Condensed Interim Consolidated Financial Statements For the three months ended and 2014 Expressed in Canadian Dollars (Unaudited Prepared by Management) Contents Management s Report 1 Condensed Interim Consolidated Financial Statements Condensed Interim Consolidated Statements of Financial Position 2 Condensed Interim Consolidated Statements of (Loss) Income and Comprehensive Income 3 Condensed Interim Consolidated Statements of Cash Flows 4 Condensed Interim Consolidated Statements of Changes in Shareholders Equity (Deficiency) 5 6-19
The accompanying unaudited condensed interim consolidated financial statements of Peruvian Precious Metals Corp. for the three months ended and 2014 have been prepared by the management of the Company and approved by the Company s Audit Committee and the Company s Board of Directors. Under National Instrument 51-102, Part 4, subsection 4.3 (3) (a), if an auditor has not performed a review of the condensed interim consolidated financial statements, they must be accompanied by a notice indicating that an auditor has not reviewed the financial statements. The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared by and are the responsibility of the Company s management. The Company s independent auditor has not performed a review of these condensed interim consolidated financial statements. /s/ Brian Maher /s/ Kimberly Ann Brian Maher, Chief Executive Officer Kimberly Ann, Chief Financial Officer Vancouver, BC Canada Vancouver, BC Canada February 29, 2016 February 29, 2016 1
Condensed Interim Consolidated Statements of Financial Position Notes September 30, ASSETS Current Assets Cash 22,562 218,804 Accounts receivable 5 28,319 23,869 Prepaid expenses 20,608 20,591 Total current assets 71,489 263,264 Non-current assets Exploration and evaluation assets 6 898,374 773,836 Advances for assets under construction 6 6,435,600 6,672,500 Property, plant and equipment 7 502,679 21,030 TOTAL ASSETS 7,908,142 7,730,630 LIABILITIES Current liabilities Accounts payable and accrued liabilities 8, 13 1,713,800 1,753,933 Interest payable 9 27,568 17,908 Convertible debentures 9 239,864 199,150 Promissory note 10 1,552,779 1,468,736 Derivative liability 9, 10 5,541 713,213 Total current liabilities 3,539,552 4,152,940 Decommissioning obligation 11 16,520 16,431 TOTAL LIABILITIES 3,556,072 4,169,371 SHAREHOLDERS EQUITY Share capital 12 44,321,731 44,174,640 Subscriptions received 18 294,375 198,518 Share-based payment reserve 12 5,886,882 5,374,697 Warrants reserve 12 2,885,655 2,876,626 Accumulated other comprehensive loss (309,032) (618,662) Deficit (48,727,541) (48,444,560) TOTAL SHAREHOLDERS EQUITY 4,352,070 3,561,259 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 7,908,142 7,730,630 Nature of Operations and Going Concern (Note 1) Commitments (Note 15) Contingency (Note 17) Subsequent Events (Notes 10 and 18) Approved on behalf of the Board: /s/ Brian J Maher /s/ Brian Imrie Director Director The accompanying notes to the Condensed Interim Consolidated Financial Statements are an integral part of this statement. 2
Condensed Interim Consolidated Statements of (Loss) Income and Comprehensive Income For the three months ended and 2014 Notes 2014 Operating expenses Communication and regulatory 19,407 29,404 Consulting fees, salaries and benefits 13 195,857 184,081 Depreciation 7 5,901 2,667 Foreign exchange loss 93,225 106,444 Office and miscellaneous 25,844 37,138 Peruvian VAT recovery 8 - (968,788) Premises 15,047 14,037 Professional fees 49,682 96,663 Share-based payments 12, 13 512,185 563,974 Travel and promotion 14,653 24,263 Write-down of exploration and evaluation assets 6-110,523 Net loss before finance Items (931,801) (200,406) Finance items Interest income - 19,834 Interest expense 9, 10 (69,352) (121,751) Change in fair value of derivative liability 9, 10 707,672 404,541 Gain on settlement of debt 12 10,500 - Net (loss) income for the period (282,981) 102,218 Other Comprehensive Gain (Loss) Foreign exchange difference on translation 309,630 (43,697) Total comprehensive income for the period 26,649 58,521 Basic and Diluted (Loss) Income per share (0.00) 0.00 Weighted average number of shares outstanding Basic and Diluted 249,156,589 165,799,709 The accompanying notes to the Condensed Interim Consolidated Financial Statements are an integral part of this statement. 3
Condensed Interim Consolidated Statements of Cash Flows For the three months ended and 2014 2014 Cash flows from operating activities Net (loss) income for the period (282,981) 102,218 Adjustments for items not affecting cash: Accretion expense 60,673 92,211 Depreciation 5,901 2,667 Accrued interest expense 9,660 30,684 Peruvian VAT recovery - (968,788) Gain on settlement of debt (10,500) - Share-based payments 512,185 563,974 Change in fair value of derivative liability (707,672) (404,541) Write-down of exploration and evaluation assets - 110,523 (412,734) (471,052) Changes in non-cash working capital items: Accounts receivable (4,450) (3,744) Prepaid expenses (17) 5,338 Accounts payable and accrued liabilities 71,720 (157,307) Cash used in operating activities (345,481) (626,765) Cash flows from financing activities Subscriptions received 95,857 - Proceeds from issuance of common shares, net of share issue costs 61,620 1,393,230 Cash provided by financing activities 157,477 1,393,230 Cash flows from investing activities Mineral property expenditures (89,714) (589,111) Cash used in investing activities (89,714) (589,111) Foreign exchange effect on cash 81,476 (24,870) (Decrease) increase in cash for the period (277,718) 177,354 Cash, beginning of period 218,804 56,795 Cash, end of period 22,562 209,279 Supplemental cash flow information (Note 16) Interest paid - - Income taxes paid - - The accompanying notes to the Condensed Interim Consolidated Financial Statements are an integral part of this statement. 4
Condensed Interim Consolidated Statements of Shareholders Equity (Deficiency) (Unaudited Expressed in Canadian Dollars) Share Capital (Number) Share Capital Warrants Reserve Share-Based Payment Reserve Subscriptions Received Accumulated Other Comprehensive Income (Loss) - Cumulative Translation Adjustments Deficit Total $ $ $ $ $ $ $ September 30, 2014 157,343,904 36,265,258 1,158,773 4,849,366 - (1,127,026) (46,022,178) (4,875,807) Units issued in private placement 12,490,960 929,089 482,030 - - - - 1,411,119 Share issue costs - (17,889) - - - - - (17,889) Fair value of finders warrants 475,208 (31,984) 31,984 - - - - - Share-based payments - - - 563,974 - - - 563,974 Foreign exchange translation difference - - - - - (43,697) - (43,697) Net income for the period - - - - - - 102,218 102,218 2014 170,310,072 37,144,474 1,672,787 5,413,340 - (1,170,723) (45,919,960) (2,860,082) Units issued in private placement 59,197,130 5,537,180 1,017,209 - - - - 6,554,389 Share issue costs - (131,688) - - - - - (131,688) Shares issued to settle debt 14,158,871 1,683,313 - - - - - 1,683,313 Shares issued for transaction costs 1,151,575 115,991 - - - - - 115,991 Fair value of finders warrants 4,040,244 (186,630) 186,630 - - - - - Fair value of finders shares 120,000 12,000 - - - - - 12,000 Share-based payments - - - (38,643) - - - (38,643) Subscriptions received - - - - 198,518 - - 198,518 Foreign exchange translation difference - - - - - 552,061-552,061 Net loss for the period - - - - - - (2,524,600) (2,524,600) September 30, 248,977,892 44,174,640 2,876,626 5,374,697 198,518 (618,662) (48,444,560) 3,561,259 Units issued in private placement 828,750 75,340 7,535 - - - - 82,875 Share issue costs - (37,693) - - - - - (37,693) Shares issued to settle debt 1,050,000 94,500 - - - - - 94,500 Cancellation of common shares (2,465,000) - - - - - - - Fair value of finders units 164,375 14,944 1,494 - - - - 16,438 Share-based payments - - - 512,185 - - - 512,185 Subscriptions received - - - 95,857 - - 95,857 Foreign exchange translation difference - - - - - 309,630-309,630 Net loss for the period - - - - - - (282,981) (282,981) 248,556,017 44,321,731 2,885,655 5,886,882 294,375 (309,032) (48,727,541) 4,352,070 The accompanying notes to the Condensed Interim Consolidated Financial Statements are an integral part of this statement.
For the Three Months Ended and 2014 Note 1 Nature of Operations and Going Concern Peruvian Precious Metals Corp. (the Company ) was incorporated on July 28, 1987, under the Alberta Business Corporations Act. Following a number of name changes the Company became Peruvian Precious Metals Corp. on July 2, 2013. The Company is in the business of acquiring, exploring and evaluating mineral properties, and either joint venturing or developing these properties further or disposing of them when the evaluation is completed. The Company is a public company with its shares listed on the TSX Venture Exchange and the Lima Stock Exchange (Bolsa De Valores De Lima). The head office, principal address and records office of the Company are located at 880 580 Hornby Street, Vancouver, BC, Canada, V6C 3B6. As its principal business, the Company acquires and explores mineral properties in areas deemed to have relatively high potential for mining success and relatively low political risk. The Company s business plan is to engage in these mining activities on a long-term basis. The Company is in the process of exploring mineral properties in Peru and has not yet determined whether the properties contain economically recoverable ore reserves. As the Company does not yet have cash flow from operations, it must rely on debt or equity financings to fund operations. To date the Company s main source of funding has been the issuance of equity securities or debt for cash, through private placements to sophisticated investors and through public offering to institutional investors. The Company has historically raised operating capital from the sale of equity and various forms of debt, something the Company will continue to do so. During the three months ended, the Company raised $82,875 through the completion of a private placement to assist with funding ongoing operations. The condensed interim consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. This assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. The Company has incurred operating losses since inception, including $282,981 for the three months ended (2014 income of $102,218) and has accumulated a deficit of $48,727,541 as at (September 30 $48,444,560). The Company has a working capital deficiency of $3,468,063 as at (September 30 $3,889,676). The Company will need to raise additional funds in order to continue on as a going concern and there can be no assurances that sufficient funding, including adequate financing, will be available to explore its mineral properties and to cover general and administrative expenses necessary for the maintenance of a public company. The ability of the Company to arrange additional financing in the future depends in part, on the prevailing capital market conditions and mineral property exploration success. These material uncertainties may cast significant doubt on the Company s ability to continue as a going concern. Accordingly, the consolidated financial statements do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and liquidate its liabilities, contingent obligations and commitments other than in the normal course of business and at amounts different from those in the consolidated financial statements. Subsequent to, the Company closed a non-brokered private placement for gross proceeds of $294,375 and issued a convertible debenture of $140,800. Management plans to raise additional funding through private placements and debt. Note 2 Basis of Preparation The condensed interim consolidated financial statements of the Company have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting ( IAS 34 ), using accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). These condensed interim consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company s annual consolidated financial statements for the year ended September 30,. The consolidated financial statements were authorized for issue by the Board of Directors on February 29, 2016. 6
For the Three Months Ended and 2014 Note 3 Significant Accounting Policies These condensed interim consolidated financial statements are expressed in Canadian dollars, the Company s presentation currency and have been prepared on a historical cost basis, except for financial instruments that have been measured at fair value. In addition, these condensed interim consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information. The significant accounting policies used in the preparation of these consolidated financial statements are described below. Consolidation The condensed interim consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries in Peru, Sienna Minerals S.A.C. and Agraria Huaranchal S.A.C. All significant intercompany transactions and balances have been eliminated. Significant Accounting Estimates and Judgments The preparation of these condensed interim consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These condensed interim consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the condensed interim consolidated financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical Accounting Estimates Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the determination of decommissioning obligations and income and sales tax obligations, the recoverability of exploration and evaluation assets, the assumptions used in the determination of the fair value of share-based payments and derivative liabilities, or recoverability of accounts and note receivables. The estimates and underlying assumptions are reviewed on an ongoing basis. Prior to September 30, 2014, the Company recorded a liability for the refunds received on the basis that the regulations in Peruvian law that give rise to the VAT refund were technical and under certain circumstances may give rise to a repayment. During the year ended September 30,, the Company re-assessed the likelihood of being requested for repayment and determined that it was no longer necessary to continue to record this liability. As such the liability was reversed. Critical Accounting Judgments Critical accounting judgments are accounting policies that have been identified as being complex or involving subjective judgments or assessments, as follows: the point in time that an economic feasibility study has established the presence of proven and probable reserves; deferred tax assets recorded in the consolidated financial statements; in accordance with International Accounting Standards ( IAS ) 21 The Effects of Changes in Foreign Exchange Rates, management determined that the functional currency of the Company is the Canadian dollar and the functional currency of the Company s wholly-owned subsidiaries is the US dollar, as they are the currencies of the primary economic environments in which the companies operate; contingency as disclosed in Note 21; determination of derivative liability. 7
For the Three Months Ended and 2014 Note 4 Accounting Standards IFRS Issued but not yet Effective The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company has not completed its assessment of the impact that the new and amended standards will have on its financial statements. The Company also has not early adopted any of these standards in the consolidated financial statements. IFRS 9 Financial Instruments The IASB intends to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety with IFRS 9 which is intended to reduce the complexity in the classification and measurement of financial instruments. The standard is effective for annual periods beginning on or after January 1, 2018 with earlier application permitted. IFRS 15 Revenue from Contracts with Customers The IASB issued IFRS 15 in May 2014. The new standard provides a comprehensive five-step revenue recognition model for all contracts with customers and requires management to exercise judgment and make estimates that affect revenue recognition. IFRS 15 is effective for annual periods commencing on or after January 1, 2018. IFRS 16 Leases IFRS 16 specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard was issued in January 2016 and is effective for annual periods beginning on or after January 1, 2019. Note 5 Accounts Receivable September 30, Canadian GST recoverable 27,839 23,261 Other 480 608 Note 6 Exploration and Evaluation Assets IGOR Concession (Peru) September 30, 2014 - Drilling, road and site preparation 721,401 Salaries, claims maintenance and staking 259,707 Social development 10,887 Write-down of capitalized costs (218,159) September 30, 773,836 Drilling, road and site preparation 30,477 Salaries, claims maintenance and staking 51,268 Social development 1,116 Foreign Exchange 41,677 898,374 28,319 23,869 8
For the Three Months Ended and 2014 Igor Concession On June 30, 2005, the Company, through its subsidiary Sienna Minerals S.A.C. acquired a 60% interest in the Igor Concession acquiring some 1,000 hectares in Peru and on March 9, 2006 acquired the remaining 40%. During the year ended September 30, 2013, due to the fact that no substantive expenditures on further exploration for and evaluation of mineral resources were budgeted or planned until the Company could raise sufficient funding, management decided to write down the capitalized costs. The Company continued the process of writing down the capitalized expenditures during the first two quarters of the fiscal year. Starting in the third quarter of the fiscal year, the Company started to capitalize the exploration and evaluation expenditures on the mineral resources again, as management determined that it can carry out its intended plan with respect to the Igor project. On February 4,, the Company signed a series of agreements with AM Mining SAC ( AMM ) who will construct and operate the Company s 350 metric tonne per day ( 350 mt/d ) gold and silver processing plant, utilizing CIP/CIL and Merrill-Crowe precious metal recovery, capable of producing precious metal dore at the Igor Project. AMM anticipates that it will take up to 18 months to fully commission the processing plant at the Igor Project and will operate the plant for up to 54 months. During the year ended September 30,, the Company paid AMM US$5,000,000 pursuant to the agreements with AMM. During the three months ended, $467,320 (US$350,000) of the amount paid has been incurred as assets under construction costs. Please see Note 7. As at, $6,435,600 (US$4,650,000) remains as advances for assets under construction as compared to $6,672,500 (US$5,000,000) at September 30,. The Company has the right to terminate the agreements by paying AMM a termination fee based on potential loss of earnings from the anticipated processing plant operations. The base termination fee is US$13,500,000. For each month that the agreement is in effect, the termination fee is reduced by US$187,500, commencing at the end of the first month following the effective date of the agreement. The termination fee can be further reduced by applying a credit equal to 50% of any appreciation in value of the shares acquired by AMM in the private placement. AMM has the right to receive a 120-day notice in event of a termination of the agreements. Note 7 Property, Plant and Equipment Cost Equipment Assets Under Construction (1) Total Balance September 30 2014 100,707-100,707 Foreign Exchange 10,922-10,922 Balance September 30, 111,629-111,629 Additions - 467,320 467,320 Foreign Exchange 11,429 17,080 28,509 Balance 123,058 484,400 607,458 Accumulated Depreciation Balance September 30 2014 71,265-71,265 Additions 9,914-9,914 Foreign Exchange 9,420 9,420 Balance September 30, 90,599-90,599 Additions 5,901-5,901 Foreign Exchange 8,279-8,279 Balance 104,779-104,779 Net Book Value at September 30, 21,030-21,030 Net Book Value at 18,279 484,400 502,679 (1) Assets under construction is pursuant to an agreement with AMM. Please see Note 6 9
For the Three Months Ended and 2014 Note 8 Accounts Payable and Accrued Liabilities September 30, Trade accounts payable 1,384,619 1,417,899 Acquisition of surface rights 329,181 336,034 10 1,713,800 1,753,933 Expenses incurred by the Company in Peru, including deferred exploration expenses, are subject to a Peruvian Value Added Tax ( VAT ). The VAT is partially refundable. The portion refundable, net of allowance, is included in Accounts Receivable. The amount not refundable to the Company can be used in the future to offset amounts due to the Peruvian Revenue Service by the Company resulting from VAT charged on future sales. Prior to September 30, 2014, the Company recorded a liability for the refunds received on the basis that the regulations in Peruvian law that give rise to the VAT refund were technical and under certain circumstances may give rise to a repayment. During the year ended September 30,, the Company re-assessed the likelihood of being requested for repayment and determined that it was no longer necessary to continue to record this liability. As such the liability was reversed. Note 9 Convertible Debentures On August 15, 2014, the Company entered into an agreement to issue a convertible debenture for aggregate proceeds of US$800,000. The convertible debenture was unsecured and bore an interest rate of 13% per annum, calculated on the principal balance, payable every four months commencing April 30,. The convertible debenture was nontransferable and could be converted into common shares of the Company at any time at a conversion price of US$0.065 for a period of one year. If the convertible debenture was not converted in the one year, the Company would repay the full amount of the debenture along with any outstanding accrued interest. The Company also issued 307,695 common shares, valued at $27,692, and US$6,243 as a finder s fee. During the year-ended September 30,, the Company settled the US$800,000 convertible debenture and accrued interest of US$104,000 by issuing 13,907,692 common shares at a price of $0.12 per share valued at $1,661,963, resulting in a loss on conversion of $478,446. The Company also issued 984,615 common shares, valued at $98,461 to an arm s length individual for assisting with the conversion of the debenture. On March 26,, the Company entered into an agreement to issue a second convertible debenture for proceeds of US$200,000. The convertible debenture is unsecured and bears an interest rate of 13% per annum, calculated on the principal balance, payable every four months commencing on September 30,. The convertible debenture is nontransferable and can be converted into 2,352,941 common shares of the Company at any time at a conversion price of US$0.085 per share for a period of one year. If the convertible debenture is not converted in the one year, the Company will repay the full amount of the debenture along with any outstanding accrued interest. The Company also issued 166,960 common shares, valued at $17,530 as a finder s fee. The conversion feature of the convertible debentures meet the definition of a derivative liability as outlined in IAS 39. As a result, the conversion feature of the debentures is required to be recorded as a derivative liability and initially measured at fair market value and revalued on each subsequent reporting date with the changes in the fair value of the derivative liability being recorded in profit and loss. Also in accordance with IAS 39, the transaction costs are to be allocated on a pro-rata basis to the derivative liability and the convertible debentures. The amount allocated to the derivative liability is to be recorded in profit and loss while the amount allocated to the convertible debentures is a reduction in the initial fair value of the convertible debentures. On inception of the March 26, debenture, the fair value of the derivative liability related to the conversion feature was $102,075 and as at, the fair value was $5 (September 30, - $106,015). The derivative liability was calculated using the Black-Scholes Option Pricing Model with the following assumptions. September 30, Dividend yield Nil Nil Risk free interest rate (%) 0.48 0.50 Expected life (years) 0.24 0.49 1.00 Expected annualized volatility (%) 82.86 97.54 130.57
For the Three Months Ended and 2014 The change in the derivative liability related to the conversion feature is as follows: September 30, Balance, beginning of the period / year 106,015 1,294,334 Fair value at inception - 102,075 Change in fair value including foreign exchange (106,010) (1,290,394) Balance, end of the period / year 5 106,015 The conversion feature for the March 26, convertible debenture was initially valued at $102,075 with the resulting residual value being allocated to the host convertible debenture in the amount of $147,344, which was then reduced to $136,988 with the allocation of the pro-rated transaction costs of $10,356. The change in the convertible debentures is as follows: September 30, Balance, beginning of the period / year 199,150 499,004 Fair value at inception - 147,344 Transaction costs - (10,356) Amortization of discount 32,152 483,475 Foreign exchange 8,562 127,042 Loss on settlement - 423,404 Shares issued to settle convertible debenture - (1,470,763) Balance, end of the period / year 239,864 199,150 During the three months ended, in addition to the amortization of the discount on the convertible debentures, the Company incurred interest expense of $8,679 (2014 - $29,540) and a foreign exchange loss of $981 (2014 - $1,144). The total interest expense on the convertible debentures for the three months ended was $40,831 (2014 - $121,751) and the accrued interest as at was $27,568 (September 30, - $17,908). Note 10 Promissory Note On June 8,, the Company entered into a promissory note agreement for proceeds of US$1,129,305 ($1,418,407). The promissory note is unsecured and is payable by the greater of cash payment of US$1,129,305 or 12,344,782 common shares of the Company. The promissory note was due February 3, 2016. Subsequent to, the Company exercised an option to extend the due date by six months, pursuant to which the promissory note is now due August 3, 2016. The repayment feature of the promissory note meets the definition of a derivative liability as outlined in IAS 39. As a result, the repayment feature of the promissory note is required to be recorded as a derivative liability and measured initially at fair market value and revalued on each subsequent reporting date with the changes in the fair value of the derivative liability being recorded in profit and loss. On inception, the fair value of the derivative liability was $61,544 and as at, the fair value was $5,536 (September 30, $607,198). The derivative liability was calculated using the Black-Scholes Option Pricing Model with the following assumptions: September 30, Dividend yield Nil Nil Risk free interest rate (%) 0.48 0.49 0.52 Expected life (years) 0.59 0.35 0.59 Expected annualized volatility (%) 98.11 89.05 144.78 11
For the Three Months Ended and 2014 The change in the derivative liability is as follows: September 30, Balance, beginning of the period / year 607,198 - Fair value at inception - 61,544 Change in fair value including foreign exchange (601,662) 545,654 Balance, end of the period / year 5,536 607,198 The change in the promissory note is as follows: September 30, Balance, beginning of the period / year 1,468,736 - Fair value at inception - 1,356,863 Amortization of discount 28,521 26,564 Foreign exchange 55,522 85,309 Balance, end of the period / year 1,552,779 1,468,736 Note 11 Decommissioning Obligation The Company estimated the fair value of the decommissioning obligation that arose as a result of exploration activities to be $16,520. The fair value of the liability was determined to be equal to the estimated remediation costs. As at, the Company cannot make a reasonable estimate of the timing of the cash flows and the fair value of the future decommissioning provision cannot be reasonably determined. The following table describes the changes to the Company s decommissioning liability: Note 12 Share Capital a) Authorized Amount Balance at September 30, 2014 17,137 Foreign exchange (706) Balance at September 30, 16,431 Foreign exchange 89 Balance at 16,520 Unlimited number of common shares, without par value; and unlimited number of preference shares, without par value. b) Issued Fiscal 2016 transactions On October 6,, the Company cancelled 2,465,000 common shares as part of a settlement agreement with a former director. Please see Note 13. On October 16,, the Company issued 1,050,000 common shares committed to at September 30, valued at $94,500 as part of a debt settlement of $105,000 with a former director and realized a gain on debt settlement of $10,500. 12
For the Three Months Ended and 2014 On, the Company closed the first tranche of a non-brokered private placement issuing 828,750 units at a price of $0.10 per unit for gross proceeds of $82,875. Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.15 for a period of two years from closing, provided that if the daily volume weighted average price for 20 consecutive days of trading of the Company s shares on the TSX Venture Exchange (or such other stock exchange on which shares of the Company are listed) exceeds $0.24 per share, the expiry date of the warrants may be accelerated to the day which is 30 calendar days after notice of acceleration has been sent by the Company to the warrant holder. In connection with the non-brokered private placement, the Company incurred legal and filing fees of $21,255 and issued 164,375 finders units valued at $16,438 on the same terms as the subscribers' units. The Company has assigned $7,535 to the warrants based on the estimated fair value using a Black-Scholes option pricing model with the balance of $75,340 assigned to the shares. The fair value of the warrants and agent warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 0.48 Expected life (years) 2 Expected annualized volatility (%) 123.82 Fiscal transactions On October 7, 2014, the Company closed a non-brokered private placement with Proyectos La Patagonia S.A.C. ( Patagonia ) for gross proceeds of $478,588 for issuance of 5,317,644 common shares. On November 3, 2014, the Company completed a non-brokered private placement issuing 4,949,690 units at $0.13 per unit for gross proceeds of $643,460. Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.18 for a period of two years from closing. Should the shares of the Company trade over $0.24 for twenty consecutive days, the expiry date of the warrants will be accelerated to 30 days from the date of the notice of acceleration. The Company also issued 319,555 Finder's Units to an arm's length finder. Each Finder's Unit consists of one common share and one common share purchase warrant (an "Agent's Warrant") which entitles the holder to purchase one additional common share at a price of $0.18 on or before November 3, 2016. The Company has assigned $323,080 to the warrants based on the estimated fair value using a Black-Scholes option pricing model with the balance of $320,380 assigned to the shares. The fair value of the warrants and agent warrants issued was estimated on the date of issue using the Black- Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 2 Expected annualized volatility (%) 124.01 On 2014, the Company completed a non-brokered private placement issuing 2,223,626 units at $0.13 per unit for gross proceeds of $289,071. Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.18 for a period of two years from closing. Should the shares of the Company trade over $0.24 for twenty consecutive days, the expiry date of the warrants will be accelerated to 30 days from the date of the notice of acceleration. The Company also incurred legal and filing fees of $17,889 and issued 155,653 Finder's Units to an arm's length finder. Each Finder's Unit consists of one common share and one Agent's Warrant which entitles the holder to purchase one additional common share at a price of $0.18 on or before 2016. The Company has assigned $158,950 to the warrants based on the estimated fair value using a Black-Scholes option pricing model with the balance of $130,121 assigned to the shares. The fair value of the warrants and agent warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 2 Expected annualized volatility (%) 128.48 On March 26,, the Company issued 166,960 common shares as part of the transaction fee for the convertible debenture transaction. The shares were valued at $17,530. Please refer to note 9. 13
For the Three Months Ended and 2014 On May 12,, the Company completed a non-brokered private placement issuing 15,385,390 units at $0.10 per unit for gross proceeds of $1,538,539. Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.15 for a period of two years from closing. Should the shares of the Company trade over $0.24 for twenty consecutive days, the expiry date of the warrants will be accelerated to 30 days from the date of the notice of acceleration. The Company issued 655,304 Finder's Units to an arm's length finder. Each Finder's Unit consisting of one common share and one Agent's Warrant which entitles the holder to purchase one additional common share at a price of $0.16 on or before May 11, 2018. The Company also incurred legal and filing fees of $21,551, paid a cash Finder s fee of US$45,670 ($54,553) and issued 575,527 Agent s Warrants to another arm s length finder, with each Agent s Warrant entitling the holder to purchase one common share at a price of $0.16 on or before May 11, 2018. The Company has assigned $936,640 to the warrants based on the estimated fair value using a Black-Scholes option pricing model with the balance of $601,899 assigned to the shares. The fair value of the warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 2 Expected annualized volatility (%) 130.25 The fair value of the agent warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 3 Expected annualized volatility (%) 112.26 On July 13,, the Company completed a non-brokered private placement issuing 42,311,740 common shares at $0.115 per common share for gross proceeds of $4,865,850. In connection with the non-brokered private placement, the Company also incurred legal and filing fees of $37,950, issued 3,384,940 Finder's Units to an arm's length finder, each Finder's Unit consisting of one common share and one Agent's Warrant which entitles the holder to purchase one additional common share at a price of $0.18 on or before July 13, 2017. The fair value of the agent warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 2 Expected annualized volatility (%) 128.59 On August 15,, the Company settled the US$800,000 convertible debenture plus accrued interest of US$104,000 by issuing 13,907,692 common shares at a price of $0.12 per common share valued at $1,661,963, resulting in a loss on conversion of $478,446. The Company also issued 984,615 common shares, valued at $98,461 to an arm s length individual for assisting with the conversion of the debenture. Please refer to Note 9. On September 1,, the Company issued 251,179 common shares valued at $21,350 as part of a debt settlement agreement of $25,118 with a former director and realized a gain on debt settlement of $3,768. Please refer to Note 13. On September 4,, the Company completed a non-brokered private placement issuing 1,500,000 units at $0.10 per unit for gross proceeds of $150,000. Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.15 for a period of two years from closing. Should the shares of the Company trade over $0.24 for twenty consecutive days, the expiry date of the warrants will be accelerated to 30 days from the date of the notice of acceleration. The Company issued 120,000 common shares to arm s length finders valued at $12,000 and incurred legal and filing fees of $17,634. The Company has assigned $80,569 to the warrants based on the estimated fair value using a Black-Scholes option pricing model with the balance of $69,431 assigned to the shares. 14
For the Three Months Ended and 2014 The fair value of the warrants issued was estimated on the date of issue using the Black-Scholes option valuation model with the following weighted average assumptions: Dividend yield Nil Risk free interest rate (%) 1.01 Expected life (years) 2 Expected annualized volatility (%) 131.99 c) Share Purchase Options Pursuant to the Company s share option plan (the "Option Plan"), the Company may grant incentive share options to directors, officers, employees and consultants of the Company or any subsidiary thereof. The total number of shares issuable pursuant to the Option Plan is up to a maximum of 10% of the issued and outstanding common shares of the Company at any given time. The exercise price of each share option is to be determined at the discretion of the board of directors at the time of the granting of the share option, as are the term and vesting policies, provided that the exercise price shall not be lower than the market price or such discount from the market price as may be permitted by the stock exchange on which the common shares are listed and provided that no share option shall have a term exceeding ten years (or such longer period as is permitted by the stock exchange on which the common shares are listed). There may not be issued to insiders within a one-year period, a number of common shares exceeding 10% of the outstanding issue and no one eligible optionee can receive share options entitling the eligible optionee to purchase more than 5% of the total common shares. Finally, there may not be issued to any one insider and such insider's associates, within a one-year period, a number of common shares of the Company exceeding 5% of the outstanding issue. The changes in share options during the three months ended and the year ended September 30, are as follows: September 30, Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Number of Options Beginning of the period / year 11,533,000 0.22 9,383,000 0.24 Granted 7,850,000 0.10 5,420,000 0.18 Expired - - (3,270,000) 0.22 End of the period / year 19,383,000 0.17 11,533,000 0.22 During the three months ended, the Company granted 7,850,000 stock options to certain directors, officers and employees. The stock options have an exercise price of $0.10 per share and a life of 5 years. The options vest immediately upon issuance. The estimated fair value of the share options granted during the three months ended was $512,185. During the three months ended 2014, the Company granted 5,420,000 share options to directors, officers and an employee. The share options have a weighted average exercise price of $0.18 per share and a life of 3.42 years. The options vest immediately upon issuance. The estimated fair value of the share options granted during the three months ended 2014 was $563,974. The fair value of the options granted during the three months ended and 2014 is estimated on the dates of grant using the Black-Scholes option valuation model with the following weighted-average assumptions: 2014 Dividend yield Nil Nil Expected annualized volatility (%) 98.89 100.35 Risk-free interest rate (%) 1.16 1.65 Expected life of options (years) 5.00 4.15 Grant date fair value 0.065 0.097 Forfeiture rate Nil Nil 15
For the Three Months Ended and 2014 Option pricing models require the input of subjective assumptions including the expected price volatility and the expected option life. Expected price volatility was calculated based on the Company s historical share prices. Changes in these assumptions can materially affect the estimated fair value of the stock options granted. A summary of the Company s options outstanding and exercisable as at is as follows: Options Outstanding Number of Options Exercisable Exercise Price Remaining Contractual Life (Years) Expiry Date 1,663,000 1,663,000 $ 0.25 0.90 November 25, 2016 550,000 550,000 $ 0.47 1.29 April 16, 2017 2,350,000 2,350,000 $ 0.26 2.16 February 28, 2018 1,550,000 1,550,000 $ 0.15 2.75 September 30, 2018 4,200,000 4,200,000 $ 0.16 3.83 October 28, 2019 1,220,000 1,220,000 $ 0.25 0.90 November 24, 2016 7,850,000 7,850,000 $ 0.10 4.79 October 15, 2020 19,383,000 19,383,000 $ 0.17 2.81 d) Warrants September 30, Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Number of Warrants Beginning of the period / year 24,433,706 0.16 13,332,447 0.33 Issued 828,750 0.15 24,058,706 0.16 Expired (375,000) 0.16 (12,957,447) 0.34 End of the period / year 24,887,456 0.15 24,433,706 0.16 A summary of the Company s warrants outstanding as at is as follows: Exercise Price Remaining Contractual Life (Years) Warrants Outstanding Expiry Date 4,949,690 0.16 0.84 November 3, 2016 2,223,626 0.18 1.00 2016 15,385,390 0.15 1.36 May 12, 2017 1,500,000 0.15 1.68 September 4, 2017 828,750 0.15 2.00 2017 24,887,456 0.15 1.27 e) Agent Warrants September 30, Weighted Average Exercise Weighted Average Exercise Number of Warrants Price Number of Warrants Price Beginning of the period / year 5,090,979 0.18 925,150 0.21 Granted 164,375 0.15 5,090,979 0.18 Expired - - (925,150) 0.21 End of the period / year 5,255,354 0.17 5,090,979 0.18 16
For the Three Months Ended and 2014 A summary of the Company s agent warrants outstanding as at is as follows: Agent Warrants Outstanding Exercise Price Remaining Contractual Life (Years) Expiry Date 319,555 0.18 0.85 November 3, 2016 155,653 0.18 1.01 2016 1,230,831 0.16 2.38 May 11, 2018 3,384,940 0.18 1.55 July 13, 2017 164,375 0.15 1.01 2016 5,255,354 0.17 1.67 Note 13 Related Party Transactions (a) Compensation of key management personnel Certain of the Company s key management personnel render services to the Company as sole proprietors or through companies in which they are an officer or director. Company name Controlled by Position Nature of transactions Maher Global Exploration Brian Maher Chief Executive Officer Consulting fees KA Gold LLC Kimberly Ann Chief Financial Officer Consulting fees Compensation includes salaries paid to the President and Chief Executive Officer, Chief Financial Officer, Vice President of Corporate Development, and amounts paid to directors as consulting fees for their services provided to the Company outside of their capacity as a director. December 31 Three months ended December 31 2014 Consulting fees, salaries and benefits 147,939 126,347 Share-based compensation 492,611 501,910 640,550 628,257 (b) Other related parties Amounts due to related parties are unsecured, non-interest bearing and due on demand. Accounts payable at included $293,243 (September 30, - $305,682), which were due to individuals or companies whose officers, directors or partners were also officers or directors of the Company. (c) Note Receivable from former Officer/Director During the year ended September 30, 2013, the Company entered into a loan agreement with the former President/Director ( director ) of the Company, whereby, the Company would provide him with a loan of $616,250 in order for him to exercise his share options to purchase 2,465,000 shares of the Company. The terms of the loan required the former director to place the shares in trust with the Company s counsel as security for the loan. The loan accrued interest at a rate of 4% per annum with principal repayments following the below schedule: 1. $136,250 due August 31, 2014 (unpaid); 2. $175,000 due September 14, (unpaid); and 3. $305,000 due on November 24, 2016 Interest amounts began accruing at the inception of the loan and had been capitalized to the note receivable. No interest was to be paid during the first three years of the term. 17
For the Three Months Ended and 2014 During the year ended September 30,, the Company and the former director agreed to settle all obligations. The settlement includes the cancellation of the loan of $616,250 receivable by the Company and the cancellation of 2,465,000 common shares (cancelled on October 6, ) of the Company held as collateral for the loan, as well as the issuance of 251,179 common shares of the Company valued at $21,350 to settle outstanding debt of $25,118, and the issuance of 1,220,000 stock options at an exercise price of $0.25 per common share which expires on November 24, 2016. Note 14 Segmented Information The Company operated in one reportable operating segment, being mineral exploration. information of the Company s total assets is as follows: Geographic segment September 30, Canada 44,456 177,293 Peru 7,863,686 7,553,337 Total assets 7,908,142 7,730,630 Geographic segmentation of the Company s (loss) income is as follows: Canada Peru Three months ended December 31 December 31 2014 (184,186) (642,266) (98,795) 744,484 Net (loss) income (282,981) 102,218 Note 15 Commitments The Company has one location that is being rented in Calgary, but the Company has subleased the Calgary office for basic rent of $42,608 per annum and additional utilities and tax. The sublease is effective May 1, 2013 and expiring October 30, 2016. The minimum annual payments are as follows: Note 16 Supplemental Cash Flow Information 2016 $ 94,357 2017 7,863 Total $ 102,220 Investing and financing activities that do not have a direct impact on the current cash flows are excluded from the consolidated statements of cash flows. During the three months ended, the following activities were excluded from the consolidated statements of cash flows: 164,375 finder s units issued at a fair value of $16,438 pursuant to the private placements. Please see Note 12. 1,050,000 common shares issued at a fair value of $94,500 pursuant to a debt settlement of $105,000 with a former director. Please see Note 12. Accounts payable of $329,181 was related to exploration and evaluation assets. During the three months ended 2014, the following activities were excluded from the consolidated statements of cash flows: 475,208 finder s warrants issued at a fair value of $31,984 pursuant to the private placements. Please see Note 12. 18