Consolidated Financial Statements Years ended December 31, 2016 and 2015 (Expressed in United States dollars)
KPMG LLP PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada Telephone (604) 691-3000 Fax (604) 691-3031 INDEPENDENT AUDITORS REPORT To the Shareholders of UGE International Ltd. We have audited the accompanying consolidated financial statements of UGE International Ltd., which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, the consolidated statements of operations and comprehensive loss, changes in shareholders deficiency and cash flows for the years then ended, and notes, comprising 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. Auditors 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 audit 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 our 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, we consider 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. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.
UGE International Ltd. Page 2 We believe that the audit evidence we have obtained in our audits 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 consolidated financial position of UGE International Ltd. as at December 31, 2016 and December 31, 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without modifying our opinion, we draw attention to Note 1 to the consolidated financial statements which indicates that UGE International Ltd. has a working capital deficiency, a shareholders deficiency and has incurred losses and negative cash flow from operations. These conditions, along with other matters as set forth in Note 1 to the consolidated financial statements, indicate the existence of a material uncertainty that cast significant doubt about UGE International Ltd. s ability to continue as a going concern. KPMG LLP (signed) Chartered Professional Accountants April 28, 2017 Vancouver, Canada
Consolidated Statements of Financial Position as at December 31, (Expressed in United States dollars) Assets 2016 2015 Current assets Cash $ 59,913 $ 179,544 Restricted cash (Note 6) 1,224,887 9,508 Trade and other receivables (Note 7) 3,488,581 1,353,023 Prepaid expenses and deposits 357,059 437,827 Inventory (Note 8) 570,740 353,262 5,701,180 2,333,164 Non-current assets Property, plant and equipment 59,396 2,620,088 Goodwill (Note 5) 2,975,228 - Lease prepayments - 2,190,831 Deferred tax assets (Note 12) - 503,008 Total assets $ 8,735,804 $ 7,647,091 Liabilities Current liabilities Accounts payable and accrued liabilities $ 3,256,612 $ 3,133,171 Loans payable (Note 9) 1,362,523 2,098,000 Deferred revenue 2,505,504 501,787 Income taxes payable 51,880 706,728 Warranty provision - 195,163 7,176,519 6,634,849 Non-current liabilities Loans payable (Note 9) 3,600,000 2,614,884 Deferred tax liability (Note 12) 3,397 - Deferred government grants - 4,647,500 10,779,916 13,897,233 Shareholders' deficiency Share capital (Note 10) 15,111,782 11,435,220 Contributed surplus 3,504,908 1,772,351 Accumulated other comprehensive income (loss) 69,279 184,082 Accumulated deficit (20,730,081) (19,641,795) (2,044,112) (6,250,142) Total liabilities and shareholders' deficiency $ 8,735,804 $ 7,647,091 Reporting entity and going concern (Note 1) Commitments and contingencies (Note 6, 16 and 17(d)) Subsequent events (Notes 9 and 20) Approved on behalf of the Board: Nicolas Blitterswyk Director, President & Chief Executive Officer Michael Doolan Director 1
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, (Expressed in United States dollars) 2015 2016 (Restated*) Continuing operations: Revenue $ 5,807,119 $ 2,240,186 Cost of sales (4,470,360) (2,169,281) Gross profit 1,336,759 70,905 Operating expenses Selling, general and administrative (Note 13) (4,352,774) (2,314,006) Loss from operating activities (3,016,015) (2,243,101) Finance expense (127,376) - Finance income 29,987 4 Loss from continuing operations before income taxes (3,113,404) (2,243,097) Income tax recovery (Note 12) 115,057 - Net loss from continuing operations (2,998,347) (2,243,097) Income (loss) from discontinued operations, net of income tax (Note 19) 1,910,061 (3,362,990) Net loss for the year (1,088,286) (5,606,087) Other comprehensive loss items that are or may be reclassified to profit or loss Foreign currency translation differences 92,970 48,962 Comprehensive loss for the year $ (995,316) $ (5,557,125) Net loss per share attributable to the shareholders of the Company Continuing operations - basic and diluted $ (0.10) $ (0.17) Net loss for the year - basic and diluted $ (0.04) $ (0.42) Weighted average number of shares Basic and diluted 29,369,986 13,332,798 *The 2015 comparative amounts have been restated to reflect the discontinued operations on the sale of sale of UGE Holdings Ltd. (Note 19) 2
Consolidated Statements of Changes in Shareholders' Deficiency (Expressed in United States dollars) Accumulated other Share Contributed comprehensive Accumulated capital surplus income (loss) deficit Total Balance - January 1, 2015 $ 9,538,132 $ 708,335 $ 135,120 $ (14,035,708) $ (3,654,121) Net loss for the year - - - (5,606,087) (5,606,087) Private placement of share units issued for cash, net of share issue costs (Note 10) 1,251,744 278,194 - - 1,529,938 Shares issued on vesting of restricted share units 604,175 (663,491) - - (59,316) Shares issued on exercise of stock options 41,169 - - - 41,169 Related party contribution through interest free debt (Note 9) - 611,690 - - 611,690 Share-based compensation - 837,623 - - 837,623 Foreign currency translation differences - - 48,962-48,962 Balance - December 31, 2015 $ 11,435,220 $ 1,772,351 $ 184,082 $ (19,641,795) $ (6,250,142) Net loss for the year - - - (1,088,286) (1,088,286) Related party conversion of debt to equity (Note 9) 544,038 - - - 544,038 Amount issued on conversion of restricted share units (Note 10) 180,670 (186,920) - - (6,250) Amount issued for acquisition of EEPC (Note 5 and 10) 1,933,827 - - - 1,933,827 Forfeiture of shares related to acquisition of EEPC (Note 5) (713,333) 713,333 - - - Contribution through favourable interest rate debt (Note 9) - 204,793 - - 204,793 Related party forgiveness of interest free debt (Note 9) - 249,623 - - 249,623 Share-based compensation 605,840 475,648 - - 1,081,488 Public offering of share units, net of share issue costs (Note 10) 1,125,520 276,080 - - 1,401,600 Sale of UGE Holdings (Note 19) - - (207,773) - (207,773) Foreign currency translation differences - - 92,970-92,970 Balance - December 31, 2016 $ 15,111,782 $ 3,504,908 $ 69,279 $ (20,730,081) $ (2,044,112) 3
Consolidated Statements of Cash Flows for the years ended December 31, (Expressed in United States dollars) 2015 2016 Restated* Cash flow from (used in) operating activities Net loss from continuing operations $ (2,998,347) $ (2,243,097) Adjustment for: Depreciation and amortization 17,439 - Income tax recovery (115,057) - Share-based compensation (Note 10) 1,102,630 419,819 Finance expense 127,376 - (1,865,959) (1,823,278) Change in trade and other receivables (2,907,687) 326 Change in inventory (570,740) - Change in prepaids (304,718) (10,173) Change in accounts payable and accrued liabilities 2,890,441 269,569 Change in deferred revenue 2,568,411 - (190,252) (1,563,556) Income taxes paid (69,367) - Finance expenses paid (88,877) - Cash used in continuing operating activities (348,496) (1,563,556) Cash used in discontinued operating activities (1,865,863) (652,878) Cash used in operating activities (2,214,359) (2,216,434) Cash flow used in investing activities Additions to property, plant and equipment (1,692) - Cash consideration paid and bank overdraft assumed on acquisition of EEPC (Note 5) (645,215) - Disposition of cash from sale of UGE Holdings (Note 19) (72,112) - Addition to restricted cash (1,224,887) - Cash used in continuing investing activities (1,943,906) - Cash used in discontinued investing activities (69,448) (18,759) Cash used in investing activitiies (2,013,354) (18,759) Cash flow from financing activities Proceeds on issue of share capital and warrants, net of issuance costs 1,393,889 1,558,093 Net proceeds of loans payable 1,018,239 - Cash from continuing financing activities 2,412,128 1,558,093 Cash from discontinued financing activities 1,905,596 428,860 Cash from financing activities 4,317,724 1,986,953 Increase (decrease) in cash for the year 90,011 (248,240) Effect of exchange rate fluctuations on cash (209,642) (5,995) Cash at beginning of year 179,544 433,779 Cash at end of year $ 59,913 $ 179,544 *The 2015 comparative amounts have been restated to reflect the discontinued operations on the sale of sale of UGE Holdings Ltd. (Note 19) 4
1. Reporting entity and going concern (a) Reporting entity UGE International Ltd. (the "Company" or "UGE") is incorporated under the laws of the Province of Ontario and its common shares are listed on the TSX Venture Exchange under the symbol "UGE". The head office of the Company is located at 40 Eglinton Ave. E., Suite 802, Toronto, Ontario, Canada and the registered office is located at 320 Bay Street, Suite 1600, Toronto, Ontario, Canada. The principal business activity of the Company is to provide renewable energy solutions to its customers. Primarily, it provides development, engineering, procurement and construction work in the commercial solar sector. (b) Going concern These consolidated financial statements have been prepared assuming the Company will continue as a going concern, notwithstanding that the Company has a working capital deficiency and incurred losses from operations. During the year ended December 31, 2016, the Company had a net loss of $2,998,347 from continuing operations and negative cash flow from continuing operations of $348,496. As at December 31, 2016, the Company has a working capital deficiency of $1,475,339 and shareholders' deficiency of $2,044,112. During the year ended December 31, 2016, the Company completed a key acquisition, divested its wind energy operations that were no longer part of its strategic plan, completed an equity financing, and rationalized expense levels, in an effort to strengthen its financial position towards self-sustainable operations. The Company s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon achieving sustained profitability and the ability to raise additional debt or equity financing to fund any working capital deficits. There are various risks and uncertainties affecting the Company s operations including, but not limited to, the market acceptance and rate of commercialization of the Company s offerings, the ability of the Company to successfully execute its business plan, and general global economic conditions, certain of which are beyond the Company s control. The Company s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued focus on renewable energy solutions, revenue growth, improving overall gross profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of bank loans and equity investments from existing or potential shareholders. There are no guarantees that the funds raised will be sufficient to sustain the Company s ongoing operations beyond twelve months or that additional debt or equity financing will be available to the Company or available at acceptable terms. Failure to implement the Company s business plan could have a material adverse effect on the Company s financial condition and/or financial performance. Accordingly, there are material risks and uncertainties that cast significant doubt about the Company s ability to continue as a going concern. These consolidated financial statements do not include any adjustments or disclosures that would be required if assets are not realized and liabilities and commitments are not settled in the normal course of operations. If the Company is unable to continue as a going concern, then the carrying value of certain assets and liabilities would require revaluation to a liquidation basis, which could differ materially from the values presented in the consolidated financial statements. 5
2. Basis of preparation (a) Statement of compliance These consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") and were approved for issuance by the Board of Directors on April 28, 2017. (b) Basis of presentation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Details of the Company's subsidiaries as at December 31, 2016 are as follows: Ownership/voting interest held at Name of Principal Place of December 31, company activity incorporation/operation 2016 2015 UGE USA Inc. Endura Energy Project Corp. UGE Philippines Inc. Operating entity in the United States Operating entity in Canada Operating entity in the Philippines United States - Delaware/New York Canada - Ontario The Philippines 100% n/a 100% n/a 100% n/a On February 22, 2016, the Company acquired 100% of the issued and outstanding shares of Endura Energy Project Corp. ("EEPC") (Note 5). The operations of EEPC and its financial results have been included in these financial statements from February 22, 2016. The Company incorporated UGE USA Inc. ("UGE USA") on June 14, 2016 for the Company s solar operations in the United States. The Company incorporated UGE Philippines Inc. ( UGE Philippines ) on August 11, 2016 for the Company s operations in the Philippines. On September 6, 2016, the Company divested 100% of the issued and outstanding shares of UGE Holdings Ltd. ("UGE Holdings"). The operations of UGE Holdings, comprising of the Company s wind energy assets, up to September 6, 2016 have been reported as discontinued operations (Note 19). The comparative statements of operations and comprehensive loss and cash flows have been restated as if the operations had been discontinued. All significant intercompany balances and transactions have been eliminated on consolidation. (c) Functional and presentation currency These consolidated financial statements are presented in United States dollars ("USD"). The functional currency of the Company and EEPC is the Canadian dollar ("CAD"), the functional currency of UGE USA is the USD, and the functional currency of UGE Philippines is the Filipino peso ("PhP"). The functional currency of UGE Holdings, Urban Green Energy Inc. ("Urban Inc.") and Urban Green Energy Hong Kong Ltd. ( Urban HK ), which are included in discontinued operations, was the USD and the functional currency of the UGE Holdings wholly owned subsidiaries Beijing Urban Green Energy Co., Ltd. ( Urban BJ ), Pingquan UGE Co. Ltd. ( Urban PQ ) and Chengde Urban Green Energy Ltd., was the Chinese Renminbi ("RMB"). 6
2. Basis of preparation (continued) (d) Basis of measurement These consolidated financial statements have been prepared on the historical cost basis. (e) Accounting assumptions, estimates and judgments The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Actual results may differ from the estimates applied in the preparation of these financial statements. Critical judgments that management has made in applying the Company s accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements include: assessment of the Company's ability to continue as a going concern (note 1(b)); classification of the disposition of the Company s wind energy assets (note 19) as discontinued operations and determination of the functional currency of the principal operations of the Company (note 2(c)). Significant areas having estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows: (i) Allowances for doubtful accounts The Company makes estimates for allowances for potential losses in respect of trade and other receivables. An allowance for doubtful accounts is estimated based on cash expected to be collected. In making such estimates, management considers the credit history with the customer and current relationships with them as well as the financial condition of the customer. Changes in these estimates affect the amount of bad expense recognized in profit or loss. (ii) Stock based compensation The Company uses a Black Scholes options pricing model to determine the amount of stock based compensation. Such models require assumptions related to share price volatility, expected life of options and discount rate. Changes in these assumptions affects the fair value of the options and the amount of stock based compensation to be recognized in profit or loss over the vesting period. (iii) Valuation of shares issued on acquisition of EEPC The Company made estimates regarding the shares that were issued related to the acquisition of EEPC that were in escrow until criteria was met as discussed in Note 5. The fair value of these shares was based on the market price of the Company s shares on the date of issuance adjusted for the effect of the escrow conditions. The impact of the escrow conditions was estimated using the Black Scholes option pricing model and changes in the estimate would affect the consideration and the amount of goodwill recognized. 7
2. Basis of preparation (continued) (iv) Valuation of goodwill The Company estimates the recoverable amount of goodwill arising from the acquisition of EEPC for the purposes of testing impairment. Key assumptions underlying the recoverable amount are summarized in note 5(b). Changes in these assumptions could result in an impairment charge recognized in profit or loss. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise indicated. (a) Basis of consolidation These consolidated financial statements include the accounts of the Company and all subsidiary entities which are controlled by the Company. Subsidiaries (Note 2(b)) are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its investment with the entity and has the ability to affect those returns through its power over the entity. All intercompany balances and transactions are eliminated on consolidation. (b) Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Depreciation is calculated to write off the cost of items of property, plant and equipment less the estimated residual value over the estimated useful lives of the assets on a straight-line basis and is recognized in profit or loss. The estimated useful lives of property, plant and equipment: Office equipment Vehicles Machinery and equipment Leasehold Improvements 3 to 5 years 4 to 5 years 3 to 10 years 5 years Depreciation methods and useful lives are reviewed at each financial year-end and adjusted if appropriate. Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within other income in profit or loss. (c) Goodwill Goodwill arising from acquisition of subsidiaries is measured at cost less accumulated impairment losses. 8
3. Significant accounting policies (continued) (d) Inventories Inventories are recorded at the lower of cost and net realizable value. The cost of inventories is based on the weighted average cost principle, and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. In establishing any impairment of inventory, management estimates the likelihood that inventory carrying values will be affected by changes in market demand, technology and design, which would impair the value of inventory on hand. (e) Lease prepayments Lease prepayments represent expenditures for land use rights paid to the relevant PRC government authorities for acquiring land held under operating leases. Lease prepayments are carried at cost less accumulated amortization. Amortization of lease prepayments is charged to profit or loss on a straight-line basis over the term of relevant rights of 50 years from the date of acquisition. (f) Leases Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and not recognized in the statement of financial position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as a reduction to the lease expense over the term of the lease. (g) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability. The unwinding of the discount is recognized as a finance cost. (h) Warranty provision A provision for warranty costs was recognized for certain wind products at the time the sale was recognized. The Company provided a warranty with terms ranging from one to three years on these products. Warranty estimates were derived from historical data and trends of product reliability and costs of repairing and replacing defective products. 9
3. Significant accounting policies (continued) (i) Share-based compensation The Company records share-based compensation related to its Restricted Share Units ( RSU s") and stock options granted. Stock-based compensation for RSU s is measured at fair value based on the share price of the Company s shares on the date of grant. Stock-based compensation for stock options is measured at fair value using a Black-Scholes option pricing formula. Compensation cost is recognized as employee benefits expense over the vesting period in which employees unconditionally become entitled to the award. The amount recognized as an expense is adjusted to reflect only the number of awards for which related service conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service conditions at the vesting date. (j) Earnings (loss) per share Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is determined by adjusting the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which comprise restricted shares granted to employees, options, and warrants. (k) Revenue recognition The Company generates revenues from development and engineering, procurement and construction ( EPC ) projects and consulting services. Discontinued operations include revenue from product sales and installation services. (i) Development and EPC: Revenue from projects is recognized, when the collection of the related receivable is reasonably assured, on a percent completion basis. The Company measures the stage of completion based on the costs incurred to date compared to the total estimated costs for the project. Revenue recognized in excess of amounts billed are reflected as unbilled revenue and billings in excess of revenue recognized are included as deferred revenue. (ii) Consulting: Revenue from consulting engagements are recognized when the services have been performed and collection of the receivable is reasonable assured. (iii) Revenue from discontinued operations: Revenue from discontinued operations was earned from the sale of standard equipment and materials. The Company recognized revenue when such products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an agreement exists and the sales price is fixed or determinable. Shipping and other transportation costs charged to buyers were recorded in revenue with the related cost incurred included in cost of sales. For revenue related to projects with a service component, revenue was recognized as the services and products are provided until the project was substantially completed, at which point the gross profit was recognized. 10
3. Significant accounting policies (continued) (l) Financial instruments (i) Financial assets The Company initially recognizes receivables on the date that they are originated and all other financial assets on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers substantially all the risks and rewards of ownership of the financial asset. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value and subsequently at amortized cost using the effective interest method, less any impairment losses. Loans and receivables are comprised of the Company s cash, restricted cash, and trade and other receivables. (ii) Financial liabilities Financial liabilities comprise the Company s trade and other payables and loans payable. The financial liabilities are initially recognized at fair value on the date they are originated. These financial liabilities are subsequently measured at amortized cost using the effective interest method. Fair value is determined based on the present value of future cash flows, discounted at the market rate of interest. Financial liabilities are derecognized when the contractual obligations are discharged, cancelled or expire. (iii) Share capital Share capital is classified as equity. Incremental costs directly attributable to increases in share capital is recognized as a deduction from equity. (m) Impairment (i) Non-financial assets Non-financial assets, such as property, plant, and equipment and goodwill, 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. Goodwill is tested annually for impairment. For the purposes of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other groups of assets (a CGU ). Goodwill arising from a business combination is allocated to CGU s that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. Fair value less costs to sell is defined as the estimated price that would be received on the sale of the asset in an orderly transaction between market participants at the measurement date. 11
3. Significant accounting policies (continued) (m) Impairment (continued) (i) Non-financial assets An impairment loss is recognized in profit or loss if the carrying amount of an asset or CGU exceeds its recoverable amount. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. (ii) Financial assets Financial assets not carried at fair value through profit or loss are assessed for impairment at each reporting date by determining whether there is objective evidence that indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. (n) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Company and its subsidiaries at the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in other than the functional currency is translated at the exchange rates in effect at the reporting date. Non-monetary items that are measured in terms of historical cost in other than the functional currency is translated using the exchange rate at the date of the transaction. The resulting exchange gains and losses are recognized in profit or loss. (ii) Foreign operations The assets and liabilities of foreign operations with functional currencies other than the USD presentation currency are translated into the presentation currency at exchange rates prevailing at the reporting date and their income and expense items are translated into the presentation currency at average exchange rates for the period. Exchange differences arising on the translation are recognized in accumulated other comprehensive income in shareholders equity. (o) Income taxes Income tax expense comprises current tax expense and deferred tax expense. Current and deferred taxes are recognized as an expense and included in profit or loss for the period, except to the extent that the tax arises from a transaction which is recognized in other comprehensive income or directly in shareholders equity. Current tax expense is the amount of income taxes payable (recoverable) in respect of the taxable income (tax loss) for a period. Current liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates that have been enacted or substantively enacted by the end of the reporting period. 12
3. Significant accounting policies (continued) Deferred tax assets and liabilities are recognized for temporary differences which are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, the carry-forward of unused tax loses and unused tax credits. Deferred tax assets and liabilities are measured at the tax rate that are expected to apply when the asset or liability is expected to be realized or settled, based on tax rates that have been enacted or substantively enacted by the end of the reporting period. The carrying amount of a deferred tax asset is reviewed at the end of each reporting period. The Company reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable income will be available to allow the benefit of part or all of these deferred tax assets to be utilized. Such reduction is reversed to the extent that it becomes probable that sufficient taxable income will be available. (p) Employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (q) Segment reporting An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company s other components. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, head office expenses, and income tax assets and liabilities. The Company s sales geographic areas have been organized based on its principal operations in the US, Canada and the Philippines. (r) Government grants Government grants are recognized when there is reasonable assurance that the Company will comply with the relevant conditions and that the government assistance will be received. Government grants that compensate the Company for expenses incurred are recognized as a reduction of the related expenses. Other government grants related to property, plant and equipment and lease prepayments are deferred as deferred government grants and amortized on a systematic basis over the useful life of the assets as a reduction of the amortization expense of the related assets. 13
4. New standards and interpretations not yet adopted There were no new standards effective January 1, 2016 that had a significant impact on the Company's consolidated financial statements. The following new standards will be adopted in periods after December 31, 2016. (i) IFRS 9, Financial Instruments ( IFRS 9 ) On July 24, 2014, the IASB issued the complete IFRS 9 (IFRS 9 (2014)). IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities and amends the impairment model by introducing a new expected credit loss model for calculating impairment. IFRS 9 is effective for the Company for annual periods beginning on January 1, 2018. (ii) IFRS 15, Revenue from Contracts ( IFRS 15 ) IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. The new revenue standard will supersede all current revenue recognition requirements under IFRS. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. Adoption of IFRS 15 is required for the Company for annual periods beginning on January 1, 2018. (iii) IFRS 16, Leases ( IFRS 16 ) IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of adopting the standards noted above and does not expect to adopt these standards prior to their mandatory effective dates. 14
5. Acquisition of EEPC and goodwill (a) Acquisition of EEPC The Company acquired 100% of the issued and outstanding shares of EEPC, a private renewable energy company located in Toronto, Ontario, Canada on February 22, 2016. EEPC provides solutions to its clients in all aspects of the solar project design-build lifecycle including: development, consulting and project management, engineering and design, and turn-key construction. The primary purpose for this acquisition is to increase market presence in Canada, increase engineering and project management expertise, and to improve cash flows. Pursuant to the share purchase agreement, the Company issued 8,888,888 shares of UGE and issued a promissory note in the amount of $627,487 (CAD$876,623), which was repaid in full on April 12, 2016. The agreement provided for a total of 8,888,888 shares to be issued to the seller, of which 2,222,222 were issued immediately and 6,666,666 were held in escrow and were to be issued in equal tranches over a three-year period on the acquisition anniversary date providing certain conditions were met. Of the 6,666,666 shares in escrow, 888,889 shares were to be released contingent on the acquired operations meeting certain revenue targets, and 2,666,666 shares were to released contingent on Cameron Steinman, one of the vendors, remaining employed with the Company over the three-year period. Accordingly, 5,333,333 shares have been treated as acquisition consideration having a fair value of $1,667,734 (CAD$2,329,888), 888,889 shares were treated as contingent consideration having a value of $266,093 (CAD $371,742) and 2,666,666 shares with a value of $1,145,280 (CAD$1,600,000) was treated as compensation which was to be accrued over the three-year period. The business combination has been accounted for using the acquisition method with the results of operations consolidated with those of the Company effective February 22, 2016. The fair value of the shares attributed to the acquisition consideration was estimated based on the market price of the Company s common shares on February 22, 2016 of $0.43 (CAD$0.60) per share discounted for the effect of the escrow conditions. The Company subsequently entered into a settlement agreement related to the acquisition of EEPC whereby Cameron Steinman resigned as an officer of the Company, and on December 31, 2016, resigned as a director of the Company. As part of the settlement agreement, 2,222,222 shares to be released on the first anniversary date were released and the remaining 4,444,444 shares in escrow were cancelled, and returned to treasury. Of the shares released pursuant to the settlement agreement, 888,889 shares related to the shares issuable upon attaining certain revenue targets resulting in the amount of $266,093 originally recognized in contributed surplus being reclassified to share capital. The remaining 1,333,333 shares released were attributed to post combination employment services resulting in share-based compensation of $605,840 and a corresponding increase in common shares. The value attributed to the remaining 4,444,444 shares cancelled of $713,333 was reclassified from share capital to contributed surplus. 15
5. Acquisition of EEPC and goodwill (continued) (a) Acquisition of EEPC (continued) The total costs incurred related to this acquisition was $72,083, of which $29,391 was incurred and expensed in the year ended December 31, 2015 and $42,692 for the year ended December 31, 2016, both included in selling, general and administrative expenses. The consideration paid and the final allocation of the consideration to the fair values of the assets acquired and liabilities assumed in the acquisition at February 22, 2016 are as follows: Consideration Shares issued $ 1,667,734 Promissory note 627,487 Contingent consideration 266,093 Total consideration 2,561,314 Net assets acquired Accounts receivable 243,012 Income tax receivable 67,948 Prepaid expenses and deposits 41,488 Unbilled revenue 79,341 Property and equipment 71,846 Accounts payable and accrued liabilities (670,093) Bank indebtedness (107,203) Deferred income tax liabilities (24,407) Goodwill 2,859,382 Total $ 2,561,314 Amongst other things, the goodwill recognized reflects future cash flows, growth in sales to existing and new customers through cross selling opportunities, and expected growth in the underlying markets in which EEPC operates. The goodwill is not tax deductible. Consolidated revenue and net profit for the year ended December 31, 2016 includes revenue and net loss of EEPC of approximately $4,100,000 and $700,000, respectively. If the acquisition had occurred on January 1, 2016, estimated consolidated revenue and net loss for the Company s year ended December 31, 2016 would have been approximately $6,300,000 and $800,000, respectively. (b) Goodwill Since acquisition, the amount of goodwill increased by $115,846 as a result of the strengthening of the CAD relative to USD. The Company performed an annual impairment test on December 31, 2016. The recoverable amount of the EEPC cash generating unit was based on its value in use, determined by discounting the future cash flows for a five-year period to be generated from the continuing operation of the cash generating unit. The recoverable amount exceeded the carrying value and no impairment charge was recognized. Key assumptions used in determining the recoverable amount include the discount and growth rate. The discount rate applied in the model is pre-tax that reflects the time value of money and risk associated with the business and was set at 16%. A growth rate of 5% was used based on past results and the Company s understanding of the Ontario Feed in Tariff program and Canada s solar market. 16
6. Restricted cash As at December 31, 2016, the Company has restricted cash of $1,224,887 (2015 - $9,508). The vast majority of this cash as at December 31, 2016 was restricted as security for a letter of credit for the procurement of project related equipment. 7. Trade and other receivables 2016 2015 Trade and other receivables, net of allowance for doubtful accounts of $Nil $ 3,041,041 $ 1,353,023 Unbilled revenue 211,571 - Corporate taxes receivable 235,969 - $ 3,488,581 $ 1,353,023 Trade and other receivables are reviewed for impairment on a case by case basis and are provided for when objective evidence is received that a customer may default, at which time a provision is recognized in the statement of operations within selling, general and administrative expenses. Subsequent recoveries of amounts previously provided for are credited against selling, general and administrative expenses in the statement of operations. For the years ended December 31, 2016 and 2015, there was no allowance for doubtful accounts. The following table sets forth details of the age of trade and other receivables. 2016 2015 Trade and other receivables $ 3,041,041 $ 1,353,023 Aging of trade and other receivables Current $ 2,844,079 $ 390,424 Past due 31-60 days 72,931 - Past due 61-90 days 16,234 5,522 Past due 90+ days 107,797 957,077 $ 3,041,041 $ 1,353,023 8. Inventory 2016 2015 Finished goods $ 570,740 $ 273,565 Work-in-progress - 46,841 Raw materials and consumables - 32,856 $ 570,740 $ 353,262 After the disposition of the shares of UGE Holdings (Note 19), the Company does not manufacture products and does not plan to hold inventory, as equipment is purchased as needed and shipped directly to customer sites for installation. The inventory as at December 31, 2016 was related to a project in Ontario which required the Company to take ownership of solar panels prior to arrival at the project site. For the year ended December 31, 2016, there was no write-down of inventories to net realizable value. For the 2015 year, there was a $272,141 write-down to net realizable value in net loss from discontinued operations, and no write-downs for continuing operations. There were no reversals of previously recorded write-downs and in years ended December 31, 2016 and 2015. 17
9. Loans payable 2016 2015 Loan 1 $ 3,600,000 $ - Loan 2 428,260 - Loan 3 20,000 - Loan 4 500,000 250,000 Loan 5 414,263 - UGE Holdings loans - 4,462,884 4,962,523 4,712,884 Current portion 1,362,523 2,098,000 Non-current portion $ 3,600,000 $ 2,614,884 Loan 1 Upon the sale of UGE Holdings, the Company issued promissory notes for a total of $3,600,000 to Urban HK (Note 19). These unsecured loans bear a fixed annual interest rate of 6.5% and are due on August 31, 2021. Loan 2 - As at December 31, 2016, the Company has a revolving demand credit facility with a maximum limit of CAD$750,000 of which $428,260 (CAD$575,000) (December 31, 2015 - $Nil) was drawn with Toronto-Dominion Bank ("TD Bank"). The credit facility bears interest at a rate equal to the TD Bank s prime rate plus 1.45% per annum and is secured by a general security agreement covering all assets of EEPC. Loan 3 As at December 31, 2016, the Company has a loan of $20,000 (December 31, 2015 - $Nil) from a former director of the Company. The loan is unsecured, non-interest bearing and was due on May 26, 2016, with a 5% processing fee due upon repayment which has been accrued and is included in accounts payable and accrued liabilities. Subsequent to December 31, 2016, this loan was repaid. Loan 4 - As at December 31, 2016, the Company has a loan of $500,000 (December 31, 2015 - $250,000) from a third-party lender. The loan bears interest of 16% per annum, is due on May 11, 2017 and is secured by first charge of all the assets of UGE USA. This loan contains a covenant that an adjusted fixed charge coverage ratio must not be less than 1.25 which was breached as at December 31, 2016. The loan was repaid in full on March 29, 2017. Loan 5 As at December 31, 2016, the Company entered into a construction financing facility for a maximum of $550,000 (December 31, 2015 $Nil) with TD Bank, guaranteed by Export Development Canada. The facility bears interest at the bank prime plus 1.45% and is due on demand. As at December 31, 2016, the Company made draws from the facility of $414,263 and has provided TD Bank a 25% cash deposit on all draws equal to $103,566 recognized as restricted cash. UGE Holdings loans Six loans were held by subsidiaries of UGE Holdings with related parties and third-party lenders with a face value of approximately $6,200,000. Certain loans issued in 2016 were carried at amortized cost which was lower than the original principal value due to the impact of the below market interest rates causing a difference of $204,793 which was recognized in the statement of changes in shareholders deficiency. During 2016, the Company entered into an agreement with Xiangrong Xie, a director, whereby she forgave $281,834 (RMB 1,830,148) of a loan and the carrying value of the portion of the loan forgiven of $249,623 (RMB 1,632,589) was recorded as a related party contribution recognized in contributed surplus. In addition, in 2016 the Company settled $500,000 of a loan from Qi Liu, a related party, by the issuance of 1,240,907 common shares of the Company valued at $544,038. Pursuant to the disposition discussed in Note 19, these loans were assumed by the purchaser of UGE Holdings. 18