UGE INTERNATIONAL LTD.

Transcription

1 Unaudited Condensed Consolidated Interim Financial Statements Three months ended March 31, (Expressed in United States dollars)

2 Notice of No Auditors Review of Interim Financial Statements Under National Instrument , Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the unaudited condensed consolidated interim financial statements; they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company. The Company s independent auditors have not performed a review of these unaudited interim condensed consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditors.

3 Condensed Consolidated Interim Statements of Financial Position (Expressed in United States dollars) March 31, December 31, Assets Current assets Cash $ 40,179 $ 59,913 Restricted cash (Note 4) 1,224,887 1,224,887 Trade and other receivables (Note 5) 2,148,043 3,488,581 Prepaid expenses and deposits 465, ,059 Inventory (Note 6) - 570,740 3,878,462 5,701,180 Non-current assets Property, plant and equipment 55,571 59,396 Goodwill 2,996,800 2,975,228 Total assets $ 6,930,833 $ 8,735,804 Liabilities Current liabilities Accounts payable and accrued liabilities $ 4,730,965 $ 3,256,612 Deferred revenue 245,128 2,505,504 Income taxes payable 51,252 51,880 Loans payable (Note 7) 680,584 1,362,523 5,707,929 7,176,519 Non-current liabilities Loans payable (Note 7) 3,600,000 3,600,000 Deferred income tax liability 4,066 3,397 9,311,995 10,779,916 Shareholders' deficiency Share capital (Note 8) 15,139,174 15,111,782 Contributed surplus 3,495,699 3,504,908 Accumulated other comprehensive income 74,072 69,279 Accumulated deficit (21,090,107) (20,730,081) (2,381,162) (2,044,112) Total liabilities and shareholders' deficiency $ 6,930,833 $ 8,735,804 Reporting entity and going concern (Note 1) Commitments and contingencies (Note 4 and 10) Subsequent events (Notes 4 and 12) Approved on behalf of the Board: "Nicolas Blitterswyk" Director, President & Chief Executive Officer "Michael Doolan" Director 1

4 Condensed Consolidated Interim Statements of Operations and Comprehensive Loss for the three months ended March 31, (Expressed in United States dollars) Revenue $ 5,498,094 $ 548,257 Cost of Sales (4,910,895) (476,503) Gross profit 587,199 71,754 Operating expenses Selling, general and administrative (792,486) (750,433) Loss from operating activities (205,287) (678,679) Finance expense (106,616) (13,094) Finance income 3,255 2 Loss from continuing operations before income taxes (308,648) (691,771) Income tax recovery (expense) (51,378) 9,226 Net loss from continuing operations (360,026) (682,545) Net loss from discontinued operations (Note 11) - (1,006,302) Net loss for the period (360,026) (1,688,847) Other comprehensive income items that are or may be reclassified to profit or loss Foreign currency translation differences (4,793) 225,839 Comprehensive loss for the period $ (364,819) $ (1,463,008) Net loss per share attributable to the shareholders of the Company Continuing operations - basic and diluted $ (0.01) $ (0.03) Net loss for the year - basic and diluted $ (0.01) $ (0.08) Weighted average number of shares Basic and diluted 36,217,837 21,908,610 2

5 Condensed Consolidated Interim Statements of Changes in Shareholders' Deficiency (Expressed in United States dollars) Accumulated other Share Contributed comprehensive Accumulated capital surplus income deficit Total Balance - January 1, 2016 $ 11,435,220 $ 1,772,351 $ 184,082 $ (19,641,795) $ (6,250,142) Net loss for the period (1,688,847) (1,688,847) Related party conversion of debt to equity 624, ,983 Amount issued on conversion of restricted share units 62,640 (62,640) Amounts issued for acquisition of EEPC 2,672, ,672,320 Contribution through favourable interest rate debt - 201, ,346 Related party forgiveness of of interest free debt - 249, ,623 Share-based compensation 87,185 48, ,276 Foreign currency translation differences , ,839 Balance - March 31, 2016 $ 14,882,348 $ 2,208,771 $ 409,921 $ (21,330,642) $ (3,829,602) Accumulated other Share Contributed comprehensive Accumulated capital surplus income deficit Total Balance - January 1, 2017 $ 15,111,782 $ 3,504,908 $ 69,279 $ (20,730,081) $ (2,044,112) Net loss for the period (360,026) (360,026) Amount issued on the conversion of restricted share units (Note 8) 27,170 (27,170) Amount issued on the conversion of warrants (Note 8) Share-based compensation - 17, ,961 Foreign currency translation differences - - 4,793-4,793 Balance - March 31, 2017 $ 15,139,174 $ 3,495,699 $ 74,072 $ (21,090,107) $ (2,381,162) 3

6 Condensed Consolidated Interim Statements of Cash Flows for the three months ended March 31, (Expressed in United States dollars) Cash provided by (used in) operating activities Net loss from continuing operations $ (360,026) $ (682,545) Adjustment for: Depreciation and amortization 4,296 2,118 Income tax (recovery) expense 51,378 (9,226) Finance expense 106,616 13,094 Share-based compensation 17, ,433 (179,775) (550,126) Change in trade and other receivables 1,366,661 (365,555) Change in inventory 574,878 64,686 Change in prepaid expenses and deposits (106,818) (154,381) Change in accounts payable and accrued liabilities 1,368,450 1,490,812 Change in deferred revenue (2,300,354) - 723, ,436 Income taxes paid (13,592) - Finance expenses paid (44,808) (13,094) Cash provided by continuing operating activities 664, ,342 Cash used in discontinued operating activities - (1,650,327) Cash provided by (used in) operating activities 664,642 (1,177,985) Cash provided by (used in) investing activities Addition to restricted cash 8,881 (678,248) Additions to property, plant and equipment - (652) Cash consideration paid for EEPC, net of bank overdraft assumed - (106,041) Cash provided by (used in) continuing investing activities 8,881 (784,941) Cash used in discontinued investing activities - (1,659) Cash provided by (used in) investimg activities 8,881 (786,600) Cash provided by (used in) financing activities Cash received from exercise of warrants (Note 8) Net proceeds (repayments) of loans payables (689,638) 336,800 Cash provided by (used in) continuing financing activities (689,416) 336,800 Cash provided by discontinued financing activities - 1,506,710 Cash provided by (used in) financing activities (689,416) 1,843,510 Decrease in cash for the period (15,893) (121,075) Effect of exchange rate fluctuations on cash (3,841) 2,739 Cash at beginning of period 59, ,544 Cash at end of period $ 40,179 $ 61,208 4

7 1. Reporting entity and going concern (a) Reporting entity UGE International Ltd. (the "Company" or "UGE") is incorporated under the laws of the Province of Ontario and its common shares are listed on the TSX Venture Exchange under the symbol "UGE". The Company s registered office is located at 320 Bay Street, Suite 1600, Toronto, Ontario, Canada. The principal business activity of the Company is to provide renewable energy solutions to its customers. Primarily, it provides development, engineering, procurement and construction work in the commercial solar sector. (b) Going concern These condensed consolidated interim financial statements have been prepared assuming the Company will continue as a going concern, notwithstanding that the Company has a working capital deficiency and incurred losses from operations. During the three months ended March 31, 2017, the Company had a net loss of $360,026 and positive cash flow of $664,642. As at March 31, 2017, the Company has a working capital deficiency of $1,829,467 and shareholders' deficiency of $2,381,162. The Company s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon achieving sustained profitability and the ability to raise additional debt or equity financing to fund any working capital deficits. There are various risks and uncertainties affecting the Company s operations including, but not limited to, the market acceptance and rate of commercialization of the Company s offerings, the ability of the Company to successfully execute its business plan, and general global economic conditions, certain of which are beyond the Company s control. The Company s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued focus on renewable energy solutions, revenue growth, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of bank loans and equity investments from existing or potential shareholders. There are no guarantees that the funds raised will be sufficient to sustain the Company s ongoing operations beyond twelve months or that additional debt or equity financing will be available to the Company or available at acceptable terms. Failure to implement the Company s business plan could have a material adverse effect on the Company s financial condition and/or financial performance. Accordingly, there are material risks and uncertainties that cast significant doubt about the Company s ability to continue as a going concern. These condensed consolidated interim financial statements do not include any adjustments or disclosures that would be required if assets are not realized and liabilities and commitments are not settled in the normal course of operations. If the Company is unable to continue as a going concern, then the carrying value of certain assets and liabilities would require revaluation to a liquidation basis, which could differ materially from the values presented in the condensed consolidated interim financial statements. 5

8 2. Basis of preparation (a) Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting. Accordingly, certain disclosures normally included in annual financial statements prepared in accordance with International Financial Reporting Standards have been omitted or condensed. These condensed consolidated interim financial statements were prepared using the same accounting policies and methods as those used in the consolidated financial statements of the Company for the year ended December 31, 2016 and should be read in conjunction with those financial statements. These condensed consolidated interim financial statements were approved for issuance by the Board of Directors on May 25, (b) Basis of presentation and accounting These condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. (c) Functional and presentation currency These condensed consolidated interim financial statements are presented in United States dollars ("USD"). The functional currency of the Company and Endura Energy Project Corp. ( EEPC ) is the Canadian dollar ("CAD"), the functional currency of UGE USA Inc. ( UGE USA ) is the USD, and the functional currency of UGE Philippines Inc. ( UGE Philippines ) is the Filipino peso ("PhP"). (d) Basis of measurement These condensed consolidated interim financial statements have been prepared on the historical cost basis. (e) Accounting assumptions, estimates and judgments The preparation of the condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could may differ from these amounts. Significant areas having estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognized in the condensed consolidated interim financial statements include the: allowance for doubtful accounts; stock based compensation; and valuation of goodwill. 6

9 2. Basis of preparation (continued) Critical judgments that management has made in applying the Company s accounting policies that have the most significant effect on the amounts recognized in the condensed consolidated interim financial statements include: assessment of the Company's ability to continue as a going concern (note 1(b)); and determination of the functional currency of the principal operations of the Company (note 2(c)). 3. New standards and interpretations not yet adopted Other than disclosed in annual audited consolidated financial statements for the year ended December 31, 2016, there are no new standards and interpretations that have been issued and not yet adopted. 4. Restricted cash As at March 31, 2017, the Company has restricted cash of $1,224,887 (December 31, $1,224,887) held in separate accounts. On April 5, 2017, $1,121,321 of restricted cash was released to the vendor when the letter of credit was executed. The remaining $103,566 was related to cash security for a construction financing loan. (Note 7 Loan 3) 5. Trade and other receivables March 31, December 31, Trade and other receivables, net of allowance for doubtful accounts of $Nil $ 1,084,686 $ 3,041,041 Unbilled revenue 912, ,571 Corporate income taxes receivable 150, ,969 $ 2,148,043 $ 3,488, Inventory After the disposition of the shares of UGE Holdings Ltd. ( UGE Holdings ) (Note 11) on September 6, 2016, the Company does not manufacture products and does not plan to hold inventory, as equipment is purchased as needed and shipped directly to project sites for installation. The inventory as at December 31, 2016 of $570,740 was related to a project in Ontario which required the Company to take ownership of solar panels prior to arrival at the project site. As at March 31, 2017, there was no inventory. There were no write-downs, or reversals of previously recorded write-downs, in the three months ended March 31, 2017, and

10 7. Loans payable March 31, December 31, Loan 1 $ 3,600,000 $ 3,600,000 Loan 2 266, ,260 Loan 3 414, ,263 Loan 4-20,000 Loan 5-500,000 4,280,584 4,962,523 Current portion 680,584 1,362,523 $ 3,600,000 $ 3,600,000 Loan 1 Upon the sale of UGE Holdings, the Company issued promissory notes for a total of $3,600,000 (December 31, $3,600,000) to a subsidiary of UGE Holdings (Note 11). These unsecured loans bear a fixed annual interest rate of 6.5% and are due on August 31, Loan 2 - As at March 31, 2017, the Company has a revolving demand credit facility with the Toronto Dominion Bank ("TD Bank") with a maximum limit of CAD$750,000, of which $266,321 (CAD$355,000) (December 31, $428,260, CAD$575,000) was drawn. The credit facility bears interest at a rate equal to TD Bank s prime rate plus 1.45% per annum and is secured by a general security agreement covering all assets of EEPC. Loan 3 As at March 31, 2017, the Company has a construction financing facility with TD Bank with a maximum limit of $550,000, guaranteed by Export Development Canada. The facility bears interest at a rate equal to TD Bank s prime rate plus 1.45% and is due on demand. As at March 31, 2017, the Company made draws from the facility of $414,263 (December 31, 2016 $414,263) and has provided TD Bank a 25% cash deposit on all draws equal to $103,566 recorded as restricted cash. Loan 4 As at December 31, 2016, the Company had a loan of $20,000 from a former director of the Company which during the three months ended March 31, 2017 was repaid in full. The loan was unsecured, non-interest bearing with a 5% processing fee due upon repayment. Loan 5 - As at December 31, 2016, the Company had a loan of $500,000 from a third-party lender which was repaid in full during the three months ended March 31, The loan bore interest of 16% per annum and was secured by first charge of all the assets of UGE USA. 8

11 8. Share capital The authorized share capital of the Company consists of an unlimited number of common shares with no par value. The issued and outstanding share capital is as follows: Three months ended March 31, 2017 Three months ended March 31, 2016 Number of Number of Number special Number special of shares warrants Amount of shares warrants Amount Balance at beginning of period 36,118,927 5,100,000 $ 15,111,782 18,838,990 10,200,000 $ 11,435,220 Shares issued for conversion of restricted share units 120,000-27, ,000-62,640 Amount issued for exercise of warrants Shares ussed for debt ,240, ,983 Shares issued on the acquisition of Endura (Note 4) ,888,888-2,672,320 Share-based compensation ,185 Balance at end of period 36,239,707 5,100,000 $ 15,139,174 29,076,785 10,200,000 $ 14,882,348 Restricted share units The Company has a restricted share unit plan that provides for the granting of restricted share units to directors, officers, employees and consultants of up to 1,005,125 shares of the Company of which 20,286 are available for grant as at March 31, Upon vesting, the Company will issue shares from treasury to the employees for no additional consideration. As at March 31, 2017, rights to receive 160,376 shares have been granted of which 158,937 vest in 2017 and 1,439 vest in During the three months ended March 31, 2017, the Company issued 120,000 shares for the rights that vested. During the three months ended March 31, 2017, the Company recognized a total of $25,308 (2016 $33,679) as compensation expense pursuant to restricted share units in selling, general, and administrative expenses. Special warrants As at March 31, 2017, the Company had 5,100,000 special warrants outstanding held by related parties and are all exercisable in The special warrants are convertible into shares of the Company on a one for one basis for no additional consideration provided that at the time on the conversion at least 20% of the issued and outstanding shares of the Company are held by Public Shareholders after the conversion of the special warrants. Public Shareholders are those shareholders who are not directors, officers or other insiders of the Company as defined by the TSX Venture Exchange. 9

12 8. Share capital (continued) Stock options The Company offers an incentive stock option plan that provides for the granting of options up to 10% of its issued and outstanding common shares to directors, officers, employees and consultants. The stock option activity is as follow: Three months ended Year ended March 31, 2017 December 31, 2016 Weighted Weighted average average Number exercise Number exercise of options price (CAD) of options price (CAD) Balance at beginning of period 2,972,461 $ ,400 $ 0.50 Granted 50, ,937, Forfeited (311,500) 0.43 (215,000) 0.73 Exercised Expired Balance at end of period 2,710,961 $ ,972,461 $ 0.45 Balance exercisable at end of period 2,013,805 $ ,733,752 $ 0.46 Details of the outstanding stock options are as follows (in CAD): Number Number of options Weighted Weighted of options Weighted outstanding at average average exercisable at average Exercise March 31, remaining exercise March 31, exercise price (CAD) 2017 life (months) price (CAD) 2017 price (CAD) $ , $ ,200 $ , , , , ,582, , , , , , , , ,710, $ ,013,805 $

13 8. Share capital (continued) During the three months ended March 31, 2017, the Company recorded a recovery to stock-based compensation of $7,347 (2016 $14,406) relating to stock options in selling, general, and administrative expenses. The compensation expense was based on the fair value of each stock option on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: Three months ended March 31, 2017 Year ended December 31, 2016 Expected life 5 years 5 years Expected volatility in market price of shares 115.6% 85.8% Expected dividend rate 0.0% 0.0% Risk-free interest rate 1.02% 0.68% Weighted average fair value per option granted $ 0.35 $ 0.24 Warrants As at March 31, 2017, the Company has warrants outstanding allowing the holders to purchase an additional 2,934,300 common shares at an exercise price of CAD$0.48 per share and 393,767 common shares at an exercise price of CAD$0.38 per share until June 23, During the three months ended March 31, 2017, 780 warrants at an exercise price of CAD$0.38 were exercised for a value of $222 (CAD$297). 11

14 9. Segmented information The Company has determined that it operates in one operating segment, renewable energy solutions. During the three months ended March 31, 2017, the Company has revenues in the United States, Canada and the Philippines, and is organized into sales geographic areas consisting of these countries. During the three months ended March 31, 2017, the Company had one customer that accounted for more than 10% of consolidated revenue from continuing operations as listed below. No other customer accounted for more than 10% of the Company s consolidated revenue. Three months ended March 31, Customer 1 93% 0% Customer 2 0% 56% Customer 3 0% 44% Information by geographic area is based on external revenue recognized by the continuing operations is outlined below. Total revenue from continuing operations for the three months ended March 31, was as follows: Canada $ 5,228,392 $ 309,699 United States 252,859 - Philippines 16,843 - Panama - 238,558 All non-current assets are related to the Company s Canadian operations. $ 5,498,094 $ 548, Contingencies On March 24, 2017, UGE USA and UGE International Ltd., along with a subsidiary of UGE Holdings, which was sold on September 6, 2016 (Note 11), was named in a legal action for breach of contract and fraud in relation to an order of wind turbines from a subsidiary of UGE Holdings to the plaintiff in The Company is defending the claim as management strongly believes it has been wrongly named. The total amount claimed is in excess of $2,500,000. While management believes that it will ultimately be successful in defending the claim, at this time the outcome, such as the potential financial effect, timing of any outflow and any reimbursements, cannot be determined and as a result, the Company has not recognized a provision. The Company is subject to possible claims that arise in the ordinary course of business. The outcome of these claims, either individually or in the aggregate, are not expected to have a material impact on the Company s financial position or financial performance. 12

15 11. Discontinued operations On September 6, 2016, the Company sold all the shares of UGE Holdings, which included the Company s wind operations. Upon the closing of the sale, UGE Holdings has been presented as a discontinued operation in the consolidated statements of operations and comprehensive loss and cash flows and certain related comparative amounts have been restated to reflect this change. Results of discontinued operations for the three months ended March 31, was as follows: Revenue $ - $ 417,146 Cost of sales - (348,516) Gross profit - 68,630 Expenses Selling, general and administrative - (530,982) Finance expense - (542,184) Finance income Loss from discontinued operations before income taxes (1,003,752) Income taxes - (2,550) Net loss from discontinued operations $ - $ (1,006,302) Net loss per share from discontinued operations attributable to the shareholders of the Company Basic and diluted $ - $ (0.05) 13

16 11. Discontinued operations (continued) Cash flows from discontinued operations for the three months ended March 31, was as follows: Cash flow used in operating activities Net loss for the period $ - $ (1,006,302) Adjustment for: Depreciation and amortization - (2,308) Deferred income tax recovery - 2,550 Share-based compensation - 8,837 Finance expense - 542,184 - (455,039) Changes in non-cash working capital: Change in trade and other receivables - 254,252 Change in inventory - (96,818) Change in prepaid expenses and deposits - (136,279) Change in accounts payable and accrued liabilities - (1,154,180) Change in warranty reserve Cash used in operating activities - (1,587,852) Income taxes paid - (2,978) Finance expense paid - (59,497) Cash used in operating activities - (1,650,327) Cash flow from (used in) investing activities Additions to property plant and equipment - (1,675) Restricted cash - 16 Cash used in investing activities - (1,659) Cash flow from financing activities Net proceeds of loans payables - 1,506,710 Cash provided by financing activities - 1,506,710 14

17 12. Subsequent events On April 3, 2017, the Company acquired, for nominal consideration, a 60% interest in UGE RE Inc. ("UGE RE"), a shell entity, which then purchased substantially all the assets of Carmanah Solar Power Corp. ("CSPC"), a wholly owned subsidiary of Carmanah Technologies Inc. ("CMH"). The remaining 40% of UGE RE is owned by affiliates of OYA Solar Inc. ("OYA") and Polar Racking, Inc. ("Polar"), strategic partners in the solar market. CSPC operates a business similar to EEPC in Toronto, Canada, providing solutions to clients during the solar project design-build lifecycle. All employees from CSPC were included in the purchase and the transaction was considered a business combination. UGE will manage the operations of UGE RE for the purpose of increasing market presence in Canada and increased engineering and project management expertise. UGE RE also adds an additional pipeline of projects. Cash consideration of $1,991,810 (CAD$2.7 million) was paid by UGE RE to CMH which was funded primarily by a $1.8 million (CAD$2.4 million) loan from The M.H. Brigham Foundation, an arm's length third party to the transaction (the "Loan"). The Loan bears interest at a rate of 10% per annum and is payable on demand. The Loan is guaranteed by UGE, and in consideration for the provision of the Loan, The M.H. Brigham Foundation received 218,182 common shares of UGE with a fair value of $89,664 (CAD$120,000) (being 5% of the Loan amount), and an origination fee of $7,472 (CAD$10,000). The initial accounting for the transaction is currently in the process of finalization. Accordingly, a summary of the purchase consideration and the allocation to the fair value of the assets acquired and the liabilities assumed have not been disclosed. 15