First Quarter. Period ending March 31, 2017 Consolidated Financial Statements

Transcription

1 2017 First Quarter Period ending March 31, 2017 Consolidated Financial Statements

2 Corporate Overview In 2017 HTC has refocused its efforts into the Environmental Technologies Sector and has recently divested its Industrial & Agricultural Divisions HTC as a company, is engaged in environmental technologies through its HTC Group of Advanced Environmental Technology Companies, namely: Energizing CO2 HTC Purenergy Inc. Consolidated Financial Statements 1

3 To the Shareholders of HTC Purenergy Inc. Management s Accountability for Management s Discussion and Analysis and Financial Statements The unaudited condensed consolidated interim financial statements for the period ending March 31, 2017 ( Consolidated Financial Statements ) have been prepared by management in accordance with International Financial Reporting Standards in Canada. Management is responsible for ensuring that these statements, which include amounts based upon estimates and judgment, are consistent with other information and operating data contained in management s discussion and analysis for the period ending March 31, 2017 ( MD&A ) and reflect HTC Purenergy Inc. ( HTC or the Corporation ) business transactions and financial position. Management is also responsible for the information disclosed in the MD&A including responsibility for the existence of appropriate information systems, procedures and controls to ensure that the information used internally by management and disclosed externally is complete and reliable in all material respects. In addition, management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Corporation s assets are appropriately accounted for and adequately safeguarded. Management has concluded that the Corporation s system of internal control over financial reporting was effective as at March 31, The board of directors ( Board ) annually appoints an audit committee which includes directors who are not employees of the Corporation. This committee meets regularly with management and the shareholders' auditors to review significant accounting, reporting and internal control matters. The shareholders' auditors have unrestricted access to the audit committee. The audit committee reviews the interim and annual financial statements, the report of the shareholders' auditors, and the interim and annual management s discussion and analysis and has delegated authority to approve the interim filings, and makes recommendations to the Board regarding annual filings. Management has reviewed the filings of the Corporation s MD&A, Consolidated Financial Statements and attachments thereto. Based on our knowledge, having exercised reasonable diligence, these interim filings do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, with respect to the period covered by the interim filings. Based on our knowledge, having exercised reasonable diligence, the Consolidated Financial Statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, the financial performance and cash flows of the Corporation, as of the date of and for the periods presented in the interim filings. Signed Lionel Kambeitz LIONEL KAMBEITZ CHAIRMAN & CEO Signed Jeffrey Allison JEFFREY ALLISON SR. VICE-PRESIDENT & CFO HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 2

4 NOTICE TO READER OF THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS The condensed consolidated interim financial statements for the period ending March 31, 2017 have been prepared by management in accordance with the International Financial Reporting Standards and have not been reviewed by HTC Purenergy Inc. s Auditor. Signed Lionel Kambeitz Lionel Kambeitz Chairman, CEO and Director HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 3

5 Consolidated Statement of Financial Position Unaudited (In Canadian dollars) Note Mar. 31, 2017 Dec. 31, 2016 ASSETS Current Assets: Cash $ 844,769 $ 2,749,347 Accounts receivable ,853 2,057,360 Other receivables 5 3,141,720 2,460,563 Government remittances receivable 157,956 71,804 Held for trading investments 6 2,606,813 2,560,184 Inventory 7 947,848 2,757,793 Current portion of contingent consideration 8 2,390,033 2,028,836 Prepaid expenses and other assets 20,012 29,547 Current portion of lease receivable 10 80, ,667 10,695,004 14,822,101 Property, plant and equipment 9 1,514,051 2,374,524 Contingent consideration receivable 8 2,969,020 3,248,992 Loan Receivable 3,068,916 Notes receivable 8 5,323,885 5,691,490 Lease receivable , ,000 Product development , ,053 Available for sale investments , ,945 Patents 13 92,172 91,301 Goodwill and intangible assets 14 2,094,100 2,165,897 $27,058,731 $29,839,303 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities: Accounts payable and accrued liabilities 24 $ 970,622 $ 2,117,586 Corporate tax payable 42,420 42,420 Operating line of credit , ,000 Current portion of financing lease , ,578 Current portion of long term debt , ,521 Current portion of deferred income 28,843 49,087 1,899,201 3,142,192 Deferred tax liability 4,19 1,295,751 1,480,858 Financing lease , ,860 Long term debt 16 24, ,188 Deferred income 104, ,692 4,234,838 6,401,790 Shareholders Equity: Share capital 17 39,008,214 39,008,214 Contributed surplus , ,556 Retained deficit (20,473,475) (20,115,020) Accumulated other comprehensive gain (loss) 19, ,416 Total equity attributable to shareholders of the Corporation 19,464,516 19,960,166 Total equity attributable to non-controlling interest 3,359,377 3,477,347 Total equity 22,823,893 23,437,513 Total liabilities and equity $27,058,731 $29,839,303 See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 4

6 Consolidated Statement of Loss Unaudited (In Canadian dollars except per share amounts) For the three month period ended March 31 Note Revenue: 26 Sales $682,380 $270,571 Engineering, process design & consulting - 25, , ,833 Expenses: Cost of sales 287,472 68,340 Engineering and process design services - 19,809 Commercialization, product development and administration 1,050, ,617 Research and Development 15,300 5,250 Amortization 152,059 99,734 Finance costs 7,998 7,116 1,513,344 1,198,866 Loss from commercial operations (830,964) (903,033) Other income: Interest and other income 149,188 6,566 Loss from operations (681,776) ( ) Gain(Loss) on disposal of assets 27 20,244 2,321 Loss for the period before tax (661,532) (894,146) Tax (recovery) provision ,107 (5,494) Loss from continuing operations (476,425) (888,652) Income from discontinued operations (net of tax provision) ,330 Net income (loss) for the period $(476,425) $(98,322) Income (loss) for the period attributable to: Shareholders of the Corporation $(358,455) $(243,166) Non-controlling interest (117,970) 144,844 Net income (loss) for the period $(476,425) $(98,322) Loss per share basic and diluted (.01).(003) Loss per share fully diluted -.- Loss per share from continuing operations basic (.01).(03) Loss per share from continuing operations diluted - - Weighted average shares outstanding: Basic 30,309,195 30,309,195 Diluted 33,157,605 33,367,959 See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 5

7 Consolidated Statement of Other Comprehensive Income (Loss) Unaudited (In Canadian dollars) For the 3 month period ended March 31 Note Net income for the period $(476,425) $(98,322) Other comprehensive gain (loss) for the period 11 (137,195) 431,133 Total comprehensive income (613,620) 332,811 Total comprehensive income (loss) for the period attributable to: Shareholders of the Corporation (495,650) 187,967 Non-controlling interest (117,970) 144,844 Net income (loss) for the period $(613,620) $ 332,811 See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 6

8 Consolidated Statement of Changes in Equity Unaudited (In Canadian dollars, except number of shares) Number of Shares Share Capital Contributed Surplus Deficit Equity attributable to the shareholders Other Comprehensive income Non Controlling Interests Total Equity Balance at Dec. 31, ,309,195 $39,008,214 $910,556 $(20,115,020) $156,416 $3,477,347 $23,437,513 Total Income (Loss) (358,455) - (117,970) (476,425) Other comprehensive gain/(loss) (137,195) - (137,195) Balance Mar. 31, ,309,195 $39,008,214 $910,556 $(20,473,475) $19,221 $3,359,377 $22,823,893 Number of Shares Share Capital Contributed Surplus Deficit Equity attributable to the shareholders Other Comprehensive income Non Controlling Interests Total Equity Balance at Dec. 31, ,309,195 $38,978,214 $940,556 $(22,785,885) $(71,329) $2,374,458 $19,436,014 Net income (Loss) (243,166) - 144,844 (98,322) Other comprehensive income/(loss) , ,133 Balance Mar. 31, ,309,195 $38,978,214 $940,556 $(23,029,051) $359,804 $2,519,302 $19,768,825 See accompanying notes to Consolidated Financial Statements HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 7

9 Consolidated Statement of Cash Flows Unaudited (In Canadian dollars) For the three month period ended March 31 Note Cash flows from operating activities: Net income (loss) $(476,425) $(98,322) Items not affecting cash: Amortization 152, ,067 Amortization of Assets held for sale - 29,047 (Gain) loss on sale of assets (20,244) (2,321) Unrealized gain on held-for-trading investments (43,576) - Deferred tax expense 185,107 (5,495) Interest on contingent consideration receivable (81,225) - Change in working capital and other 21 (756,273) (2,605,388) (1,040,577) (2,512,412) Cash flows from investing activities: Cash change in investments and loans receivable - (454,578)- Purchase of assets (net) (78,052) (229,154) Net purchase of held-for-trading investments (11,281) Increase in patents (3,681) Finance leases paid during the period (86,630) Finance leases received during the period 26,667 45,000 (66,347) (725,362) Cash flows from financing activities: Loans repaid during the period 2,808 (59.839) Payments of capital leases (100,682) Net increase in bank line of credit 100,000 2,126 (59,839) Increase (decrease) in cash during the period (1,104,798) (3,297,613) Cash beginning of period 2,749,347 6,953,041 Cash acquired (disposed) on acquisition (sale) 4, 27 (799,780) (56,593) Cash end of period $844,769 $3,598,835 Included in operating activities Cash interest received 3,939 3,327 Cash interest paid 7,998 17,912 Corporate tax paid - - See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 8

10 Notes to the Consolidated Financial Statements Unaudited for the three months ended March 31, 2017 and Operations: HTC Purenergy Inc. ( HTC or Corporation ) is incorporated under the Business Corporations Act (Alberta) and is located at # Victoria Avenue, Regina, Saskatchewan, Canada. These interim unaudited condensed consolidated financial statements for the period ending March 31, 2017 ( Consolidated Financial Statements ) include the accounts of the Corporation and its wholly owned subsidiary companies. All intercompany balances, transactions and unrealized profits and losses are eliminated on consolidation. With the exception of HTC s subsidiaries, Maxx Group of Companies Corp. ( Maxx ) and Clear Glycol & Solvents Inc. (formerly Delta Purification Corp.), HTC and its subsidiaries are development stage companies whose commercial business is the development, aggregation and commercialization of proprietary technologies relating to CO 2 capture and CO 2 solvent recovery. Maxx and its subsidiaries (together the Maxx Group ) provide consulting and logistical support for its subsidiary operations and others, should the opportunity arise.. Clear Glycol & Solvents Inc. ( ClearGSI ) and its subsidiaries provide recycled glycol and solvent products and services for a wide range of industries including oil, gas processing, mining, aviation, and agriculture. 2. Basis of Presentation: a) Statement of Compliance with International Financial Reporting Standards ( IFRS ): These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board ( IASB ) and Interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). These Consolidated Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The Consolidated Financial Statements do not include all of the information required for full annual financial statements and should be read in conjunction with the annual audited consolidated financial statements as at and for the year ended December 31, HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 9

11 These Consolidated Financial Statements include the accounts of HTC and its subsidiaries. In management s opinion, the Consolidated Financial Statements include all adjustments necessary to fairly present such information. These Consolidated Financial Statements were authorized by the audit committee of the board of directors for issue and approved by the Corporation s board of directors ( Board ) on May 30, b) Comparative Amounts Comparative amounts have been restated to conform to the present basis of presentation. c) Functional Currency The Consolidated Financial Statements are presented in Canadian dollars, which is the Corporation s functional currency. d) Use of Estimates and Judgment The preparation of the Consolidated Financial Statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected. Judgment is used mainly in determining whether a balance or transaction should be recognized in the Consolidated Financial Statements. Estimates and assumptions are used mainly in determining the measurement of recognized transactions and balances. However, judgment and estimates are often interrelated. Judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected. These Consolidated Financial Statements are based on management s best estimates using information available. Uncertainty regarding the timing of anticipated large scale market demand for carbon capture technology, related legislative incentives, and uncertainty in financial markets has complicated the estimation process. Accordingly, the inherent uncertainty involved in making estimates and assumptions may impact the actual results reported in future periods by a material amount. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 10

12 Use of estimates and judgment Information about judgment, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment are as follows: Investments classification: As part of the evaluation and identification of significant influence investments, management must exercise judgment based on current information and in the evaluation and applications of the accounting pronouncements. Determination of whether or not an investment should be classified and accordingly accounted for as subsidiary, significant influence or available for sale has a material impact on the financial statements. Management takes into account all facts and circumstances in concluding the classification of an investment. Business Combinations: Business combinations are accounted for using the acquisition method of accounting. The determination of fair value often requires management to make assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair value of acquired assets, liabilities, goodwill and intangibles changes in any of these assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the purchase price allocation. Future net income can be affected as a result of changes in asset impairment. Asset Impairment: The carrying amounts of the Corporation s non-financial assets, other than inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. The Corporation s most significant estimates and assumptions involve values associated with product development costs, patents, goodwill and intangible assets. These estimates and assumptions include those with respect to future cash inflows and outflows, discount rates, asset lives, and the determination of cash generating units. At least annually, the carrying value of goodwill is reviewed for potential impairment. Among other things, this review considers the fair value of the cashgenerating units based on discounted estimated future cash flows or other information about the fair values. This review involves significant estimation uncertainty, which could affect the Corporation s future results if the current estimates of future performance and fair values change. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 11

13 Classification of Financial Instruments: The Corporation classifies its financial instruments into one of the following categories: held for-trading; held-to-maturity; loans and receivables; available-forsale; and other liabilities. Classification requires management to exercise judgment based on available information and in the context of the prescribed accounting policies. Provisions: Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of a past obligating event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Identification and evaluation of provisions is subject to judgment and estimates. Inventory Provision: In determining the lower of cost and net realizable value of inventory and in establishing the appropriate impairment amount for inventory obsolescence, management estimates the likelihood that inventory carrying values will be affected by changes in market pricing or demand for the products and by changes in technology or design which could make inventory on hand obsolete or recoverable at less than the recorded value. Management performs regular reviews to assess the impact of changes in technology and design, sales trends and other changes on the carrying value of inventory. Where it is determined that such changes have occurred and will have an impact on the value of inventory on hand, appropriate adjustments are made. If there is a subsequent increase in the value of inventory on hand, reversals of previous write-downs to net realizable value are made. Unforeseen changes in these factors could result in additional inventory provisions, or reversals of previous provisions, being required. Revenue Recognition: Revenues from contracts for product and engineering development services is recognized on achieving defined milestones agreed with the customer under the contract. Management monitors the progress achieved against these milestones and considers that milestones represent actual proportionate work performed on the contracts. Accordingly, the revenues and costs for these contracts are recognized at the time milestone bills are sent to the customers. Changes in management s estimated costs to complete a contract may result in an adjustment to previously recognized revenues. Utilization of Tax Losses: Due to current circumstances, there is no immediate expectation for utilization of losses based on prior year s results. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 12

14 Contingencies: By their nature, contingencies will only be resolved when one of more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. Additional insight to the use of judgment estimates and assumptions are provided in the notes below. Disposal of subsidiary: During 2016, the Corporation disposed of a subsidiary, NuVision Industries Inc. ( NuVision ) (see Note 27). The following judgments and estimations were made in the computation of the gain on disposal of this subsidiary: - Date of loss of control; - Present value of contingent consideration receivable; - Value of working capital adjustment related to the determination of the final purchase consideration; and - Allocation of goodwill to the major subsidiaries of Maxx. Additional insight to the use of judgment estimates and assumptions are provided in the notes below. On January 1, 2017 the Corporation sold its interest in Pinnacle for share consideration of $501,894 and the repayment of loans due to Maxx of $3,068,916. e) Basis of Measurement The Consolidated Financial Statements have been prepared on the historical cost basis except for held-for-trading investments which are measured at fair value through profit and loss as described in Note 3 and available for sale investments which are measured at fair value through other comprehensive income as described in Note 12The methods used to measure fair values are discussed in Note Significant Accounting Policies: There were no new or amended accounting standards adopted by the Corporation for the period ending March 31, 2017 ( Period ). Cash Equivalents Cash includes balances in banks and cash on hand. Cash equivalents are comprised of cash and highly liquid investments with a maturity of three months or less from the date of purchase. The Corporation does not presently have any highly liquid investments that would qualify as cash equivalents in the current or previous year. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 13

15 Basis of Consolidation a) Subsidiaries Subsidiaries are entities controlled by the Corporation. The financial statements of the subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. b) Transactions Eliminated on Consolidation Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions are eliminated in preparing the Consolidated Financial Statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. The Consolidated Financial Statements include the accounts of the Corporation and its subsidiaries. As at March , subsidiaries include HTC CO 2 Systems Corp. ( HTC CO2 Systems ), Saskatchewan Ltd., Carbon Rx Inc., CO 2 Technologies Pty Ltd.. The Corporation owns 78% of Maxx and 52% of ClearGSI. Maxx owns the following subsidiaries: Port Lajord Terminal Corp., and Steelblast Coating and Paintings Inc. (in 2016 Maxx owned Saskatchewan Ltd doing business as Pinnacle Industrial services ( Pinnacle and NuVision Industries Inc. until April 1, 2016) (collectively referred to as the Maxx Group ). Maxx operations are based in Saskatchewan. ClearGSI owns the following subsidiaries: Clear GSI (Sask.) Inc., Alberta Ltd doing business as Valhalla Filtration 2006 ( Valhalla ) and Clear Glycol Inc. ( Clear ). ClearGSI operations are based in Alberta, British Columbia and Saskatchewan. The Corporation has accounted for the business combinations using the acquisition method of accounting. The Corporation has a 45% interest in Assist Energy Solutions Corp. ( Assist ). Assist has not commenced financial operations. Foreign Currency Translation The Corporation translates monetary assets and liabilities using the rate of exchange at the Consolidated Financial Statement date and non-monetary assets liabilities using the historical exchange rate at the transaction date. Revenues and expenses are translated using the average exchange rate in effect for the period. Inventory Inventory is comprised of completed product as well as work in progress including materials, services, labor and related overhead associated with projects in progress. Inventory is valued at the lower of cost and net realizable value using the specific identification method. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 14

16 Property, Plant and Equipment Property plant and equipment is recorded at cost and depreciated over its useful life at a rate of 30% on a declining balance basis except for leasehold improvements (3 years straight line). Manufacturing property and equipment are amortized on a straight line basis as follows: Vehicles - 3 to 5 years; leaseholds, office equipment and buildings - 5 years; and shop equipment - 10 years. The amortization period requires estimation of the useful life of the asset. Long-lived assets are tested for recoverability if events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment of Assets a) Financial Assets The Corporation assesses at each statement of financial position date whether there is any objective evidence that a financial asset is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods, if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. b) Non-Financial and Intangible Assets The carrying amounts of the Corporation s property and equipment and intangible assets having a finite useful life are assessed for impairment indicators on an annual basis to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s or group of assets estimated fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable independent cash inflows (CGU). HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 15

17 Where an impairment loss is subsequently reversed, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Assets that have an indefinite useful life and goodwill are not subject to depreciation and are tested for impairment at least on an annual basis or earlier when there is an indication of potential impairment. Provisions Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of a past obligating event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. These provisions are measured at the present value of management s best estimate of the expenditure required to settle the obligation as at December 31, The discount rate used to determine the present value reflects current market assessments of the time value of money. HTC performs evaluations to identify onerous contracts and where applicable, records provisions for such contracts. Financial instruments The Corporation classifies its financial instruments into one of the following categories: held-for-trading; held-to-maturity; loans and receivables; available-forsale; and other financial liabilities. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments, except for held-for-trading instruments, in which case the transaction costs are expensed as incurred. Measurement in subsequent periods is based on the classification of the financial instrument. Financial assets and liabilities classified as held-for-trading are measured at fair value with gains and losses recognized in the Consolidated Statement of Income (Loss). Financial assets held-to-maturity, loans and receivables and financial liabilities, other than those held-for-trading, are measured at amortized cost using the effective interest rate method. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Where the fair value of financial assets that are equity instruments is not determinable because there is no active market for the instrument, the asset is carried at cost and tested annually for impairment. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 16

18 Financial instruments Classification Measurement Cash Loans and receivables Amortized cost Accounts receivable Loans and receivables Amortized cost Other receivables Loans and receivables Amortized cost Available for sale investments Available for sale Fair value Held-for-trading investments Held-for-trading Fair value Contingent consideration receivable Loans and receivables Amortized cost Accounts payable and accrued liabilities Other financial liabilities Amortized cost Operating line of credit Other financial liabilities Amortized cost Long term debt Other financial liabilities Amortized cost Patents Costs associated with registration of patents are accumulated at cost and when registration is complete, amortized on a straight line basis over 15 years. Intangible Assets Identifiable intangible assets, acquired through acquisitions that are subject to amortization, are amortized using the straight-line method over their estimated useful lives of 3 to 20 years. Intangible assets, not subject to amortization, are tested annually for impairment, and any impairment identified is charged to earnings as identified. The Corporation does not have any such intangible assets. Research and Development Research costs are expensed as they are incurred in accordance with specific criteria set out under IFRS. Product development costs are expensed as incurred except if the costs are related to the development and setup of new products, processes and systems, and satisfy certain conditions for capitalization, including reasonable assurance that they will be recovered. All capitalized development costs are amortized when commercial production begins, based on the expected useful life of the completed product. The carrying value of capitalized development costs are examined for recoverability annually. Costs associated with the development of the LCDesign, and HTC s Delta Reclaimer System TM, PDOengine have been capitalized in accordance with the specific criteria under IFRS. Goodwill The excess of the purchase price over the fair market value of identifiable assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assessed for impairment at least annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired. The assessment of impairment is based on estimated fair market values derived from certain valuation HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 17

19 models, which may consider various factors such as estimated future earnings, terminal values and discount rates. An impairment loss is recognized to the extent that the carrying amount of goodwill relating to certain acquired assets exceeds its estimated market value. As at December 31, 2016, there has been an impairment of goodwill associated with Maxx in the amount of $419,509 ( $nil). The impairment test of goodwill involves significant estimates and judgement based on the information available to management at the date of the impairment test. Should these assumptions and estimates change, the carrying value of goodwill may differ from the amount presented in the Consolidated Financial Statements. Stock-Based Compensation The Corporation used the fair-value based method of accounting for share-based compensation for all awards of share options granted. The fair value at the grant date of share options is calculated using the Black-Scholes valuation method. Compensation expense is charged to net income over the vesting period with a corresponding increase to contributed surplus. The Corporation issues shares and share options under its share-based compensation plans as described in Note 18. Any consideration paid by directors, consultants and employees on exercise of share options or purchase of shares, together with the amount initially recorded in contributed surplus, is credited to share capital. Revenue Recognition Revenues from contracts for product and engineering development services is recognized on achieving defined milestones agreed with the customer under the contract. Management monitors the progress achieved against these milestones and considers that milestones represent actual proportionate work performed on the contracts. Accordingly, the revenues and costs for these contracts are recognized at the time milestone bills are sent to the customers. Revenue from product sales are recognized when risks and rewards of ownership are transferred to the customer and the amount of revenue can be measured reliably. Interest revenue is recorded when earned. Government Grants and Bursaries Government assistance and investment tax credits are recorded as either a reduction of the cost of the applicable assets, or credited against the related expense incurred in the statement of operations, as determined by the terms and conditions of the agreements under which the assistance is provided to the Corporation or the nature of the expenditures which gave rise to the credits unless repayable conditions HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 18

20 or terms are attached, in which case they are recorded separately. Government assistance and investment tax credit receivables are recorded when their receipt is reasonably assured. Income Taxes Income tax expense comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity. Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income taxes are calculated using the liability method of accounting. Under this method, future income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis (temporary differences). The resulting changes in the net future tax asset or liability are included in income. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. Future income tax assets are recognized to the extent it is probable that these will be realized in the future. Changes to Accounting Policies and Future Changes to Accounting Standards Future Changes to accounting policies not yet adopted The standards and interpretations that are issued, but not yet effective up to the date of issuance of the Corporation s Consolidated Financial Statements, and that may have an impact on the disclosures and financial position of the Corporation, are disclosed below. The Corporation intends to adopt these standards and interpretations, if applicable, when they become effective. Financial Instruments: Recognition and Measurement: In July 2014, IFRS 9, Financial Instruments was issued as a complete standard, including the requirements previously issued related to classification and measurement of financial assets and liabilities, and additional amendments to introduce a new expected loss impairment model for financial assets, including HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 19

21 credit losses. Retrospective application of this standard with certain exemptions is effective for fiscal years beginning on or after January 1, 2018, with earlier application permitted. The Corporation is currently assessing the impact of this standard. Leases: In January, 2016, the IASB issued IFRS 16, Leases, which replaces IAS 17, Leases. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if the entity is also applying IFRS 15 Revenue from Contracts with Customers. The Corporation plans to adopt IFRS 16 on January 1, 2019 and is currently assessing the potential impact of this adoption on the Corporation s financial statements. Revenue recognition: In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which establishes a single revenue recognition framework that applies to contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects to receive when control is transferred to the purchaser. IFRS 15 is effective for years beginning on or after January 1, The Corporation is currently assessing the impact of this standard. 4. Business acquisition On June 1, 2016, ClearGSI issued 92 Class A common voting shares for consideration of $92, diluting HTC s interest to 52% of the outstanding stock. The transaction has been treated as a transaction between shareholders, with the resulting impact on the non-controlling interest of $181,524 adjusted through ClearGSI deficit. 5. Other receivables Mar. 31, 2017 Dec. 31, 2016 Loan to related party $304,083 $255,693 Other receivables 2,837,637 2,204,870 $3,141,720 $2,460,563 Loan to related party represents short-term loan to Kingsland Energy Corp. bearing interest at 6%. The loan is secured with a first charge on property of the third party. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 20

22 Included in other receivables is $2,191,381 receivable from AG Growth International Inc. ( AGI ) on account of a final working capital adjustment on the sale of the Corporation s subsidiary NuVision as well as the $501,894 receivable from the sale of Saskatchewan Ltd. dba Pinnacle Industrial Services ( Pinnacle ) (see Note 27). 6. Held for trading investments The Corporation has invested funds in an investment portfolio with RBC Dominion Securities Inc. The Corporation has classified these shares as held-for-trading. The securities have been recorded at their trading prices based on December 31, 2016 quoted prices obtained from over the counter exchanges, and changes in fair value have been accounted for in the consolidated statement of income (loss). 7. Inventory Mar. 31, 2017 Dec. 31, 2016 Work in progress $ - $1,084,566 Materials and supplies 65,755 1,364,717 Finished goods 882, ,510 $947,848 $2,757,793 During the three-month period ending March 31, 2017, changes in work in progress, materials, supplies and finished goods recognized as cost of sales amounted to $287,482 ( $5,889,303). There were no adjustments for net realizable value or obsolescence during the Period or for the year ending December 31, Notes receivable and contingent consideration receivable a) Notes receivable: On April 1, 2016, Maxx sold a subsidiary NuVision (see Note 27). Of the base initial payment of $12,000,000, $6,000,000 was settled by way of cash, with the remaining $6,000,000 of the proceeds on the sale to be paid by way of a credit note for products and services provided by AGI. The credit note may be redeemable by means of any and all products, materials produced by and services provided by AGI and its subsidiaries. As at December 31, 2016, the Corporation has redeemed $676,115 of this note by way of steel product received. The remaining balance of the note as at March 31, 2017 is $5,323,885. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 21

23 b) Contingent consideration receivable: Contingent consideration is calculated based on estimated payments receivable from AGI on NuVision s adjusted EBITDA results over the years ended 2015, 2016, 2017, and The total contingent consideration will not exceed $14,000,000, and will be paid annually with the last payment to be made after calculation of the 2018 EBITDA, subject to final adjustments. This would result in total sale proceeds not to exceed $26,000,000. Half of the contingent consideration is to be settled by AGI through delivery of steel, other products and services to the Maxx Group. At December 31, 2016, the estimated probability weighted present value of the contingent consideration receivable from AGI based on current information on the date of the sale was $4,909,607. This present value has been included in the sale proceeds on the disposition of NuVision (see Note 27). The present value has been computed using a discount rate of 10%. Accretion in contingent consideration receivable balance of $449,445 (Mar 31, 2017) and $368,220 (Dec 31, 2016) from the date of disposal to the year end, have been recognized in the statement of income as interest income. A decrease in the probability weighting of 10% would result in a decrease in the present value of contingent consideration receivable by $537,080. An increase in the discount factor from 10% to 20% would result in a decrease in the present value of contingent consideration receivable by $903, Property, plant and equipment: Equipment Leaseholds Vehicles Buildings Total Carrying amount Dec 31, 2016 $1,751,929 $61,065 $528,753 $32,777 $2,374,524 Additions 6, ,004 78,052 Disposals Disposition of subsidiary assets (757,300) (59,914) (50,078) - (867,292) Amortization (29,496) (432) (38,861) (2,444) (71,233) Carrying amount Mar. 31, 2017 $971,181 $719 $439,815 $102,337 $1,514,051 Balance Mar. 31, 2017 is comprised of: Cost $1,327,963 $151,113 $626,727 $120,889 $2,226,691 Accumulated Amortization (356,782) (150,394) (186,912) (18,552) (712,640) Carrying Amount $971,181 $719 $439,815 $102,337 $1,514,051 HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 22

24 Equipment Leaseholds Vehicles Buildings Total Carrying amount Dec 31, 2015 $1,812,734 $227,864 $329,669 $3,000 $1,795,639 Additions 622, ,934 41,381 1,547,610 Disposals (318,560) (44,727) (222,889) (6,000) (427,520) Disposal of subsidiary assets (134,638) (78,611) (278,300) - (491,549) Amortization (303,365) (16,912) (175,969) (8,449) (504,695) Reclassification adjustment 73,618 (135) (73,483) - - Carrying amount Dec. 31, 2016 $1,751,929 $61,065 $528,753 $32,777 $2,374,524 Balance Dec. 31, 2016 is comprised of: Cost $3,210,178 $299,677 $913,817 $88,885 $4,512,557 Accumulated Amortization (1,458,250) (238,613) (385,063) (56,107) (2,138,033) Carrying Amount $1,751,929 $61,064 $528,753 $32,777 $2,374, Lease receivables: Mar. 31, 2017 Dec. 31, 2016 Delta Reclaimer lease bearing no interest, receivable in monthly payments of $15,000 for the first 12 months and $8,889 thereafter. The lease matures July 6, 2019 and is secured by specific equipment. Lessee has option to cancel lease after the first year of operation. $240,000 $266,667 Current portion (80,000) (106,667) Future minimum financing lease payments receivable are approximately: 2017 $ 80, $ 106, $ 53,333 Total $ 240,000 $160,000 $160, Product development: Product development costs represent costs incurred to date in connection with the design and construction of the CCS Purenergy 1000, the HTC Delta Reclaimer System ( Delta Reclaimer ), and the CCS FEEDengine. Amortization of these costs commence once the development is substantially complete. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 23

25 Mar. 31, 2017 Dec. 31, 2016 HTC Delta Reclaimer System $ 278,792 $ 278,792 Amortization (32,949) (28,006) 245, ,786 LCDesign CCS 444, ,272 Amortization (249,236) (238,399) 195, ,873 PDOengine 186, ,092 Amortization (102,350) (97,698) 83,742 88,394 Total product development costs $ 524,833 $ 531, Available for Sale Investments: Mar. 31, 2017 Dec. 31, 2016 Share Investments (a) 284, ,000 Share Investments (b) 332, ,945 $616,750 $753,945 a) On January 29, 2013 the Corporation acquired 6 million common shares in Kingsland Energy Corp. ( KLE ). On November 27, 2013 the Corporation acquired an additional 1,100,000 KLE common shares. The shares have been recorded at their trading price at March 31, 2017 (December 31, 2016) based on March 31, 2017 (December 31, 2016) quoted prices obtained from the TSX Venture Exchange Inc. In 2016, the value of this investment has not decreased, and management does not consider that indicators of impairment exist on the investment. b) On December 4, 2008 HTC acquired 2,500,000 shares in EESTech Inc. The Corporation has classified these shares as available-for-sale at fair value through other comprehensive income. The shares have been recorded at their trading price at March 31, 2017 (December 31, 2016) based on March 31, 2017, (December 31, 2016) quoted prices obtained from over the counter exchanges. HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 24

26 13. Patents: Cost Accumulated amortization Net book value Carrying Value Dec. 31, 2016 $168,313 $(77,012) $91,301 Additions 3,681-3,681 Amortization - (2,810) (2,810) Carrying Value Mar. 31, 2017 $171,994 $(79,822) $92,172 Cost Accumulated amortization Net book value Carrying Value Dec. 31, 2015 $150,610 $56,931 $93,679 Amortization - 10,041 10,041 Carrying Value Dec. 31, 2016 $150,610 $66,972 $83, Goodwill and intangible assets: Goodwill impairment is tested at the operating segment level and is determined based on the carrying value of goodwill exceeding the operating segment s recoverable amount. The recoverable amount is the higher of fair value less cost to sell ( FVLCS ) and value in use ( VIU ). If the impairment loss exceeds the carrying amount of goodwill, the goodwill is written off completely. Any impairment loss left over is allocated to the remaining assets of the operating segment. In 2016, given the disposition of a major subsidiary of the Maxx operating segment, goodwill attributable to the Maxx operating segment was allocated on the closing date of the sale to the major subsidiaries of Maxx on a pro-rata basis using their relative fair values at the date of disposal. Goodwill attributed to NuVision has been included in the carrying value of assets and liabilities disposed, and included as part of the calculation of the gain on disposal (see Note 27). Subsidiary Goodwill attributed NuVision $8,244,692 Pinnacle and others 419,509 Total $8,664,201 The remaining portion of goodwill not disposed as part of the sale of NuVision was assessed for impairment as at December 31, On January 1, 2017, Pinnacle HTC Purenergy Inc. Condensed Consolidated Interim Financial Statements 25