2014 Annual Report
Table of Contents
Letter to Shareholders ................................................................................................................................. 3
Management Discussion & Analysis ........................................................................................................... 4
Consolidated Financial Statements ............................................................................................................ 23
Independent Auditor’s Report
............................................................................................................ 24
Corporate Information ................................................................................................................................ 67
Mongolia Growth Group Ltd.
Mongolia Growth Group Ltd. (MGG) is a leading publicly traded property investment and development
company in Ulaanbaatar, Mongolia. MGG owns an extensive property portfolio, with an emphasis on
institutional-grade commercial assets.
MGG undertakes its own property acquisitions, develops brownfield land assets and repositions
outdated properties, relying on in-house services for all facets of both the investment portfolio and
development side of the business. In addition, MGG acts as a full-service third party provider for
institutional clients.
Letter to Shareholders
Harris Kupperman
Chairman of the Board
Dear Shareholders,
2014 started with much hope and promise, yet ended
with accelerating operating losses and extensive
disruption to our overall business. Ultimately, we had
to bear a substantial economic cost to reverse these
trends and set the company back on a viable course.
On the upside, our acquisition of the Tuguldur Center
and adjacent land packages were the culmination of
over a year of negotiations that created the cornerstone
of our future growth. Redevelopment of Tuguldur Stage
1 represented our largest project to date and when
the development of Tuguldur Stage 2 is completed,
this retailing center will reposition MGG as a dominant
retail-focused property company. Unfortunately, our
2014 successes get rather thin after our triumph with
Tuguldur.
As the company’s largest shareholder, I have always
promised that I would look out for minority shareholders
and ensure that we run a frugal organization focused on
long-term shareholder returns. As the year progressed,
I realized that we were drastically straying from this
ethos. In 2014 not only were the Company’s losses
accelerating, but years of accomplishments looked on
the verge of being annulled. Ultimately, this realization
large shareholders
amongst myself and other
precipitated the changes that were announced at year-
end.
In 2015 our current board and I have undertaken the
following actions;
• A dramatic cost cutting initiative targeted at
aligning our cost structure with current revenues
• The re-initiation of various internal processes in
order to improve efficiency and accountability
• A focus on restoring the company’s relationships
with employees and the Mongolian business
community
• A repositioning of Tuguldur Center in order
to improve its profile amongst shoppers and
reduce tenant turnover
The net result of these actions is that our monthly cash
burn has declined from the hundreds of thousands,
into the tens of thousands. Over the past four months,
much has been accomplished to preserve our core
business, but we still have a long road ahead of us.
Our goal is to achieve positive cash flow. This goal
seemed impossible when I resumed the role of CEO in
December; there is now a clear path to get there. As the
business stabilizes we are once again thinking of how
to grow our revenues. The initiatives that we will target
were identified over a year ago—however, we are now
setting our plans towards turning them into reality.
In summary, 2014 was a very difficult and traumatic
year for MGG. I believe that the Company is now on the
best path that it has been on since inception. Recently,
the government of Mongolia has taken steps to
reinvigorate the overall Mongolian economy. I believe
that we will once again be beneficiaries of this growth;
however we will be operating with a much lower cost
structure—hopefully giving us improved leverage to
Mongolia.
I want to thank the shareholders and employees of MGG
for staying with us during 2014. We have stumbled, but
not fallen—2015 will be better.
Sincerely,
Harris Kupperman
Mongolia Growth Group Ltd. | 3
MONGOLIA GROWTH GROUP LTD.
Management Discussion & Analysis
December 31, 2014
The management of Mongolia Growth Group Ltd. ( “MGG” or “the Corporation”) presents the Corporation’s
management discussion and analysis for the year ended December 31, 2014 (the “MD&A”), compared with the
year ended December 31, 2013. As of January 1, 2011, the Corporation adopted International Financial Reporting
Standards (“IFRS”). This MD&A provides an overall discussion, followed by analyses of the performance of the
Corporation’s major reportable segments. The reporting and presentation currency in the consolidated financial
statements and in this discussion and analysis is the Canadian dollar, unless otherwise noted.
This MD&A is dated April 29, 2015, and incorporates all relevant information and considerations to that date.
The following discussion and analysis should be read in conjunction with the audited consolidated financial
statements of the Corporation for the year ended December 31, 2014 and December 31, 2013 together with all of
the notes, risk factors and information contained therein, available on SEDAR at www.sedar.com.
Non-IFRS Financial Measures
This MD&A makes reference to earnings before interest, taxes, unrealized fair value adjustments, depreciation and
amortization (“Adjusted EBITDA”). The Corporation uses Adjusted EBITDA as a measure of the performance of its
operating subsidiaries as it excludes depreciation and interest charges, which are a function of the Corporation’s
specific capital structure, and also excludes entity specific tax expense. These amounts are not performance
measures as defined under IFRS and should not be considered either in isolation of, or as a substitute for, net
earnings prepared in accordance with IFRS. The Corporation refers to “Funds used in operations”, “operating
losses” and “re-valuation of investment properties” within this analysis. “Funds used in operations” is computed by
calculating the cash flow from operations before changes to non-cash working capital from operations. “Operating
Profits” is computed by calculating the profit before tax and any fair value adjustments.
4 | Mongolia Growth Group Ltd.
Forward Looking Statements
This MD&A contains forward-looking statements relating to future events. In some cases, forward-looking
statements can be identified by words such as “anticipate”, “continue”, “estimate”, “expect”, “forecast”, “may”,
“will”, “project”, “should”, “believe”, or similar expressions.
These statements represent management’s best projections but undue reliance should not be placed upon them
as they are derived from numerous assumptions. These assumptions are subject to known and unknown risks
and uncertainties, including the “Risks and Uncertainties” as discussed herein. Actual performance and financial
results will differ from any projections of future performance or results expressed or implied by such forward looking
statements and the difference may be material.
Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those
predicted. From time to time, the Corporation’s management may make estimates and have opinions that form
the basis for the forward-looking statements. The Corporation assumes no obligation to update such statements if
circumstances, management’s estimates, or opinions change.
Forward looking statements are included within the Outlook, CEO Message to Shareholders and Executive Strategy
sections of this MD&A.
Mongolia Growth Group Ltd. | 5
Section 1 – Overview
Financial and Operational Overview
During 2014, the Corporation continued to suffer from negative cash flow as a result of excessive spending
and insufficient revenues. Over the course of the year, these negative cash flows accelerated, which ultimately
necessitated a management change at year end in order to correct this imbalance and put the Corporation on a
more sustainable path.
On the positive side, the Corporation saw increased revenues versus the prior year due to an overall increase in
average revenue per meter. This was achieved by maintaining high occupancy rates during the year, even amidst a
slowdown in the local economy and higher vacancy rates across the country. The Corporation’s occupancy rates
continue to be strong with a weighted average occupancy rate of 94.2% at the end of the year.
On the expense side, overall expenses increased from $5,598,618 in 2013 to $7,543,135 in 2014, contributing to a
negative cash flow of $3,724,898 during the year.
The Corporation had an unrealized fair value adjustment gain at the end of the year of $10,683,896 versus a fair
value adjustment gain of $3,845,521 during the prior year.
This significant fair value adjustment propelled the Corporation to net income from Continuing Operations of
$4,151,782 or a gain of $0.12 per share (EPS) versus a net loss of $250,574 or a net loss of $0.01 per share (EPS) in
2013.
Throughout the year, the Corporation continued to dispose of non-core assets to streamline the portfolio and
dispose of smaller and underperforming assets. Proceeds from sales were used for working capital and reinvested
in higher quality institutional assets with better net-yield profiles. During the year, the Corporation disposed and
swapped a total of 25 properties at a gain of $56,105. As of December 31, 2014, the Corporation had 6 investment
properties classified as available for sale.
The Mongolian Tögrög continued to depreciate throughout the year, depreciating from 1,542 MNT/CAD on
December 31, 2013, to 1,624 MNT/CAD over the course of 2014; a decline of 5.3%.
In December 2014, the Corporation replaced four resigning members of the Board of Directors (Jordan Calonego,
Bill Fleckenstein, John Shaw and Paul Sweeney) with four new Board members (Nick Cousyn, Jim Dwyer, Brad
Farquhar and Robert Scott). Additionally, former CEO Paul Byrne resigned and the existing Board Chair, Harris
Kupperman, reassumed the role of CEO, with a mandate to reduce costs and improve operational performance.
Economic Overview
During recent years, the Mongolian real estate sector has benefitted from significant local economic growth. The
majority of this recent growth is attributable to the mining and construction booms taking place in Mongolia, mainly
resulting from the opening of the Oyu Tolgoi and Tavan Tolgoi deposits located in the Gobi desert. The associated
infrastructure requirements for these projects have also served to strengthen the local economy. In addition, an
increase in other industries, particularly tourism and agriculture have helped to grow the economy. The positive
impact of improving consumer and business confidence has led to a substantial increase in the gross production of
the local economy.
During 2014, the Mongolian economy witnessed a decrease in its growth rate, with this slow-down accelerating
in the second half of the year. This slow-down has been caused by reduced prices for commodities, political
uncertainty, the arrest of certain foreign executives, a decrease in bank lending, along with significant doubt over
the timing of the continuation of the Oyu Tolgoi underground development. These factors have led to a substantial
decline in foreign direct investment (FDI) which has reduced the rate of growth of the economy.
The Mongolian economy continues to grow though at a slower rate according to data from The National Statistics
Office of Mongolia (“NSO”) with estimates of full year 2014 growth of 7.8% from 11.7% in 2013.
The Mongolian Tögrög has fluctuated significantly over the past three years. In 2013, the average exchange rate
between the Tögrög and the Canadian Dollar was approximately 1,360 MNT/CAD for the year, whereas during
2014, the Tögrög reached a low of over 1,728 Tögrög per Canadian Dollar and averaged 1,637 per Canadian
Dollar. Management would like to note that in general, most commercial property transactions in Ulaanbaatar are
6 | Mongolia Growth Group Ltd.
negotiated in US Dollars and recent declines in the Tögrög to US Dollar exchange rate have not had a noticeable
impact on the prices of property assets, in US Dollar terms.
Management believes that the current economic slow-down is the result of policies that have discouraged Foreign
Direct Investment (“FDI”). When the government takes the appropriate steps to stimulate FDI, it is expected that the
economy can return to prior rates of economic growth. MGG remains a believer in the long-term growth potential of
Mongolia.
Property Overview
The general property market continues to be influenced by the overall Mongolian economy. With the recent
slow-down in the Mongolian economy, there has been a noticeable increase in vacancy, particularly in office and
residential space. In the downtown core, this has led to a decline in pricing for both rental rates and sales for those
two asset classes. High street retail has seen less of an increase in supply, and demand for space remains strong.
Outside of the downtown of Ulaanbaatar, a noticeable increase in building activity has saturated certain markets
and led to a more substantial decline in prices. In addition, there has been a recent increase in office and residential
construction activity that will likely lead to future saturation in those markets. Management cautions shareholders
that property prices have historically been, and continue to be, volatile.
Management expects continued high demand for well-located retail space, with a lower demand level for office
space. However, MGG continues to have below market rates of vacancy in all asset classes.
Mongolia Growth Group Ltd. | 7
Section 2 - Executing the Strategy
Core Business
During the past four years, Management and employees have worked hard to build up the infrastructure needed
to manage MGG’s institutional property platform. This platform is unique in Mongolia and is one of the only
platforms capable of managing assets through the full cycle of ownership from acquisition and development,
through disposition and includes dedicated departments that manage maintenance, leasing, marketing and tenant
management. Management believes it has a strong team in place to lead the Corporation into its next phase of
growth.
MGG’s real estate subsidiary plans on further expansion via the investment of additional capital into income
producing and redevelopment properties in Ulaanbaatar. The Corporation’s plan is contingent on procuring further
funds for investment and on finding suitable investment targets which meet MGG’s stringent investment criteria. In
addition, due to MGG’s unique platform, the Corporation is adding third party leasing and property management
to its focus, in order to leverage its existing resources. Management believes that it has excess capacity to handle
these functions.
Since inception, MGG has acquired a number of redevelopment properties. To date the Corporation has also
remodeled, rebuilt and completed additions on properties. During 2014, the Corporation spent substantial
resources on redeveloping its Tuguldur retail center property. Assuming that funding is available, the Corporation
intends to invest substantial additional capital into increasing the size of this property. It is Management’s intent to
begin de novo property developments on the Corporation’s other owned sites and MGG’s intention is to remain a
substantial owner of the properties, post-completion. However, there can be no certainty on when this happens due
to the current economic climate in Mongolia and the difficulty in accessing additional growth capital.
Portfolio
Mongolia Growth Group’s properties are located in Downtown and the Central Business District of Ulaanbaatar.
Within the financial statements, MGG classifies properties in each of the following categories; Investment
Properties, Property and Equipment, and Other Assets/Prepaid Deposits.
Investment Properties
Investment Properties includes properties held to earn rental revenue, for capital appreciation, and/or for
redevelopment. Investment Properties are initially valued at fair value, which is the purchase price plus any directly
attributable expenditures. Investment Properties are subsequently valued at fair value, which reflects market
conditions at the date of the statement of financial position.
The following table represents properties classified as Investment Properties, as of December 31, 2014;
The following table represents properties classified as Investment Properties, as of December 31, 2014;
Residential
Office
Retail
Land and Redevelopment
Total
# of
Value at 31-Dec-14
Properties
$CDN
Meters # of Properties
2014
2
3
35
4
44
357,160
-
5,039,196
2,650
27,645,411
9,497
15,416,750
7,086
48,458,517 19,233
10
4
43
6
63
Value at 31-Dec-13
$CDN
1,378,377
5,310,481
16,058,219
2013
Meters
-
2,727
6,808
9,566,314
11,540
32,313,391
21,075
Property and Equipment
Property and Equipment
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the property.
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the
Properties classified as Property and Equipment are measured at cost less accumulated depreciation, less any
property. Properties classified as Property and Equipment are measured at cost less accumulated
accumulated impairment losses.
depreciation, less any accumulated impairment losses.
All repairs and maintenance costs to these properties are charged to the consolidated statement of
operations during the period in which they occur unless eligible for capitalization. The Corporation’s
Headquarters, purchased in October 2011, falls within this category.
8 | Mongolia Growth Group Ltd.
The following table represents properties classified as Property and Equipment, as of December 31,
2014;
Residential
Office
Retail
Total
Land and Redevelopment
# of
Value at 31-Dec-14
Value at 31-Dec-13
Meters
# of Properties
Properties
2014
-
-
-
$CDN
139,536
-
-
2,627,014
1,300
2
1
-
-
3
2013
Meters
-
1,300
134
-
$CDN
591,557
2,567,260
510,728
-
4
1
1
-
6
2,766,550
1,300
3,669,545
1,434
Other Assets/ Prepaid Deposits
Investment property purchases where the Corporation has paid either the full or partial purchase
proceeds to the seller, but the Corporation has not yet received the official land or building title from
the Mongolian Property office, are recorded at cost as Prepaid Deposits on Investment Properties and
classified within other assets.
10
The following table represents properties classified as Investment Properties, as of December 31, 2014;
# of
Value at 31-Dec-14
Properties
$CDN
Meters # of Properties
Value at 31-Dec-13
2014
Residential
Office
Retail
Total
Land and Redevelopment
2
3
35
4
44
357,160
-
5,039,196
2,650
27,645,411
9,497
15,416,750
7,086
48,458,517 19,233
10
4
43
6
63
Property and Equipment
2013
Meters
-
2,727
6,808
$CDN
1,378,377
5,310,481
16,058,219
9,566,314
11,540
32,313,391
21,075
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the
property. Properties classified as Property and Equipment are measured at cost less accumulated
depreciation, less any accumulated impairment losses.
All repairs and maintenance costs to these properties are charged to the consolidated statement of
operations during the period in which they occur unless eligible for capitalization. The Corporation’s
Headquarters, purchased in October 2011, falls within this category.
All repairs and maintenance costs to these properties are charged to the consolidated statement of operations
during the period in which they occur unless eligible for capitalization. The Corporation’s Headquarters, purchased
in October 2011, falls within this category.
The following table represents properties classified as Property and Equipment, as of December 31,
The following table represents properties classified as Property and Equipment, as of December 31, 2014;
2014;
# of
Value at 31-Dec-14
Properties
$CDN
Meters
# of Properties
2014
Residential
Office
Retail
Land and Redevelopment
Total
2
1
-
-
3
139,536
-
2,627,014
1,300
-
-
-
-
2,766,550
1,300
4
1
1
-
6
Value at 31-Dec-13
$CDN
591,557
2,567,260
510,728
-
2013
Meters
-
1,300
134
-
3,669,545
1,434
Other Assets/ Prepaid Deposits
Other Assets/ Prepaid Deposits
Investment property purchases where the Corporation has paid either the full or partial purchase proceeds to the
Investment property purchases where the Corporation has paid either the full or partial purchase
seller, but the Corporation has not yet received the official land or building title from the Mongolian Property office,
are recorded at cost as Prepaid Deposits on Investment Properties and classified within other assets.
proceeds to the seller, but the Corporation has not yet received the official land or building title from
the Mongolian Property office, are recorded at cost as Prepaid Deposits on Investment Properties and
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of
classified within other assets.
December 31, 2014;
December 31, 2014;
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December
31, 2014;
# of Properties
# of Properties
Value at 31-Dec-14
Value at 31-Dec-14
$CDN
$CDN
Meters # of Properties
Meters # of Properties
Value at 31-Dec-13
Value at 31-Dec-13
$CDN
$CDN
2014
2014
Residential
Residential
Office
Office
Retail
Retail
Land and
Land and
Redevelopment
Redevelopment
-
-
-
-
1
1
1
1
-
-
-
-
-
-
-
-
729,497
729,497
184
184
69,392
69,392
28
28
-
-
-
-
1
1
5*
5*
798,889
Total
798,889
Total
* These land assets are part of the land packages outlined in the Investment Properties section and are not standalone land packages.
* These land assets are part of the land packages outlined in the Investment Properties section and are not standalone land packages.
* These land assets are part of the land packages outlined in the Investment Properties section and are not standalone land packages.
2
2
1,859,082
1,859,082
212
212
6
6
1,892
1,892
Occupancy Rates
Occupancy Rates
Occupancy Rates
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
31 –Dec- 2014
31 –Dec- 2014
Occupancy Rate*
Occupancy Rate*
Residential
Residential
Office
Office
Retail
Retail
Weighted Average**
Weighted Average**
* Occupancy rates are calculated on a per meter basis;
* Occupancy rates are calculated on a per meter basis;
** Weighted Average is calculated based on total meters available for lease
** Weighted Average is calculated based on total meters available for lease
* Occupancy rates are calculated on a per meter basis;
** Weighted Average is calculated based on total meters available for lease
100%
100%
98.2%
98.2%
91.2%
91.2%
94.2%
94.2%
31-Dec- 2013
31-Dec- 2013
Occupancy Rate*
Occupancy Rate*
95.6%
95.6%
84.3%
84.3%
98.3%
98.3%
97.7%
97.7%
Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s
Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the
Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the
Office space have been strong even while vacancy levels throughout the city have increased significantly
Corporation’s Office space have been strong even while vacancy levels throughout the city have
Corporation’s Office space have been strong even while vacancy levels throughout the city have
throughout the year as additional supply entered the market. Management attributes its success due to increased
increased significantly throughout the year as additional supply entered the market. Management
marketing initiatives and realistic price expectations.
increased significantly throughout the year as additional supply entered the market. Management
attributes its success due to increased marketing initiatives and realistic price expectations.
attributes its success due to increased marketing initiatives and realistic price expectations.
Leasing Schedule
Leasing Schedule
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation
targets shorter lease durations with most tenants. Management’s experience is that this practice is in
targets shorter lease durations with most tenants. Management’s experience is that this practice is in
line with the local industry standards, with the expectation that once leases expire, existing tenants are
line with the local industry standards, with the expectation that once leases expire, existing tenants are
offered the first right to re-lease the space at then prevailing market rates.
offered the first right to re-lease the space at then prevailing market rates.
Mongolia Growth Group Ltd. | 9
70.0%
70.0%
60.0%
60.0%
50.0%
50.0%
40.0%
40.0%
30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
0.0%
0.0%
2015
2015
2016
2016
2017
2017
2018
2018
Redevelopment
Redevelopment
Office
Office
Retail
Retail
11
11
2013
2013
Meters
Meters
-
-
-
-
184
184
-
-
-
-
908,222
908,222
950,860
950,860
1,708
1,708
10
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of
# of Properties
Meters # of Properties
Value at 31-Dec-14
Value at 31-Dec-13
2014
-
-
$CDN
-
-
729,497
184
69,392
28
-
-
1
1
2013
Meters
-
-
$CDN
-
-
908,222
184
950,860
1,708
-
-
1
5*
6
Total
2
798,889
212
1,859,082
1,892
* These land assets are part of the land packages outlined in the Investment Properties section and are not standalone land packages.
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
December 31, 2014;
Residential
Office
Retail
Land and
Redevelopment
Occupancy Rates
Residential
Office
Retail
Weighted Average**
31 –Dec- 2014
Occupancy Rate*
31-Dec- 2013
Occupancy Rate*
100%
98.2%
91.2%
94.2%
95.6%
84.3%
98.3%
97.7%
* Occupancy rates are calculated on a per meter basis;
** Weighted Average is calculated based on total meters available for lease
Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the
Corporation’s Office space have been strong even while vacancy levels throughout the city have
increased significantly throughout the year as additional supply entered the market. Management
attributes its success due to increased marketing initiatives and realistic price expectations.
Leasing Schedule
Leasing Schedule
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter
targets shorter lease durations with most tenants. Management’s experience is that this practice is in
lease durations with most tenants Management’s experience is that this practice is in line with the local industry
standards, with the expectation that once leases expire, existing tenants are offered the first right to re-lease the
line with the local industry standards, with the expectation that once leases expire, existing tenants are
space at then prevailing market rates.
offered the first right to re-lease the space at then prevailing market rates.
A summary of the Corporation’s lease expirations by asset class is presented in the chart below:
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
Redevelopment
Office
Retail
0.0%
The weighted average remaining lease term decreased slightly to 17.2 months at December 31st 2014,
2017
2018
2016
2015
from 17.7 months at December 31st 2013 calculated as a percentage of monthly revenues.
The weighted average remaining lease term decreased slightly to 17.2 months at December 31st 2014, from 17.7
months at December 31st 2013 calculated as a percentage of monthly revenues.
It is Management’s belief that most existing leases are at rates that are generally at the current
11
prevailing market rates. With the current economic conditions, many smaller companies without
It is Management’s belief that most existing leases are at rates that are generally at the current prevailing market
rates. With the current economic conditions, many smaller companies without significant cash reserves are
suffering which is reflected lower office rents in aggregate.
significant cash reserves are suffering which is reflected lower office rents in aggregate.
Lease Type
Lease Renewal
SqM
Old Price Per Meter
New Price Per Meter
Percent
Date
(Mongolian Tögrög)
(Mongolian Tögrög)
Increase
Most Recent Retail Lease Signings
Retail Lease
Retail Lease
Retail Lease
Office
Office
December 2014
December 2014
December 2014
October 2014
November 2014
246
110
206
40
62
14,785
34,347
35,232
31,818
30,067
23,947
37,179
33,030
22,727
35,551
62%
8%
-6%
-29%
33%
10 | Mongolia Growth Group Ltd.
12
Section 3 – Results of Operation
Section 3 – Results of Operation
Selected Annual Financial Information (CAD)
Selected Annual Financial Information (CAD)
Revenue and other income
Income
Income/ (loss) from continuing operations
attributable to equity holders of the Corporation
Net Income/ (loss) attributable to equity holders
of the Corporation
Comprehensive income/ (loss) attributable to
equity holders of the Corporation
Basic earnings per share ("EPS") (in CAD)
Earnings/ (loss) from continuing operations
Earnings/ (loss) from discontinued operations
Net income/ (loss)
Diluted EPS (in CAD)
Earnings/ (loss) from continuing operations
Earnings/ (loss) from discontinued operations
Net Income/ (loss)
Balance Sheet
Total Assets
Total liabilities
Total Equity
Shares Outstanding at year end
Book Value per share
Year ended
Year ended
31-Dec- 2014
31-Dec- 2013
Year ended
31-Dec- 2012
(Restated)*
1,918,916
1,727,373
1,582,460
4,151,782
(250,574)
(4,931,975)
4,151,782
(155,563)
(6,073,750)
2,631,084
(3,713,297)
(7,360,920)
0.12
0
0.12
0.12
0
0.12
54,106,591
3,176,142
50,930,449
34,848,745
1.46
(0.01)
0
(0.01)
(0.01)
0
(0.01)
47,291,018
1,968,460
45,322,558
34,303,352
1.32
(0.14)
(0.03)
(0.17)
(0.14)
(0.03)
(0.17)
51,306,531
4,002,971
47,303,560
34,143,352
1.38
*Excludes operations of Mandal Insurance previously included in Continuing Operations. Mandal Insurance was disposed of on December 20,
*Excludes operations of Mandal Insurance previously included in Continuing Operations. Mandal Insurance was disposed of on December 20, 2013.
2013.
Revenue from Investment Properties
Revenue from Investment Properties
For the year end December 31, 2014, Revenue from Investment Properties reached $1,822,392 versus $1,650,895
in the prior year. This increase was attributable to higher achieved market lease rates.
For the year end December 31, 2014, Revenue from Investment Properties reached $1,822,392 versus
Revenue from Other Sources
$1,650,895 in the prior year. This increase was attributable to higher achieved market lease rates.
Revenue from other sources consists of late fees and other income. For the year ending December 31, 2014,
revenues from other sources totaled $96,524 compared to $76,478 for the year ending December 31, 2013.
Revenues increased due to higher late payments collected along with higher income from property disposals in
comparison to the previous year.
Fair Value Adjustment on Investment Properties
As elected under IFRS, the Corporation’s investment portfolio is subsequently measured at fair value in the
Corporation’s financial statements. As of December 31, 2014, the Corporation had approximately 90% of
its Investment Properties Portfolio valued by either an international valuation firm and the remaining 10% (23
properties) were valued by Management. For the year ended December 31, 2014, the fair value adjustment to
investment properties was a gain of $10,683,896 compared to a gain of $3,845,521 for the same period in 2013.
Overall, the gains in the portfolio were attributed to two of the Corporation’s land packages that were assembled
13
Mongolia Growth Group Ltd. | 11
through several transactions. In aggregate, most of the remaining investment properties depreciated in Canadian
dollar terms.
Property Operating Expenses
Property Operating Expenses consist of repairs and maintenance, bad debts, utilities, salaries and land and
property taxes. For the year ending December 31, 2014 the property operating expenses were $1,556,367
compared to $1,398,184 during the same period in 2013, representing an increase of 11%. This increase is mainly
attributed to an increase in salaries, utilities and land and property taxes.
Corporate Expenses
Corporate expenses include senior management’s compensation, share-based costs, listing fees, professional
fees, technology, travel and administrative costs.
included TSX listing fees, fees for a transaction that did not materialize and expenses incurred on
For the year ending December 31, 2014 general and administration expenses increased to $4,635,599 from
$3,680,336 in 2013. The majority of this increase was due to spending for initiatives that never materialized,
increased investor outreach, legal expenses, increased human resource recruitment and retention costs and
costs related to the management change at year-end. In addition, the Corporation experienced several one-time
expenses.
disposal of the Corporation’s insurance subsidiary totaling $632,009.
At this time, management does not foresee any significant one-time expenses during 2015.
One-Time Expenses
Currency
During the 2014 year, the Corporation incurred one–time expenses including; severance to of the Corporation’s
former CEO of $870,540, accrued a commission payment of $487,522 to a senior employee of the Corporation
The Mongolian Tögrög has fluctuated significantly over the past three years. The Mongolian Tögrög
for several recent large acquisitions, a discount of $402,339 given to UMC against sale of Mandal Insurance and
has depreciated 6.8%, 5.1%, 11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the
$222,995 spent on legal and professional fees to file a base shelf prospectus. These four major expenses total
to $1,983,396. In 2013, one-time major expenses included TSX listing fees, fees for a transaction that did not
Canadian Dollar. The fluctuation in the currency is reflected in the Corporation’s financial statements,
materialize and expenses incurred on disposal of the Corporation’s insurance subsidiary totaling $632,009.
most notably in the investment property portfolio, as it is the largest item on the balance sheet. Note
At this time, management does not foresee any significant one-time expenses during 2015.
4 in the financial statements disclose the foreign exchange adjustment, which flows through the
Currency
investment property classification during each period. As at December 31, 2014 the Corporation
portfolio due to the 5.3% depreciation of the local currency during the year.
recognized a significant foreign exchange adjustment loss of $1,375,377 to its investment property
The Mongolian Tögrög has fluctuated significantly over the past three years. The Mongolian Tögrög has
depreciated 6.8%, 5.1%, 11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the Canadian Dollar.
The fluctuation in the currency is reflected in the Corporation’s financial statements, most notably in the investment
property portfolio, as it is the largest item on the balance sheet. Note 4 in the financial statements disclose the
foreign exchange adjustment, which flows through the investment property classification during each period. As at
December 31, 2014 the Corporation recognized a significant foreign exchange adjustment loss of $1,375,377 to its
investment property portfolio due to the 5.3% depreciation of the local currency during the year.
In total the Corporation’s continuing operations reported an Operating loss or an Adjusted EBITDA loss
Operating Profit (Loss) from Continuing Operations
of $5,900,540 during 2014 (2013 – loss of $3,733,368), generated interest income of $66,606 (2013 -
Operating Profit (Loss) from Continuing Operations
$239,055) and finance expense of $250,230 (2013 – Nil) during the year. The larger Adjusted EBITDA
In total the Corporation’s continuing operations reported an Operating loss or an Adjusted EBITDA loss of
loss in 2014 is attributed to the large one-time expenses mentioned earlier as well as increased
$5,900,540 during 2014 (2013 – loss of $3,733,368), generated interest income of $66,606 (2013 - $239,055) and
finance expense of $250,230 (2013 – Nil) during the year. The larger Adjusted EBITDA loss in 2014 is attributed to
salaries, property taxes and the discount of $402,339 given to UMC in exchange for early repayment of
the large one-time expenses mentioned earlier as well as increased salaries, property taxes and the discount of
$402,339 given to UMC in exchange for early repayment of a debt.
a debt.
The following table reconciles net income before income tax to Adjusted EBITDA from operations.
The following table reconciles net income before income tax to Adjusted EBITDA from operations.
Net Income before Income taxes
Add Depreciation and Amortization
Subtract Interest and Investment (Income) / Finance Expense
EBITDA
Subtract Fair Value Adjustment
Total Adjusted EBITDA
2014
4,473,714
126,018
183,624
4,783,356
(10,683,896)
(5,900,540)
2013
213,331
137,877
(239,055)
112,153
(3,845,521)
(3,733,368)
Operating Profit from Discontinued Operations
The Corporation disposed of its insurance business on December 20, 2013. During 2013, the insurance
12 | Mongolia Growth Group Ltd.
business generated an Operating loss or Adjusted EBITDA loss of $711,146 and investment income of
$543,045.
15
Operating Profit from Discontinued Operations
The Corporation disposed of its insurance business on December 20, 2013. During 2013, the insurance business
generated an Operating loss or Adjusted EBITDA loss of $711,146 and investment income of $543,045.
Net Income
For the year ended December 31, 2014, the Corporation incurred a net gain of $4,151,782 compared to a net loss
of $155,563 for the year ended December 31, 2013. This improvement is attributed to the substantial unrealized
gain on fair value adjustment on investment properties of $10,683,896 during the year versus the unrealized gain of
$3,845,521 from the prior year.
Management cautions investors that the Corporation is primarily focused on increasing shareholder value on a per
share basis. This means that operationally, management is more concerned with long-term asset appreciation at
the expense of short-term cash flow. However, the newly installed CEO and board have taken an active focus on
the Corporation’s negative cash flow as they recognize that the Corporation cannot continue to suffer from negative
cash flow.
Mongolia Growth Group Ltd. | 13
Section 4 - Financial Condition
Section 4 - Financial Condition
Cash Flow
Mongolia Growth Group’s primary sources of capital are cash generated from operating, financing and
Cash Flow
investing activities. Management expects to meet all of the Corporation’s obligations through current
Mongolia Growth Group’s primary sources of capital are cash generated from operating, financing and investing
activities. Management expects to meet all of the Corporation’s obligations through current cash and cash
equivalents along with cash flows from operations.
cash and cash equivalents along with cash flows from operations.
The following table provides an overview of the Corporation’s cash flows from operating, financing and
The following table provides an overview of the Corporation’s cash flows from operating, financing and investing
activities for the year ended December 31, 2014 and 2013.
investing activities for the year ended December 31, 2014 and 2013.
Net change in cash related to:
Operating
Investing
Financing
Effects of exchange rates on cash
Net change in cash during the period
31-Dec-14
(2,908,159)
(1,392,747)
821,951
(245,943)
(3,724,898)
For the year ending
31-Dec-13
(1,730,252)
(1,012,196)
293,600
(883,086)
(3,331,934)
Overall, cash outflows during 2014 were lower than the previous year with net outflows in operating
Overall, cash outflows during 2014 were lower than the previous year with net outflows in operating and investing
each higher than the previous year offset by an increase in financing inflows. The changes in components of cash
flows for the year ended December 31, 2014 compared to the year ended December 31, 2013 were the result of the
following factors:
and investing each higher than the previous year offset by an increase in financing inflows. The
changes in components of cash flows for the year ended December 31, 2014 compared to the year
ended December 31, 2013 were the result of the following factors:
• Operating – Operating cash outflows for the year ended 2014 increased primarily due to an increase
in one-time expenses.
• Operating–Operating cash outflows for the year ended 2014 increased primarily due to an
• Investing – Investing cash outflows for the year ended 2014 increased due to acquisitions of
increase in one-time expenses.
investment properties netted off by the receipt of payment on the disposal of insurance
• Investing–Investing cash outflows for the year ended 2014 increased due to acquisitions of
subsidiary as well as from disposal of properties in comparison to the previous year.
• Financing – Financing cash inflows for the year ended 2014 increased over 2013 as the Corporation
investment properties netted off by the receipt of payment on the disposal of
generated increased cash through the exercise of options.
insurance subsidiary as well as from disposal of properties in comparison to the
previous year.
• Financing–Financing cash inflows for the year ended 2014 increased over 2013 as the
To date, the Corporation has been able to meet all of its capital and other cash requirements from its internal
sources of cash. As at December 31, 2014, the Corporation had approximately $1,645,421 in cash and cash
equivalents.
Corporation generated increased cash through the exercise of options.
To date, the Corporation has been able to meet all of its capital and other cash requirements from its
Total Assets
internal sources of cash. As at December 31, 2014, the Corporation had approximately $1,645,421 in
As of December 31, 2014, the Corporation had $2,673,124 (2013 - $9,416,810) in Current Assets out of which
$1,645,421 (2013 - $5,370,319) was held in cash and cash equivalents.
cash and cash equivalents.
The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment Properties.
Investment Properties are carried at Fair Market Value and increased throughout the year by way of a significant
acquisition and the appreciation of the portfolio during the year.
In 2014, assets classified as Investment Properties increased to $48,458,517 from $32,313,391 the year prior,
primarily due to an increase in unrealized fair value adjustment and the acquisition of Tulguldur. Property and
17
Equipment, which primarily consists of properties that are measured at their cost base, decreased from $3,915,692
in 2013 to $2,974,950 in 2014 as several properties in this category were either sold or transferred to Investment
Properties.
In 2013, as part of the agreement to sell Mandal to UMC Capital LLC, proceeds for this transaction were included in
current assets and non-current assets. As the payment for this transaction was received during 2014, this item was
no longer outstanding at December 31, 2014.
14 | Mongolia Growth Group Ltd.
Total Assets
As of December 31, 2014, the Corporation had $2,673,124 (2013 - $9,416,810) in Current Assets out of
which $1,645,421 (2013 - $5,370,319) was held in cash and cash equivalents.
The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment
Properties. Investment Properties are carried at Fair Market Value and increased throughout the year
by way of a significant acquisition and the appreciation of the portfolio during the year.
In 2014, assets classified as Investment Properties increased to $48,458,517 from $32,313,391 the year
prior, primarily due to an increase in unrealized fair value adjustment and the acquisition of Tulguldur.
Property and Equipment, which primarily consists of properties that are measured at their cost base,
decreased from $3,915,692 in 2013 to $2,974,950 in 2014 as several properties in this category were
either sold or transferred to Investment Properties.
In 2013, as part of the agreement to sell Mandal to UMC Capital LLC, proceeds for this transaction
were included in current assets and non-current assets. As the payment for this transaction was
received during 2014, this item was no longer outstanding at December 31, 2014.
Total Liabilities
As of December 31, 2014, the Corporation had current liabilities of $2,077,001 consisting of payables
and accrued liabilities. In December 31, 2013, current liabilities were significantly lower at of $878,343.
Total Liabilities
The reason for increase in trade payables is due to capital expenditures performed on one of the
Corporation’s investment properties and an increase in deposits as prepayments for property sales.
As of December 31, 2014, the Corporation had current liabilities of $2,077,001 consisting of payables and accrued
liabilities. In December 31, 2013, current liabilities were significantly lower at of $878,343. The reason for increase
in trade payables is due to capital expenditures performed on one of the Corporation’s investment properties and
an increase in deposits as prepayments for property sales.
As of December 31, 2014, the Corporation had no long term debt outstanding, as such the only non-
current liability on the balance sheet is deferred income taxes. Deferred tax liabilities increased slightly
As of December 31, 2014, the Corporation had no long term debt outstanding, as such the only non-current
liability on the balance sheet is deferred income taxes. Deferred tax liabilities increased slightly during the year to
$1,099,141 in 2014 (2013 - $1,090,117).
during the year to $1,099,141 in 2014 (2013 - $1,090,117).
Total Equity
Total Equity
The equity of the Corporation consists of one class of common shares.
The equity of the Corporation consists of one class of common shares.
Outstanding
Common shares
Options to buy common shares
Options Outstanding
As at 31-Dec-2014
As at 31-Dec-2013
34,848,745
2,448,000
34,303,352
1,957,000
At December 31, 2014, the Corporation had 1,385,000 options that were exercisable (December 31,
Options Outstanding
2013; 1,324,500).
At December 31, 2014, the Corporation had 1,385,000 options that were exercisable (December 31, 2013;
1,324,500).
The Chart below shows the historical option grants and options outstanding as of December 31, 2014.
The Chart below shows the historical option grants and options outstanding as of December 31, 2014.
$ Option Price
Granted
Forfeited
Cancelled
Exercised
Total Options
Options
Options Non-
Outstanding
Exercisable
1.64
1.75
1.90
4.20
4.77
4.25
4.00
4.13
1.09
100,000
300,000
1,363,000
900,000
175,000
150,000
190,000
475,000
375,000
0
0
35,000
408,000
100,000
50,000
0
75,000
0
0
0
0
362,000
0
0
0
0
0
100,000
250,000
200,000
0
0
0
0
0
0
0
50,000
1,128,000
130,000
75,000
100,000
190,000
400,000
375,000
0
50,000
492,500
97,500
65,000
75,000
105,000
125,000
375,000
Exercisable
18
0
0
635,500
32,500
10,000
25,000
85,000
275,000
0
Total
4,028,000
668,000
362,000
550,000
2,448,000
1,385,000
1,063,000
Acquisitions and Dispositions
Acquisitions and Dispositions
During the year, the Corporation acquired a large property for a total of $9,099,706 in three separate
During the year, the Corporation acquired a large property for a total of $9,099,706 in three separate transactions.
During this time, the Corporation disposed of 25 properties for $5,432,386 including 5 properties swapped
transactions. During this time, the Corporation disposed of 25 properties for $5,432,386 including 5
at a value of $2,981,944. These acquisitions and disposals are consistent with the Corporation’s strategy of
properties swapped at a value of $2,981,944. These acquisitions and disposals are consistent with the
streamlining its investment property portfolio.
Corporation’s strategy of streamlining its investment property portfolio.
Off-Balance Sheet Items
As of December 31, 2014, the Corporation had no off-balance sheet items.
Off-Balance Sheet Items
Events Subsequent to Year End
As of December 31, 2014, the Corporation had no off-balance sheet items.
The Corporation sold 6 properties with a fair value of approximately $1,227,836 for cash proceeds of approximately
$1,075,964. The loss since December 31, 2014 is attributed to the currency depreciation in the Mongolian Tögrög.
Events Subsequent to Year End
On April 2, 2015, the Corporation announced that it intended to issue a total of 640,691 common shares of the
The Corporation sold 6 properties with a fair value of approximately $1,227,836 for cash proceeds of
Corporation at a price of CDN $0.82 per share in settlement of outstanding amounts owed by the Corporation in
approximately $1,075,964. The loss since December 31, 2014 is attributed to the currency depreciation
the amount of US $420,000. The Corporation also issued 935,000 5-year options to purchase at a price of CDN
$0.72 per share,
in the Mongolian Tögrög.
On April 7, 2015, the Corporation announced that various employees and a consultant have agreed to forfeit and
On April 2, 2015, the Corporation announced that it intended to issue a total of 640,691 common
cancel 615,000 options with exercise prices between CDN $4.00 and CDN $4.77. The Corporation also announced
shares of the Corporation at a price of CDN $0.82 per share in settlement of outstanding amounts
owed by the Corporation in the amount of US $420,000. The Corporation also issued 935,000 5-year
options to purchase at a price of CDN $0.72 per share,
Mongolia Growth Group Ltd. | 15
On April 7, 2015, the Corporation announced that various employees and a consultant have agreed to
forfeit and cancel 615,000 options with exercise prices between CDN $4.00 and CDN $4.77. The
19
that a total of 640,000 5-year, stock options had been issued to Directors and Officers at an exercise price of CDN
$0.74.
On April 27, 2015, the Corporation announced the closing of the Company’s previously announced settlement
of outstanding amounts owed by the Company in the amount of US $420,000 through the issuance of 640,691
common shares of the Company at a price of CAD $0.82 per share.
16 | Mongolia Growth Group Ltd.
Section 5 - Quarterly Information
Section 5 - Quarterly Information
Quarterly Results
Quarterly Results
The following table is a summary of select quarterly information over the previous eight quarters:
The following table is a summary of select quarterly information over the previous eight quarters:
Q4 2014
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Revenue *
316,712
424,787
542,837
634,581
427,836
452,185
421,599
425,753
Net income (loss) *
117,251
(1,489,119)
5,033,379
812,202
1,449,697
(825,693)
(1,127,918)
253,340
Income (loss) per
common share*
0.00
(0.04)
0.15
0.02
0.04
(0.02)
(0.03)
0.01
Total Assets
54,106,591
55,523,885
54,965,199
49,253,675
47,291,018
47,988,406
52,443,237
52,859,111
Weighted Average
Shares (No.)
Ending Shares
(No.)
34,652,992
35,800,084
34,495,983
35,823,685
34,696,557
34,246,026
34,245,230
34,170,019
34,848,745
34.848,745
34,748,745
34,538,352
34,303,352
34,303,352
34,303,352
34,173,352
* These numbers have been restated to reflect the continuing operations of the Corporation.
* These numbers have been restated to reflect the continuing operations of the Corporation.
Revenue
Revenue
During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $316,712 (Q4 2013
During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $316,712
-$427,836) of which rental income earned was $457,496 (Q4 2013 - $397,894). The majority of this rental income
increase is attributed to a larger property portfolio as well as increased occupancy levels. The quarterly revenue
(Q4 2013 -$427,836) of which rental income earned was $457,496 (Q4 2013 - $397,894). The majority
number also includes other revenue earned from miscellaneous sources such as late fee, advertising and from sale
of investment properties. During the fourth quarter, the Corporation also experienced a loss on sale of investment
properties of $140,423, which negatively affected the Corporation’s revenue.
of this rental income increase is attributed to a larger property portfolio as well as increased
occupancy levels. The quarterly revenue number also includes other revenue earned from
During the fourth quarter of 2014, the Corporation ‘s net investment income decreased by $12,405 as compared
miscellaneous sources such as late fee, advertising and from sale of investment properties. During the
to an increase of $36,736 in the same period in 2013. The decrease in net investment income is attributable to a
fourth quarter, the Corporation also experienced a loss on sale of investment properties of $140,423,
decrease in investment and marketable securities as the Corporation continues to deploy its cash into building its
property portfolio.
which negatively affected the Corporation’s revenue.
During the 4th quarter of 2014, the Corporation also incurred a large unrealized gain of $2,747,150 compared to an
unrealized gain of $3,845,521 during Q4 2013.
During the fourth quarter of 2014, the Corporation 's net investment income decreased by $12,405 as
Expenses
compared to an increase of $36,736 in the same period in 2013. The decrease in net investment
Quarterly expenses related to corporate operations totaled $2,007,286 (Q4 2013 - $1,024,256). The majority of
income is attributable to a decrease in investment and marketable securities as the Corporation
this increase is attributed to a $870,540 severance payment made to the Corporation’s former CEO along with a
commission of $487,522 accrued to a senior employee of the Corporation.
continues to deploy its cash into building its property portfolio.
Net Income
During the 4th quarter of 2014, the Corporation also incurred a large unrealized gain of $2,747,150
compared to an unrealized gain of $3,845,521 during Q4 2013.
During the quarter, the Corporation generated a gain of $117,251 in comparison to a gain of $1,201,133 in the same
quarter of the previous year. This difference is mainly attributed to the fair value adjustments recorded in the fourth
quarter of the years offset by an increase in expenses.
Expenses
Quarterly expenses related to corporate operations totaled $2,007,286 (Q4 2013 - $1,024,256). The
majority of this increase is attributed to a $870,540 severance payment made to the Corporation’s
former CEO along with a commission of $487,522 accrued to a senior employee of the Corporation.
21
Mongolia Growth Group Ltd. | 17
Section 6 – Critical Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with IFRS required Management to make assumptions
about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually
evaluated based on historical experiences and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. In the future, actual experience may differ from these
estimates and assumptions.
The critical estimates made in the preparation of the consolidated financial statements include the following:
Fair value of Investment Properties
The estimate of fair value of investment properties is the most critical accounting estimate to the Corporation. An
external appraiser estimates the fair value of the majority of the Investment Properties annually, the remainder are
appraised internally by Management. The fair value of investment properties is based on the nature, location and
condition of the specific asset. The fair value of investment properties represents an estimate of the price that
would be made in an arm’s length transaction between knowledgeable, willing parties. The Corporation operates
in the emerging real estate market of Mongolia, which given its current economic and industry conditions, has an
increased inherent risk resulting from the lack of reliable and comparable market information. At December 31,
2014, the unrealized gain on fair value adjustment was a gain of $10,683,896 (gain of $3,845,521; 2013). During
the first six months of 2014, there was a fair value adjustment gain of $7,936,746 relating to properties that were
not available for use at year end or were being carried at depreciated cost, and thus were recorded at the lower of
cost and market, but adjusted during the first six months of 2014 as the properties became available for use. The
remaining $2,747,150 gain was adjusted during the 4th quarter of 2014. As of December 31, 2014, Management
took the decision to write off the carrying value of one of the Corporation’s land assets as the asset had been
impaired and Management believed it was unlikely that it could fully recover the asset in the future.
Accuracy of Share Based Compensation Expense
The estimate of the ultimate expense arising from share based compensation plans is another critical accounting
estimate. There are several sources of uncertainty that need to be considered in the estimate of the share based
compensation expense recorded by the Corporation. The ultimate expense is estimated by using a number of key
assumptions such as the expected volatility of the share price, the dividends expected on the shares, the risk free
interest rate for the expected life of the options and future forfeiture rates. For the year ending December 31, 2014,
the cost of the share based payments) totaled $1,838,904 (2013 - $931,783). The increase over the previous year
was due to a large amount of options issued to the Corporation’s former CEO.
Operating Environment of the Corporation
Mongolia displays many characteristics of an emerging market including relatively high inflation and interest rates.
The tax and customs legislation in Mongolia is subject to varying interpretations and frequent changes. The future
economic performance of Mongolia is tied to continuing demand from China and continuing high global prices for
commodities as well as being dependent upon the effectiveness of economic, financial and monetary measures
undertaken by the Government of Mongolia together with tax, legal, regulatory and political developments.
Management is unable to predict all developments that could have an impact on the Mongolian economy and
consequently what effect, if any, they could have on the future financial position of the Corporation.
Assets and Liabilities Held for Sale
The Corporation makes judgments in determining whether certain non-current assets or group of assets and
liabilities meet the specified criteria under IFRS for classification as held for sale. At December 31, 2014, the
Corporation has identified 6 investment properties, which meet the specified criteria, and has accounted for them
as assets held for sale.
18 | Mongolia Growth Group Ltd.
Deferred Tax Assets
Deferred tax assets are recognized to the extent that it is probable that deductible temporary differences will
reverse in the foreseeable future and there will be sufficient future taxable profits against which the deductible
temporary differences can be utilized. The Corporation reviews the carrying amount of deferred tax assets at the
end of each reporting period which is reduced to the extent that it is no longer probable that deferred tax assets
recognized will be recovered, or increased to the extent that sufficient future taxable profit will be available to allow
all or part of a previously unrecognized deferred tax asset to be recovered. Estimates of future taxable income
are based on forecasted cash flows from operations, available tax planning opportunities and expected timing of
reversals of taxable temporary differences.
Mongolia Growth Group Ltd. | 19
Section 7 – Risk Management
Credit risk
The Corporation’s exposure to credit risk is managed through risk management policies and procedures with
emphasis on the quality of the investment portfolio. For the year, most of the Corporation’s credit risk consisted of
institutional deposits. The majority of the funds invested are held in reputable Canadian or Mongolian banks. The
Corporation is in the early stages of development and is continually improving its policies in regards to monitoring
its credit risk.
The Corporation is exposed to credit risk as an owner of real estate in which tenants may become unable to pay
contracted rents. The Corporation mitigates this risk by carrying out due diligence on significant tenants. The
Corporation’s properties are diversified across residential and commercial classes. Historically, bad debts have not
been a substantial expense for the Corporation.
Liquidity risk
The Corporation does not believe its current maturity profile lends itself to any material liquidity risk, taking into
account the level of cash and cash equivalents, investments and marketable securities as at December 31, 2014.
As at December 31, 2014, the Corporation had working capital of $596,123 (2013- $8,538,467) comprised of cash
and cash equivalents, other assets, net of trade and accrued liabilities and income taxes payable. Management
considers the funds on hand to be sufficient to meet its ongoing obligations.
As of December 31, 2014, the Corporation does not have any contractual obligations.
Currency risk
The Corporation owns properties located in Mongolia and collects rental revenue in Mongolian Tögrög, and is
therefore subject to foreign currency fluctuations that may impact its financial position and results. Changes in
the Mongolian Tögrög, U.S. dollar and Canadian dollar foreign currency exchange rates impact the fair value of
securities denominated in Mongolian Tögrög and in U.S. dollars.
Economic Volatility and Uncertainty
Over the past few years, economic volatility and uncertainty around the world has contributed to dramatically
restricted access to capital and reduced capital markets activity for more speculative businesses. The
Corporation’s management believes that the Corporation has sufficient resources to carry on its business and
remain a going concern.
MGG holds the majority of its assets, investments and operations in the nation of Mongolia. Mongolia is presently
experiencing drastic changes in its fast growing economy. Economic volatility and uncertainty in Mongolia could
result in inflation, hyperinflation, economic stagnation, political extremism, and other similarly detrimental scenarios
which could materially harm the Corporation.
While inflation subsided in 2013, the consequences of loose monetary policy as well as exchange rate depreciation
emerged in 2014 through rising inflation levels. The inflation rate peaked at 14.9% in July but gradually decreased
towards the end of the year due to weakening domestic demand. As reported by the National Statistics Office,
year over year inflation was 11% in December, 11.5% in November, 12.1% in October and 13% in September. The
Bank of Mongolia raised the policy rate by 1.5 points to 12.0% in July in an effort to curb inflation.
Depending on the requirements of MGG’s businesses, additional funds may be required to be raised in the capital
markets and there is no guarantee that sufficient funds raised will be available to complete a financing required to
augment the Corporation’s operations.
20 | Mongolia Growth Group Ltd.
Risks and Uncertainties
The Corporation, as part of its operations, carries financial instruments consisting of cash and cash equivalents,
investments and marketable securities, accounts receivable, and trade payables and accrued liabilities. It is
Management’s opinion that the Corporation is not exposed to significant credit, interest or currency risks arising
from these financial instruments except as otherwise disclosed in the notes to the Consolidated Financial
Statements. Certain members of parliament have recently asked to re-negotiate the agreement that exists between
the government of Mongolia and Turquoise Hill regarding the current tax stability agreement. There can be no
certainty if any changes to the agreement will be reached and how it will impact the investment climate or future
GDP growth of Mongolia.
Further information related to Mongolia Growth Group Ltd. and the risks and uncertainties of MGG is filed on the
System for Electronic Document Analysis and Retrieval (“SEDAR”) and can be reviewed at www.sedar.com.
Financial Instruments
The Corporation’s financial instruments consist of cash and cash equivalents, investments and marketable
securities, accounts receivable and trade and accrued payables. The Corporation is subject to interest risk as it
earns interest income from its cash deposits. It is Management’s opinion that the Corporation is not exposed to
significant credit risks arising from these financial instruments and that the fair value of these financial instruments
approximates their carrying values. Management believes that there are material currency risks associated to
certain Financial Instruments of the Corporation as they are held in Mongolian Tögrög. For further discussion of
financial instrument risks, see the Insurance and Financial Risk Management note.
Internal Controls over Financial Reporting
Changes in securities laws no longer require the Chief Executive Officer and Chief Financial Officer of junior
reporting issuers to certify that they have designed internal control over financial reporting, or caused it to be
designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with IFRS.
Instead, an optional form of certification has been made available to junior reporting issuers and has been used by
the Corporation’s certifying officers for the December 31, 2013 annual filings. The new certification reflects what
the Corporation considers to be a more appropriate level of CEO and CFO certification given the size and nature of
the Corporation’s operations. This certification requires the certifying officers to state that: they have reviewed the
interim MD&A and consolidated financial statements; they have determined that there is no untrue statement of a
material fact, or any omission of material fact required to be stated which would make a statement or its omission
misleading in light of the circumstances under which it was made within the interim MD&A and consolidated
financial statements; based on their knowledge, the interim filings, together with the other financial information
included in the interim filings, fairly present in all material respects the financial condition, results of operations and
cash flows of the Corporation as of the date and for the periods presented in the filings.
Recent Accounting Pronouncements
IFRS 9 – Financial Instruments introduces new requirements for classifying and measuring financial assets and
financial liabilities. Under IFRS 9, financial assets are classified and measured based on the business model in
which they are held and the characteristics of their contractual cash flows. IFRS 9 also introduced additional
changes related to financial liabilities.
The IASB also recently introduced amendments to IFRS related to hedge accounting. The Standard is not
applicable until annual periods beginning on or after January 1, 2015, but is available for early adoption.
In November 2013, the IASB issued three amendments affecting IFRS 9, IAS 7 and IAS 39. The first amendment
sets out new hedge accounting requirements. The second amendment allows entities to apply the accounting for
changes from own credit risk in isolation without applying the other requirements of IFRS 9. The third amendment
removes the mandatory effective date of IFRS 9 from January 1, 2015 to a new date that will be determined when
IFRS 9 is closer to completion.
Mongolia Growth Group Ltd. | 21
Additional Information
Additional information relating to Mongolia Growth Group Ltd., including its interim financial statements, is available
on SEDAR at www.sedar.com.
22 | Mongolia Growth Group Ltd.
Mongolia Growth Group Ltd.
Consolidated Financial Statements
December 31, 2014
(expressed in Canadian dollars)
Mongolia Growth Group Ltd. | 23
April 29, 2015
Independent Auditor’s Report
To the Shareholders of
Mongolia Growth Group Ltd.
We have audited the accompanying consolidated financial statements of Mongolia Growth Group Ltd. and its
subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2014 and 2013
and the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows
for the years then ended, and the related notes, which comprise 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 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 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 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 financial
position of Mongolia Growth Group Ltd. and its subsidiaries as at December 31, 2014 and 2013 and their
financial performance and their cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Chartered Accountants
PricewaterhouseCoopers LLP
One Lombard Place, Suite 2300, Winnipeg, Manitoba, Canada R3B 0X6
T: +1 (204) 926 2400, F: +1 (204) 944 1020
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
24 | Mongolia Growth Group Ltd.
Mongolia Growth Group Ltd.
Consolidated Statements of Financial Position
As at December 31
(expressed in Canadian dollars)
Assets
Current assets
Cash and cash equivalents (note 6)
Other assets (note 7)
Non-current assets
Other assets (note 7)
Investment properties (note 8)
Property and equipment (note 9)
Total assets
Liabilities
Current liabilities
Trade payables and accrued liabilities (note 10)
Income taxes payable (note 11)
Non-current liabilities
Deferred income tax liability (note 11)
Total liabilities
Equity
Share capital (note 12)
Contributed surplus
Accumulated other comprehensive loss
Deficit
Total equity
Total equity and liabilities
Commitments and contingencies (note 16)
2014
$
2013
$
1,645,421
1,027,703
5,370,319
4,046,491
2,673,124
9,416,810
-
48,458,517
2,974,950
1,645,125
32,313,391
3,915,692
54,106,591
47,291,018
1,925,655
151,346
874,222
4,121
2,077,001
878,343
1,099,141
1,090,117
3,176,142
1,968,460
53,789,459
5,815,656
(7,607,039)
(1,067,627)
52,204,394
4,423,914
(6,086,341)
(5,219,409)
50,930,449
45,322,558
54,106,591
47,291,018
Approved by the Board of Directors
“Robert Scott” Director “Jim Dwyer” Director
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statement of Operations
As at December 31
(expressed in Canadian dollars)
Revenue
Rental income
Other revenue
Total revenue
Expenses
Salaries and wages
Other expenses (note 19)
Share based payment (note 12)
Depreciation (note 9)
Total expenses
2014
$
2013
$
1,822,392
96,524
1,650,895
76,478
1,918,916
1,727,373
2,677,203
2,901,010
1,838,904
126,018
1,202,117
3,326,841
931,783
137,877
7,543,135
5,598,618
Net investment income
66,606
239,055
Unrealized gain on fair value adjustment on
investment properties (note 8)
10,683,896
3,845,521
Impairment of other assets (note 5)
Finance expense
Net income before income taxes
Income tax expense (note 11)
402,339
250,230
4,473,714
321,932
-
-
213,331
463,905
Income (loss) from continuing operations
4,151,782
(250,574)
Income from discontinued operations - net of tax
(note 5)
-
95,011
Net Income (loss) for the year
4,151,782
(155,563)
Net income (loss) per share (note 12)
Basic
From continuing operations
From discontinued operations
From net income (loss) for the year
Diluted
From continuing operations
From discontinued operations
From net income (loss) for the year
$0.12
0.00
0.12
$0.12
0.00
0.12
$(0.01)
0.00
(0.01)
(0.01)
0.00
(0.01)
The accompanying notes are an integral part of these consolidated financial statements.
26 | Mongolia Growth Group Ltd.
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Consolidated Statement of Comprehensive Income (Loss)
As at December 31
(expressed in Canadian dollars)
Net Income (loss) for the year
4,151,782
(155,563)
2014
$
2013
$
Other comprehensive loss
Items that may be subsequently reclassified to income or
loss
Unrealized losses on translation of financial statement
operations with Mongolian Tögrög
functional
currency to Canadian dollar reporting currency -
continuing operations
Realized losses on translation of financial statement
operations with Mongolian Tögrög
functional
currency to Canadian dollar reporting currency -
discontinued operations (note 5)
(1,520,698)
(4,383,809)
-
826,075
Total comprehensive income (loss)
2,631,084
(3,713,297)
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statement of Changes in Equity
As at December 31
(expressed in Canadian dollars)
Share capital
$
Contributed
surplus
$
Accumulated
other
comprehensive
loss
$
Retained
earnings
(deficit)
$
Total
$
Balance at January 1, 2013
Net loss for the year
Other comprehensive loss
51,681,818
-
-
3,214,195
-
-
(2,528,607)
-
(3,557,734)
(5,063,846)
(155,563)
-
47,303,560
(155,563)
(3,557,734)
Share based payments
Share capital issued (note
12)
Balance at December 31,
2013
51,681,818
-
3,214,195
1,438,695
522,576
(228,976)
(6,086,341)
-
-
(5,219,409)
-
43,590,263
1,438,695
-
293,600
52,204,394
4,423,914
(6,086,341)
(5,219,409)
45,322,558
Balance at January 1, 2014
52,204,394
4,423,914
(6,086,341)
(5,219,409)
45,322,558
Net income for the year
Other comprehensive loss
-
-
52,204,394
-
-
4,423,914
-
(1,520,698)
(7,607,039)
4,151,782
-
(1,067,627)
4,151,782
(1,520,698)
47,953,642
Share based payments
Share capital issued (note
12)
Balance at December 31,
2014
-
2,038,907
1,585,065
(647,165)
-
-
-
-
2,038,907
937,900
53,789,459
5,815,656
(7,607,039)
(1,067,627)
50,930,449
The accompanying notes are an
integral part of these consolidated financial statements.
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Consolidated Statement of Cash Flows
As at December 31
(expressed in Canadian dollars)
Cash provided by (used in)
Operating activities
Net income (loss) for the year
Items not affecting cash
Share based payments (note 12)
Deferred taxes (note 11)
Depreciation of property and equipment (note 9)
Realized loss on disposal of property and equipment
Realized loss on disposal of other asset
Realized loss (gain) on disposal of investment properties
(note 8)
Unrealized
loss (gain) on
fair value adjustment on
investment
properties (note 8)
Impairment of other assets (note 5)
Realized gain on disposal of subsidiary (note 5)
Net change in non-cash working capital balances (note 17)
Financing activities
Proceeds from share issuance (note 12)
Proceeds from long term debt, net of finance costs
Repayment of long term debt
Investing activities
Net acquisition of property and equipment
Disposal of investment properties
Acquisition of investment properties
Proceeds from disposal of subsidiary
Effect of exchange rates on cash
2014
$
2013
$
4,151,782
(155,563)
1,838,904
9,024
126,018
15,252
144,107
1,438,695
423,418
178,148
6,307
-
(56,105)
17,906
(10,683,896)
402,339
-
(3,845,521)
-
(359,252)
(4,052,575)
1,144,416
(2,295,862)
565,610
(2,908,159)
(1,730,252)
937,900
3,253,169
(3,369,118)
821,951
(37,116)
2,721,465
(7,044,845)
2,967,749
(1,392,747)
293,600
-
-
293,600
(131,773)
1,026,960
(1,742,875)
(164,508)
(1,012,196)
(3,478,955)
(2,448,848)
(245,943)
(883,086)
Decrease in cash and cash equivalents
(3,724,898)
(3,331,934)
Cash and cash equivalents - Beginning of year
5,370,319
8,702,253
Cash and cash equivalents - End of year
1,645,421
5,370,319
The accompanying notes are an
integral part of these consolidated financial statements.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
1 Corporate information
Mongolia Growth Group Ltd. (MGG or the Company) was incorporated in Alberta on
December 17, 2007, and is a real estate investment and development company participating in
the growth of the Mongolian economy through the ownership of commercial investment property
assets in Ulaanbaatar, Mongolia.
The Company’s common shares were previously listed on the Canadian National Stock Exchange
(CNSX). On January 9, 2013, the Company filed an application for the de-listing of the common
shares from the CNSX and filed an application for the listing of common shares on the TSX
Venture Exchange (TSXV). The Company is now listed on the TSXV, having the symbol YAK.
MGG has one wholly-owned subsidiary at December 31, 2014, Mongolia Barbados Corp.
Mongolia Barbados Corp. owns the wholly-owned subsidiaries MGG Properties LLC and Big Sky
Capital LLC. Big Sky Capital LLC owns the wholly-owned subsidiaries, Carrollton LLC, Biggie
Industries LLC, Orpheus LLC, Endymion LLC, Zulu LLC, Crescent City LLC, Main Street
Acquisitions LLC (formerly known as Tchoupitoulos LLC), and Oceanus LLC (together “the
investment property operations”). The investment property operations are conducted in Big Sky
Capital LLC and its subsidiaries. No active business operations occur in Mongolia Barbados
Corp., MGG Properties LLC, Oceanus LLC, and Main Street Acquisitions LLC at this time.
Prior to December 20, 2013, through the Company’s wholly-owned subsidiary, Mandal General
Insurance, the Company offered insurance products in Mongolia covering all common general
insurance types. The Company’s main lines of business were motor insurance, including
voluntary motor third party liability, property, accident medical and travel and liability
insurance. Mandal General Insurance was disposed of on December 20, 2013 and was therefore
not a part of the Company as at December 31, 2014 (see note 5).
The Company is registered in Alberta, Canada, with its Head Office at its registered address at
1400, 700-2nd Street W, Calgary, Alberta, Canada. The Company’s Canadian headquarters are
located at 100 King Street West, Suite 5600, Toronto, Ontario, M5X 1C9, Canada. The Company’s
Mongolian investment property operations are based out of its office located at the Mandal
Building, at the corner of Chinggis Ave. and Seoul St. in Ulaanbaatar, Mongolia.
At December 31, 2014, the Company is organized into two business units based on the business
operations:
(cid:127) Big Sky Capital LLC and its subsidiaries own investment properties which are located in
Ulaanbaatar, Mongolia and are held for the purpose of generating rental revenue, capital
appreciation, and/or redevelopment; and
(cid:127) The MGG Corporate office is located in Toronto, Canada and administers the financial
resources, investment portfolio and corporate reporting and legal functions of the
Company.
2 Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (IFRS), as issued by the International Accounting
30 | Mongolia Growth Group Ltd.
Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
Standards Board (IASB). The significant accounting policies used in the preparation of these
consolidated financial statements are summarized in note 3.
The consolidated financial statements, including the notes to the consolidated financial
statements, are presented in Canadian dollars ($) which is the Company’s presentation currency
and the functional currency of the parent company. The functional currency of the Company’s
operating subsidiaries is the Mongolian National Tögrög (MNT).
These consolidated financial statements were approved by the Board of Directors of the Company
for issue on April 29, 2015.
3 Significant accounting policies
a.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost
convention, as modified by the revaluation of investment properties.
b. Basis of consolidation
These consolidated financial statements include the accounts of MGG and its wholly-
owned subsidiaries. Subsidiaries are entities controlled by MGG. Control exists when MGG
is exposed to, or has rights to, variable returns from its involvement with the entity and has
the ability to affect those returns through its power over the entity. The financial
statements of the subsidiaries are prepared for the same reporting year as MGG, using
consistent accounting policies. Intercompany balances and transactions, and any
unrealized income and expenses arising from intercompany transactions, are eliminated in
preparing the consolidated financial statements. Upon the disposal of a subsidiary,
amounts previously recognized in other comprehensive income in respect of that entity,
are reclassified to income or loss.
c. Financial instruments
Financial assets
Financial assets are classified into one of the following categories: AFS, fair-value through
profit or loss (FVTPL), or loans and receivables. The classification depends on the purpose
for which the asset was acquired. All transactions related to financial instruments are
recorded on a trade date basis. The Company’s accounting policy for each category is as
follows:
i)
Fair value through profit or loss
Financial assets at FVTPL are financial assets held for trading. A financial asset is
classified in this category if it is acquired principally for selling in the short term.
Derivatives are also categorized as held for trading unless they are designated as
hedges. FVTPL instruments are carried at fair value in the consolidated statement of
financial position with changes in fair value recorded in the consolidated statement of
operations.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
ii) Loans and receivables
These assets are non-derivative financial assets resulting from the delivery of cash or
other assets by a lender to a borrower in return for a promise to repay on a specific date
or dates, or on demand. They are initially recognized at cost, being the fair value of the
consideration paid for the acquisition of the investment. After initial measurement,
loans and receivables are measured at amortized cost, using the effective interest rate
method, less any impairment losses. Amortized cost is calculated taking into account
any discount or premium on acquisition and includes fees that are an integral part of
the effective interest rate and transaction costs.
Impairment on financial assets
All financial assets other than FVTPL instruments are assessed for impairment at each
reporting date. The Company assesses whether there is any objective evidence that a
financial asset or a group of financial assets is impaired. A financial asset or 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 has occurred after the initial recognition
of the asset and that event has an impact on the estimated future cash flows of the financial
asset or group of financial assets.
Financial liabilities
Financial liabilities are classified as other financial liabilities, based on the purpose for
which the liability was incurred, and are comprised of trade payables and accrued liabilities.
These liabilities are initially recognized at fair value net of any transaction costs directly
attributable to the issuance of the instrument and subsequently carried at amortized cost
using the effective interest rate method. This ensures that any interest expense over the
period to repayment is at a constant rate on the balance of the liability carried in the
statement of financial position. Interest expense in this context includes initial transaction
costs and premiums payable on redemption, as well as any interest or coupon payable while
the liability is outstanding.
Trade payables and accrued liabilities represent liabilities for goods and services provided to
the Company prior to the end of the period which are unpaid. Trade payable amounts are
unsecured and are usually paid within 30 days of recognition.
Fair value of financial instruments
Fair value represents the price at which a financial instrument could be exchanged in an
orderly market, in an arm’s length transaction between knowledgeable and willing parties
who are under no compulsion to act. Financial assets and liabilities recorded at fair value in
the consolidated statement of financial position are measured and classified in a hierarchy
consisting of three levels for disclosure purposes. The three levels are based on the priority
of the inputs to the respective valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within
the fair value hierarchy is based on the lowest level of significant input to its valuation. The
input levels are defined as follows:
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Notes to the Consolidated Financial Statements
As at December 31, 2014
(cid:127) Level 1 fair value measurements are those derived from unadjusted quoted prices in
an active market for identical assets or liabilities.
(cid:127) Level 2 fair value measurements are those derived from quoted prices in markets
that are not active or inputs that are observable for the asset or liability, either
directly (i.e., as price) or indirectly (derived from prices).
(cid:127) Level 3 fair value measurements are those derived from unobservable inputs that
are supported by little or no market activity and are significant to the estimated fair
value of the assets or liabilities.
The Company has implemented the following classifications:
Level 1: Unadjusted quoted prices in active markets for identical assets or
liabilities
(cid:127) The Company defines active markets based on the frequency of valuation and any
restrictions or illiquidity on disposition of investments. The size of the bid/ask spread is
used as an indicator of market activity for fixed maturity securities. Assets measured at
fair value and classified as Level 1 include cash and cash equivalents, and investments
and marketable securities. Fair value is based on market price data for identical assets
obtained from the investment custodian, investment managers or dealer markets. The
Company does not adjust the quoted price for such instruments.
Level 2: Quoted prices in markets that are not active or inputs that are
observable either directly (i.e. as prices) or indirectly (i.e. derived from
prices)
(cid:127) Level 2 inputs include observable market information, including quoted prices for assets
in markets that are considered less active. Assets measured at fair value and classified as
Level 2 include investments and marketable securities. Fair value is based on or derived
from market price data for same or similar instruments obtained from the investment
custodian, investment managers or dealer markets.
Level 3: Unobservable inputs that are supported by little or no market
activity and are significant to the estimated fair value of the assets or
liabilities
(cid:127) Level 3 assets and liabilities would include financial instruments whose values are
determined using internal pricing models, discounted cash flow methodologies, or
similar techniques that are not based on observable market data, as well as assets or
liabilities for which the determination of estimated fair value requires significant
management judgement or estimation.
d. Investment properties
Investment properties include properties held to earn rental revenue, for capital
appreciation, and/or for redevelopment. Investment properties are initially measured at fair
value which is most often the purchase price plus any directly attributable expenditures.
Investment properties are subsequently measured at fair value, which reflects market
conditions at the date of the statement of financial position. Gains or losses arising from
changes in the fair value of investment properties are recognized in the consolidated
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Notes to the Consolidated Financial Statements
As at December 31, 2014
statement of operations in the year they arise. A key characteristic of an investment property
is that it generates cash flows largely independently of the other assets held by an entity.
Subsequent expenditure is included in the asset’s carrying amount only when it is probable
that future economic benefits associated with the item will flow to the Company and the cost
of the item can be measured reliably. All other repairs and maintenance costs are charged to
the consolidated statement of operations during the financial period in which they occur.
Substantially all of the Company’s income properties and properties under development are
investment properties.
Properties under development are measured at cost.
Certain land leases held under an operating lease are classified as investment properties
when the definition of an investment property is met. At inception these leases are
recognized at the lower of the fair value of the property and the present value of the
minimum lease payments.
Some properties may be partially occupied by the Company, with the remainder being held
for rental income or capital appreciation. If that part of the property occupied by the
Company can be sold separately, the Company accounts for the portions separately. The
portion that is owner-occupied is accounted for under IAS 16, and the portion that is held
for rental income, capital appreciation or both is treated as investment property under IAS
40. When the portions cannot be sold separately, the whole property is treated as
investment property only if an insignificant portion is owner-occupied. The Company
considers the owner-occupied portion as insignificant when the property is more than 90%
held to earn rental income or capital appreciation. In order to determine the percentage of
the portions, the Company uses the size of the property measured in square metres.
The fair value of investment properties was based on the nature, location and condition of
the specific asset. The fair value is calculated at December 31, 2014 on the majority of
investment properties by an independent, professional, qualified appraisal firm, whose
appraisers hold recognized relevant, professional qualifications and who have recent
experience in the locations and categories of the investment properties valued. The
remaining investment properties’ fair value was calculated by management and was
performed by qualified individuals with recent experience in the locations and categories of
the investment properties valued.
Investment property purchases where the Company has paid either the full or partial
purchase proceeds to the seller, but the Company has not yet received the official land or
building title from the Mongolian Property office are recorded at the lower of cost and fair
value as Prepaid deposits on investment properties and classified within other assets.
e. Assets held for sale
Assets, or disposal groups comprising assets and liabilities, are categorized as held for sale at
the point in time when the asset or disposal group is available for immediate sale,
management has committed to a plan to sell and is actively locating a buyer at a sales price
that is reasonable in relation to the current fair value of the asset, and the sale is probable
and expected to be completed within a one year period. Investment property that is to be
disposed of without redevelopment has been determined to not have a change in use and
continues to be recorded in investment property. Investment property that has evidence of
commencement of redevelopment with a view to sell is transferred to assets held for sale.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Investment properties are measured by the guidelines of IAS 40 - Investment Property. All
other assets held for sale are stated at the lower of carrying amounts and fair value less
selling costs. An asset that is subsequently reclassified as held and in use, with the exception
of investment property measured under the fair value model, is measured at the lower of its
recoverable amount and the carrying value that would have been recognized had the asset
never been classified as held for sale.
f. Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to
the Company and the revenue can be reliably measured. Revenue is measured at the fair
value of the consideration received or receivable. The Company’s specific revenue
recognition criteria are as follows:
i) Rental revenue
The Company has not transferred substantially all of the benefits and risk of ownership
of its investment properties and, therefore, the Company accounts for leases with its
tenants as operating leases. Rental revenue includes all amounts earned from tenants
related to lease agreements including property tax and operating cost recoveries.
The Company reports minimum rental revenue on a straight-line basis, whereby the
total amount of cash to be received under a lease is recognized into earnings in equal
periodic amounts over the term of the lease.
Contingent rents are recognized as revenue in the period in which they are earned.
Amounts payable by tenants to terminate their lease prior to their contractual expiry
date (lease cancellation fees) are included in rental revenue at the time of cancellation.
Initial direct costs incurred in negotiating an operating lease are added to the carrying
amount of the leased asset. Tenant incentives are recognized as a reduction of rental
revenue on a straight-line basis over the term of the lease.
ii)
Investment income
Investment income is recorded as it accrues using the effective interest method.
g. Cash and cash equivalents
Cash and cash equivalents include cash at bank, deposits held at call with banks, other
short-term bank deposits and highly liquid investments with an original term to maturity of
three months or less at the date of purchase that are readily convertible to known amounts
of cash and subject to an insignificant risk of change in value.
h. Property and equipment
On initial recognition, property and equipment are valued at cost, being the purchase price
and directly attributable cost of acquisition or construction required to bring the asset to the
location and condition necessary to be capable of operating in a manner intended by the
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Company, including appropriate borrowing costs and the estimated present value of any
future unavoidable costs of dismantling and removing items.
Property and equipment is subsequently measured at cost less accumulated depreciation,
less any accumulated impairment losses. All repairs and maintenance costs are charged to
the consolidated statement of operations during the period in which they occur.
Depreciation is recognized in the consolidated statement of operations and is provided on a
straight-line basis over the estimated useful life of the assets as follows:
Buildings
Furniture and fixtures
Equipment
Vehicles
Straight-line over 40 years
Straight-line over 5 to 10 years
Straight-line over 1 to 5 years
Straight-line over 10 years
Impairment reviews are performed when there are indicators that the net recoverable
amount of an asset may be less than the carrying value. The net recoverable amount is
determined as the higher of an asset’s fair value less cost to dispose and value in use.
Impairment is recognized in the consolidated statement of operations, when there is
objective evidence that a loss event has occurred which has impaired future cash flows of an
asset. In the event that the value of previously impaired assets recovers, the previously
recognized impairment loss is recovered in the consolidated statement of operations at that
time.
An item of property and equipment is derecognized upon disposal or when no further
economic benefits are expected from its use. Any gain or loss arising on de-recognition of
the asset (calculated as the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the consolidated statement of operations in the period
the asset is derecognized.
Depreciation methods, useful lives and residual values are reviewed at each financial year
end and adjusted if appropriate.
i.
Income taxes
Income taxes are comprised of both current and deferred taxes. Current tax and deferred tax
are recognized in the statement of operations except to the extent that it relates to items
recognized in OCI or directly in equity. In this case, the tax is recognized in OCI or directly
in equity respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or
substantively enacted at the consolidated statement of financial position date in the
countries where the Company and its subsidiaries operate and generate taxable income and
are measured at the amount expected to be recovered from or paid to the taxation
authorities for the current and prior periods.
Deferred income tax assets and liabilities are recorded for the expected future income tax
consequences of events that have been included in the consolidated financial statements or
income tax returns. Deferred income taxes are provided for using the liability method.
Under the liability method, deferred income taxes are recognized for all significant
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Notes to the Consolidated Financial Statements
As at December 31, 2014
temporary differences between the tax and financial statement bases for assets and liabilities
and for certain carry-forward items, such as losses and tax credits not utilized from prior
years. However, if the deferred income tax arises from initial recognition of an asset or a
liability in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable income, it is not accounted for.
Recognition of deferred tax assets for unused tax losses, tax credits and deductible
temporary differences is restricted to those instances where, in the opinion of management,
it is probable that future taxable profit will be available against which the deferred tax asset
can be realized. Deferred income tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates, on the date the changes in tax laws and rates have been
enacted or substantively enacted.
j. Foreign exchange transactions
Foreign currency transactions are translated at the rate of exchange in effect on the dates
they occur. Gains and losses arising as a result of foreign currency transactions are
recognized in the current year consolidated statement of operations.
Translation of foreign operations
For the purpose of the consolidated financial statements, the results and financial position
of the Mongolian operations are expressed in Canadian dollars, which is the functional
currency of the parent, and the presentation currency of the consolidated financial
statements.
The Company translates the assets, liabilities, income and expenses of its Mongolian
operations which have a functional currency of Mongolian Tögrög , to Canadian dollars on
the following basis:
(cid:127) Assets and liabilities are translated at the closing rate of exchange in effect at the
(cid:127)
consolidated statement of financial position date.
Income and expense items are translated using the average rate for the month in
which they occur, which is considered to be a reasonable approximation of actual
rates.
(cid:127) Equity items are translated at their historical rates.
(cid:127)
The translation adjustment from the use of different rates is included as a separate
component of equity.
k. Comprehensive income
Comprehensive income consists of net income (loss) and OCI. OCI includes changes in
unrealized gains (losses) on the translation of financial statement operations with
Mongolian Tögrög functional currency.
l.
Share capital and deferred share issuance costs
Ordinary shares issued by the Company are classified as equity. Costs directly identifiable
with the raising of capital will be charged against the related share issue, net of any tax
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
effect. Costs related to shares not yet issued are recorded as deferred financing costs. These
costs will be deferred until the issuance of the shares to which the costs relate, at which time
the costs will be charged against the related share issuance or charged to operations if the
shares are not issued.
m. Share based payment
The Company offers share based payment plans for directors, executive management, key
employees and other key service providers. The purpose of the share based payment plan is
to enhance the ability of the Company to attract and retain Directors, executive
management, key employees and other key service providers whose training, experience and
ability will contribute to the effectiveness of the Company and to directly align their interests
with the interests of shareholders.
The Company’s share based payment plans provide for the granting of stock options to
independent Directors, executive management, key employees and other key service
providers. Each stock option entitles the participant to receive one common share and can
only be settled with the issuance of common shares, and as a result, is deemed to be an
equity-settled share based payment transaction. Additionally, the Company will at times
grant restricted stock of the Company under the terms of the Restricted Stock Award Plan.
Restrictions on such shares are removed as the vesting conditions are met. For restricted
shares, the holder is entitled to all dividend payments during the vesting period. Share based
payment expense is measured based on the fair market value of the Company’s shares at the
grant date. The associated compensation expense is recognized over the vesting period or
service period, whichever is shorter based on the number of rewards that are expected to
vest.
Share based payment arrangements to other key service providers in which the Company
receives properties, goods or services as consideration for its own equity instruments are
measured at fair value.
The fair value of stock options granted is measured using the Black-Scholes option pricing
model. The fair value of restricted shares granted is measured using the market price of the
Company’s shares.
Agent options granted as compensation for the issuance of shares are charged to share issue
costs.
Any consideration received upon the exercise of stock options is credited to common shares.
In the event that vested stock options expire without being exercised, previously recorded
compensation costs associated with such options are not reversed.
n. Discontinued operations
A discontinued operation is a component of the Company's business that represents a
separate major line of business or geographical area of operations that has been disposed of
or is held for sale or distribution, or is a subsidiary acquired exclusively with a view to resale.
Classification as a discontinued operation occurs upon disposal or when the operation meets
the criteria to be classified as held for sale, if earlier. When an operation is classified as a
loss and other
discontinued operation,
the comparative statement of profit or
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Notes to the Consolidated Financial Statements
As at December 31, 2014
comprehensive income is restated as if the operation had been discontinued from the start
of the comparative period.
The results of operations associated with disposal groups sold, or classified as held for sale,
are reported separately as income or loss from discontinued operations.
o. Earnings (loss) per share
For both continuing and discontinued operations, the Company presents basic and diluted
earnings (loss) per share (EPS) data for its common shares. Basic EPS is calculated by
dividing the results of operations attributable to ordinary shareholders of the Company by
the weighted average number of common shares outstanding during the period. Diluted EPS
is determined by adjusting the results of operations attributable to common shareholders
and the weighted average number of common shares outstanding for the effects of all
dilutive potential common shares, which comprise share options.
p.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting
provided to the chief operating decision maker. The chief operating decision maker, who is
responsible for allocating resources and assessing performance of operations, has been
identified as the Chief Executive Officer. The Company is now managed as two operating
segments based on how information is produced internally for the purpose of making
operating decisions. The segments are defined as investment property operations and
corporate. Previously to 2014, the Company’s insurance operations were managed and
segmented separately.
q. Leases
The Company has entered into Mongolian government land leases on some of its investment
properties. The Company, as a lessee, has determined, based on an evaluation of the terms
and conditions of the arrangements, that these land leases meet the definition of an
investment property and has classified them as such. At inception, these leases are
recognized at the lower of the fair value of the property and the present value of the
minimum lease payments.
The Company has entered into commercial and residential property leases on its investment
properties. The Company as a lessor, has determined, based on an evaluation of the terms
and conditions of the arrangements, that it retains the significant risks and rewards of
ownership of these properties and therefore accounts for these agreements as operating
leases.
r. Provisions and contingent liabilities
Provisions are recognized when the Company has a present legal or constructive obligation
as a result of a past event, it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. When the Company expects some or all of the provision to be
reimbursed, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain. The expense of any provision is recognized in the
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Notes to the Consolidated Financial Statements
As at December 31, 2014
consolidated statement of operations net of any reimbursement. If the effect of the time
value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate, the risks specific to the liability. Where discounting is used, the
increase in the provision due to the passage of time is recognized as a borrowing cost.
Contingent liabilities are disclosed if there is a possible future obligation as a result of a past
event, or if there is a present obligation as a result of a past event but either a payment is not
probable or the amount cannot be reasonably estimated.
s. Changes in accounting policies
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2014. These changes were made in
accordance with the applicable transitional provisions.
Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32
These amendments clarify the meaning of ’currently has a legally enforceable right to off-set
and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify
for offsetting and is applied retrospectively. These amendments have no impact on the
Company, since none of the entities in the Company has any offsetting arrangements.
Impairment of assets on the recoverable amount disclosures for non-financial
assets – Amendments to IAS 36
This amendment removed certain disclosures of the recoverable amount of CGUs which had
been included in IAS 36 by the issue of IFRS 13. This amendments has no impact on the
Company as the Company has not impaired any non-financial assets.
IFRIC 21 Levies
IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers
payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon
reaching a minimum threshold, the interpretation clarifies that no liability should be
anticipated before the specified minimum threshold is reached. Retrospective application is
required for IFRIC 21. This interpretation has no impact on the Company as it has applied
the recognition principles under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets consistent with the requirements of IFRIC 21 in prior years.
Annual Improvements 2010-2012 Cycle
In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six
standards, which included an amendment to IFRS 13 Fair Value Measurement. The
amendment to IFRS 13 is effective immediately and, thus, for periods beginning at January
1, 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables
with no stated interest rates can be measured at invoice amounts when the effect of
discounting is immaterial. This amendment to IFRS 13 has no impact on the Company.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Annual Improvements 2011-2013 Cycle
In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four
standards, which included an amendment to IFRS 1 First-time Adoption of International
Financial Reporting Standards. The amendment to IFRS 1 is effective immediately and,
thus, for periods beginning at January 1, 2014, and clarifies in the Basis for Conclusions that
an entity may choose to apply either a current standard or a new standard that is not yet
mandatory, but permits early application, provided either standard is applied consistently
throughout the periods presented in the entity’s first IFRS financial statements. This
amendment to IFRS 1 has no impact on the Company.
t. Accounting standards issued but not yet effective
A number of new standards, amendments to standards and interpretations are effective for
annual periods beginning after January 1, 2015 or later and have not been applied in
preparing these consolidated financial statements. Those which are relevant to the
Company are set out below. The Company does not plan to adopt these standards early and
is continuing to evaluate the impact of such standards.
Annual Improvements 2012-2014 Cycle
In the 2012-2014 annual improvements cycle, the IASB issued five amendments to four
standards, and will apply to annual periods beginning on or after January 1, 2016. The
amendments affect IFRS 5 Non-current assets held for sale and discontinued operations,
IFRS 7 Financial Instruments: Disclosures, IAS 19 Employee Benefits, and IAS 34 Interim
Financial Reporting. The relevant proposed amendments are not expected to have a
significant impact on the Company.
IFRS 9 Financial Instruments
IFRS 9, Financial Instruments, first issued in November 2009 with final version released in
July 2014 by the IASB, brings together the classification and measurement, impairment and
hedge accounting phases of the IASB’s project to replace IAS 39. IFRS 9 introduces a
principles-based approach to the classification of financial assets based on an entity’s
business model and the nature of the cash flows of the asset. All financial assets, including
hybrid contracts, are measured as at fair value through profit and loss (FVTPL), fair value
through OCI or amortized cost.
For financial
measurement previously included in IAS 39.
liabilities, IFRS 9
includes the requirements for classification and
IFRS 9 also introduces an expected loss impairment model for all financial assets not as at
FVTPL. The model has three stages: (1) on initial recognition, 12-month expected credit
losses are recognized in profit or loss and a loss allowance is established; (2) if credit risk
increases significantly and the resulting credit risk is not considered to be low, full lifetime
expected credit losses are recognized; and (3) when a financial asset is considered credit-
impaired, interest revenue is calculated based on the carrying amount of the asset, net of the
loss allowance, rather than its gross carrying amount.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for
hedge relationships more closely with an entity’s risk management activities. The standard
is effective for annual periods beginning on or after January 1, 2018.
The Company is currently assessing the impact of IFRS 9 and plans to adopt the new
standard on the required effective date.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to
revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an
amount that reflects the consideration to which an entity expects to be entitled in exchange
for transferring goods or services to a customer. The principles in IFRS 15 provide a more
structured approach to measuring and recognising revenue.
The new revenue standard is applicable to all entities and will supersede all current revenue
recognition requirements under IFRS. Either a full or modified retrospective application is
required for annual periods beginning on or after January 1, 2017 with early adoption
permitted. The Company is currently assessing the impact of IFRS 15 and plans to adopt the
new standard on the required effective date.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of
Depreciation and Amortization
The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of
economic benefits that are generated from operating a business (of which the asset is part)
rather than the economic benefits that are consumed through use of the asset. As a result, a
revenue-based method cannot be used to depreciate property, plant and equipment and may
only be used in very limited circumstances to amortize intangible assets.
The amendments are effective prospectively for annual periods beginning on or after
January 1, 2016, with early adoption permitted. These amendments are not expected to have
any impact to the Company given that the Company has not used a revenue-based method
to depreciate its non-current assets.
4 Significant accounting estimates and judgements
The preparation of financial statements in accordance with IFRS requires management to make
estimates and assumptions about the future that affect the reported amounts of assets and
liabilities. Estimates and judgements are continually evaluated based on historical experiences
and other factors, including expectations of future events that are believed to be reasonable
under the circumstances. In the future, actual experience may differ from these estimates and
assumptions.
The effect of a change in an accounting estimate is recognized prospectively by including it in
net income (loss) in the period of the change, if the change affects that period only, or in the
period of the change and future periods, if the change affects both.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Significant estimates made in the preparation of these consolidated financial statements include
the following areas:
(cid:127) Fair value of investment properties - The estimate of fair value of investment properties
is the most critical accounting estimate to the Company. An external appraiser
estimates the fair value of the majority of investment properties annually. The fair value
of investment properties is based on the nature, location and condition of the specific
asset. The fair value of investment properties represents an estimate of the price that
would be made in an arm’s length transaction between knowledgeable, willing parties.
The Company operates in the emerging real estate market of Mongolia, which given its
current economic, political and industry conditions, gives rise to an increased inherent
risk given the lack of reliable and comparable market information. The significant
estimates underlying the fair value determination are disclosed in note 8. Changes in
assumptions about these factors could materially affect the carrying value of investment
properties.
(cid:127) Accuracy of share based compensation expense - The estimate of the ultimate expense
arising from share based compensation plans is another critical accounting estimate.
There are several sources of uncertainty that need to be considered in the estimate of
the share based compensation expense recorded by the Company. The ultimate expense
is estimated by using a number of key assumptions such as the expected volatility of the
share price, the dividends expected on the shares, the risk-free interest rate for the
expected life of the option and future forfeiture rates. Further information on key
assumptions including sensitivity analysis is included in note 12.
(cid:127) Operating environment of the Company - Mongolia displays many characteristics of an
emerging market including relatively high inflation and interest rates. The tax and
customs legislation in Mongolia is subject to varying interpretations and frequent
changes. The future economic performance of Mongolia is tied to the continuing
demand from China and global prices for commodities as well as being dependent upon
the effectiveness of economic, financial and monetary measures undertaken by the
legal, regulatory and political
Government of Mongolia
developments. Management is unable to predict all developments that could have an
impact on the Mongolian economy and consequently what effect, if any, they could have
on the future financial position of the Company.
together with
tax,
5 Disposal of subsidiary
During the year ended December 31, 2013, the Company disposed of its interest in Mandal
General Insurance LLC (Mandal). The Company held 100% of the shares of Mandal with net
assets at the date of disposal of $2,484,624. Management committed to a plan to sell this
segment due to a strategic decision to place greater focus on the Company's core operation, being
investment properties.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
As part of this transaction, the Company filed a formal application with the Financial Regulatory
Commission (FRC) of Mongolia to seek permission for disposal of Mandal, which was granted.
The transaction closed on December 20, 2013 with the Company selling its stake to UMC Capital
LLC (UMC) for consideration of $3,669,951. Cash consideration of $458,101 was paid at the date
of closing with a further $223,978 received on September 30, 2014. During the year, the
Company amended the original payment terms in order to realise full payment of the remaining
long-term receivable. As a result, the Company negotiated a discount on the consideration
receivable of $402,339 and the remaining $2,585,533 was received in cash in November 2014.
This discount of $402,339 has been recorded as an expense during the year ended December 31,
2014.
Income attributable to discontinued operations was as follows:
Net premiums earned
Other revenue
Salaries and wages
Other expenses
Share based payment
Depreciation
Net investment income
Gain on disposal of subsidiary
Realized loss on foreign currency translations
Gain on disposal of net assets
Provision for income taxes
Income for the period
Cash flows from (used in) discontinued operations:
Net cash from operating activities
Net cash used from investing activities
Net effect on cash flows
2013
$
1,873,666
365,564
2,239,230
773,611
1,669,853
506,912
40,271
2,990,647
543,045
(208,372)
(826,075)
1,185,327
359,252
150,880
55,869
95,011
2013
$
741,355
(581,018)
160,337
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Notes to the Consolidated Financial Statements
As at December 31, 2014
6 Cash and cash equivalents
Cash at banks earns interest at floating rates based on daily bank deposit rates. The component of
cash and cash equivalents account currently consists only of cash amounts held in banks or on
hand.
The following table discloses the geographical location of cash and cash equivalents:
Barbados
Canada
Mongolia
2014
$
1,703
339,429
1,304,289
2013
$
22,888
2,110,032
3,237,399
1,645,421
5,370,319
Cash and cash equivalents are not collateralized. All amounts are classified as neither past due
and not impaired.
The carrying amount of cash and cash equivalents approximates fair value.
The credit quality of cash and cash equivalents balances may be summarized based on Standard
and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at December
31 was as follows:
Cash on hand
A or A+ rated
-B or B+ rated
Unrated
$
2014
$
$
3,216
318,485
1,079,405
244,315
2013
$
10,822
2,109,532
3,198,387
51,578
Total cash and cash equivalents
1,645,421
5,370,319
The unrated balance relates to one (2013 - one) commercial bank in Mongolia, which has not
been rated by any rating agency and one (2013 - one) private bank in Barbados which is also
unrated.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
7 Other assets
Accounts receivable
Prepaid expenses
Prepaid deposits on investment properties
Consideration receivable from UMC (note 5)
Less: Non-current portion of other assets
2014
$
151,585
77,229
798,889
-
2013
$
138,714
481,970
1,859,082
3,211,850
1,027,703
-
5,691,616
(1,645,125)
1,027,703
4,046,491
Total consideration receivable from UMC at December 31, 2014 is $nil (2013 - $3,211,850) (note
5). An early payment discount of $402,339 was granted and as a result the balance of the
receivable was paid before December 31, 2014. All other assets are considered current.
8
Investment properties
Balance - beginning of period
Additions
Acquisitions
Capital expenditures
Transfer from prepaid deposits
Transfer from property and equipment
Disposals
Unrealized fair value adjustment(1)
Foreign exchange adjustments
2014
$
2013
$
32,313,391
30,786,742
9,099,706
1,435,909
722,572
689,054
(5,228,204)
10,801,466
(1,375,377)
1,684,451
131,137
-
204,995
(921,126)
4,040,173
(3,612,981)
Balance - end of period
48,458,517
32,313,391
i) During the year ended December 31, 2014, the Company recorded a $10,801,466 (2013
- $4,040,173) unrealized fair value gain on its investment properties. The majority of
this unrealized gain ($6,112,423) was recorded in June 2014 as the Company obtained
the full land title for one of its redevelopment assets previously held at cost. This
holding comprises of 52 separate property titles. The unrealized gain (loss) on fair
value adjustment on investment properties of $10,683,896 (2013 - $3,845,521)
recorded in the consolidated statement of operations includes an impairment provision
of $117,570 (2013 - $194,652) related to investment properties classified as prepaid
deposits.
ii)
In February 2014, the Company purchased a property for $6,465,868, in a transaction
which involved consideration of $5,137,820 in cash and two properties valued at
$1,328,048. The two properties included in the consideration paid were recorded at a
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Notes to the Consolidated Financial Statements
As at December 31, 2014
value of $1,210,204 prior to their disposal. Of these two properties sold, $1,060,223
was classified as Investment properties and the remaining $149,981 as other assets as
of December 31, 2013. A total gain of $122,810 was recorded as a result of this
transaction due to the swap involved.
In June 2014, the Company entered into a swap transaction to buy a redevelopment
asset adjacent to the asset purchased during February 2014 in order to increase the size
of the total redevelopment asset. The property was purchased for consideration of
$1,799,357. The consideration for this purchase included one redevelopment asset
carried at a fair value of $1,003,439 and $795,918 in cash. The gain recorded in this
transaction by way of swap was $8,986.
In December 2014, the Company entered into a swap transaction to acquire a piece of
land for a total value of $775,121, adjacent to the asset purchased in February 2014.
This included giving up two retail properties valued at $664,408 in a swap and
$110,713 payable in cash out of which $61,596 was paid subsequent to year end. The
swap resulted in a gain of $1,839.
In addition to the five properties disposed of discussed above, an additional 20
investment properties were sold for cash consideration of $2,450,441, resulting in net
loss on disposal of $77,530. Furthermore, $271,024 was received as a deposit against a
sale which later took place subsequent to the year end in February 2015.
Investment properties by major category are as follows:
Residential
Office
Retail
Land and redevelopment sites
2014
$
357,160
5,039,196
27,645,411
15,416,750
2013
$
1,378,377
5,310,481
16,058,219
9,566,314
48,458,517
32,313,391
Included in investment properties are properties actively being marketed for sale that are to be
disposed of without redevelopment with a fair value of $1,109,821 (2013 - $2,883,050). During
the year, the Company earned gross proceeds of $2,721,465 from sale of investment properties
out of which $271,024 was a deposit against a property which was sold in February 2015 and
$2,450,441 (2013 – $961,079) was the proceeds against sales of investment properties that took
place during the year ended December 31, 2014. A loss of $77,530 (2013 - $17,906) on these
transactions and a total gain of $133,635 (2013 – Nil) on transactions involving swap has been
recorded in other revenue on the consolidated statement of operations.
Investment properties with an aggregate fair value of $43,435,936 (2013 - $21,718,639) at
December 31, were valued by an external independent valuation professional who is deemed to
be qualified appraiser who holds a recognized, relevant, professional qualification and who has
recent experience in the locations and categories of the investment properties valued. The
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Notes to the Consolidated Financial Statements
As at December 31, 2014
carrying value of investment properties valued by the external appraiser at December 31, 2014
and 2013 agrees to the valuations reported by the external appraiser.
The Company determined the fair value of investment properties using the income approach and
the sales comparison approach, which are generally accepted appraisal methodologies.
Under the income approach, the methodology used was the direct capitalization approach which
is based on rental income and yields. Rental incomes were based on current rent and reasonable
and supportable assumptions that represent what knowledgeable, willing parties would assume
about rental income from future rent in light of current conditions adjusted for non-recoverable
property costs. Yields were determined using data from real estate agencies, market reports and
property location among other things in determining the appropriate assumptions. Under this
method, year one income is stabilized and capped at a rate deemed appropriate for each
investment property.
The sales comparison approach analyzes all available information of sales of comparable
properties that have recently taken place and adjusts the price to reflect differences in the
property valued and sold.
The entire portfolio of investment properties has been valued using the income approach, the
sales comparison approach or a combination thereof.
Under the fair value hierarchy, the fair value of the Company's investment properties is
considered a level three, as defined in note 3.
The key valuation assumptions for commercial investment properties are as follows:
Maximum
Minimum
2014
Weighted-
average
Capitalization rate
11.5%
8%
9.75%
Maximum
Minimum
2013
Weighted-
average
Capitalization rate
11.5%
7.5%
9.5%
The following sensitivity table outlines the impact of a 0.25% change in the weighted average
capitalization rate on investment properties at December 31, 2014:
Change to fair value if
capitalization rate
increased 0.25%
Change to fair value if
capitalization rate decreases
0.25%
Commercial property
$(1,290,639)
$1,358,567
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Additional valuation assumptions include the rental revenue per square meter, grade quality of
the property and comparable market data. Changes to these assumptions could have a material
impact on the fair value of the Company’s investment properties.
Investment properties of $26,666,348 (2013 - $15,886,443) have no rental revenue associated
with them at December 31, 2014.
Investment properties include land held under operating leases with an aggregate fair value of
$15,416,750 (2013 - $10,538,656 ) at December 31 2014.
Certain investment properties held by the Company are leased out under operating leases. The
future minimum lease payments under non-cancellable leases are as follows:
Less than 1 year
Between 1 and 5 years
2014
$
2013
$
1,509,802
1,047,863
1,358,772
1,264,909
2,557,665
2,623,681
Direct operating expenses arising from investment properties that generated rental income
during the year was $1,556,367 (2013 - $1,130,285). Direct operating expenses arising from
investment properties that did not generate rental income during the year was $125,116 (2013 -
$267,899).
9 Property and equipment
Furniture
and fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2014
Total
$
Cost
At January 1
Additions
Disposals
Transfers
Foreign exchange
adjustment
71,844
42,566
(4,787)
-
111,745
45,772
-
-
137,170
-
(92,439)
-
3,863,751
-
-
(738,823)
4,184,510
88,338
(97,226)
(738,823)
(7,280)
1,026
788
(152,468)
(157,934)
At December 31
102,343
158,543
45,519
2,972,460
3,278,865
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Furniture
and fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2014
Total
$
Accumulated
depreciation
At January 1
Depreciation
Disposals
Transfers
Foreign exchange
adjustment
16,873
5,656
(1,637)
-
26,267
39,058
-
-
31,472
10,042
(29,115)
-
194,206
71,262
-
(49,769)
268,818
126,018
(30,752)
(49,769)
(690)
30
49
(9,789)
(10,400)
At December 31
20,202
65,355
12,448
205,910
303,915
Net book value at
December 31
82,141
93,188
33,071
2,766,550
2,974,950
Furniture
and fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2013
Total
$
Cost
At January 1
Additions
Disposals
Transfers
Foreign exchange
adjustment
138,890
14,215
(68,237)
-
125,737
95,231
(90,547)
-
268,351
21,729
(132,985)
-
4,238,707
67,120
-
(204,995)
4,771,685
198,295
(291,769)
(204,995)
(13,024)
(18,676)
(19,925)
(237,081)
(288,706)
At December 31
71,844
111,745
137,170
3,863,751
4,184,510
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Furniture
and fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2013
Total
$
Accumulated
depreciation
At January 1
Depreciation
Disposals
Foreign exchange
adjustment
17,606
12,650
(10,740)
37,970
43,813
(41,688)
32,090
24,200
(23,775)
107,988
97,485
-
195,654
178,148
(76,203)
(2,643)
(13,828)
(1,043)
(11,267)
(28,781)
At December 31
16,873
26,267
31,472
194,206
268,818
Net book value at
December 31
54,971
85,478
105,698
3,669,545
3,915,692
10 Trade payables and accrued liabilities
Trade and accrued payables
Security deposit
Unearned revenue
Deposit on investment property sales
2014
$
1,403,004
188,970
62,657
271,024
2013
$
650,337
145,315
78,570
-
1,925,655
874,222
The carrying amounts above reasonably approximate fair value at the balance sheet date. All
trade and other payables are current.
11 Income taxes
a) Effective tax rate
The income tax expense reflects an effective tax rate that differs from the combined tax rate
for Canadian federal and provincial corporate taxes for the following:
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Notes to the Consolidated Financial Statements
As at December 31, 2014
Net income (loss) before income taxes
Combined statutory tax rate
Tax payable (recoverable) based on statutory tax
rate
Effect of:
Permanent differences
Tax rate variances of foreign subsidiaries
Deferred tax assets not recognized
Other
Provision for income taxes
Current
Deferred
Provision for income taxes - continuing operations
- discontinued
Provision
income
taxes
for
operations
2014
$
4,473,714
26.5%
2013
$
213,331
26.5%
1,185,534
56,533
361,829
(1,846,320)
620,889
-
175,406
(465,218)
683,715
13,469
321,932
463,905
312,908
9,024
321,932
-
321,932
40,487
423,418
463,905
55,869
519,774
a) Deferred income taxes
Differences between IFRS and statutory taxation regulations in Mongolia give rise to
temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and their tax bases.
The Company did not recognize a deferred tax asset in these consolidated financial
statements as there is uncertainty with regard to the recoverability of the asset for both the
Canadian and Mongolian entities.
There are non-capital loss carry-forwards relating to the Mongolian entities that will expire
in 2016 for which no future tax benefit has been recorded. The Company also did not
recognize deferred tax assets related to taxable temporary differences. In accordance with
Mongolian tax law, the taxable losses can be carried forward for two years and are
deductible up to 50% of the taxable income of that year.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
In accordance with Canadian tax law, the taxable losses can be forward twenty years. There
are $7,935,753 (2013 - $5,419,472) of non-capital losses relating to the Canadian entity.
The losses expire as follows:
Year of expiry
2028
2029
2030
2031
2032
2033
2034
Non-capital
loss
$
8,572
75,387
275,393
933,914
1,660,163
2,735,616
2,246,708
No future tax benefit has been recorded on these non-capital loss carry forwards as the
timing for potential realization of these future benefits is uncertain.
Components of the deferred tax liabilities are as follows:
Deferred tax liabilities
Investment properties
12 Share capital and contributed surplus
a) Authorized
2014
$
2013
$
1,099,141
1,090,117
1,099,141
1,090,117
The Company is authorized to issue an unlimited number of common and preferred shares.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
b) Common shares
The issued and outstanding common shares are as follows:
Balance, December 31, 2012
Number of
shares
34,143,352
Amount
$
51,681,818
Options exercised
160,000
522,576
Balance, December 31, 2013
34,303,352
52,204,394
New shares issued
RSAs vested
Options exercised
125,000
30,393
390,000
250,000
70,815
1,264,250
Balance, December 31, 2014
34,848,745
53,789,459
c) Stock options
Balance, January 1, 2013
Granted
Cancelled
Exercised
Forfeited
December 31, 2013
Balance, January 1, 2014
Granted
Cancelled
Exercised
Forfeited
December 31, 2014
Number of
options
1,782,000
475,000
(65,000)
(160,000)
(75,000)
1,957,000
1,957,000
1,538,000
(297,000)
(390,000)
(360,000)
2,448,000
Weighted
average
exercise
price
$
3.40
4.13
4.20
1.84
4.21
3.76
3.76
1.70
4.20
1.76
4.08
2.61
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Notes to the Consolidated Financial Statements
As at December 31, 2014
The Company has established a share based payment plan (the "Plan") to encourage
ownership of
its shares by key management personnel (directors and executive
management), employees and other key service providers, and to provide compensation for
certain services. The Plan provides for the issuance of stock options in an aggregate number
of up to 10% of the Company’s issued and outstanding shares, calculated from time to time.
At December 31, 2014, the Company had 1,036,874 (2013 - 1,473,335) common shares
available for the granting of future options under the new plan. The Company does not have
any cash-settled transactions.
On March 1, 2013, 475,000 options were granted to employees and consultants of the
Company. These options allow the holder to acquire common shares at a price of $4.13 per
share for each option exercised. Of these options 375,000 vest in four equal annual tranches
each year over four years and expire on March 1, 2018 and 125,000 of these options vested
and became exercisable immediately and expire on March 1, 2016.
On December 20, 2013, the Company disposed of its investment in Mandal General
Insurance resulting in the immediate vesting of 143,000 shares. The options became
exercisable immediately and expired on January 20, 2014. None of these options were
exercised.
On March 3, 2014, the Company issued 1,128,000 five year stock options at a price of $1.90
per share and 35,000 three year stock options at a price of $1.90. Of these options issued,
192,000 were issued in satisfaction of approximately $200,000 of directors fees which had
been accrued at December 31, 2013.
On December 15, 2014, the Company issued 375,000 five year stock options at a price of
$1.09 to the Directors of the Company. The options vested immediately.
A summary of the Company’s options as at December 31 and changes during the periods
then ended follows:
December 31,
2014
Weighted
average
exercise price
$
December 31,
2013
Weighted
average
exercise price
$
Balance, beginning of the
year
Options cancelled
Options granted
Options exercised
Options forfeited
1,957,000
(297,000)
1,538,000
(390,000)
(360,000)
3.76
4.20
1.70
1.76
4.08
1,782,000
(65,000)
475,000
(160,000)
(75,000)
Balance, end of the year
2,448,000
2.61
1,957,000
Exercisable
1,385,000
2.46
1,324,500
Weighted
average
(years)
remaining
life
3.63
3.40
4.20
4.13
1.84
4.21
3.76
3.44
3.55
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Notes to the Consolidated Financial Statements
As at December 31, 2014
During the year, 80,000 options were exercised at a price of $1.90, 60,000 options were
exercised at a price of $1.64 and 250,000 options at a price of $1.75 were exercised for total cash
proceeds of $687,900 (2013 – $65,600). In addition, 30,393 RSAs vested increasing the shares
issued by the same amount. Of the RSAs which vested during the year, 7,000 were subsequently
bought back by the Company.
Additionally during 2014, 360,000 options with a weighted average exercise price of $4.08 were
forfeited and 297,000 options with a weighted average exercise price of 4.20 were cancelled
during this time. An additional 75,000 options with a weighted average exercise price of 4.20
expired and were cancelled during the period.
The fair value associated with the options issued in March was calculated using the Black-Scholes
model for options valuation, assuming volatility of 77.5% (2013 - 90%) on the underlying units, a
risk free interest rate of 1.39% (2013 - 1.19%) and a forfeiture rate of nil based on the composition
of the option holders. The fair value associated with the options issued in December was
calculated using the Black-Scholes model for options valuation, assuming volatility of 68.6%
(2013 - 90%) on the underlying units, a risk free interest rate of 1.31% (2013 - 1.19%) and a
forfeiture rate of nil based on the composition of the option holders.
Share prices for the calculation were the closing price on the TSXV on the date of issue of the
options. The Company has assumed the options will be exercised at the end of the term of the
option.
The Company considered its historical share price over the last four years in determining the
volatility to use in the option valuation. In prior periods, given the lack of sufficient information
on historical volatility, it also considered historical volatility of similar entities following a
comparable period in their lives.
The approximate impact of an increase of 1o% in the volatility assumption for the options issued
in the current year would decrease net income of the Company by $106,687. The approximate
impact of a decrease of 10% in the volatility assumption would increase net income of the
Company by $116,905.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
The following options were issued, outstanding and exercisable at December 31:
Options outstanding 2014
Number outstanding
Weighted average
remaining life
(years)
Weighted
average exercise
price
Weighted
average at grant
date
50,000
130,000
75,000
100,000
190,000
400,000
1,128,000
375,000
2,448,000
6.19
1.32
1.69
1.92
2.23
2.92
4.11
4.94
3.63
$
1.64
4.20
4.77
4.25
4.00
4.13
1.90
1.09
2.61
1.78
4.04
4.70
4.14
4.00
4.09
2.13
1.15
2.52
Options outstanding 2013
Number outstanding
Weighted average
remaining life
(years)
Weighted
average exercise
price
Weighted
average at grant
date
360,000
80,000
602,000
150,000
100,000
190,000
475,000
1,957,000
6.02
7.19
1.24
2.69
2.92
3.23
3.96
3.55
$
1.73
1.90
4.20
4.77
4.25
4.00
4.13
3.76
1.78
1.78
4.04
4.70
4.14
4.00
4.13
3.55
Restricted Stock Awards
The Company has granted restricted stock of the Company to certain individuals under the terms
of the Restricted Stock Award Plan of the Company. Restrictions on such shares are removed as
vesting conditions are met.
The number of restricted shares granted under the Restricted Stock Award Plan was as follows:
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Notes to the Consolidated Financial Statements
As at December 31, 2014
December
31,
2014
Weighted
average
exercise
price
December
31,
2013
Balance, beginning of period
RSAs forfeited
RSAs vested
91,179
(14,000)
(30,393)
Balance, end of the period
46,786
$
-
-
-
-
91,179
-
-
91,179
Weighted
average
exercise
price
$
-
-
-
-
The fair value of the restricted shares granted during the 2014 year was $212,447 at the time of
the grant (weighted average grant price of $2.33 per share) and was based on the market price of
the Company’s shares at that time.
During the 2014 year, the Company recorded net compensation expense of $127,230 (2013 -
$2,384) for the Restricted Share Plan within the share based payment expenses.
d) Earnings per share
The following table summarizes the shares used in calculating earnings (loss) per share:
2014
$
2013
$
Weighted average number of shares - basic
Effect of dilutive stock options
34,652,992
-
34,256,557
440,000
Weighted average number of shares - diluted
34,652,992
34,696,557
Basic earnings (loss) per share are derived by dividing net income (loss) for the year by the
weighted average number of common shares outstanding for the period. The effect of
potentially dilutive securities is excluded if they are anti-dilutive.
There have been no significant capital transactions from the reporting date to the date of
this filing which have had a material impact on earnings per share.
13 Management of capital structure
The Company’s objective when managing capital is to ensure the Company is capitalized in a
manner which provides a strong financial position for its shareholders.
The Company’s capital structure includes equity and working capital. In managing its capital
structure, the Company considers future investment and acquisition opportunities, potential
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Notes to the Consolidated Financial Statements
As at December 31, 2014
credit available and potential issuances of new equity. The Company’s objective is to maintain a
flexible capital structure that will allow it to execute its stated business. Upon acquiring
investment properties and operating businesses, the Company will strive to balance its
proportion of debt and equity within its capital structure in accordance with the needs of the
continuing business. The Company may, from time to time, issue shares and adjust its spending
to manage current and projected proportions as deemed appropriate.
The method used by the Company to monitor its capital is based on an assessment of the
Company’s working capital position relative to its projected obligations. At December 31, 2014,
the Company’s working capital was $596,123 (2013 - $8,538,467) and the Company had no debt.
Current assets
Current liabilities
Working capital
14 Financial risk management
2014
$
2013
$
2,673,124
2,077,001
9,416,810
878,343
596,123
8,538,467
The Board of Directors ensures that management has put appropriate risk management
processes in place. Through the Audit Committee, the Board oversees such risk management
procedures and controls. Management provides updates to the Audit Committee on a quarterly
basis with respect to risk management.
The Company is no longer exposed to risks resulting from insurance contracts and the related
claims as the Company has disposed of their insurance operations effective December 20, 2013
(note 5).
Catastrophe risk
The Company obtained
approximately $24,600,000 (2013 - $28,700,000).
insurance on buildings and all permanent
fixtures totalling
Credit risk
Credit risk is the risk of an unexpected financial loss to the Company if a third party fails to fulfill
its performance obligations under the terms of a financial instrument. The Company’s credit risk
arises principally from the Company’s cash and cash equivalents and receivables.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
The following table summarizes the Company’s maximum exposure to credit risk on the
consolidated statement of financial position. The maximum credit exposure is the carrying value
of the asset, net of any allowances for loss.
Cash and cash equivalents
Receivables
2014
$
2013
$
1,645,421
151,585
5,370,319
3,350,564
Maximum credit risk exposure on the consolidated
statement of financial position
1,797,006
8,720,883
The Company’s exposure to credit risk is managed through risk management policies and
procedures with emphasis on the quality of the investment portfolio. The majority of the funds
invested are held in reputable Barbadian, Canadian or Mongolian banks. The Company is in the
early stages of development and is continually improving its policies regarding monitoring its
credit risk.
The Company is exposed to credit risk as an owner of real estate in that tenants may become
unable to pay the contracted rents. The Company mitigates this risk by carrying out appropriate
credit checks and related due diligence on the significant tenants. The Company’s properties are
diversified across residential and commercial classes.
Liquidity risk
Liquidity risk is the risk of having insufficient cash resources to meet financial obligations
without raising funds at unfavourable rates or selling assets on a forced basis. Liquidity risk
arises from the general business activities and in the course of managing the assets and liabilities.
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial
commitments and obligations as they fall due. The liquidity requirements of the Company’s
business are met primarily by funds generated from operations, liquid investments and income
and other returns received on investments. Cash provided from these sources is used primarily
for investment property operating expenses.
As at December 31, 2014, the Company does not believe the current maturity profile of the
Company lends itself to any material liquidity risk, taking into account the level of cash and cash
equivalents, investments and marketable securities as at December 31, 2014. The Company does
not have material liabilities that can be called unexpectedly at the demand of a client.
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Notes to the Consolidated Financial Statements
As at December 31, 2014
The following table summarizes the undiscounted cash flows of financial assets and liabilities by
contractual or expected maturity:
December 31, 2014
One year or
less
$
One to two
years
$
No maturity
date
$
Financial Assets
Cash and cash equivalents
Receivables
Financial Liabilities
Trade payables and accrued
liabilities
1,645,421
151,585
1,797,006
1,925,655
-
-
-
-
-
-
-
-
December 31, 2013
One year or
less
$
One to two
years
$
No maturity
date
$
Financial Assets
Cash and cash equivalents
Receivables
5,370,319
1,705,439
-
1,645,125
7,075,758
1,645,125
Financial Liabilities
Trade payables and accrued
liabilities
874,222
-
-
-
-
-
Market risk
Market risk includes interest rate risk, currency risk and other price risk.
i)
Interest rate risk
Interest rate risk is the potential for financial loss arising from changes in interest rates.
Changes in interest rate levels generally impact the financial results to the extent that
reinvestment yields are different than the original yields on fixed income securities.
Changes in interest rates will affect the fair value of the fixed income securities. During
periods of rising interest rates, the market value of the existing fixed income securities
will generally decrease. During periods of declining interest rates the opposite is true.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
The Company is not directly exposed to interest rate risk at December 31, 2014 and
2013.
ii) Currency risk
Currency risk represents the risk that the Company incurs losses due to exposure to
foreign currency fluctuations. The Company owns properties and carries out related
business operations in Mongolia, and is therefore subject to foreign currency
fluctuations that may impact its financial position and results.
The approximate impact of an increase of 10% in the Mongolian Tögrög against the
Canadian dollar would increase the OCI of the Company by $766,111 (2013 -
$4,267,566). The approximate impact of a decrease of 10% in the Mongolian Tögrög
against the Canadian dollar would decrease OCI of the Company by $935,558 (2013 -
$4,267,566).
iii) Other price risk
Other price risk market fluctuation risk is where fluctuations in the value of equity
securities affect the level and timing of recognition of gains and losses on securities
held, and cause changes in realized and unrealized gains and losses. As the Company
does not have any equity investments, it does not have any exposure to equity risk.
Economic risk
Mongolian tax, currency and customs legislation is subject to varying interpretations, and
changes, which can occur frequently. Management’s interpretation of such legislation as applied
to the transactions and activity of the Company may be challenged by tax authorities.
Mongolian tax authorities may be taking a more assertive position in their interpretation of the
legislation and assessments, and it is possible that transactions and activities that have not been
challenged in the past may be challenged by tax authorities. As a result, significant additional
taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the
authorities in respect of taxes for five calendar years preceding the year of review. Under certain
circumstances reviews may cover longer periods.
Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in
areas such as Value added tax (VAT), corporate income tax, personal income tax and other areas.
From time to time, the Company adopts interpretations of such uncertain areas that reduce the
overall tax rate of the Company. As noted above, such tax positions may come under heightened
scrutiny as a result of recent developments in administrative and court practices. The impact of
any challenge by the tax authorities cannot be reliably estimated; however, it may be significant
to the financial position and/or the overall operations of the entity.
The Company’s management believes that its interpretation of the relevant legislation is
appropriate and the Company’s tax positions will be sustained. Management believes that tax
risks are remote at present.
Management performs regular re-assessments of tax risk and its position may change in the
future as a result of the change in conditions that cannot be anticipated with sufficient certainty
at present.
15 Related party transactions
Parties are generally considered to be related if the parties are under common control or if one
party has the ability to control the other party or can exercise significant influence or joint control
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
over the other party in making financial and operational decisions. In considering each possible
related party relationship, attention is directed to the substance of the relationship, not merely
the legal form.
On August 8, 2013, the Company loaned a member of the key management $100,000 with a
fixed interest rate of 6% payable back to the Company within six months from the loan date. The
loan was fully repaid in February 2014.
Key management personnel of the Company include all directors and executive management.
The summary of compensation for key management personnel is as follows:
Salaries and other short-term employee benefits
Share-based payments
Termination benefits
2014
$
438,006
929,311
870,540
2013
$
821,756
341,049
-
2,237,857
1,162,805
In addition to the above, during the period, the Company rented an office for total consideration
of $4,746 (2013 - Nil) from a company in which a former director of the Company has a
controlling interest.
16 Commitments and contingencies
From time to time and in the normal course of business, claims against the Company may be
received. On the basis of management’s assessments and professional legal advice, management
is of the opinion that no material losses will be incurred and no provision or disclosure has been
made in these consolidated financial statements.
The Company indemnifies its directors and officers against any and all claims or losses
reasonably incurred in the performance of their service to the Company to the extent permitted
by law.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
17 Supplementary cash flow information
Changes in non-working capital arising from
Other assets
Trade payables and accrued liabilities
Income tax payable
2014
$
3,557,875
(2,563,665)
150,206
2013
$
394,187
107,760
63,663
Changes in non-cash working capital from operating
activities
1,144,416
565,610
Income tax paid during the year was $75,991 (2013 $181,423). Interest paid during the year was
$250,230 (2013 - Nil).
18 Segment information
The Company’s operations are conducted in two reportable segments; Investment Property
Operations and Corporate. The Company reports information about its operating segments based
on the way management organizes and reports the segments within the organization for making
operating decisions and evaluating performance.
Investment Property operations consist of commercial and residential investment property in
Mongolia held for the purposes of rental revenue, capital appreciation or redevelopment. These
properties are managed by Big Sky Capital LLC and its subsidiaries.
Insurance Operations included general property and casualty insurance products in Mongolia.
Insurance underwriting and claims handling functions were administered through Mandal
General Insurance LLC. These operations were disposed of on December 20, 2013 (note 5).
64 | Mongolia Growth Group Ltd.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
The Company evaluates performance based on net income (loss) before income taxes.
Rental income
Property operating expenses
Unrealized gain on fair value
on
adjustment
investment properties
Share based payment
Other expenses
Depreciation
Net investment income
Gain on disposal of investment property
Other revenue
Net
income
income taxes
(loss) before
Investment
Property
$
1,822,392
(1,556,367)
Corporate
$
-
-
10,683,896
(603,798)
(1,280,628)
(119,312)
65,537
56,105
40,158
-
(1,235,106)
(3,393,787)
(6,706)
1,069
-
261
2014
Total
$
1,822,392
(1,556,367)
10,683,896
(1,838,904)
(4,674,415)
(126,018)
66,606
56,105
40,419
9,107,983
(4,634,269)
4,473,714
Rental income
Property operating expenses
Unrealized gain on fair value
on
adjustment
investment properties
insurance
Net premiums earned
Claims
and
benefits incurred
Share based payment
Other expenses
Depreciation
Net investment income
Gain on disposal of
investment property
Other revenue
Net
income
income taxes
(loss) before
2013
Total
$
1,650,895
(1,398,184)
3,845,521
1,873,666
(1,063,379)
(1,438,695)
(4,517,168)
(178,148)
782,100
Investment
Property
$
1,650,895
(1,398,184)
Insurance
$
Corporate
$
-
-
3,845,521
-
-
1,873,666
-
-
-
-
(1,063,379)
(506,912)
(1,380,085)
(40,271)
543,045
-
(605,816)
(3,065,792)
(8,728)
1,383
-
(325,967)
(71,291)
(129,149)
237,672
(17,906)
99,691
-
365,564
-
1,001
(17,906)
466,256
3,891,282
(208,372)
(3,677,952)
4,958
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2014
Balance as of
December 31, 2014
Total assets
Property and equipment
Investment properties
Expenditures
Property and equipment
Investment properties
Balance as of
December 31, 2013
Total assets
Property and equipment
Investment properties
Expenditures
Property and equipment
Investment properties
Investment
Property
$
53,745,233
2,963,284
48,458,517
88,338
10,535,615
Investment
Property
$
41,819,097
3,893,719
32,313,391
129,576
715,915
Corporate
$
361,358
11,666
-
-
-
Corporate
$
5,471,921
21,973
-
2,197
-
Total
$
54,106,591
2,974,950
48,458,517
88,338
10,535,615
Total
$
47,291,018
3,915,692
32,313,391
131,773
715,915
Revenue
Property and
equipment
Investment property
2014
$
2013
$
2014
$
2013
$
2014
$
2013
$
Canada
Mongolia
-
1,918,655 3,919,375 2,963,284 3,893,719 48,458,517 32,313,391
11,666
21,973
1,001
261
-
1,918,916 3,920,376 2,974,950 3,915,692 48,458,517 32,313,391
Revenue in Mongolia includes nil (2013 - $2,239,230) from discontinued operations (note 5).
19 Other expenses
Professional fees
Travel
Advertising
Land and property tax
Insurance
Utility expense
Other expenses
2014
$
1,513,848
140,349
150,253
268,694
68,519
142,299
617,048
2013
$
1,866,094
303,038
21,118
254,404
27,901
75,983
778,303
2,901,010
3,326,841
66 | Mongolia Growth Group Ltd.
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Board of Directors
Harris Kupperman
CEO & Chairman of Mongolia Growth Group Ltd
Mr. Kupperman is a co-founder of Mongolia Growth
Group. Mr. Kupperman was the President and CEO of
the Corporation from February 2011 to March 2014,
where he stepped down as CEO to continue his role as
Executive Chairman, then returned as CEO in December
2014. Mr. Kupperman publishes AdventuresInCapitalism.
com; a site dedicated to uncovering unique opportunities
around the world. He spent 10 years as President of
Praetorian Capital, a macro themed small cap focused
hedge fund based in Miami. He graduated from Tulane
University College with a history degree. Mr. Kupperman
served as a Director at Aeroquest International Limited
(TSX:AQL) from 2010-2011.
Jim Dwyer
Independent Director
Mr. Dwyer was a New York-based investment banker
specializing in mergers and acquisitions for 30 years and
completed over 100 M&A transactions. In addition, he
founded and managed M&A departments for two major
investment banking firms: Shearson Loeb Rhoades and
UBS-North America. Mr. Dwyer first visited Mongolia in
2001 to represent the Government of Mongolia as lead
investment banker for the privatization of its largest
bank, Trade & Development Bank. Thereafter, he served
as lead investment banker for the privatization of the
largest Government owned retail bank, Khan Bank. He
co-founded the Business Council of Mongolia (BCM) and
has served as Executive Director since its formation, in
August 2007. Mr. Dwyer received his MBA from Columbia
Graduate School of Business (Columbia University).
Byambaa Losolsuren
Independent Director
Mrs. Losolsuren is a founder and CEO of the Trend
Capital LLC, investment advisory firm. In the past, she
was one of the key partners at UMC to launch and
build Mandal financial services group being in charge
of asset management arm. She managed three local
investment funds under Mandal Asset Management.
She was instrumental in drafting of the Investment
Fund law of Mongolia, which was successfully passed
by the Parliament in 2013. Ms.Losolsuren also serves
as an independent director of the Mongolian Mortgage
Corporation SPV and local insurance company. Also
currently member of the Economic Council at the Prime
Minister of Mongolia and a Director of the Investment
the
and Finance Research Center. Columnist at
Mongolian Economy journal. She holds a BA from the
National University of Mongolia, and MBA degree from
Waseda University, Japan.
Nick Cousyn
Independent Director
Mr Cousyn is a Capital Markets¹ professional with 15 years
of alternatives and traditional industry experience. Before
moving to Mongolia, Mr. Cousyn was a licensed securities
professional in the U.S. with extensive experience in
relationship management and trading which spanned
equities, fixed income, derivatives and distressed debt.
Since 2012, Mr. Cousyn has served as Chief Operating
Officer and head of research for BDSec (MO:BDS),
Mongolia¹s largest broker and investment bank. Mr.
Cousyn also serves as Co-Chair of the Business Council
of Mongolia Capital Market Working Group and is a Senior
Council Member and guest lecturer at Mongolia¹s Institute
for Finance and Economics. Mr. Cousyn holds a BA in
Economics from the University of California at Riverside.
Brad Farquhar
Independent Director
Mr. Farquhar is Executive Vice-President and Chief
Financial Officer of Input Capital Corp. (TSXV: INP), the
world¹s first agricultural streaming company. He also
serves in a similar capacity at Assiniboia Capital Corp.,
which manages a 140,000 acre portfolio of farmland on
behalf of one of the world¹s largest institutional investors.
In addition, Mr. Farquhar is President of Nomad Mongolia
LP, an investment partnership that invests in Mongolian
public companies, including MGG. Mr. Farquhar is a
trained financial planner. He received a MPA in Electoral
Governance from Griffith University in Australia, studied
political science at Carleton University, and completed
a BA at Providence College. Mr. Farquhar is a Director
of Input Capital Corp, Greenfield Carbon Offsetters Inc.,
on the advisory board of AgFunder.com and Chair of the
board of directors of SIM Canada.
Robert Scott
Independent Director
Mr. Scott, CA, CFA brings more than 20 years of
professional experience incorporate finance, accounting
and merchant and commercial banking. Mr. Scott earned
his CFA in 2001, his CA designation in 1998 and has a
B.Sc. from the University of British Columbia. He is a
Founder and President of Corex Management Inc., a
private company providing accounting, administration,
and corporate compliance services to privately held and
publicly traded companies. Mr. Scott is currently the CFO
of Riverside Resources (TSXV: RRI) and on the board of
Entourage Metals (TSXV: EMT). In addition, Mr. Scott is a
co-founder and director of privately held, Pan American
Hydro Corporation, a developer of small hydro projects
in Latin America.
Officers
Harris Kupperman
CEO and Chairman
Genevieve Walkden, MBA, CFP, CAIA
Talha Siddiqui, ACCA
Corporate Secretary and
Sr.Vice President Finance
Interim Chief Financial Officer
Auditors
Legal
Transfer Agent
PricewaterhouseCoopers LLP
Winnipeg, MB
Borden Ladner Gervais LLP
Computershare Investor Services
Calgary, AB
100 University Ave., 8th Floor
Blakes, Cassels & Graydon LLP
Calgary, AB
Toronto, ON M5J 2Y1
Tel: 1 800 564 6253
www.investorcentre.com/service
Mongolia Growth Group Ltd. | 67
TSX - Venture
Canada: YAK
USA: MNGGF
MONGOLIA GROWTH GROUP Ltd.
First Canadian Place,100 King Street West,
56th Floor, Toronto, Ontario M5X 1C9, Canada
Tel: (877) 644-1186
Fax: (866) 468-9119
68 | Mongolia Growth Group Ltd.
info@mongoliagrowthgroup.com | www.mongoliagrowthgroup.com