEMNITY AND INSURANCE OF AUDITOR The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. ENVIRONMENTAL ISSUES The Group’s operations are subject to significant environmental regulation under the law of the Commonwealth and State in relation to discharge of hazardous waste and materials arising from any mining activities and development conducted by the Group on any of its tenements. To date the Group has not carried out any exploration activities and there have been no known breaches of any environmental obligations. The directors have considered the National Greenhouse and Energy Reporting Act 2007 (the NGER Act) which introduces a single national reporting framework for the reporting and dissemination of information about the greenhouse gas emissions, greenhouse gas projects, and energy use and production of corporations. At the current stage of development, the directors have determined that the NGER Act will have no effect on the Group for the current or subsequent financial period. The directors will reassess this position as and when the need arises. INDEMNIFYING AND INSURANCE OF OFFICERS The Group has entered into deeds of indemnity with each director whereby, to the extent permitted by the Corporations Act 2001, the Group agreed to indemnify each director against all loss and liability incurred as an officer of the Group, including all liability in defending any relevant proceedings. The Group has paid premiums to insure each of the directors against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director of the Group, other than conduct involving a wilful breach of duty in relation to the Group. The disclosure of the amount of the premium is prohibited by the insurance policy. – 12 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ REPORT (CONT.) FUTURE DEVELOPMENTS, PROSPECTS AND BUSINESS STRATEGIES Further information, other than as disclosed this report, about likely developments in the operations of the Group and the expected results of those operations in future periods has not been included in this report as disclosure of this information would be likely to result in unreasonable prejudice to the Group. PROCEEDINGS ON BEHALF OF THE GROUP No person has applied for leave of Court to bring proceedings on behalf of the Group or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. The Group was not a party to any such proceedings during the year. NON-AUDIT SERVICES There following fees were paid or payable to the auditor for non-audit services provided during the year ended 30 June 2014: — taxation services $ 500 The directors are satisfied that the provision of non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the non-audit services provided by the auditor do not compromise the auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services provided undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board. • AUDITOR’S INDEPENDENCE DECLARATION The lead auditor’s independence declaration for the year ended 30 June 2014 has been received and can be found on the next page of the directors’ report. Signed in accordance with a resolution of the Board of Directors. Aryo Bimo Executive Director Dated: 19 September 2014 – 13 – RSM Bird Cameron Partners 8 St George’s Terrace Perth WA 6000 GPO Box R1253 Perth WA 6844 T +61 8 9261 9100 F +61 8 9261 9101 www.rsmi.com.au AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of the financial report of Krakatoa Resources Limited for the year ended 30 June 2014, I declare that, to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. RSM BIRD CAMERON PARTNERS Perth, WA Dated: 19 September 2014 TUTU PHONG Partner Liability limited by a scheme approved under Professional Standards Legislation Major Offices in: Perth, Sydney, Melbourne, Adelaide and Canberra ABN 36 965 185 036 RSM Bird Cameron Partners is a member of the RSM network. Each member of the RSM network is an independent accounting and advisory firm which practises in its own right. The RSM network is not itself a separate legal entity in any jurisdiction. Krakatoa Resources Limited & Controlled Entities STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2014 Revenue Administration expenses Compliance and regulatory expense Employee benefits expense Exploration expenditure and project evaluation costs Impairment of exploration expenditure Travel and accommodation Loss before income tax expense Income tax expense Loss for the year / period Other comprehensive income Item that may be reclassified subsequently to operating result Foreign currency translation Total comprehensive (loss) attributable to members of the parent entity Net loss attributable to: Members of the parent entity Non-controlling interest Total comprehensive loss attributable to: Members of the parent entity Non-controlling interest Note 2 30 June 2014 $ 30 June 2013 $ 70,539 38,897 (259,482) (178,483) (522,649) (718,129) (106,187) (169,723) 3 (1,884,114) - (187,081) (116,621) (130,308) (100,675) - (123,476) (619,264) - (1,884,114) (619,264) 1,992 446 (1,882,122) (618,818) (1,884,114) - (1,884,114) (1,882,122) - (1,882,122) (619,264) - (619,264) (618,818) - (618,818) Basic and diluted loss per share (cents per share) 4 (6.12) (2.89) The accompanying notes form part of these financial statements. – 15 – Krakatoa Resources Limited & Controlled Entities STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2014 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Other financial assets Other assets TOTAL CURRENT ASSETS NON CURRENT ASSETS Other assets Exploration and evaluation expenditure TOTAL NON CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Non-controlling interest Accumulated losses TOTAL EQUITY Note 2014 $ 2013 $ 6 7 8 9 9 10 11 12 13 14 61,796 209,436 865 38,182 1,773,444 16,629 37,490 122,684 310,279 1,950,247 - 1,767,767 40,190 543,687 1,767,767 583,877 2,078,046 2,534,124 195,211 195,211 195,211 89,167 89,167 89,167 1,882,835 2,444,957 4,234,730 147,438 87,500 (2,586,833) 2,914,730 145,446 87,500 (702,719) 1,882,835 2,444,957 The accompanying notes form part of these financial statements. – 16 – Krakatoa Resources Limited & Controlled Entities STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2014 Note Issued Capital $ Accumulated Losses $ Option Premium Reserve $ Foreign Currency Translation Reserve $ Non- controlling interest $ Total $ 186,798 (619,264) 446 (618,818) 3,200,000 (555,523) 145,000 Balance at 1 July 2012 270,253 (83,455) Loss for the year Other comprehensive income Total comprehensive loss Transactions with owner directly recorded in equity Shares issued during the year Less: transaction costs arising from issue of shares Options issued during the year Recognition of minority interest of PT. Dana Ramakala Balance at 30 June 2013 - - - (619,264) - (619,264) 12 3,200,000 - 12 13 14 (555,523) - - 2,914,730 - - - - - - - 446 446 - - - - - - - - - - - - - - 145,000 - - (702,719) 145,000 - 446 87,500 87,500 87,500 2,444,957 Balance at 1 July 2013 2,914,730 (702,719) 145,000 446 87,500 2,444,957 Loss for the year Other comprehensive loss Total comprehensive loss Transactions with owner directly recorded in equity Shares issued during the year Balance at 30 June 2014 - - - (1,884,114) - (1,884,114) - - - - 1,992 1,992 - - - (1,884,114) 1,992 (1,882,122) 12 1,320,000 4,234,730 - - (2,586,833) 145,000 - 2,438 - 87,500 1,320,000 1,882,835 The accompanying notes form part of these financial statements. – 17 – Krakatoa Resources Limited & Controlled Entities STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2014 CASH FLOWS FROM OPERATING ACTIVITIES Interest received Payments to suppliers and employees Payment for exploration and evaluation expenditure Note 2014 $ 2013 $ 29,811 (804,541) (788,301) 22,062 (593,058) (206,862) Net cash used in operating activities 16 (1,563,031) (777,858) CASH FLOWS FROM INVESTING ACTIVITIES Payments for exploration assets Payments for financial assets Proceeds from sale of financial assets Loans to other entities Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Proceeds from issue of options Share application money (refunded)/received Payment of transaction costs associated with capital raising - - 51,015 (193,865) (150,000) (114,060) 32,850 - (142,850) (231,210) - - (5,767) - 3,000,000 140,768 10,000 (555,523) Net cash (used in)/provided by financing activities (5,767) 2,595,245 Net (decrease)/increase in cash held Cash at beginning of financial year / period (1,711,648) 1,773,444 1,586,177 187,267 Cash at end of financial year / period 6 61,796 1,773,444 The accompanying notes form part of these financial statements. – 18 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES These financial statements and notes represent those of Krakatoa Resources Limited (the “Company”) and its controlled entities (the “Group”). Krakatoa Resources Limited is a listed public Company, incorporated and domiciled in Australia. The financial statements were authorised for issue on 18 September 2014 by the directors of the Group. Basis of Preparation The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The Group is a for profit entity for financial reporting purposes under Australian Accounting Standards. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the IASB. Material accounting policies adopted in the preparation of this financial report are presented below. They have been consistently applied unless otherwise stated. The financial report has been prepared on an accruals basis and is based on historical costs modified by the revaluation of selected financial assets for which the fair value basis of accounting has been applied. All amounts are presented in Australian dollars unless otherwise stated. Going Concern The financial report has been prepared on a going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the ordinary course of business. The Company and Group incurred losses of $1,794,175 and $1,884,114 respectively and the Group had net cash outflows from operating activities of $1,563,031 for the year ended 30 June 2014. The ability of the Company and Group to continue as going concerns is principally dependent upon the ability of the Company to secure funds by raising capital from equity markets and managing cashflow in line with available funds. These conditions indicate a material uncertainty, which may cast significant doubt about the ability of the Company and Group to continue as going concerns. The directors have prepared a cash flow forecast, which indicates that the Company and Group will have sufficient cash flows to meet all commitments and working capital requirements for the 12 month period from the date of signing this financial report. Subsequent to year end the Company raised $100,000 from this issue of 1,000,000 shares and 500,000 options exercisable at $0.20 on or before 30 June 2015. Based on the cash flow forecasts, and other factors referred to above, the directors are satisfied that the going concern basis of preparation is appropriate. In particular, given the Company’s history of raising capital to date, the directors are confident of the Company’s ability to raise additional funds as and when they are required. Should the Company and Group be unable to continue as going concerns they may be required to realise their assets and extinguish their liabilities other than in the normal course of business and at amounts different to those stated in the financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or to the amount and classification of liabilities that might result should the Company and Group be unable to continue as going concerns and meet their debts as and when they fall due. Accounting Policies a) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Income and expense of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. – 19 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) a) Basis of consolidation (Cont.) Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognised in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss has been recognised in other comprehensive income and accumulated in equity, the amounts previously recognised in other comprehensive income and accumulated in equity are accounted for as if the Group had directly disposed of the relevant assets (i.e. reclassified to profit or loss or transferred directly to retained earnings as specified by applicable Standards). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under AASB 139 ‘Financial Instruments: Recognition and Measurement’ or, when applicable, the cost on initial recognition of an investment in an associate or jointly controlled entity. Income Tax b) The income tax expense (revenue) for the period comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at reporting date. Current tax liabilities (assets) are therefore measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the period as well unused tax losses. Current and deferred income tax expense (income) is charged or credited directly to equity instead of the profit or loss when the tax relates to items that are credited or charged directly to equity. Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. – 20 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) c) Exploration and Evaluation Expenditure Exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Accumulated costs in relation to an abandoned area are written off in full against profit in the period in which the decision to abandon the area is made. When production commences, the accumulated costs for the relevant area of interest are amortised over the life of the area according to the rate of depletion of the economically recoverable reserves. A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Costs of site restoration are provided over the life of the facility from when exploration commences and are included in the costs of that stage. Site restoration costs include the dismantling and removal of mining plant, equipment and building structures, waste removal, and rehabilitation of the site in accordance with clauses of the mining permits. Such costs have been determined using estimates of future costs, current legal requirements and technology on an undiscounted basis. Any changes in the estimates for the costs are accounted on a prospective basis. In determining the costs of site restoration, there is uncertainty regarding the nature and extent of the restoration due to community expectations and future legislation. Accordingly the costs have been determined on the basis that the restoration will be completed within one period of abandoning the site. d) Financial Instruments Initial recognition and measurement Financial instruments, incorporating financial assets and financial liabilities, are recognised when the entity becomes a party to the contractual provisions of the instrument. Trade date accounting is adopted for financial assets that are delivered within timeframes established by marketplace convention. Financial instruments are initially measured at fair value plus transaction costs where the instrument is not classified as ‘at fair value through profit or loss’, in which case transaction costs are expensed to profit or loss immediately. Classification and subsequent measurement Finance instruments are subsequently measured at either of fair value, amortised cost using the effective interest rate method, or cost. Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and reduction for impairment, and adjusted for any cumulative amortisation of the difference between the amount initially recognised and the maturity amount calculated using the effective interest method. Fair value represents the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties. Where available, quoted prices in an active market are used to determine fair value. In other circumstances, valuation techniques are adopted. The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that exactly discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense in profit or loss. – 21 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) d) Financial Instruments (Cont.) The Group does not designate any interests in subsidiaries, associates or joint venture entities as being subject to the requirements of accounting standards specifically applicable to financial instruments. (i) Financial assets at fair value through profit and loss Financial assets are classified ‘at fair value through profit or loss’ when they are held for trading for the purpose of short term profit taking, where they are derivatives not held for hedging purposes, or designated as such to avoid an accounting mismatch or to enable performance valuation where a Group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Such assets are subsequently measured at fair value with changes in the carrying value being included in profit or loss. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period. All other loans and receivables are classified as non-current assets. (iii) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the Group’s intention to hold these investments to maturity. They are subsequently measured at amortised cost. Held-to-maturity investments are included in non-current assets, except for those which are expected to mature within 12 months after the end of the reporting period. (All other investments are classified as current assets). If during the period the Group sold or reclassified more than an insignificant amount of the held-to-maturity investments before maturity, the entire held-to-maturity investments category would be tainted and reclassified as available-for-sale. (iv) Available for sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either not suitable to be classified into other categories of financial assets due to their nature, or they are designated as such by management. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments. Available-for-sale financial assets are included in non-current assets, except for those which are expected to mature within 12 months after the end of the reporting period. All other financial assets are classified as current assets. (v) Financial Liabilities Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost. Fair Value Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value of all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. – 22 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) d) Financial Instruments (Cont.) Impairment At each reporting date the Group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments a significant or prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the statement of comprehensive income. De-recognition Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity is no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised where the related obligations are either discharged, cancelled or expire. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non- cash assets or liabilities assumed, is recognised in profit or loss. e) Foreign currencies The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group entity are expressed in Australian dollars (‘$’), which is the functional currency of the Group and the presentation currency for the consolidated financial statements. In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non- monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for: • • • exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; exchange differences on transactions entered into in order to hedge certain foreign currency risks; and exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into Australian dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate). On the disposal of a foreign operation (i.e. a disposal of the Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, loss of joint control over a jointly controlled entity that includes a foreign operation, or loss of significant influence over an associate that includes a foreign operation), all of the accumulated exchange differences in respect of that operation attributable to the Group are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are reattributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. partial disposals of associates or jointly controlled entities that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss. – 23 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Impairment of Assets f) At the end of each reporting date, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include the consideration of external and internal sources of information including dividends received from subsidiaries, associates or jointly controlled entities deemed to be out of pre-acquisition profits. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed. Impairment testing is performed annually for intangible assets with indefinite lives. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. g) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of 3 months or less. h) Revenue Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. All revenue is stated net of the amount of goods and services tax (GST). i) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. j) Trade and other receivables All trade receivables are recognised when they are due for settlement in the short term. Collectability of trade and other receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off. A provision for doubtful debts is raised when some doubt as to collection exists. k) Trade and other payables These amounts represent liabilities for goods and services provided to the Group before the end of the financial period and which are unpaid. The amounts are unsecured and usually paid within 30 days of recognition. Issued capital l) Ordinary shares are classified as equity. Costs directly attributable to the issue of shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, or for the acquisition of a business, are included in the cost of the acquisition as part of the purchase consideration. m) Earnings per share Basic earnings per share Basic earnings per share is determined by dividing the net profit after income tax attributable to members of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. – 24 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) n) Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. o) Critical Accounting Estimates and Judgments The directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Group. Taxation Balances disclosed in the financial statements and the notes thereto, related to taxation, are based on the best estimates of directors. These estimates take into account both the financial performance and position of the Group as they pertain to current income taxation legislation, and the directors understanding thereof. No adjustment has been made for pending or future taxation legislation. The current income tax position represents that directors’ best estimate, pending an assessment by the Australian Taxation Office. Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Exploration and Evaluation Expenditure Exploration and evaluation costs are carried forward where right of tenure of the area of interest is current. These costs are carried forward in respect of an area that has not at balance date reached a stage that permits reasonable assessment of the existence of economically recoverable reserves, refer to the accounting policy stated in note 1(c). p) Changes in accounting policies and disclosure In the year ended 30 June 2014, the Group has reviewed all of the new and revised Standards and Interpretations issued by the AASB that are relevant to its operations and effective for the current annual reporting period. It has been determined by the Group that there is no impact, material or otherwise, of the new and revised Standards and Interpretations on its business and, therefore, no change is necessary to Group accounting policies. q) New Accounting Standards for Application in Future Periods Accounting Standards and Interpretations issued by the AASB that are not yet mandatorily applicable to the Company, together with an assessment of the potential impact of such pronouncements on the Company when adopted in future periods, are discussed below: – AASB 9: Financial Instruments and associated Amending Standards (applicable for annual reporting periods commencing on or after 1 January 2017). The Standard will be applicable retrospectively (subject to the comment on hedge accounting below) and includes revised requirements for the classification and measurement of financial instruments, revised recognition and derecognition requirements for financial instruments and simplified requirements for hedge accounting. The key changes made to the Standard that may affect the Group on initial application include certain simplifications to the classification of financial assets, simplifications to the accounting of embedded derivatives, and the irrevocable election to recognise gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. AASB 9 also introduces a new model for hedge accounting that will allow greater flexibility in the ability to hedge risk, particularly with respect to hedges of non-financial items. Should the Group elect to change its hedge policies in line with the new hedge accounting requirements of AASB 9, the application of such accounting would be largely prospective. – 25 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) q) New Accounting Standards for Application in Future Periods (Cont.) – – – – Although the directors anticipate that the adoption of AASB 9 may have an impact on the Group’s financial instruments, it is impracticable at this stage to provide a reasonable estimate of the impact. AASB 2012–3: Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities (applicable for annual reporting periods commencing on or after 1 January 2014). This Standard provides clarifying guidance relating to the offsetting of financial instruments, which is not expected to impact the Group’s financial statements. Interpretation 21: Levies (applicable for annual reporting periods commencing on or after 1 January 2014). Interpretation 21 clarifies the circumstances under which a liability to pay a levy imposed by a government should be recognised, and whether that liability should be recognised in full at a specific date or progressively over a period of time. This Interpretation is not expected to significantly impact the Group’s financial statements. AASB 2013–3: Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets (applicable for annual reporting periods commencing on or after 1 January 2014). This Standard amends the disclosure requirements in AASB 136: Impairment of Assets pertaining to the use of fair value in impairment assessment and is not expected to significantly impact the Group’s financial statements. AASB 2013–4: Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (applicable for annual reporting periods commencing on or after 1 January 2014). AASB 2013–4 makes amendments to AASB 139: Financial Instruments: Recognition and Measurement to permit the continuation of hedge accounting in circumstances where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations. This Standard is not expected to significantly impact the Group’s financial statements. – AASB 2013–5: Amendments to Australian Accounting Standards – Investment Entities (applicable for annual reporting periods commencing on or after 1 January 2014). AASB 2013–5 amends AASB 10: Consolidated Financial Statements to define an “investment entity” and requires, with limited exceptions, that the subsidiaries of such entities be accounted for at fair value through profit or loss in accordance with AASB 9 and not be consolidated. Additional disclosures are also required. As neither the parent nor its subsidiaries meet the definition of an investment entity, this Standard is not expected to significantly impact the Group’s financial statements. – 26 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 2: REVENUE Interest received Profit on sale of financial assets NOTE 3: INCOME TAX EXPENSE a. from ordinary activities before Reconciliation of income tax expense to prima facie tax payable: Loss expense Prima facie tax benefit on loss from ordinary activities before income tax at 30% income tax Increase in income tax due to: - Non-deductible expenses - Losses and temporary differences not recognised Decrease in income tax due to: - Deductible equity raising costs Income tax attributable to the Group b. Unused tax losses and temporary differences for which no deferred tax asset has been recognised at 30%: 2014 $ 2013 $ 34,524 36,015 70,539 28,047 10,850 38,897 (1,884,114) (619,264) (565,234) (185,779) - 565,234 - 185,779 - - - - Deferred tax assets have not been recognised in respect of the following: Deductible temporary differences Tax revenue losses - 776,049 776,049 - 210,815 210,815 Potential deferred tax assets attributable to tax losses and exploration expenditure carried forward have not been brought to account at 30 June 2014 because the directors do not believe it is appropriate to regard realisation of the deferred tax assets as probable at this point in time. These benefits will only be obtained if: • the Group derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the loss and exploration expenditure to be realised; no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the loss and exploration expenditure. • NOTE 4: EARNINGS PER SHARE a. Loss used to calculate basic EPS (1,884,114) (619,264) b. Weighted average number of ordinary shares outstanding during the period used in calculating basic and diluted EPS No No 30,808,222 21,460,277 As the Group is in a loss position the options outstanding at 30 June 2014 have no dilutive effects on the earnings per share calculation. – 27 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 5: KEY MANAGEMENT PERSONNEL COMPENSATION Remuneration of Key Management Personnel The totals of remuneration paid to the KMP of the Group during the year are as follows: Short-term employee benefits Post-employment benefits Share based payments Total remuneration 2014 $ 2013 $ 234,597 5,511 220,000 460,108 79,820 1,559 - 81,379 NOTE 6: CASH AND CASH EQUIVALENTS Cash at bank 61,796 1,773,444 NOTE 7: TRADE AND OTHER RECEIVABLES CURRENT GST receivable Other receivables NOTE 8: OTHER FINANCIAL ASSETS Financial assets at fair value through profit or loss Held-for-trading Australian listed shares 4,873 204,563 209,436 6,412 10,217 16,629 865 37,490 Shares held for trading are traded for the purpose of short-term profit taking. Changes in fair value are included in the statement of comprehensive income. NOTE 9: OTHER ASSETS CURRENT Prepayments NON-CURRENT Prepayments 38,182 122,684 - 40,190 – 28 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 10: EXPLORATION AND EVALUATION EXPENDITURE Exploration expenditure capitalised - Exploration and evaluation phase A reconciliation of evaluation expenditure is set out below: the carrying amount of exploration and - Carrying amount at the beginning of the year - Acquisition of exploration assets (note 15) - Non-controlling interest - Costs capitalised during the year - Exploration written off 2014 $ 2013 $ 1,767,767 543,687 543,687 1,330,267 - - (106,187) 1,767,767 - 350,000 87,500 106,187 - 543,687 The value of the Group’s interest in exploration expenditure is dependent upon: the continuance of the Group’s rights to tenure of the areas of interest; the results of future exploration; and the recoupment of costs through successful development and exploitation of the areas of interest, or alternatively, by their sale. • • • NOTE 11: TRADE AND OTHER PAYABLES CURRENT Sundry payables and accrued expenses Trade creditors are expected to be paid on 30 day terms. NOTE 12: ISSUED CAPITAL 195,211 89,167 2014 No. 2014 $ 2013 No. 2013 $ Fully paid ordinary shares with no par value 35,000,003 4,234,730 29,000,003 2,914,730 a) Ordinary shares At the beginning of reporting period Shares issued during the year /period: - 20 December 2012 - 20 December 2012 - 12 March 2014 Less capital raising costs 29,000,003 2,914,730 13,000,003 270,253 - - 6,000,000 - - - 1,320,000 - 15,000,000 1,000,000 - - 3,000,000 200,000 - (555,523) Net share capital 35,000,003 4,234,730 29,000,003 2,914,730 The Group does not have authorised capital nor par value in respect of its issued capital. Ordinary shares have the right to receive dividends as declared and, in the event of a winding up of the Group, to participate in the proceeds from sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or proxy, at a meeting of the Group. – 29 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 b) Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it may continue to provide returns for shareholders and benefits for other stakeholders. The Group’s capital includes ordinary share capital and financial liabilities, supported by financial assets. Due to the nature of the Group’s activities, being mineral exploration, it does not have ready access to credit facilities, with the primary source of funding being equity raisings. Accordingly, the objective of the Group’s capital risk management is to balance the current working capital position against the requirements of the Group to meet exploration programmes and corporate overheads. This is achieved by maintaining appropriate liquidity to meet anticipated operating requirements, with a view to initiating appropriate capital raisings as required. The Group is not subject to any externally imposed capital requirements. Cash and cash equivalents Trade and other receivables Other financial assets Trade and other payables Working capital position c) Share Options on issue 2014 $ 2013 $ 61,796 209,436 865 (195,211) 1,773,444 16,629 37,490 (89,167) 76,886 1,738,396 At 30 June 2014, the Group has 14,500,002 (2013: 14,500,002) listed options exercisable at $0.20 on or before 30 June 2015. Options carry no rights to dividends and have no voting rights. NOTE 13: RESERVES Foreign currency translation reserve Option premium reserve 2,438 145,000 147,438 446 145,000 145,446 Exchange differences relating to the translation of the results and net assets of the Group’s foreign operations from their functional currencies to the Group’s presentation currency (i.e. Australian dollars) are recognised directly in other comprehensive income and accumulated in the foreign currency translation reserve. NOTE 14: NON-CONTROLLING INTEREST Balance at the beginning of the year Non-controlling interests arising on the acquisition of PT. Dana Ramakala Share of loss for the year 87,500 - - 87,500 - 87,500 - 87,500 NOTE 15: ACQUISTION OF EXPLORATION ASSETS On 20 December 2012, the Group completed the acquisition of an 80% interest in the issued capital of PT. Dana Ramakala through the payment of $150,000 and the issue of 1,000,000 ordinary fully paid shares. It is considered that the acquisition of PT. Dana Ramakala is not a business combination, but rather an acquisition of mining tenements. Purchase consideration: Cash Ordinary shares Non-controlling interest Identifiable assets acquired: Mineral exploration and evaluation expenditure – 30 – Fair Value $ 150,000 200,000 87,500 437,500 437,500 Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 15: ACQUISTION OF EXPLORATION ASSETS (CONT.) On 12 March 2014, the Group completed the acquisition of a 99.8% interest in the issued capital of PT. Bina Citra Sawita through the payment of US$150,000 and the issue of 5,000,000 ordinary fully paid shares. It is considered that the acquisition of PT. Bina Citra Sawita is not a business combination, but rather an acquisition of mining tenements. Purchase consideration: Cash Ordinary shares Identifiable assets/(liabilities) acquired: Mineral exploration and evaluation expenditure Trade and other payables NOTE 16: CASH FLOW INFORMATION Reconciliation of Cash Flow from Operations with Loss after Income Tax Loss after income tax Non cash-flows in loss: Profit on sale of financial assets Unrealised loss on financial assets Share based payments Foreign exchange loss Changes in assets and liabilities: Trade and other receivables Other assets Exploration and evaluation Trade payables and accruals Cash flow from operations Non Cash Investing & Financing Activities: Fair Value $ 172,216 1,100,000 1,272,216 1,330,267 (58,051) 1,272,216 2014 $ (1,884,114) 2013 $ (619,264) (36,015) 21,625 220,000 1,992 (3,174) 124,692 (66,029) 57,992 (10,850) 54,570 - - (10,616) (162,874) (106,187) 77,363 (1,563,031) (777,858) During the financial year ended 30 June 2014, the Group issued 5,000,000 shares as part consideration of a 99.8% interest in the issued capital of PT. Bina Citra Sawita, as disclosed in Note 15. During the financial year ended 30 June 2013, the Group issued 1,000,000 shares as part consideration of an 80% interest in the issued capital of PT. Dana Ramakala, as disclosed in Note 15. Apart from the above, there were no non-cash investing or financing activities entered into by the Group during the year. NOTE 17: RELATED PARTY TRANSACTIONS The Group incurred the following transactions with related parties: - During the year ended 30 June 2014, Mining Corporate Pty Ltd, an entity which Kent Hunter and Stephen Brockhurst are directors and have a beneficial interest, was paid $56,090 (2013: $163,650) in Group secretarial and IPO compliance fees up until the resignation of Kent Hunter from the board of directors on 5 December 2013. No amount (2013: $nil) was outstanding at year end. - During the year ended 30 June 2013, Stellar Securities Pty Ltd, an entity which Kent Hunter is a director and has a beneficial interest, was issued 933,333 ordinary fully paid shares and paid $102,667 under the co-lead broker mandate. No amount was outstanding for the year ended 30 June 2013. All transactions were made on normal commercial terms and condition and at market rates. – 31 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 2014 $ 2013 $ NOTE 18: SHARE BASED PAYMENTS The following share based payments were in existence during the year: Ordinary shares On 20 December 2012, 1,000,000 ordinary shares were issued to vendors as part consideration for exploration assets acquired - 200,000 On 13 March 2014, 1,000,000 ordinary shares were issued to Aryo Bimo as an incentive for future performance On 12 March 2014, 5,000,000 ordinary shares were issued to Sitasa as part consideration for the exploration asset acquired Fair value of ordinary shares issued during the period: 220,000 1,100,000 The fair value of ordinary shares issued were determined by reference to market price. - - NOTE 19: AUDITORS’ REMUNERATION Remuneration of RSM Bird Cameron Partners as auditor for: — — — Auditing or reviewing the financial report taxation services Other services NOTE 20: CONTINGENT LIABILITIES AND CONTINGENT ASSETS 24,500 500 - 20,000 500 8,000 The Group will issue to the vendors of PT. Dana Ramakala up to an additional 2,000,000 Krakatoa shares, upon the achievement of the following performance milestones: a. 1,000,000 upon completion of a mapped geochemical survey, that in the sole discretion of Krakatoa, warrants a 3 to 4 thousand metre diamond drilling program; and b. 1,000,000 upon a JORC compliant resource of 1m oz Au or equivalent. The Group has other no contingent assets or contingent liabilities. NOTE 21: EVENTS AFTER THE REPORTING PERIOD On 22 August 2014, the Company issued 1,000,000 fully paid ordinary shares and 1,000,000 Options exercisable at $0.20 on or before 30 June 2015, raising $100,000. Other than the above, no matters or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial periods. NOTE 22: CAPITAL AND LEASING COMMITMENTS The Group has no commitments as at 30 June 2014. NOTE 23: CONTROLLED ENTITIES Subsidiaries of Krakatoa Resources Limited: PT. Bumi Pratama PT. Dana Ramakala PT. Bina Citra Sawita Equity holding Equity Holding 2014 % 100 80 99.8 2013 % 100 80 - Country of Incorporation Indonesia Indonesia Indonesia – 32 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 24: PARENT ENTITY DISCLOSURES Financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Total liabilities Equity Issued capital Accumulated losses Reserves Total equity Financial performance (Loss) for the year Total comprehensive (loss) for the year 2014 $ 2013 $ 301,003 1,621,345 1,922,348 1,899,790 546,387 2,446,177 39,513 39,513 89,167 89,167 4,234,730 (2,496,895) 145,000 1,882,835 2,914,730 (702,720) 145,000 2,357,010 (1,794,175) (1,794,175) (619,264) (619,264) Guarantees: Krakatoa Resources Limited has not entered into any guarantees in the current or previous financial year, in relation to the debts of its subsidiaries. Other Commitments and Contingencies: Krakatoa Resources Limited has no commitment to acquire property, plant and equipment and has no contingents liabilities other than disclosed in Note 20. NOTE 25: OPERATING SEGMENTS The Group has identified its operating segments based on the internal reports that are used by the Board (the chief operating decision makers) in assessing performance and in determining the allocation of resources. The operating segments are identified by the Board based on the phase of operation within the mining industry. For management purposes, the Group has organised its operations into two reportable segments on the basis of stage of development as follows: • Development assets; and • Exploration and evaluation assets, which includes assets that are associated with the determination and assessment of the existence of commercial economic reserves. The Board as a whole will regularly review the identified segments in order to allocate resources to the segment and to assess its performance. During the year ended 30 June 2014, the Group had no development assets. The Board considers that it has only operated in one segment, being mineral exploration within Indonesia. The Group is domiciled in Australia. All revenue from external customers are only generated from Australia and Indonesia. No revenues were derived from a single external customer. – 33 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 26: FINANCIAL RISK MANAGEMENT The Group has exposure to the following risks from their use of financial instruments: credit risk; liquidity risk; and - - - market risk. This note presents information about the Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the Group through regular reviews of the risks. Credit risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions is spread amongst approved counterparties. Credit risk related to balances with banks and other financial institutions is managed by the board. The board’s policy requires that surplus funds are only invested with counterparties with a Standard & Poor’s rating of at least AA-. All of the Group’s surplus funds are invested with AA Rated financial institutions. The credit risk for counterparties included in cash and cash equivalents at 30 June 2014 is detailed below: Financial assets: Cash and cash equivalents - AA rated counterparties 2014 $ 2013 $ 61,796 1,773,444 The Group does not have any material credit risk exposure to any single receivable or Group of receivables under financial instruments entered into by the Group. Liquidity risk The responsibility with liquidity risk management rests with the Board of Directors. The Group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate working capital is maintained. The Group’s policy is to ensure that it has sufficient cash reserves to carry out its planned exploration activities over the next 12 months. Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. Interest rate risk The Group is exposed to interest rate risk as it invests funds at floating interest rates. Interest rate sensitivity analysis At 30 June 2014, the effect on loss and equity as a result of a 2% increase in the interest rate, with all other variables remaining constant would be a decrease in loss by $1,236 (2013: $35,469) and an increase in equity by $1,236 (2013: $35,469). The effect on loss and equity as a result of a 2% decrease in the interest rate, with all other variables remaining constant would be an increase in loss by $1,236 (2013: $35,469) and an decrease in equity by $1,236 (2013: $35,469). – 34 – Krakatoa Resources Limited & Controlled Entities NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 NOTE 26: FINANCIAL RISK MANAGEMENT (CONT.) Fair value of financial instruments The Directors consider that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair value. Financial instruments measured at fair value The financial instruments recognised at fair value in the statement of financial position have been analysed and classified using a fair value hierarchy reflecting the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following levels: - Quoted prices in active markets for identical assets and liabilities (level 1); - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and - Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). 2014 Financial assets Fair value through profit or loss - Listed investments – held for trading Level 1 Level 2 Level 3 $ 865 $ - $ - 2013 Financial assets Fair value through profit or loss - Listed investments – held for trading 37,490 Level 1 Level 2 Level 3 $ $ - $ - Total $ 865 Total $ 37,490 Included within level 1 of the hierarchy are listed investments. The fair value of these financial assets have been based on the closing quoted bid prices at the end of the reporting period, excluding transaction costs. – 35 – Krakatoa Resources Limited & Controlled Entities DIRECTORS’ DECLARATION In accordance with a resolution of the Directors of Krakatoa Resources, I state that: 1. In the opinion of the directors: (a) the financial statements and notes of the Group are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Group as at 30 June 2014 and of its performance for the year ended on that date; and complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (ii) (b) (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 1. 2. This declaration has been made after receiving the declarations required to be made by the directors in accordance with sections of 295A of the Corporations Act 2001 for the financial year ended 30 June 2014. On behalf of the Board Aryo Bimo Executive Director Dated: 19 September 2014 – 36 – RSM Bird Cameron Partners 8 St George’s Terrace Perth WA 6000 GPO Box R1253 Perth WA 6844 T +61 8 9261 9100 F +61 8 9261 9101 www.rsmi.com.au INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KRAKATOA RESOURCES LIMITED Report on the Financial Report We have audited the accompanying financial report of Krakatoa Resources Limited, which comprises the statement of financial position as at 30 June 2014, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial report 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation Major Offices in: Perth, Sydney, Melbourne, Adelaide and Canberra ABN 36 965 185 036 RSM Bird Cameron Partners is a member of the RSM network. Each member of the RSM network is an independent accounting and advisory firm which practises in its own right. The RSM network is not itself a separate legal entity in any jurisdiction. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Krakatoa Resources Limited, would be in the same terms if given to the directors as at the time of this auditor's report. Opinion In our opinion: (a) the financial report of Krakatoa Resources Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 in the financial report, which indicates that the company and consolidated entity incurred losses of $1,794,175 and $1,884,114 respectively and the consolidated entity had net cash outflows from operating activities of $1,563,031 during the year ended 30 June 2014. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty which may cast significant doubt about the company’s and consolidated entity’s ability to continue as going concerns and therefore, the company and consolidated entity may be unable to realise their assets and discharge their liabilities in the normal course of business. Report on the Remuneration Report We have audited the Remuneration Report included within the directors’ report for the year ended 30 June 2014. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Krakatoa Resources Limited for the year ended 30 June 2014 complies with section 300A of the Corporations Act 2001. RSM BIRD CAMERON PARTNERS Perth, WA Dated: 19 September 2014 TUTU PHONG Partner Krakatoa Resources Limited & Controlled Entities CORPORATE GOVERNANCE STATEMENT The Board recognises the need for the Group to operate with the highest standards of behaviour and accountability. The Group has considered the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations to determine an appropriate system of control and accountability to best fit its business and operations commensurate with these guidelines. The Group seeks to follow these recommendations for listed companies where appropriate for its size and operations. In cases where the Group determines it would be inappropriate to follow the principles because of its circumstances, the Group will provide reasons for not doing so in its Annual Report. The Board will consider on an ongoing basis its Corporate Governance procedures and whether they are sufficient given the Group’s nature of operations and size. Compliance with the Recommendations For ease of comparison the Recommendations and, where the Group has not followed a Recommendation, this is identified with the reasons for not following the Recommendation. following Section addresses each of the Recommendations, the to PRINCIPLES AND RECOMMENDATIONS COMMENT 1. Lay solid foundations for management and oversight 1.1 Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. 1.2 Companies should disclose the process for evaluating the performance of senior executives. the 1.3 Companies should provide information indicated in the Guide to reporting on Principle 1. 2. Structure the board to add value The Group’s Corporate Governance Manual includes a Board Charter, which discloses the specific responsibilities of the Board. The Board delegates responsibility for the day-to-day operations and administration of the Group to the Executive Director. On appointment, all Directors of the Group receive a letter of appointment which sets out the terms and conditions of their appointment. The Group’s Corporate Governance Manual includes a section on performance evaluation practices adopted by the Group. The Board will review the performance of the Executive Director and executives to ensure they execute the Group’s strategy through the business the efficient and effective objectives. The Executive Director and executives will be assessed against the performance of the Group and individual performance. implementation of Explanation of departures from Principles and Recommendations 1.1 and 1.2 (if any) are set out above. No performance evaluation of senior executives has taken place to date as this process is conducted annually. Future annual reports will disclose whether such a performance evaluation has taken place in the relevant reporting period and whether it was in accordance with the process disclosed. The Corporate Governance Manual, which includes the Board Charter, is posted on the Group’s website. – 39 – Krakatoa Resources Limited & Controlled Entities PRINCIPLES AND RECOMMENDATIONS COMMENT 2.1 A majority of the Board should be independent directors. The Board consists of one executive Director and three non- executive Directors. Details of each Board member’s experience, expertise and qualifications are set out in the Director’s Report. The Board has assessed the independence of the non-executive Directors using defined criteria of independence and materiality for guidance consistent with Recommendation 2.1. The Board has determined that two of the three non-executive directors are independent as defined under Recommendation 2.1. commentary and the The Board has determined that the composition of the current Board represents the best mix of directors that can understand and competently deal with current and emerging business issues and can effectively review and challenge the performance of management. Furthermore, each individual member of the Board is satisfied that all directors bring an independent judgment to bear on Board decisions. 2.2 The chair should be an independent director. The Group is at variance with Recommendation 2.2 in that the Board does not have an independent chair. 2.3 The roles of chair and chief executive officer should not be exercised by the same individual. 2.4 The Board should establish a nomination committee. 2.5 Companies should disclose the process for evaluating the performance of the Board, its committees and individual directors. 2.6 Companies should provide the information indicated in the Guide to reporting on Principle 2. The Board Charter summarises the roles and responsibilities of the chairman and the Chief Executive Officer (once appointed). As the whole Board only consists of three (3) members, the Group does not have a nomination committee because it would not be a more efficient mechanism than the full Board for focusing the Group on specific issues. The Board will review its performance each year to ensure individual directors and the Board as a whole work efficiently in achieving their functions as set out in the Board charter. The Board as a whole discusses and analyses its own performance during the year including suggestions for change or improvement. The Board may also utilise the services of an external party to review the performance of the Board. In accordance with the guide to reporting on Principle 2, a description of the procedure for the selection appointment of new directors and the re-election of current directors is available from the corporate governance section of the Group’s website. 3. Promote ethical and responsible decision-making 3.1 Companies should establish a code of conduct and disclose the code or a summary of the code as to: The Board has adopted a Code of Conduct which applies to all directors and officers of the Group. It sets out Krakatoa’s commitment in laws and regulations while accordance with all applicable demonstrating and promoting the highest ethical standards. The Code of Conduct reflects the matters set out in the commentary integrity and guidance for Recommendation 3.1. to successfully conducting the business in the Group’s • the practices necessary to maintain confidence • the practices necessary to take into account their legal obligations and the reasonable their expectations stakeholders • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. of – 40 – Krakatoa Resources Limited & Controlled Entities PRINCIPLES AND RECOMMENDATIONS COMMENT 3.2 Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board establish measureable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them. to The Board has adopted a Diversity Policy which sets out the Group’s aims and practices in relation to recognising and respecting diversity in employment. The Policy reinforces the Group’s commitment to actively managing diversity as a means of enhancing the Group’s performance by recognising and utilising the contributions of diverse skills and talent from its employees. The Diversity Policy reflects the matters set out in the commentary and guidance for Recommendation 3.2. 3.3 Companies should disclose in each annual report the measureable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress in achieving them. The Board continues to monitor diversity across the organisation and is satisfied with the current level of gender diversity within the Company. Due to the size of the company and its small number of employees, the Board does not consider it appropriate at this time, to formally set measurable objectives for gender diversity. 3.4 Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the Board. The Company is committed to setting measurable objectives for attracting and engaging women of the board level, in senior management and across the whole organisation. As at the date of this report, the Company has the following proportion of women appointed: to the Board - nil to senior management – nil to the organisation – 14% 3.5 Companies should provide the information indicated in the Guide to reporting on Principle 3. In accordance with the guide to reporting on Principle 3, the Group’s Code of Conduct and Diversity Policy is available from the corporate governance section of the Group’s website. 4. Safeguard integrity in financial reporting 4.1 The Board should establish an audit committee. Due to the size and scale of operations of the Group the full Board undertakes the role of the Audit Committee. In the absence of a formal audit committee the Board considers the issues that would otherwise be considered by the audit committee. A copy of the Audit Committee Charter is available on the Group’s website. 4.2 The audit committee should be structured so that it: The Group is at variance with Recommendation 4.2 in that full Board undertakes the role of the Audit Committee, which consists of an executive and non-independent directors. • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the board • has at least three members 4.3 The audit committee should have a formal charter. in the commentary and guidance The Audit and Risk Committee charter sets out its role, responsibilities and membership requirements and reflects the matters set out for Recommendation 4.3. Consistent with the Group’s Audit and Risk Committee Charter, the Audit and Risk Committee reviews the external auditor’s terms of engagement and audit plan, and assesses the independence of the external auditor. The current practice, subject to amendment in the event of legislative change, is for the rotation of the engagement partner to occur every five years. 4.4 Companies should provide the information indicated in the Guide to reporting on Principle 4. In accordance with the guide to reporting on Principle 4, the Group’s Audit and Risk Committee charter is available from the corporate governance section of the Group’s website. 5. Make timely and balanced disclosure – 41 – Krakatoa Resources Limited & Controlled Entities PRINCIPLES AND RECOMMENDATIONS COMMENT 5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements ensure and accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. to The Group’s Continuous Disclosure Policy sets out the key obligations of to the Directors and employees continuous disclosure as well as the Group’s obligations under the Listing Rules and the Corporations Act. The Policy also provides procedures for internal notification and external disclosure, as well as procedures for promoting understanding of compliance with the disclosure requirements for the monitoring of Group compliance. The Policy reflects the matters set out in the commentary and guidance for Recommendation 5.1. in relation 5.2 Companies should provide the information indicated in Guide to Reporting on Principle 5. 6. Respect the rights of shareholders should design a 6.1 Companies for promoting communications policy with effective their shareholders and encouraging participation at general meetings and disclose their policy or a summary of that policy. communication 6.2 Companies should provide the information indicated in the Guide to reporting on Principle 6. 7. Recognise and manage risk 7.1 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. The board should 7.2 require management to design and implement the risk management and internal control system to manage the Group’s material business risks and report to it on whether those being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the Group’s management of its material business risks. risks are include required by The Group will Recommendation 5.2 in its future annual reports. In accordance with the guide to reporting on Principle 5, the Group’s Continuous Disclosure Policy is available from the corporate governance section of the Group’s website. disclosure the The Shareholder Communications Policy sets out the Group’s aims and practices in respect of communicating with both current and prospective Shareholders. The Policy reinforces the Group’s commitment to promoting investor confidence and reflects the matters set out for in Recommendation 6.1. the commentary and guidance include The Group will required by Recommendation 6.2 in its future annual reports. In accordance with the guide to reporting on Principle 6, the Group’s Shareholder Communication Policy is available from the corporate governance section of the Group’s website. disclosure the Krakatoa recognises that risk is inherent to any business activity and that managing risk effectively is critical to the immediate and future success of the Group. As a result, the Board has adopted a Risk Management Policy which sets out the Group’s system of risk oversight, management of material business risks and internal control. Krakatoa’s risk management framework is supported by the Board of Directors, management and the Audit and Risk Committee. The Board is responsible for approving and reviewing the Group’s risk management strategy and policy. Management are responsible for monitoring that appropriate processes and controls are in place to effectively and efficiently manage risk. The Audit and Risk Committee also has delegated responsibilities in relation to risk management and the financial reporting process as set out in the Group’s Audit and Risk Committee Charter. 7.3 The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. When considering the Audit and Risk Committee’s review of financial reports, the Board will receive a written statement declaration in accordance with section 295A of the Corporations Act, signed by the Executive Director and Chief Financial Officer, stating whether, amongst other things, the Group’s financial reports give a true and fair view, in all material respects, with the Group’s financial position and performance and comply with relevant accounting standards. This statement will also confirm whether the Group’s financial reports are founded on a sound system of risk management and internal control and whether the system is operating effectively in relation to financial reporting risks. Similarly, in a separate written statement the Executive – 42 – Krakatoa Resources Limited & Controlled Entities PRINCIPLES AND RECOMMENDATIONS COMMENT Director and the Chairman of the Audit and Risk Committee will also confirm to the Board whether the Group’s risk management and internal control systems are operating effectively in relation to material business risks for the period, and that nothing has occurred since period-end that would materially change the position. 7.4 Companies should provide information in Guide indicated Reporting on Principle 7. the to In accordance with the guide to reporting on Principle 7, the Group’s Audit and Risk Committee Charter is available from the corporate governance section of the Group’s website. 8. Remunerate fairly and responsibly 8.1 The board should establish a remuneration committee. As the whole Board only consists of three (3) members, the Group does not have a remuneration committee because it would not be a more efficient mechanism than the full Board for focusing the Group on specific issues. 8.2 The remuneration committee should be structured so that it: • consists of a majority of independent directors The Group is at variance with Recommendation 8.2 in that full Board undertakes the role of the Nomination and Remuneration Committee, which consists of an executive and non-independent directors. • is chaired by an independent director • has at least three members 8.3 Companies should clearly distinguish the structure of non-executive directors’ remuneration that of executive directors and senior executives. from from The structure of non-executive directors’ remuneration is clearly that of executive directors and senior distinguished executives. Remuneration for non-executive directors is fixed. Total remuneration for all non-executive directors, last voted upon by shareholders at the 2012 General Meeting, is not to exceed $250,000 per annum. Neither the non-executive directors nor the executives of the Group receive any retirement benefits, other than superannuation. The Executive Director is employed pursuant to an employment agreement, which is summarised in the Director’s Report. the 8.4 Companies should provide information indicated in the Guide to reporting on Principle 8. In accordance with the guide to reporting on Principle 8, the Group’s Nomination and Remuneration Committee Charter is available from the corporate governance section of the Group’s website. – 43 – Krakatoa Resources Limited & Controlled Entities ASX INFORMATION AS AT 31 AUGUST 2014 The following additional information is required by the ASX Limited in respect of listed public companies and was applicable at 31 August 2014. 1. Shareholding a. Distribution of Shareholders Number (as at 31 August 2014) Category (size of holding) Shareholders Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over 21 7 129 196 52 405 584 25,907 1,275,425 8,309,080 26,389,007 36,000,003 b. The number of shareholdings held in less than marketable parcels is 25 shareholders amounting to 11,491 shares. c. The followings securities are restricted at 31 August 2014: -- 10,060,000 ordinary shares fully paid until 28 December 2014 d. The names of substantial shareholders listed in the company’s register as at 31 August 2014 are: Shareholder Ordinary Shares Asia Mineral Trade Pte Ltd CK Locke & Partners Pty Ltd 5,000,000 1,866,667 %Held of Total Ordinary Shares 13.89% 5.19% e. Voting Rights The voting rights attached to the ordinary shares are as follows: Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. – 44 – Krakatoa Resources Limited & Controlled Entities f. 20 Largest Shareholders as at 31 August 2014 — Ordinary Shares 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. ASIA MINERAL TRADE PTE LTD CK LOCKE & PARTNERS PTY LTD LINKWELL LTD CV INDO PROJECT SERVICES CV JAVA HOLDINGS LUCKY BILLION INVESTMENTS LTD ASGAR ALI DJUHAEPA HOLLOW POINT HOLDINGS LTD UNIVERSAL FIRM LIMITED STELLAR SECURITITES PTY LTD PROF YEW KWANG NG 12. MR JOHN ROBERT TYRRELL + MS CLAIRE KATHERINE TYRRELL 13. DR RONALD JOHN BOND 14. GILPIN PARK PTY LTD 15. RJB MEDICAL PTY LTD 16. MR GREGG CHRISTOPHER FREEMANTLE 17. MRS TAOLA BALDWIN 18. 19. NOBEL INTERNATIONAL LIMITED DR SHIRLEY THEIN GI LIM 20. MR MURRAY WILLIAM BROUN Number of Ordinary Fully Paid Shares Held % Held of Issued Ordinary Capital 5,000,000 13.89 1,866,667 1,445,000 1,250,000 1,250,000 1,055,000 1,000,000 1,000,000 1,000,000 933,333 700,000 600,000 500,000 500,000 500,000 410,000 400,000 368,809 340,000 325,000 5.19 4.01 3.47 3.47 2.93 2.78 2.78 2.78 2.59 1.94 1.67 1.39 1.39 1.39 1.14 1.11 1.02 0.94 0.90 20,443,809 56.78 2. The name of the company secretary is David Palumbo. 3. The address of the principal registered office in Australia is: Level 11, 216 St Georges Terrace Perth WA 6000 4. Registers of securities are held at the following address: Computershare Investor Services Pty Ltd, Level 2, 45 St Georges Terrace, Perth WA 6000 5. Stock Exchange Listing Quotation has been granted for all the ordinary shares of the company on all Member Exchanges of the ASX Limited. 6. Unquoted Securities The Company has 1,000,000 $0.20 unlisted options expiring on or before 30 June 2015 on issue. – 45 – Krakatoa Resources Limited & Controlled Entities 7. Quoted Options over Unissued Shares ($0.20 options – expiry 30 June 2015) A total of 14,500,002 $0.20 options are on issue. Each option can be exercised upon the payment of $0.20 and will receive one ordinary share. The expiry date for the options is 30 June 2015. 20 Largest Shareholders as at 31 August 2014 — $0.20 options expiring on or before 30 June 2015 1. 2. 3. 4. 5. 6. 7. 8. 9. YORK RICH (CHINA) LTD STELLAR SECURITITES PTY LTD PROF YEW KWANG NG MR MURRAY WILLIAM BROUN RJB MEDICAL PTY LTD MS SALLY JUDITH MOLYNEUX DR RONALD JOHN BOND EAGLE EYE NOMINEES PTY LTD ARCHFIELD HOLDINGS PTY LTD 10. MR TERRY JAMES GARDINER + MRS VICTORIA HELEN GARDINER 11. MR ALF TOMMY HARSTROM 12. MISS FELICITY ANNE WISBEY 13. 14. 15. PROFESSOR YEW KWANG NG CICCHINO PTY LTD DR SHIRLEY THEIN GI LIM 16. MR STEPHEN BROCKHURST 17. MS SUSAN FIDLER 18. 19. 20. KOUTA BAY PTY LTD STRATUM METALS LIMITED TILPA PTY LTD Number of $0.20 Options Held % Held of $0.20 Options 6,000,000 41.38 466,667 350,000 339,243 333,334 292,900 250,000 250,000 242,500 189,750 162,500 155,713 150,000 137,500 135,000 125,000 125,000 125,000 125,000 125,000 3.22 2.41 2.34 2.30 2.02 1.72 1.72 1.67 1.31 1.12 1.07 1.03 0.95 0.93 0.86 0.86 0.86 0.86 0.86 10,080,107 69.49 8. Use of Cash and Assets The Company used the cash and assets in a form readily convertible to cash that it had at the time of admission in a way consistent with its business objectives stated in the company’s prospectus dated 28 September 2012. – 46 – Krakatoa Resources Limited & Controlled Entities SCHEDULE OF MINERAL TENEMENTS AS AT 31 AUGUST 2014 Project Tenement Interest held by Krakatoa Resources Limited DONGGALA IUP No.188.45/0465/DESDM 80% BCS IUP No.540/23/IUP/DESDM/BUP-2010 99.8% – 47 –

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