Year-End Financial. Consolidated Financial Statements

Transcription

1 2016 Year-End Financial Consolidated Financial Statements

2 Corporate Overview In 2016 HTC Purenergy Inc. is participating in two Industry Sectors Industrial and Energy Services and Clean Energy Technologies. INDUSTRIAL & ENERGY SERVICES CLEAN ENERGY TECHNOLOGIES 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 audited annual consolidated financial statements for the year ending December 31, 2016 ( 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 year ending December 31, 2016 ( 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 December 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 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 annual filings. Based on our knowledge, having exercised reasonable diligence, the Consolidated Financial Statements together with the other financial information included in the annual 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 annual filings. Signed Lionel Kambeitz LIONEL KAMBEITZ CHAIRMAN & CEO Signed Jeffrey Allison JEFFREY ALLISON SR. VICE-PRESIDENT & CFO HTC Purenergy Inc. Consolidated Financial Statements 2

4 INDEPENDENT AUDITOR'S REPORT To the Shareholders of HTC Purenergy Inc.: We have audited the accompanying consolidated financial statements of HTC Purenergy Inc., which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows, for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of HTC Purenergy Inc. as at December 31, 2016 and 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Calgary, Alberta April 28, 2017 Chartered Professional Accountants

5 Consolidated Statement of Financial Position (In Canadian dollars) Note Dec. 31, 2016 Dec. 31, 2015 ASSETS Current Assets: Cash $ 2,749,347 $ 6,953,041 Accounts receivable 24 2,057,360 4,080,147 Other receivables 5 2,460, ,849 Government remittances receivable 71,804 - Held-for-trading investments 6 2,560,184 - Inventory 7 2,757,793 4,373,212 Current portion of contingent consideration 8 receivable 2,028,836 - Prepaid expenses and other assets 29,547 73,657 Current portion of lease receivable , ,333 14,822,101 15,892,239 Property, plant and equipment 9 2,374,524 2,708,288 Contingent consideration receivable 8 3,248,992 - Notes receivable 8 5,691,490 - Lease receivable , ,667 Product development , ,070 Available for sale investments , ,200 Patents 13 91,301 83,638 Goodwill and intangible assets 14 2,165,897 11,137,283 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities: $29,839,303 $31,516,385 Accounts payable and accrued liabilities 24 $ 2,117,586 $ 9,312,287 Government remittances payable - 206,615 Corporate tax payable 42,420 39,895 Operating line of credit ,000 - Current portion of financing lease , ,859 Current portion of long term debt , ,422 Current portion of deferred income 49,087-3,142,192 10,593,078 Deferred tax liability 4, 19 1,480, ,427 Financing lease , ,428 Long term debt ,188 1,113,438 Deferred income 104,692-6,401,790 12,080,371 Shareholders Equity: Share capital 17 39,008,214 38,978,214 Contributed surplus , ,556 Retained deficit (20,115,020) (22,785,885) Accumulated other comprehensive income (loss) 156,416 (71,329) Total equity attributable to HTC shareholders 19,960,166 17,061,556 Total equity attributable to non-controlling interest 3,477,347 2,374,458 Total equity 23,437,513 19,436,014 Total liabilities and equity $29,839,303 $31,516,385 See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Consolidated Financial Statements 4

6 Consolidated Statement of Income (Loss) (In Canadian dollars except per share amounts) For the year ended December 31 Note Revenue: 26 Sales $9,059,867 $10,930,129 Engineering, process design & consulting 31,446 1,745,141 9,091,313 12,675,270 Expenses: Cost of sales 5,889,303 7,613,480 Engineering and process design services 26,618 1,481,104 Commercialization, product development and administration 6,931,498 6,086,000 Research and development 21,000 - Amortization 902, ,064 Finance costs 105,688 66,028 13,877,045 15,728,676 Income (Loss) from commercial operations (4,785,732) (3,053,406) Other income (expense): Interest and other income 579,682 43,492 Income (Loss) from operations (4,206,050) (3,009,914) Gain on disposal of subsidiary 27 9,183,826 - Loss on disposal of assets (30,519) (37,297) Impairment of goodwill 14 (419,509) - Impairment of available for sale investments 12 (280,000) (3,860,438) Income (Loss) for the year before income tax 4,247,748 (6,907,649) Deferred income tax expense (recovery) 19 1,297,431 - Current tax provision 19 42,420 4,145 Income (Loss) from continuing operations 2,907,897 (6,911,794) Income from discontinued operations (2016 is net of tax provision) ,765 4,366,903 Net income (loss) for the year $ 3,773,662 $(2,544,891) Income (Loss) for the year attributable to: Shareholders of the Corporation 2,489,341 (2,225,560) Non-controlling interest 1,284,321 (319,331) Net income (Loss) for the year $3,773,662 $(2,544,891) Income (Loss) per share basic 0.08 (0.07) - diluted (2015 not calculated as anti-dilutive) Earnings (Loss) per share from continued operations basic 0.06 (0.19) - diluted (2015 not calculated as anti-dilutive) See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Consolidated Financial Statements 5

7 Consolidated Statement of Other Comprehensive Income (Loss) (In Canadian dollars) For the year ending December 31 Note Net income(loss) for the year $3,773,662 $(2,544,891) Fair value change in available for sale 10 investments 227,745 (787,702) Impairment expense recycled to income statement - 904,901 Total other comprehensive net income 227, ,199 Total comprehensive income (loss) $4,001,407 $(2,472,692) Total comprehensive income (loss) for the year attributable to: Shareholders of the Corporation 2,717,086 (2,108,361) Non-controlling interest 1,284,321 (319,331) Total comprehensive income (loss) for the year $4,001,407 $(2,427,692) See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Consolidated Financial Statements 6

8 Consolidated Statement of Changes in Equity (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 $38,978,214 $940,556 $(22,785,885) $ (71,329) $2,374,458 $19,436,014 Net income (Loss) ,489,341-1,284,321 3,773,662 Warrants expired - 30,000 (30,000) ClearGSI share issue (Note 4) ,524 - (181,524) - Other comprehensive income/(loss) , ,745 Subsidiary share issuance Balance Dec. 31, ,309,195 $39,008,214 $910,556 $(20,115,020) $156,416 $3,477,347 $23,437,513 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 $(20,560,325) $(1,724,065) $2,693,789 $20,328,169 Total Income (Loss) (2,225,560) (319,331) (2,544,891) Other comprehensive gain/(loss) (787,702) - (787,702) Impairment loss recycled to consolidated statement of loss ,440,438-2,440,438 Balance Dec. 31, ,309,195 $38,978,214 $940,556 $(22,785,885) $ (71,329) $2,374,458 $19,436,014 See accompanying notes to Consolidated Financial Statements HTC Purenergy Inc. Consolidated Financial Statements 7

9 Consolidated Statement of Cash Flows (In Canadian dollars) For the year ended December 31 Note Cash flows from operating activities: Net income (loss) $3,773,662 $(2,544,891) Items not affecting cash: Amortization 902, ,138 Impairment expense - 3,860,438 (Gain) loss on sale of subsidiary (9,183,826) - Loss on sale of assets 30,519 37,297 Impairment of goodwill 419,509 - Impairment in available for sale investments 280,000 - Interest on contingent consideration receivable (368,221) - Unrealized gain on held-for-trading investments (77,747) - Deferred tax expense 1,297,431 - Change in working capital and other 21 (4,594,338) 3,288,937 (7,520,073) 5,186,919 Cash flows from investing activities: Cash change in investments and loans receivable - 68,155 Purchase of assets (net) (539,220) (527,566) Capitalized development costs - 105,829 Net purchase of held-for-trading investments (2,482,437) - Increase in patents (17,704) - Finance leases received during the year 143,333 90,000 Proceeds from sale of NuVision 6,000,000-3,103,972 (263,582) Cash flows from financing activities: Loans repaid during the year (730,151) (58,937) Payments of capital leases (353,010) (93,713) Proceeds from sale-leaseback transactions 15 1,012, ,000 Net increase in bank line of credit 340, , ,350 Increase (decrease) in cash during the year (4,147,101) 5,525,687 Cash beginning of year 6,953,041 1,230,599 Cash acquired (disposed) on acquisition (sale) 4, 27 (56,593) 196,755 Cash end of year $2,749,347 $6,953,041 Included in operating activities Cash interest received 81,005 45,724 Cash interest paid 105,688 69,072 Corporate tax paid 33,595 7,367 See accompanying notes to the Consolidated Financial Statements HTC Purenergy Inc. Consolidated Financial Statements 8

10 Notes to the Consolidated Financial Statements for the years ended December 31, 2016 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 audited annual consolidated financial statements for the year ending December 31, 2016 ( 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 provide energy products and services for oil field drilling, completion and production; and operate custom fabrication, CNC and conventional machine shop as well as overhead, mobile crane division, fertilizer/material handling and paint shop. Clear Glycol & Solvents Inc. ( ClearGSI ) and its subsidiaries provide recycled solvent products and services for a wide range of industries including oil and gas, farmers and individuals. 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 ( IFRS ), as issued by the International Accounting Standards Board ( IASB ) and Interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). 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. HTC Purenergy Inc. Consolidated Financial Statements 9

11 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 April 28, b) Functional Currency The Consolidated Financial Statements are presented in Canadian dollars, which is the Corporation s functional currency. c) 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. 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 HTC Purenergy Inc. Consolidated Financial Statements 10

12 whether or not an investment should be classified and accordingly accounted for as a subsidiary, significant influence, available for sale or held for trading has a material impact on the Consolidated 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. 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 are subject to judgment and estimates. HTC Purenergy Inc. Consolidated Financial Statements 11

13 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: Revenue 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. Contingencies: By their nature, contingencies will only be resolved when one or 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. Disposal of subsidiary: During 2016, the Corporation disposed of a subsidiary, NuVision Industries Inc. (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. HTC Purenergy Inc. Consolidated Financial Statements 12

14 Additional insight to the use of judgment estimates and assumptions are provided in the notes below. d) 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 12. The 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 year ending December 31, 2016 ( Year ). Cash and 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. 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 control commences until the date 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 December , wholly owned subsidiaries include Saskatchewan Ltd, HTC CO 2 Systems Corp. ( HTC CO2 Systems ), Carbon Rx Inc., and CO 2 Technologies Pty Ltd. The Corporation owns 78% of Maxx and 52% of Clear GSI (December 31, % and 100%, respectively). Maxx owns the following subsidiaries: Saskatchewan Ltd. doing business as Pinnacle Industrial Services ( Pinnacle ), and SteelBlast Coatings and Painting Inc. (collectively referred to as the Maxx Group ). Maxx operations are based in Alberta and Saskatchewan. ClearGSI owns the following subsidiaries: HTC Purenergy Inc. Consolidated Financial Statements 13

15 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, Manitoba and Saskatchewan. 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 products 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 average cost method. 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 indicates 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. HTC Purenergy Inc. Consolidated Financial Statements 14

16 b) Non-Financial and Intangible Assets The carrying amounts of the Corporation s property plant 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). 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. The Corporation 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. HTC Purenergy Inc. Consolidated Financial Statements 15

17 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. 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 HTC accounts for its investment in Maxx Chenglin Energy Products and Services Ltd. ( MCEPS ), a private company, as an available for sale investment due to contractual restrictions on shares. HTC effectively owns and controls, directly and indirectly, 22% of MCEPS ( %). 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 HTC Purenergy Inc. Consolidated Financial Statements 16

18 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 CCS Purenergy 1000, and HTC s Delta Reclaimer System TM, CCS FEEDengine 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 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 uses 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 profit or loss 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 Revenue 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 HTC Purenergy Inc. Consolidated Financial Statements 17

19 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 is recognized when the 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 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. HTC Purenergy Inc. Consolidated Financial Statements 18

20 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 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 October 31, 2015, ClearGSI acquired 100% of Valhalla for consideration of $563,000 paid by way of promissory note. These promissory notes are unsecured and carry no interest. The outstanding balance has been included in Accounts payable accrued liabilities in the consolidated statement of financial position. HTC Purenergy Inc. Consolidated Financial Statements 19

21 On December 31, 2015, ClearGSI acquired 100% of Clear for consideration of $1,000,000 paid by way of promissory note. These promissory notes are secured by a hypothecation of ClearGSI shares, and carry no interest. The outstanding balance has been included in Accounts payable accrued liabilities in the consolidated statement of financial position. The consideration paid and the fair value of assets and liabilities acquired as result of these acquisitions are presented below: Valhalla Clear Acquisition date October 31, 2015 December 31, 2015 Purchase price $563,000 $1,000,000 Fair value of assets & liabilities acquired: Current Assets Property Plant & Equipment Investment Intangible Assets Current Liabilities Deferred Tax Liabilities $369, ,071 10,000 - (134,868) (50,115) $563,000 $499, , ,636 (238,795) (133,311) $1,000,000 The Corporation acquired cash of $196,755 on these acquisitions as follows: Valhalla acquisition $133,933 Clear acquisition $62,822 $196,755 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 Dec. 31, 2016 Dec. 31, 2015 Loan to related party $ 255,693 $ 242,307 Other receivables 2,204,870 26,542 $2,460,563 $268,849 The loan to related party represents a short-term loan to Kingsland Energy Corp. bearing interest at 6%. Kingsland Energy Corp. is a related party by way of common HTC Purenergy Inc. Consolidated Financial Statements 20

22 directors and common senior management. The loan is secured with a first charge on property of Kingsland Energy Corp. Included in other receivables is $2,191,381 receivable from AG Growth International Inc. on account of a final working capital adjustment on the sale of the Corporation s subsidiary NuVision Industrial Services Inc. (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 Dec. 31, 2016 Dec. 31, 2015 Work in progress $ 1,084,566 $ 582,408 Materials and supplies 1,364,717 3,380,584 Finished goods 308, ,220 $2,757,793 $4,373,212 In 2016, changes in work in progress, materials, supplies and finished goods recognized as cost of sales amounted to $5,889,303 ( $7,611,480). There were adjustments throughout the year for net realizable value in the amount of $151,973. There was an adjustment for obsolescence at December 31, 2016 of $52,170 ( $nil). 8. Notes receivable and contingent consideration receivable a) Notes receivable: On April 1, 2016, Maxx sold a subsidiary named NuVision Industrial Services Inc. ( 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 AG Growth International Inc. ( 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 $308,510 of this note by way of steel product received. The remaining balance of the note as at December 31, 2016 is $5,691,490. HTC Purenergy Inc. Consolidated 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 Maxx Group. 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 $368,220, from the date of disposal to the year end, has 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, 2015 $1,812,734 $157,886 $696,442 $41,226 $2,708,288 Additions 622, ,105-1,172,245 Disposals (318,560) (1,163) (190,042) - (509,765) Disposition 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 (1,458,249) (238,612) (385,064) (56,108) (2,138,033) Carrying Amount $1,751,929 $61,065 $528,753 $32,777 $2,374,524 Carrying amount Dec 31, 2014 $1,235,106 $227,864 $329,669 $3,000 $1,795,639 Additions 924, ,934 41,381 1,547,610 Disposals (153,904) (44,727) (222,889) (6,000) (427,520) Amortization (192,763) (25,251) 7,728 2,845 (207,441) Carrying amount Dec. 31, 2015 $1,812,734 $157,886 $696,442 $41,226 $2,708,288 HTC Purenergy Inc. Consolidated Financial Statements 22

24 Balance Dec. 31, 2015 is comprised of: Cost $3,039,584 $369,233 $925,815 $ 54,711 $4,389,343 Accumulated Amortization (1,226,850) (211,347) (229,373) (13,485) (1,681,055) Carrying Amount $1,812,734 $157,886 $696,442 $41,226 $2,708, Lease receivable: 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. Dec. 31, 2016 Dec. 31, 2015 $266,667 $410,000 Current portion (106,667) (143,333) Future minimum lease payments receivable are approximately: 2017 $ 106, , ,333 Total $ 266,667 $160,000 $266, 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. Dec. 31, 2016 Dec. 31, 2015 HTC Delta Reclaimer System $ 278,792 $ 278,792 Amortization (28,006) (8,237) 250, ,555 CCS Purenergy , ,566 Amortization (238,399) (195,054) 191, ,512 CCS FEEDengine 186, ,092 Amortization (97,698) (79,089) 88, ,003 Total product development costs $ 531,053 $ 612,070 HTC Purenergy Inc. Consolidated Financial Statements 23