2015 Annual Report
Table of Contents
Letter to Shareholders ................................................................................................................................. 3
Management Discussion & Analysis ........................................................................................................... 4
Consolidated Financial Statements ............................................................................................................ 22
Independent Auditor’s Report
............................................................................................................ 23
Corporate Information ................................................................................................................................ 61
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outdated properties, relying on in-house services for all facets of both the investment portfolio and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
CEO and Chairman of the Board
Dear Shareholders,
At the end of 2014, I took drastic action to reverse
the course of our business and set it back on a path
towards sustainability. We spent much of our first
four years with sizable and accelerating cash losses.
These losses were rapidly destroying our equity and
threatening the future of this Company. It became
obvious that to preserve our capital, the first step was
to stop losing money. I can now say that we’ve made
substantial progress in this regard.
On the revenue side, we have continued to seek out
ways of enhancing our revenues; however despite the
success of these initiatives, they have been insufficient
to offset the declines in rent caused by the deteriorating
economy. While we will do our best to find additional
savings, there is only so much that we can do to get
to positive AFFO—especially as lease rates decline
in Mongolian Togrog terms, while the Togrog itself
declines against the Canadian Dollar.
Following the turnaround in 2015, we’ve now cut our
recurring losses to a point where we believe we can
successfully manage through this downturn. In many
ways, 2015 was the best year in our Company’s history
and I am proud of the success that has been achieved
despite a steadily weakening economy in Mongolia.
In concrete terms, these accomplishments are;
• Improvements in operational performance have
reduced negative quarterly AFFO by 89% year over
year to CDN $451,898 compared to 2014 when
negative AFFO was CDN $4,127,427.
• Reduced expenses excluding non-cash, non-
capitalized development expense from $5,578,213
to $2,665,165, a decrease of 52%, despite an
increase in expenses associated with the operation
of Tuguldur Center and various marketing initiatives
Please note that the above discussion is all about costs
as our cost structure was bloated and 2015 was all
about the immediacy of eliminating this unnecessary
spending. The interesting thing about cutting costs is
that when you cut one set of unnecessary costs, you
suddenly realize that some other piece of spending is
pointless without the other leg to stand on—so you can
eliminate it too. During 2015 we have taken a number
of journeys through each and every expense item and
we’ve continued to find additional costs to cut. At the
time, some items seemed impossible to live without—
now we wonder why we ever spent on them on the
first place. Now that we have cut more than half of our
run-rate expenses, we can operate the Company more
efficiently as a result of fewer distractions. I suspect
that as we continue to make cuts, our effectiveness will
increase.
Offsetting these accomplishments has been the
realization that the Mongolian property market is
rapidly declining and there is very little that we can
do to compensate for these macro forces, outside
of continuing to cut costs and manage the business
better.
Despite this obvious headwind, I feel good about the
overall state of the business and believe that we are on
the right track—even if that may only mean losing less
money until the economy recovers. Previously, our goal
had been to grow with the economy. Now our goal is to
preserve as much shareholder value as possible, until
the economy recovers.
My only regret from 2015 has been that we continued
to spend money on advancing Tuguldur Stage 2. While
the economics of this project are very robust, it may
have been wiser to defer all new development with
the economy is in such a debilitated state. Despite
the availability of funding for the project, we ultimately
decided to postpone development—but not before
spending a good deal of our capital to push it forward.
This money isn’t wasted as we will ultimately have
to divert these utilities before any development can
be undertaken—but as I write this, I’d much rather
have the cash in our bank accounts to redeploy into
distressed property assets—rather than a clean piece
of land that we won’t build on for many years.
Returning to the original motif, in many ways, 2015
was the best year in the history of our Company and
we ended the year with the best quarter in the history
of our Company. We expect these improvements
to continue through 2016. We are on the right track,
have identified additional costs to cut and when the
Mongolian economy recovers, we hope to be leveraged
to an increase in asset values while using our unique
property management platform to drive third party
business.
Sincerely,
Harris Kupperman
CEO and Chairman of the Board
3
MONGOLIA GROWTH GROUP LTD.
Management Discussion & Analysis
December 31, 2015
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, 2015 (the “MD&A”), compared with the
year ended December 31, 2014. 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 19, 2016 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, 2015 and December 31, 2014 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 adjusted earnings before interest, taxes, unrealized fair value adjustments, share
based payments 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. The Corporation also refers to Funds from Operations (“FFO”) and Adjusted Funds from
Operations (“AFFO”). “FFO” is not defined under IFRS. The Corporation calculates FFO in accordance with the
Real Property Association of Canada ( “REALpac ”) White Paper on Funds from Operations issued April 2014. FFO
is defined by the Corporation as net income (loss) and comprehensive income (loss) calculated in accordance with
IFRS, excluding: (i) Unrealized change in fair value of investment properties (ii) depreciation and amortization of
investment properties; (iii) gains (or losses) from sales of investment properties and equipment; (iv) tax on gains or
losses of sale on investment properties (v) deferred income tax (expense) recovery; (vi) impairment/losses on all real
estate assets (vii) Gains or losses on PPE properties (viii) share based payments. “AFFO” is not defined under IFRS
and may not be comparable to AFFO used by other issuers. The Corporation has defined AFFO as FFO subject
to certain adjustments, including: development expenses not capitalized, large one-time expenses and other
adjustments as determined by Management.
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.
4
Section 1 – Overview
Financial and Operational Overview
During 2015, the Corporation continued to suffer from negative cash flow as a result of inadequate scale and
insufficient revenues accentuated by an accelerating decline in market rental rates. On the positive side, the
Corporation was able to dramatically reduce expenses in order to offset the decline in revenues. As a result
of reduced expenses and increased efficiency, AFFO improved from negative $4,127,427 in 2014 to negative
$342,866 in 2015, representing a dramatic improvement over prior years.
The Corporation maintained 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 87.4% at the end of the year.
On the expense side, overall expenses decreased from $7,543,135 in 2014 to $3,954,927 in 2015 due to the
successful cost cutting initiatives undertaken throughout the year.
The Corporation had an unrealized fair value adjustment loss at the end of the year of $7,926,701 versus a fair
value adjustment gain of $10,683,896 during the prior year.
This significant fair value loss propelled the Corporation to net loss from Continuing Operations of $9,930,970 or a
loss of $0.28 per share (EPS) versus a gain of $4,151,782 or $0.12 (EPS) in 2014.
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 advancing the Corporation’s Tuguldur asset. During the year, the Corporation disposed a total of ten properties
(2014 – 25) at a net loss of $116,182 (2014 - $56,105 gain). As of December 31, 2015, the Corporation had four
investment properties (2014 – 6) classified as available for sale.
The Mongolian Tögrög appreciated throughout the year versus the Canadian dollar, appreciating from 1,624 MNT/
CAD on December 31, 2014, to 1,438 MNT/CAD over the course of 2015; an increase of 11.4%. This appreciation
served to reduce the Corporation’s negative AFFO and make the decline in property values appear less severe due
to the smaller decline in Canadian dollar terms.
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 2015, the Mongolian economy witnessed a decrease in its growth rate, with this decline 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 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 was negatively impacted by the global commodity market downturn. The National
Statistics Office of Mongolia (“NSO”) estimates full year 2015 growth was 2.3%, down from 7.8% in 2014.
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,
while in 2015, the Tögrög bounced back to an average rate of 1,540 per Canadian dollar finishing the year at 1,438
per Canadian dollar. Management would like to note that in general, most commercial property transactions in
Ulaanbaatar are negotiated in US Dollars.
5
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. Management 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 accelerating
decline 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 substantial 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 adequate although lease rates have declined noticeably during the second half of the year. While most
data is anecdotal, office rental prices in the downtown core have declined by more than half, while retail lease rates
have declined by approximately a third in Mongolian Tögrög terms over the past 12-18 months.
Outside of the downtown of Ulaanbaatar, a noticeable increase in building activity has saturated most 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. Finally, there has been a noticeable
increase in the number distressed property owners, including banks that are experiencing a rapidly increasing
number of bad debts and foreclosures. It is likely that these individuals will be forced to liquidate their property
assets, potentially at prices that are substantially below current market prices. Management cautions shareholders
that property prices have historically been, and continue to be, volatile.
Management expects a 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 and believes that it is
substantially outperforming the overall market in terms of occupancy.
MGG has seen an increase in bad debt and late payment of rent over the past year. Additionally, a large number
of tenants are asking to have their rents reduced due to the economic crisis. MGG proactively evaluates tenants
based on past rental history before changing the terms of rental contracts.
If the economy continues to deteriorate, it is expected that market rental rates will continue to decline. Additionally,
overall rental revenue is expected to decline as existing leases are re-signed at current market rates that are often
substantially lower than the rates that existed when contracts were previously signed. In many cases, it is expected
that upon signing new leases, rents will continue to drop considerably.
6
Section 2 - Executing the Strategy
Section 2 - Executing the Strategy
Core Business
During the past five years, Management and employees have worked hard to build up the infrastructure needed
Core Business
to manage MGG’s institutional property platform. This platform is unique in Mongolia and is one of the only
During the past five years, Management and employees have worked hard to build up the infrastructure
platforms capable of managing assets through the full cycle of ownership from acquisition and development,
needed to manage MGG’s institutional property platform. This platform is unique in Mongolia and is one of
through disposition and includes dedicated departments that manage maintenance, leasing, marketing and tenant
the only platforms capable of managing assets through the full cycle of ownership from acquisition and
management. Management believes it has a strong team in place to lead the Corporation into its next phase of
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
growth.
Corporation into its next phase of growth.
MGG’s real estate subsidiary plans on further expansion via the investment of additional capital into income
MGG’s real estate subsidiary plans on further expansion via the investment of additional capital into
producing and redevelopment properties in Ulaanbaatar. The Corporation’s plan is contingent on procuring further
income producing and redevelopment properties in Ulaanbaatar. The Corporation’s plan is contingent on
funds for investment and on finding suitable investment targets which meet MGG’s stringent investment criteria. In
procuring further funds for investment and on finding suitable investment targets which meet MGG’s
addition, due to MGG’s unique platform, the Corporation is adding third party leasing and property management
stringent investment criteria. In addition, due to MGG’s unique platform, the Corporation is adding third
to its focus, in order to leverage its existing resources. Management believes that it has excess capacity to handle
party leasing and property management to its focus, in order to leverage its existing resources.
these functions and has seen a sizable increase in interest in using its brokerage operation as awareness spreads
Management believes that it has excess capacity to handle these functions and has seen a sizable increase in
in the Ulaanbaatar market. The Corporation intends to more actively target this brokerage opportunity once its
interest in using its brokerage operation as awareness spreads in the Ulaanbaatar market. The Corporation
website is renewed and relaunched.
intends to more actively target this brokerage opportunity once its website is renewed and relaunched.
Since inception, MGG has acquired a number of redevelopment properties. To date the Corporation has also
Since inception, MGG has acquired a number of redevelopment properties. To date the Corporation has
remodeled, rebuilt and completed additions on properties. During 2015, the Corporation spent substantial
also remodeled, rebuilt and completed additions on properties. During 2015, the Corporation spent
resources on redeveloping its Tuguldur retail center property; however these redevelopment efforts have been
substantial resources on redeveloping its Tuguldur retail center property; however these redevelopment
efforts have been recently put on hold due to a slowing economy and uncertainty regarding the ability to
recently put on hold due to a slowing economy and uncertainty regarding the ability to lease added space due to
lease added space due to the rapidly increasing vacancy level in the city. The Corporation did complete a
the rapidly increasing vacancy level in the city. The Corporation did complete a 334 meter extension to Tuguldur
334 meter extension to Tuguldur during early 2016 and a lease was signed with a well-respected Mongolian
during early 2016 and a lease was signed with a well-respected Mongolian tenant in early 2016. It is expected that
tenant in early 2016. It is expected that this tenant will begin to pay rent on June 1st of 2016. Due to the
this tenant will begin to pay rent on June 1st of 2016. Due to the project going over budget and the sizable decline
project going over budget and the sizable decline in market rents from when the project began, until a lease
in market rents from when the project began, until a lease was signed, this development project did not hit internal
was signed, this development project did not hit internal return targets, further validating the
return targets, further validating the Corporation’s decision to cease all further development spending.
Corporation’s decision to cease all further development spending.
Given the current economic situation, the Corporation is focused on finding additional opportunities to reduce
Given the current economic situation, the Corporation is focused on finding additional opportunities to
costs and reduce the Corporation’s cash burn. In addition, the Corporation is looking to sell additional properties in
reduce costs and reduce the Corporation’s cash burn. In addition, the Corporation is looking to sell
order to have sufficient liquidity to get through the downturn.
additional properties in order to have sufficient liquidity to get through the downturn.
Portfolio
Portfolio
Mongolia Growth Group’s properties are located in Downtown and the Central Business District of
Mongolia Growth Group’s properties are located in Downtown and the Central Business District of Ulaanbaatar.
Ulaanbaatar. Within the financial statements, MGG classifies properties in each of the following
Within the financial statements, MGG classifies properties in each of the following categories; Investment
categories; Investment Properties, Property and Equipment, and Other Assets/Prepaid Deposits.
Properties, Property and Equipment, and Other Assets/Prepaid Deposits.
Investment Properties
Investment Properties
Investment Properties include properties held to earn rental revenue, for capital appreciation, and/or for
Investment Properties include 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
redevelopment. Investment Properties are initially valued at fair value, which is the purchase price plus any directly
directly attributable expenditures. Investment Properties are subsequently valued at fair value, which
attributable expenditures. Investment Properties are subsequently valued at fair value, which reflects market
reflects market conditions at the date of the statement of financial position.
conditions at the date of the statement of financial position.
The following table represents properties classified as Investment Properties, as of December 31, 2015;
The following table represents properties classified as Investment Properties, as of December 31, 2015;
Residential
Office
Retail
Land and Redevelopment
Total
2015
# of
Properties
Value at 31-Dec-15
$CAD
Meters
# of Properties
Value at 31-Dec-14
$CAD
1
3
26
4
34
285,170
4,649,657
25,842,765
15,696,158
-
2,650
8,532
7,058
46,473,750
18,240
2
3
35
4
44
357,160
5,039,196
27,645,411
15,416,750
48,458,517
2014
Meters
-
2,650
9,497
7,058
19,205
7
Overall, the investment portfolio performed substantially better than similar properties in Ulaanbaatar,
Overall, the investment portfolio performed substantially better than similar properties in Ulaanbaatar,
with the exception of Tuguldur which has continued to struggle with high turnover and vacancy. The
with the exception of Tuguldur which has continued to struggle with high turnover and vacancy. The
Overall, the investment portfolio performed substantially better than similar properties in Ulaanbaatar,
Corporation believes that this is a result of mistakes made during the initial lease-up phase, compounded
Overall, the investment portfolio performed substantially better than similar properties in Ulaanbaatar, with the
Corporation believes that this is a result of mistakes made during the initial lease-up phase, compounded
with the exception of Tuguldur which has continued to struggle with high turnover and vacancy. The
by the fact that many long-term leases were signed at below-market rents. This asset has now stabilized at
by the fact that many long-term leases were signed at below-market rents. This asset has now stabilized at
exception of Tuguldur which has continued to struggle with high turnover and vacancy. The Corporation believes
Corporation believes that this is a result of mistakes made during the initial lease-up phase, compounded
average weekly occupancy rates of between 70% and 80% and correcting these mistakes continues to be a
average weekly occupancy rates of between 70% and 80% and correcting these mistakes continues to be a
by the fact that many long-term leases were signed at below-market rents. This asset has now stabilized at
that this is a result of mistakes made during the initial lease-up phase, compounded by the fact that many long-
focus of management.
focus of management.
average weekly occupancy rates of between 70% and 80% and correcting these mistakes continues to be a
term leases were signed at below-market rents. This asset has now stabilized at average weekly occupancy rates
focus of management.
of between 70% and 80% and correcting these mistakes continues to be a focus of management.
Property and Equipment
Property and Equipment
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the
Property and Equipment
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
property. Properties classified as Property and Equipment are measured at cost less accumulated
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the
depreciation, less any accumulated impairment losses. All repairs and maintenance costs to these
Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the property.
depreciation, less any accumulated impairment losses. All repairs and maintenance costs to these
property. Properties classified as Property and Equipment are measured at cost less accumulated
properties are charged to the consolidated statement of operations during the period in which they occur
properties are charged to the consolidated statement of operations during the period in which they occur
Properties classified as Property and Equipment are measured at cost less accumulated depreciation, less
depreciation, less any accumulated impairment losses. All repairs and maintenance costs to these
unless eligible for capitalization. The Corporation’s Headquarters, purchased in October 2011, falls within
unless eligible for capitalization. The Corporation’s Headquarters, purchased in October 2011, falls within
properties are charged to the consolidated statement of operations during the period in which they occur
any accumulated impairment losses. All repairs and maintenance costs to these properties are charged to the
this category.
this category.
unless eligible for capitalization. The Corporation’s Headquarters, purchased in October 2011, falls within
consolidated statement of operations during the period in which they occur unless eligible for capitalization. The
this category.
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, 2015;
The following table represents properties classified as Property and Equipment, as of December 31, 2015;
The following table represents properties classified as Property and Equipment, as of December 31, 2015;
The following table represents properties classified as Property and Equipment, as of December 31, 2015;
Property and Equipment
# of Properties
# of Properties
2015
Meters
Meters
# of Properties
# of Properties
2015
2015
2014
2014
2014
Meters
Meters
Meters
-
-
1,300
1,300
-
-
-
1,300
-
-
-
1,300
1,300
-
1,300
Other Assets/ Prepaid Deposits
# of Properties
1
1
1
1
1
-
-
1
-
-
-
2
2
-
2
# of Properties
2
2
1
1
2
-
-
1
-
-
-
3
3
-
3
Residential
Residential
Office
Office
Residential
Retail
Retail
Office
Land and Redevelopment
Land and Redevelopment
Retail
Total
Total
Land and Redevelopment
Total
Other Assets/ Prepaid Deposits
Other Assets/ Prepaid Deposits
Other Assets/ Prepaid Deposits
Investment property purchases where the Corporation has paid either the full or partial purchase proceeds
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
to the seller, but the Corporation has not yet received the official land or building title from the Mongolian
Investment property purchases where the Corporation has paid either the full or partial purchase proceeds
Property office, are recorded at cost as Prepaid Deposits on Investment Properties and classified within
Property office, are recorded at cost as Prepaid Deposits on Investment Properties and classified within
to the seller, but the Corporation has not yet received the official land or building title from the Mongolian
other assets.
other assets.
Property office, are recorded at cost as Prepaid Deposits on Investment Properties and classified within
other assets.
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
December 31, 2015;
December 31, 2015;
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of
December 31, 2015;
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.
The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December
31, 2015;
Meters
-
-
1,300
1,300
-
-
-
1,300
-
-
-
1,300
1,300
-
1,300
Value at 31-Dec-14
Value at 31-Dec-14
$CAD
$CAD
Value at 31-Dec-14
139,536
139,536
$CAD
2,627,015
2,627,015
139,536
-
-
2,627,015
-
-
-
2,766,551
2,766,551
-
2,766,551
Value at 31-Dec-15
Value at 31-Dec-15
$CAD
$CAD
Value at 31-Dec-15
99,316
99,316
$CAD
2,665,989
2,665,989
99,316
-
-
2,665,989
-
-
-
2,765,305
2,765,305
-
2,765,305
2015
2015
2015
Meters
Meters
# of Properties
# of Properties
# of Properties
# of Properties
Value at 31-Dec-14
Value at 31-Dec-14
$CAD
$CAD
Value at 31-Dec-14
Residential
-
-
Residential
$CAD
-
Office
-
Office
Residential
-
729,497
Retail
729,497
Retail
-
Office
69,392
Land and Redevelopment
69,392
Land and Redevelopment
729,497
Retail
798,889
Total
798,889
Total
Land and Redevelopment
69,392
* This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.
* This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.
Total
798,889
* This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.
* This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.
Occupancy Rates
Occupancy Rates
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
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:
Value at 31-Dec-15
Value at 31-Dec-15
$CAD
$CAD
Value at 31-Dec-15
-
-
$CAD
-
-
-
-
-
-
69,727
69,727
-
69,727
69,727
69,727
69,727
A summary of MGG’s property portfolio occupancy rates is set forth in the following table:
# of Properties
-
-
-
-
-
1
1
-
1
1
1
2
2
1
2
# of Properties
-
-
-
-
-
-
-
-
1*
1*
-
1*
Meters
-
-
-
-
-
-
-
-
28
28
-
28
28
28
28
Occupancy Rates
1
1
1
31 –Dec- 2015
31 –Dec- 2015
Occupancy Rate*
Occupancy Rate*
31 –Dec- 2015
91.7%
Occupancy Rate*
91.7%
31 –Dec- 2014
31 –Dec- 2014
Occupancy Rate*
Occupancy Rate*
31 –Dec- 2014
98.2%
Occupancy Rate*
98.2%
Office
Office
84.4%
91.7%
84.4%
87.4%
87.4%
84.4%
* Occupancy rates are calculated on a per meter basis;
** Weighted Average is calculated based on total meters available for lease
Retail
Office
Retail
Weighted Average**
Weighted Average**
Retail
* Occupancy rates are calculated on a per meter basis;
* Occupancy rates are calculated on a per meter basis;
Weighted Average**
** 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
Demand for retail space has remained strong, despite a difficult economy. Prior to year end, the
Demand for retail space has remained strong, despite a difficult economy. Prior to year end, the
Demand for retail space has remained strong, despite a difficult economy. Prior to year end, the Corporation lost a
Corporation lost a significant tenant occupying 375 meters of retail space. Furthermore, the Corporation
Corporation lost a significant tenant occupying 375 meters of retail space. Furthermore, the Corporation
Demand for retail space has remained strong, despite a difficult economy. Prior to year end, the
significant tenant occupying 375 meters of retail space. Furthermore, the Corporation received the title to another
Corporation lost a significant tenant occupying 375 meters of retail space. Furthermore, the Corporation
large retail space, consisting of 379 square meters, that was previously tied up in litigation between the former
owner and tenant. Both of these space has since been leased. 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.
91.2%
98.2%
91.2%
94.2%
94.2%
91.2%
94.2%
87.4%
8
2014
2014
2014
Meters
Meters
Meters
-
-
-
-
-
184
184
-
28
28
184
212
212
28
212
The Corporation would like to caution shareholders that it is experiencing abnormally high levels of tenant turnover
and occupancy levels fluctuate dramatically between months as tenants break leases. It is expected that turnover
will increase as the economy continues to decline and it is uncertain if the Corporation will be able to continue to
find new tenants due to the weak economy.
9
Leasing Schedule
Leasing Schedule
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation
Leasing Schedule
lease durations with most tenants. Management’s experience is that this practice is in line with the local industry
targets shorter lease durations with most tenants. Management’s experience is that this practice is in line
In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation
standards, with the expectation that once leases expire, existing tenants are offered the first right to re-lease the
with the local industry standards, with the expectation that once leases expire, existing tenants are offered
targets shorter lease durations with most tenants. Management’s experience is that this practice is in line
the first right to re-lease the space at then prevailing market rates.
space at then prevailing market rates.
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.
100.00%
100.00%
80.00%
80.00%
60.00%
60.00%
40.00%
40.00%
20.00%
20.00%
0.00%
0.00%
2016
2016
Lease End Dates
Lease End Dates
2017
2018
Retail Office Redevelopment
2017
2018
2019
2019
The weighted average remaining lease term decreased significantly to 10.4 months in December 2015 from
Retail Office Redevelopment
17.2 months in December 31st 2014, calculated as a percentage of monthly revenues.
The weighted average remaining lease term decreased significantly to 10.4 months in December 2015 from 17.2
The weighted average remaining lease term decreased significantly to 10.4 months in December 2015 from
months in December 31st 2014, calculated as a percentage of monthly revenues.
17.2 months in December 31st 2014, calculated as a percentage of monthly revenues.
It is Management’s belief that most existing leases are at rates that are above current prevailing market
rates. With the current economic conditions, many companies are suffering which is reflected by lower
It is Management’s belief that most existing leases are at rates that are above current prevailing market rates. With
It is Management’s belief that most existing leases are at rates that are above current prevailing market
market rental rates in aggregate. It is expected that the Corporation’s rental revenue may decline as leases
the current economic conditions, many companies are suffering which is reflected by lower market rental rates in
rates. With the current economic conditions, many companies are suffering which is reflected by lower
are renewed at current market rates. Offsetting this fact, many of the Corporation’s prior leases were signed
aggregate. It is expected that the Corporation’s rental revenue may decline as leases are renewed at current market
market rental rates in aggregate. It is expected that the Corporation’s rental revenue may decline as leases
at rates that did not reflect peak market rates.
are renewed at current market rates. Offsetting this fact, many of the Corporation’s prior leases were signed
rates. Offsetting this fact, many of the Corporation’s prior leases were signed at rates that did not reflect peak
at rates that did not reflect peak market rates.
market rates.
Most Recent Retail Lease Signings
Lease Renewal Date
SqM
Most Recent Retail Lease Signings
Lease Renewal Date
December 2015
December 2015
December 2015
December 2015
November 2015
December 2015
October 2015
December 2015
November 2015
October 2015
SqM
246
110
206
246
40
110
62
206
40
62
Old Price Per Meter
(Mongolian Tögrög)
Old Price Per Meter
26,785
(Mongolian Tögrög)
25,000
35,000
26,785
46,758
25,000
30,083
35,000
46,758
30,083
New Price Per Meter
(Mongolian Tögrög)
New Price Per Meter
25,000
(Mongolian Tögrög)
25,000
32,085
25,000
32,710
25,000
27,906
32,085
32,710
27,906
Percent
Increase
(decrease)
Percent
-6.6%
Increase
0.0%
(decrease)
-8.3%
-6.6%
-30.0%
0.0%
-7.2%
-8.3%
-30.0%
-7.2%
Lease Type
Lease Type
Office Lease
Office Lease
Retail Lease
Office Lease
Retail Lease
Office Lease
Office Lease
Retail Lease
Retail Lease
Office Lease
10
Section 3 – Results of Operation
Section 3 – Results of Operation
Selected Annual Financial Information (CAD)
Selected Annual Financial Information (CAD)
Total Revenue
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- 2015
31-Dec- 2014
1,947,508
1,918,916
Year ended
31-Dec- 2013
(Restated) *
1,727,373
(9,930,970)
4,151,782
(250,574)
(9,930,970)
4,151,782
(155,563)
(3,459,196)
2,631,084
(3,713,297)
(0.28)
0
(0.28)
(0.28)
0
(0.28)
50,815,170
1,840,825
48,974,345
35,512,829
1.38
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
*Excludes operations of Mandal Insurance previously included in Continuing Operations. Mandal Insurance was disposed of on December 20, 2013.
*Excludes operations of Mandal Insurance previously included in Continuing Operations. Mandal Insurance was disposed of on December 20, 2013.
Revenue from Investment Properties
Revenue from Investment Properties
For the year end December 31, 2015, Rental revenue from Investment Properties reached $2,002,512
For the year end December 31, 2015, Rental revenue from Investment Properties reached $2,002,512 versus
versus $1,822,392 in the prior year. This increase was primarily attributable to the addition of a full year
$1,822,392 in the prior year. This increase was primarily attributable to the addition of a full year of revenue from
of revenue from Tulguldur along with the depreciation of the Canadian Dollar as compared to the
Tulguldur along with the depreciation of the Canadian Dollar as compared to the Mongolia Tögrög.
Mongolia Tögrög.
Gain/loss on sale of Investment Properties
Gain/loss on sale of Investment Properties
For the year end December 31, 2015, the Corporation reported a net loss of $116,182 on the sale of ten
investment properties versus a net gain of $56,105 in the prior year on the sale of 25 properties.
For the year end December 31, 2015, the Corporation reported a net loss of $116,182 on the sale of ten investment
properties versus a net gain of $56,105 in the prior year on the sale of 25 properties.
Revenue from Other Sources
Revenue from Other Sources
Revenue from other sources consists of late fees and other income. For the year ending December 31, 2015,
Revenue from other sources consists of late fees and other income. For the year ending December 31,
revenues from other sources totaled $61,178 compared to $40,419 for the year ending December 31, 2014.
2015, revenues from other sources totaled $61,178 compared to $40,419 for the year ending December
Revenues increased due to higher late payments and penalty income collected throughout the year.
31, 2014. Revenues increased due to higher late payments and penalty income collected throughout the
year.
Fair Value Adjustment on Investment Properties
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, 2015, the Corporation had approximately 86% of its
As elected under IFRS, the Corporation’s investment portfolio is subsequently measured at fair value in
Investment Properties Portfolio valued by an international valuation firm and the remaining 14% (19 properties)
the Corporation’s financial statements. As of December 31, 2015, the Corporation had approximately
were valued by Management. For the year ended December 31, 2015, the fair value adjustment to investment
86% of its Investment Properties Portfolio valued by an international valuation firm and the remaining 14%
properties was a loss of $7,926,701 compared to a gain of $10,683,896 for the same period in 2014.
Property Operating Expenses
Property Operating Expenses consist of repairs and maintenance, bad debts, utilities, salaries, as well as land
and property taxes. For the year ending December 31, 2015 the property operating expenses were $1,576,751
11
to investment properties was a loss of $7,926,701 compared to a gain of $10,683,896 for the same period in
2014.
Property Operating Expenses
compared to $1,556,367 during the same period in 2014, representing an increase of approximately 1%. This
Property Operating Expenses consist of repairs and maintenance, bad debts, utilities, salaries, as well as
increase was primarily due to the addition of Tulguldur.
land and property taxes. For the year ending December 31, 2015 the property operating expenses were
$1,576,751 compared to $1,556,367 during the same period in 2014, representing an increase of
approximately 1%. This increase was primarily due to the addition of Tulguldur.
Corporate Expenses
Corporate expenses include senior management’s compensation, share-based costs, listing fees, professional fees,
technology, travel and administrative costs.
Corporate Expenses
Corporate expenses
professional fees, technology, travel and administrative costs.
listing fees,
For the year ending December 31, 2015 general and administration expenses decreased to $1,291,511 from
$4,635,599 in 2014. This decrease since the previous year is attributed to the cost cutting initiatives implemented
throughout the year.
include senior management’s compensation, share-based costs,
For the year ending December 31, 2015 general and administration expenses decreased to $1,291,511 from
$4,635,599 in 2014. This decrease since the previous year is attributed to the cost cutting initiatives
implemented throughout the year.
One-Time Expenses
During 2015, the Corporation did not incur any significant one-time expenses. In comparison, during 2014, the
Corporation incurred one–time expenses of $1,983,396 including; severance to the Corporation’s former CEO of
One-Time Expenses
$870,540, accrued a commission payment of $487,522 to a senior employee of the Corporation for several large
During 2015, the Corporation did not incur any significant one-time expenses. In comparison, during
acquisitions, a discount of $402,339 given to UMC against the sale of Mandal Insurance and $222,995 spent on
2014, the Corporation incurred one–time expenses of $1,983,396 including; severance to the Corporation’s
legal and professional fees to file a base shelf prospectus.
former CEO of $870,540, accrued a commission payment of $487,522 to a senior employee of the
Corporation for several large acquisitions, a discount of $402,339 given to UMC against the sale of Mandal
Insurance and $222,995 spent on legal and professional fees to file a base shelf prospectus.
Currency
The Mongolian Tögrög has fluctuated significantly over the past five years. The Mongolian Tögrög has depreciated
Currency
6.8%, 5.1%, 11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the Canadian Dollar while
The Mongolian Tögrög has fluctuated significantly over the past five years. The Mongolian Tögrög has
appreciating 11.4% in 2015. The fluctuation in the currency is reflected in the Corporation’s financial statements,
depreciated 6.8%, 5.1%, 11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the Canadian
most notably in the investment property portfolio, as it is the largest item on the balance sheet. Note 7 in the
Dollar while appreciating 11.4% in 2015. The fluctuation in the currency is reflected in the Corporation’s
financial statements disclose the foreign exchange adjustment, which flows through the investment property
financial statements, most notably in the investment property portfolio, as it is the largest item on the
classification during each period. As at December 31, 2015 the Corporation recognized a significant foreign
balance sheet. Note 7 in the financial statements disclose the foreign exchange adjustment, which flows
through the investment property classification during each period. As at December 31, 2015 the
exchange adjustment gain of $6,471,774 to its investment property portfolio due to the 11.4% appreciation of the
Corporation recognized a significant foreign exchange adjustment gain of $6,471,774 to its investment
local currency during the year.
property portfolio due to the 11.4% appreciation of the local currency during the year.
Operating Profit (Loss) from Continuing Operations
Operating Profit (Loss) from Continuing Operations
In total the Corporation’s continuing operations reported an Operating loss or an Adjusted EBITDA loss $2,089,560
In total the Corporation’s continuing operations reported an Operating loss or an Adjusted EBITDA loss
during 2015 (2014 – loss of $5,900,540). The Improvement in EBITDA since last year is due to the cost saving
$2,089,560 during 2015 (2014 – loss of $5,900,540). The Improvement in EBITDA since last year is due to
initiatives implemented during the year.
the cost saving initiatives implemented during the year.
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 Gain (Add back loss)
Total Adjusted EBITDA
2015
2014
$CAD
(10,123,298)
137,608
(30,571)
(10,016,261)
7,926,701
(2,089,560)
$CAD
4,473,714
126,018
183,624
4,783,356
(10,683,896)
(5,900,540)
Funds From Operations (“FFO”)
Funds From Operations ("FFO")
While FFO does not have a standardized meaning prescribed by IFRS, it is a non-IFRS financial measure of
While FFO does not have a standardized meaning prescribed by IFRS, it is a non-IFRS financial measure of
operating performance widely used by the real estate industry. The Real Property Association of Canada
operating performance widely used by the real estate industry. The Real Property Association of Canada (REALpac)
(REALpac) recommends that FFO be determined by reconciling FFO from net income.
recommends that FFO be determined by reconciling FFO from net income.
During 2015, negative FFO improved from a loss of $4,127,427 in 2014 to a loss of $517,295 in 2015. The
improvement is primary due to a reduction in expenses due to cost cutting measures initiated since the beginning
of the year.
Adjusted Funds From Operations (“AFFO”)
Since FFO does not consider capital expenditures and other one-time expenses. AFFO is presented herein as
an alternative measure of determining available cash flow. AFFO is not defined by IFRS but the Corporation
12
of operating performance widely used by the real estate industry. The Real Property Association of
Canada (REALpac) recommends that FFO be determined by reconciling FFO from net income.
During 2015, negative FFO improved from a loss of $4,127,427 in 2014 to a loss of $517,295 in 2015. The
improvement is primary due to a reduction in expenses due to cost cutting measures initiated since the
beginning of the year.
Adjusted Funds From Operations ("AFFO")
Since FFO does not consider capital expenditures and other one-time expenses. AFFO is presented
herein as an alternative measure of determining available cash flow. AFFO is not defined by IFRS but the
Corporation follows recommendations by REALpac. During 2015, the Company’s AFFO numbers
improved considerably from $4,127,427 to $342,866.
follows recommendations by REALpac. During 2015, the Company’s AFFO numbers improved considerably from
$4,127,427 to $342,866.
It should be noted that FFO and AFFO include certain one-time costs related to the Corporation’s cost
It should be noted that FFO and AFFO include certain one-time costs related to the Corporation’s cost cutting
cutting plan that were not sufficiently large enough to be broken out, but their exclusion would have
plan that were not sufficiently large enough to be broken out, but their exclusion would have further reduced the
further reduced the Corporation’s AFFO loss for the year.
Corporation’s AFFO loss for the year.
Reconciliation of FFO and AFFO
Reconciliation of FFO and AFFO
The analysis below shows a reconciliation of the Corporation’s net income to FFO and AFFO for the year ended
The analysis below shows a reconciliation of the Corporation’s net income to FFO and AFFO for
December 31, 2015
the year ended December 31, 2015
Net Income for the period
Add (deduct) items not affecting cash
Unrealized Change in fair value of investment properties
Depreciation and amortization of investment Properties
Loss (gain) from sales of investment properties
Tax on sales on investment property
Deferred Taxes
Impairment/losses on all real estate assets
Impairment of other assets
Loss (gain) on PP&E properties
Share Based Payments
Funds From Operations
Add (deduct)
Development costs not capitalized
Significant one-time expenses
Adjusted Funds From Operations
Per Unit
Funds From Operations
Adjusted Funds From Operations
Year ended
31-December
2015
$CAD
Year ended
31-December
2014
$CAD
(9,930,970)
4,151,782
7,926,701
137,608
116,182
35,710
(109,032)
-
-
219,749
977,725
(10,683,896)
126,018
(56,105)
84,507
9,024
-
402,339
-
1,838,904
(517,295)
(4,127,427)
174,429
-
(342,866)
(0.01)
(0.01)
-
-
(4,127,427)
(0.12)
(0.12)
13
Net Income
For the year ended December 31, 2015, the Corporation incurred a net loss of 9,930,970, compared to a net gain
of $4,151,782 for the year ended December 31, 2014. This deterioration is attributed to the substantial unrealized
loss on fair value adjustment on investment properties of $7,926,701 during the year versus the unrealized gain of
$10,683,896 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.
14
Section 4 - Financial Condition
Section 4 - Financial Condition
Cash Flow
Cash Flow
Mongolia Growth Group’s primary sources of capital are cash generated from equity issuance financing
and asset sales. Management expects to meet all of the Corporation’s obligations through current cash and
cash equivalents along with cash flows from asset sales.
Mongolia Growth Group’s primary sources of capital are cash generated from equity issuance financing and asset
sales. Management expects to meet all of the Corporation’s obligations through current cash and cash equivalents
along with cash flows from asset sales.
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
investing activities for the year ended December 31, 2015 and 2014.
activities for the year ended December 31, 2015 and 2014.
Net change in cash related to:
Operating
Investing
Financing
Effects of exchange rates on cash
Net change in cash during the period
31-Dec-15
$CAD
(1,391,362)
642,001
-
139,212
(610,149)
For the year ending
31-Dec-14
$CAD
(2,908,159)
(1,392,747)
821,951
(245,943)
(3,724,898)
Overall, cash outflows during 2015 were significantly lower than the previous year with net outflows from operations
Overall, cash outflows during 2015 were significantly lower than the previous year with net outflows from
much lower than net operating outflows in 2014. Cash flows from Investing were inflows of $642,001 for the year
operations much lower than net operating outflows in 2014. Cash flows from Investing were inflows of
compared to outflows of $1,392,747 in 2014 as funds from property sales outweighed funds spent on property
$642,001 for the year compared to outflows of $1,392,747 in 2014 as funds from property sales outweighed
acquisitions. Cash flows from Financing were unchanged during the year compared to inflows of $821,951 during
funds spent on property acquisitions. Cash flows from Financing were unchanged during the year
compared to inflows of $821,951 during 2014. The changes in components of cash flows for the year ended
2014. The changes in components of cash flows for the year ended December 31, 2015 compared to the year
December 31, 2015 compared to the year ended December 31, 2014 were the result of the following
ended December 31, 2014 were the result of the following factors:
factors:
• Operating –Operating cash outflows for the year ended 2015 decreased primarily due to a significant
(cid:127) Operating–Operating cash outflows for the year ended 2015 decreased primarily due to a
significant decrease in large one-time expenses as well as an overall reduction in
expenses.
• Investing – Investing cash inflows for the year ended 2015 increased due to property sales outweighing
decrease in large one-time expenses as well as an overall reduction in expenses.
(cid:127) Investing– Investing cash inflows for the year ended 2015 increased due to property sales
property acquisitions for the year.
outweighing property acquisitions for the year.
• Financing –Financing cash inflows for the year ended 2015 were nil compared to cash inflows of
(cid:127) Financing– Financing cash inflows for the year ended 2015 were nil compared to cash inflows
of $821,951 in 2014 as the Corporation generated increased cash through the
exercise of options.
$821,951 in 2014 as the 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 internal
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, 2015, the Corporation had approximately $1,035,272 (2014 -
sources of cash. As at December 31, 2015, the Corporation had approximately $1,035,272 (2014 - $1,645,421) in
$1,645,421) in cash and cash equivalents.
cash and cash equivalents.
Total Assets
Total Assets
As of December 31, 2015, the Corporation had $1,363,271 (2014 - $2,673,124) in Current Assets out of
As of December 31, 2015, the Corporation had $1,363,271 (2014 - $2,673,124) in Current Assets out of which
which $1,035,272 (2014 - $1,645,421) was held in cash and cash equivalents.
$1,035,272 (2014 - $1,645,421) was held in cash and cash equivalents.
The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment
The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment Properties.
Properties. Investment Properties are carried at Fair Market Value and decreased during the year to
Investment Properties are carried at Fair Market Value and decreased during the year to $46,473,749 (2014
$46,473,749 (2014 -$48,458,517) the year by way of a dispositions and a large unrealized loss on fair value
-$48,458,517) the year by way of a dispositions and a large unrealized loss on fair value adjustment offset by an
adjustment offset by an increase in the Mongolian Tögrög versus the Canadian dollar during the year.
increase in the Mongolian Tögrög versus the Canadian dollar during the year.
Property and Equipment, which primarily consists of properties that are measured at their cost base,
Property and Equipment, which primarily consists of properties that are measured at their cost base, increased
increased from $2,974,950 in 2014 to $2,978,150 in 2015 primarily due to a decrease in the Canadian
from $2,974,950 in 2014 to $2,978,150 in 2015 primarily due to a decrease in the Canadian dollar versus the
dollar versus the Mongolian Tögrög.
Mongolian Tögrög.
15
Total Liabilities
As of December 31, 2015, the Corporation had current liabilities of $850,716 consisting of payables and accrued
liabilities. In December 31, 2014, current liabilities were significantly higher at of $2,077,001. The decrease is due
to the settlement of the Corporation’s outstanding liabilities over the course of the year.
Total Liabilities
As of December 31, 2015, the Corporation had current liabilities of $850,716 consisting of payables and
Total Liabilities
accrued liabilities. In December 31, 2014, current liabilities were significantly higher at of $2,077,001. The
As of December 31, 2015, the Corporation had current liabilities of $850,716 consisting of payables and
decrease is due to the settlement of the Corporation’s outstanding liabilities over the course of the year.
accrued liabilities. In December 31, 2014, current liabilities were significantly higher at of $2,077,001. The
decrease is due to the settlement of the Corporation’s outstanding liabilities over the course of the year.
As of December 31, 2015, 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 decreased slightly during the
As of December 31, 2015, the Corporation had no long term debt outstanding, as such the only non-current
year to $990,109 in 2015 (2014 - $1,099,141).
liability on the balance sheet is deferred income taxes. Deferred tax liabilities decreased slightly during the
year to $990,109 in 2015 (2014 - $1,099,141).
Total Equity
The equity of the Corporation consists of one class of common shares.
Total Equity
The equity of the Corporation consists of one class of common shares.
Options Outstanding
At December 31, 2015, the Corporation had 2,510,500 options that were exercisable (December
Options Outstanding
31, 2014; 1,385,000).
At December 31, 2015, the Corporation had 2,510,500 options that were exercisable (December
31, 2014; 1,385,000).
As of December 31, 2015, 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 decreased slightly during the year to
$990,109 in 2015 (2014 - $1,099,141).
The equity of the Corporation consists of one class of common shares.
Total Equity
Outstanding
Common shares
Outstanding
Options to buy common shares
Common shares
Options to buy common shares
Options Outstanding
As at 31-Dec-2015
35,512,829
As at 31-Dec-2015
3,288,000
35,512,829
3,288,000
As at 31-Dec-2014
34,848,745
As at 31-Dec-2014
2,448,000
34,848,745
2,448,000
The Chart below shows the historical option grants and options outstanding as of December 31,
At December 31, 2015, the Corporation had 2,510,500 options that were exercisable (December 31, 2014;
2015.
The Chart below shows the historical option grants and options outstanding as of December 31,
1,385,000).
2015.
The Chart below shows the historical option grants and options outstanding as of December 31, 2015.
Cancelled
$ Option Price
Exercised
Forfeited
Granted
$ Option Price
1.64
1.75
1.64
1.90
1.75
4.20
1.90
4.77
4.20
4.25
4.77
4.00
4.25
4.13
4.00
1.09
4.13
0.72
1.09
0.74
0.72
0.74
Total
Granted
100,000
300,000
100,000
1,363,000
300,000
900,000
1,363,000
175,000
900,000
150,000
175,000
190,000
150,000
475,000
190,000
375,000
475,000
935,000
375,000
640,000
935,000
5,603,000
640,000
Forfeited
0
Cancelled
0
Exercised
100,000
0
0
85,000
0
408,000
85,000
100,000
408,000
50,000
100,000
0
50,000
75,000
0
0
75,000
20,000
0
0
20,000
738,000
0
50,000
0
0
50,000
362,000
0
55,000
362,000
95,000
55,000
190,000
95,000
275,000
190,000
0
275,000
0
0
0
0
1,027,000
0
250,000
100,000
200,000
250,000
0
200,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
550,000
0
Total Options
Outstanding
Total Options
0
Outstanding
0
0
1,078,000
0
130,000
1,078,000
20,000
130,000
5,000
20,000
0
5,000
125,000
0
375,000
125,000
915,000
375,000
640,000
915,000
3,288,000
640,000
Options
Exercisable
Options
0
Exercisable
0
0
492,500
0
130,000
492,500
20,000
130,000
3,750
20,000
0
3,750
125,000
0
375,000
125,000
467,500
375,000
640,000
467,500
2,510,500
640,000
Options Non-
Exercisable
Options Non-
0
Exercisable
0
0
585,500
0
0
585,500
0
0
1,250
0
0
1,250
0
0
0
0
447,500
0
0
447,500
777,500
0
738,000
550,000
1,027,000
5,603,000
3,288,000
Acquisitions and Dispositions
Total
Acquisitions and Dispositions
During the year, the Corporation did not acquire any properties (2 properties at a cost of $9,099,706 in
Acquisitions and Dispositions
2014). The Corporation spent $832,245 to further develop one of its existing properties versus capital
During the year, the Corporation did not acquire any properties (2 properties at a cost of $9,099,706 in
During the year, the Corporation did not acquire any properties (2 properties at a cost of $9,099,706 in 2014).
expenditures of $1,435,909 spent in 2014. During the year, the Corporation disposed of 10 investment
2014). The Corporation spent $832,245 to further develop one of its existing properties versus capital
The Corporation spent $832,245 to further develop one of its existing properties versus capital expenditures of
properties for cash proceeds of $1,669,455 at a net loss of $116,182. During 2014, the Corporation disposed
expenditures of $1,435,909 spent in 2014. During the year, the Corporation disposed of 10 investment
$1,435,909 spent in 2014. During the year, the Corporation disposed of 10 investment properties for cash proceeds
of 25 properties for $5,432,386 including 5 properties swapped at a value of $2,981,944. These
properties for cash proceeds of $1,669,455 at a net loss of $116,182. During 2014, the Corporation disposed
acquisitions and disposals are consistent with the Corporation’s strategy of streamlining its investment
of $1,669,455 at a net loss of $116,182. During 2014, the Corporation disposed of 25 properties for $5,432,386
of 25 properties for $5,432,386 including 5 properties swapped at a value of $2,981,944. These
property portfolio.
including 5 properties swapped at a value of $2,981,944. These acquisitions and disposals are consistent with the
acquisitions and disposals are consistent with the Corporation’s strategy of streamlining its investment
Corporation’s strategy of streamlining its investment property portfolio.
property portfolio.
2,510,500
777,500
Off-Balance Sheet Items
As of December 31, 2015, the Corporation had no off-balance sheet items.
Events Subsequent to Year End
• Subsequent to year end, the Corporation disposed of one property for $229,743 with a book value at year
end of $261,521
As disclosed in the Corporation’s February 17, 2016 News Release, on February 11, 2016, the Corporation
filed a Form 5C “Notice of Intention to make a Normal Course Corporation Bid” (the “NCIB Form”), with
the TSX Venture Exchange (the “Exchange”). The Corporation received Exchange approval (“Exchange
Approval”) for the Normal Course Corporation Bid (the “Bid”) on February 17, 2016. A summary of the
information contained in the NCIB Form is as follows:
16
Securities Sought: Up to 2,950,000 common shares (representing up to approximately 8.3% of the
35,512,829 common shares of the Corporation currently issued and outstanding, or approximately 9.9% of
the 29,825,579 common shares constituting the Corporation’s current Public Float (as that term is defined
in the policies of the Exchange).
Duration of the Bid: Purchases under the Bid would begin on the date that is three clear trading days
following receipt of Exchange approval and would terminate on the date that is one year from the date
on which purchases began. Following receipt of Exchange Approval, the Corporation announced that
purchases under the Bid were permitted to commence on Tuesday, February 23, 2016 and the Bid will end
no later than February 22, 2017.
Method of Acquisition & Member Broker: The Corporation has retained M Partners Inc. of Toronto,
Ontario as its broker Member for the purposes of conducting the Bid. Purchases under the Bid will be
conducted on the open market through the facilities of the Exchange.
Consideration Offered: The common shares will be purchased for cancellation at market price.
Reasons for the Bid: The Corporation is undertaking the Bid because, in the opinion of its board of
directors, the market price of its common shares, from time to time, may not fully reflect the underlying
value of its operations and future growth prospects. The Corporation believes that in such circumstances,
the purchase of the common shares of the Corporation may represent an appropriate and desirable use of
the Corporation’s funds and further enhance market stability.
Persons Acting Jointly & in Concert: No person is acting jointly and in concert with the Corporation in
connection with the Bid.
Pervious Purchases: In the 12 months preceding the commencement of the Bid, the Corporation has not
purchased any of its common shares.
Valuation: After making reasonable enquiry, the Corporation is not aware of any appraisal or valuation
of the Corporation’s securities that has been prepared within the two years preceding the date of the
NCIB Form. In connection with the preparation of its audited financial statements for the financial year
ending December 31, 2014, the Corporation engaged, an arm’s length property valuator, to prepare three
independent valuation reports in respect of the Corporation’s Mongolian real estate investment assets. The
valuations were prepared for internal accounting purposes.
Acceptance by Insiders, Affiliates and Associates & Benefits: To the knowledge of the Corporation
at the time of filing the NCIB Form, no director, senior officer or other Insider of the Corporation or any
associate or affiliate of the Corporation or any insider of the Corporation currently intends to sell common
shares under the Bid. However, such sales by persons through the facilities of the Exchange may occur if
the personal circumstances of such persons change or any such person makes a decision to sell shares
as market circumstances may warrant. The benefits to any such person whose shares are purchased
under the bid would be the same as the benefits available to all other holders of the Corporation’s common
shares whose shares are purchased under the Bid.
Shareholders may obtain a copy of the NCIB Form from the Corporation, without charge, by contacting
info@mongoliagrowthgroup.com
•
The Corporation has purchased 18,500 shares at a price of $0.40/share
17
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:
Q2 2014
Q2 2015
Q1 2015
Q3 2014
Q4 2014
Q4 2015
Q3 2015
Revenue
Net income (loss)
Income (loss) per
common share
Total Assets
Weighted
Average Shares
(No.)
Ending Shares
(No.)
526,949
(5,503,493)
340,871
(2,701,490)
501,936
(1,352,996)
577,752
(372,991)
316,712
117,251
424,787
(1,489,119)
542,837
5,033,379
(0.15)
(0.08)
(0.04)
(0.01)
0.00
(0.04)
0.15
0.02
50,815,170
54,495,461
54,790,433
55,548,676
54,106,591
55,523,885
54,965,199
49,253,675
35,315,357
35,248,810
35,114,612
34,848,745
34,652,992
35,800,084
34,495,983
35,823,685
35,512,829
35,512,829
35,512,829
34,848,745
34,848,745
34.848,745
34,748,745
34,538,352
Q1 2014
634,581
812,202
Revenue
Revenue
During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $526,949 (Q4
During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $526,949 (Q4 2014
2014 -$316,712) of which rental income earned was $491,837 (Q4 2014 - $457,496). The majority of this
-$316,712) of which rental income earned was $491,837 (Q4 2014 - $457,496). The majority of this rental income
rental income increase is attributed to a larger property portfolio as well as increased occupancy
increase is attributed to a larger property portfolio as well as increased occupancy levels. The quarterly revenue
levels. The quarterly revenue number also includes other revenue earned from miscellaneous sources
number also includes other revenue earned from miscellaneous sources such as late fee, advertising and from
such as late fee, advertising and from sale of investment properties. During the fourth quarter, the
sale of investment properties. During the fourth quarter, the Corporation experienced a gain on sale of investment
Corporation experienced a gain on sale of investment properties of $22,455 (2014 – loss of $140,423),
properties of $22,455 (2014 – loss of $140,423), which negatively affected the Corporation’s revenue.
which negatively affected the Corporation’s revenue.
During the 4th quarter of 2015, the Corporation also incurred a large unrealized loss of $5,655,640 compared to an
unrealized gain of $2,747,150 during Q4 2014.
During the 4th quarter of 2015, the Corporation also incurred a large unrealized loss of $5,655,640
compared to an unrealized gain of $2,747,150 during Q4 2014.
Expenses
Expenses
Quarterly expenses related to corporate operations totaled $202,022 (Q4 2014 - $2,007,286). The majority of
Quarterly expenses related to corporate operations totaled $202,022 (Q4 2014 - $2,007,286). The
this decrease is attributed to a $870,540 severance payment made to the Corporation’s former CEO along with a
majority of this decrease is attributed to a $870,540 severance payment made to the Corporation’s
commission of $487,522 accrued to a senior employee of the Corporation.
former CEO along with a commission of $487,522 accrued to a senior employee of the Corporation.
Net Income
Net Income
During the quarter, the Corporation experienced a loss of $5,503,493 in comparison to a gain of $117,251 in the
During the quarter, the Corporation experienced a loss of $5,503,493 in comparison to a gain of
same quarter of the previous year. This difference is manly attributed to the significant fair value adjustments loss
$117,251 in the same quarter of the previous year. This difference is manly attributed to the significant fair
recorded in the fourth quarter of the year compared to a gain in the 4th quarter of 2014, offset by an decrease in
value adjustments loss recorded in the fourth quarter of the year compared to a gain in the 4th quarter of
expenses versus last year.
2014, offset by an decrease in expenses versus last year.
18
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,
2015, the unrealized gain on fair value adjustment was a loss of $7,926,701 (gain of $10,683,896; 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. This continues to be the case as of December 31, 2015.
Accuracy of Share Based Compensation Expense
The estimate of the 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 riskfree
interest rate for the expected life of the options and future forfeiture rates. For the year ending December 31, 2015,
the cost of the share based payments totaled $977,725 (2014 - $1,838,904).
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, 2015, the
Corporation has identified 4 investment properties, which meet the specified criteria, and has accounted for them
as assets held for sale.
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.
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, 2015.
As at December 31, 2015, the Corporation had working capital of $512,555 (2014- $596,123) 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, 2015, the Corporation does not have any material 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.
As economic growth slowed down, one upside was much improved stability of the Tögrög. The Bank of Mongolia
raised the policy rate by 1.0 percent to 13.0% in January of 2015 in an effort to curb inflation. The inflation rate
started at 9.8% in January but due to weakening domestic demand decreased steadily over the year reaching
7.3% in June, 4.9% in September and finally reached 1.9% Y-o-Y in December, the lowest point since 2009.
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.
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.
20
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, 2015 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.
Additional Information
Additional information relating to Mongolia Growth Group Ltd., including its interim financial statements, is available
on SEDAR at www.sedar.com.
21
Mongolia Growth Group Ltd.
Consolidated Financial Statements
December 31, 2015
(expressed in Canadian dollars)
22
23
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 5)
Other assets (note 6)
Non-current assets
Investment properties (note 7)
Property and equipment (note 8)
Total assets
Liabilities
Current liabilities
Trade payables and accrued liabilities (note 9)
Income taxes payable (note 10)
Non-current liabilities
Deferred income tax liability (note 10)
Total liabilities
Equity
Share capital (note 11)
Contributed surplus
Accumulated other comprehensive loss
Deficit
Total equity
2015
$
2014
$
1,035,272
327,999
1,645,421
1,027,703
1,363,271
2,673,124
46,473,749
2,978,150
49,451,899
48,458,517
2,974,950
51,433,467
50,815,170
54,106,591
704,426
146,290
1,925,655
151,346
850,716
2,077,001
990,109
1,099,141
1,840,825
3,176,142
54,369,332
6,738,875
(1,135,265)
(10,998,597)
53,789,459
5,815,656
(7,607,039)
(1,067,627)
48,974,345
50,930,449
Total equity and liabilities
50,815,170
54,106,591
Commitments and contingencies (note 15)
Approved by the Board of Directors
“Robert Scott” Director “Harris Kupperman” Director
The accompanying notes are an integral part of these consolidated financial statements.
24
3
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Mongolia Growth Group Ltd.
Consolidated Statement of Operations
As at December 31
(expressed in Canadian dollars)
Revenue
Rental income
Gain (Loss) on disposal of investment property
Other revenue
2015
$
2014
$
2,002,512
1,822,392
(116,182) 56,105
40,419
61,178
Total revenue
1,947,508
1,918,916
Expenses
Salaries and wages
Other expenses (note 18)
Development expense
Share based payment (note 11)
Depreciation (note 8)
1,065,273
1,599,892
174,429
977,725
137,608
2,677,203
2,901,010
-
1,838,904
126,018
Total expenses
3,954,927
7,543,135
Net investment income
30,571
66,606
Unrealized gain (loss) on
fair value
adjustment on investment properties
(note 7)
Impairment
Finance expense
(7,926,701)
10,683,896
219,749
-
402,339
250,230
Net income (loss) before income taxes
(10,123,298)
4,473,714
Income taxes (note 10)
(192,328)
321,932
Net Income (loss) for the year
(9,930,970)
4,151,782
Net income (loss) per share (note 12)
Basic
From net income (loss) for the year
Diluted
From net income (loss) for the year
(0.28)
(0.28)
0.12
0.12
The accompanying notes are an integral part of these consolidated financial statements.
4
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P a g e
25
Mongolia Growth Group Ltd.
Consolidated Statement of Comprehensive Income (Loss)
As at December 31
(expressed in Canadian dollars)
2015
$
2014
$
Net Income (loss) for the year
(9,930,970)
4,151,782
Other comprehensive (income) loss
Items that may be subsequently reclassified to income or loss
Unrealized losses on translation of financial statement
functional
operations with Mongolian Tögrög
currency to Canadian dollar reporting currency
6,471,774
(1,520,698)
Total comprehensive income (loss)
(3,459,196)
2,631,084
The accompanying notes are an integral part of these consolidated financial statements.
26
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Mongolia Growth Group Ltd.
Consolidated Statement of Changes in Equity
As at December 31
(expressed in Canadian dollars)
Share capital
$
Contributed
surplus
$
Accumulated
other
comprehensive
loss
$
Deficit
$
Total
$
Balance at January 1,
2014
Net income (loss) for the
year
Other comprehensive loss
Liability settled by equity
Share based payments
Share capital issued (note 11)
Balance at December 31,
2014
52,204,394
4,423,914
(6,086,341)
(5,219,409)
45,322,558
-
-
52,204,394
-
-
1,585,065
-
-
4,423,914
200,003
1,838,904
(647,165)
-
(1,520,698)
(7,607,039)
4,151,782
-
(1,067,627)
4,151,782
(1,520,698)
47,953,642
-
-
-
-
-
-
200,003
1,838,904
937,900
53,789,459
5,815,656
(7,607,039)
(1,067,627)
50,930,449
Share capital
$
Contributed
surplus
$
Accumulated
other
comprehensive
loss
$
Retained
earnings
(deficit)
$
Total
$
53,789,459
5,815,656
(7,607,039)
(1,067,627)
50,930,449
-
-
53,789,459
525,367
-
54,506
-
-
5,815,656
-
977,725
(54,506)
-
6,471,774
(1,135,265)
(9,930,970)
-
(10,998,597)
(9,930,970)
6,471,774
47,471,253
-
-
-
-
-
-
525,367
977,725
-
54,369,332
6,738,875
(1,135,265)
(10,998,597)
48,974,345
Balance at January 1,
2015
Net income (loss) for the
year
Other comprehensive income
Liability settled by equity
Share based payments
Share capital issued (note 11)
Balance at December 31,
2015
The accompanying notes are an
integral part of these consolidated financial statements.
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Mongolia Growth Group Ltd.
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
Depreciation of property and equipment (note 8)
Share based payments (note 11)
Deferred taxes (note 10)
Realized loss (gain) on disposal of property and equipment
Realized loss on disposal of other asset
Realized loss (gain) on disposal of investment properties (note 7)
Impairment
Unrealized loss (gain) on fair value adjustment on investment
properties (note 7)
2015
$
2014
$
(9,930,970 )
4,151,782
137,608
977,725
(234,440)
126,018
1,838,904
9,024
(17,175)
-
116,182
219,749
15,252
144,107
(56,105)
402,339
7,926,701
(10,683,896)
(804,620)
(4,052,575)
Net change in non-cash working capital balances (note 16)
(586,742)
1,144,416
Financing activities
Proceeds from share issuance (note 11)
Proceeds from long term debt, net of finance costs
Repayment of long term debt
Investing activities
Disposal (acquisition) of property and equipment - Net
Disposal of investment properties
Acquisition of investment properties
Proceeds from disposal of subsidiary
Effect of exchange rates on cash
(1,391,362)
(2,908,159)
-
-
-
-
937,900
3,253,169
(3,369,118)
821,951
27,128
1,447,118
(832,245 )
-
(37,116)
2,721,465
(7,044,845)
2,967,749
642,001
(1,392,747)
(749,361)
(3,478,955)
139,212
(245,943)
Decrease in cash and cash equivalents
(610,149)
(3,724,898)
Cash and cash equivalents – Beginning of year
1,645,421
5,370,319
Cash and cash equivalents – End of year
1,035,272
1,645,421
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, 2015
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, 2015, 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.
The Company is registered in Alberta, Canada, with its Head Office at its registered address at
Centennial Place, East Tower, 1900, 520 - 3rd Avenue S.W. Calgary, Alberta, Canada T2P 0R3.
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 MGG Properties Building, at the corner of Chinggis Ave. and Seoul
St. in Ulaanbaatar, Mongolia.
At December 31, 2015, 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
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).
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
These consolidated financial statements were approved by the Board of Directors of the Company
for issue on April 19, 2016.
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 as either 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.
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
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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:
(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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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. 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. 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 consolidated statement of financial position. Gains or losses
arising from changes in the fair value of investment properties are recognized in the
consolidated 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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 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.
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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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
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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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
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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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
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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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. 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
o.
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.
p. 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.
q. 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
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.
r. 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, 2016 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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.
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, 2018 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
IFRS 16 – Leases
IFRS 16 replaces IAS 17 Leases and related interpretations. The core principle is that a lessee
recognize assets and liabilities for all leases with a lease term of more than 12 months. A
lessee is required to recognize a right-of-use asset representing its right to use the
underlying leased asset and a lease liability representing its obligation to make lease
payments. Assets and liabilities arising from a lease are initially measured on a present value
basis. The measurement includes non-cancellable lease payments (including inflation-linked
payments), and also includes payments to be made in optional periods if the lessee is
reasonably certain to exercise an option to extend the lease, or not to exercise an option to
terminate the lease. The new standard is intended to provide a faithful representation of
leasing transactions, in particular those that do not currently require the lessees to recognize
an asset and liability arising from an operating lease. IFRS 16 is effective for annual periods
beginning on January 1, 2019, with early adoption permitted for entities that would also
apply IFRS 15 Revenue from Contracts with Customers.
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.
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
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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 7. 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 11.
(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 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
2015
$
7,003
137,930
13
890,339
2014
$
1,703
339,429
1,304,289
1,035,272
1,645,421
Cash and cash equivalents are not collateralized, the carrying amount of cash and cash
equivalents approximates fair value.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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
$
$
2015
$
3,245
137,853
887,171
7,003
2014
$
3,216
318,485
1,079,405
244,315
Total cash and cash equivalents
1,035,272
1,645,421
The unrated balance relates to one (2014 – one) private bank in Barbados. In 2014, there was
also one commercial bank in Mongolia which had not been rated by any rating agency.
6 Other assets
Accounts receivable
Prepaid expenses
Prepaid deposits on investment properties
2015
$
222,601
35,671
69,727
2014
$
151,585
77,229
798,889
327,999
1,027,703
Prepaid deposits on investment properties decreased from the prior year as the Company received the
title for one of its properties for which the value was subsequently transferred to Investment
Properties. The remaining prepaid deposit on investment properties relates to one property for which
a title has not been obtained.
7
Investment properties
Balance - beginning of period
Additions
Acquisitions
Capital expenditures
Transfer from prepaid deposits
Transfer from property and equipment
Disposals
Fair value adjustment
Foreign exchange adjustments
2015
$
2014
$
48,458,517
32,313,391
-
832,245
750,869
-
(1,785,637)
(7,926,701)
6,144,456
9,099,706
1,435,909
722,572
689,054
(5,228,204)
10,801,466
(1,375,377)
Balance – end of period
46,473,749
48,458,517
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
During the year, the Company recorded a $7,926,701 unrealized fair value loss (2014 -
$10,801,466 gain) on its investment properties.
Ten investment properties were sold during the year for total cash consideration of $1,669,455
resulting in a net loss of $116,182 on these transactions. A deposit of $271,024 was received for
the sale of one of these properties in 2014.
As of December 31, 2015, included in investment properties are four investment properties
actively being marketed for sale that are to be disposed without redevelopment with a fair value
of $2,970,114 (December 31, 2014 - $1,109,821). As at December 31, 2015, a deposit of $48,688
has been received relating to the sale of one of these properties.
Investment properties by major category are as follows:
Residential
Office
Retail
Land and redevelopment sites
2015
$
285,170
4,649,657
25,842,764
15,696,158
2014
$
357,160
5,039,196
27,645,411
15,416,750
46,473,749
48,458,517
Investment properties with an aggregate fair value of $40,075,384 (2014 - $43,435,936) 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
carrying value of investment properties valued by the external appraiser at December 31, 2015
and 2014 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 or have recently been marketed 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
The key valuation assumptions for commercial investment properties are as follows:
Maximum
Minimum
2015
Weighted-
average
Capitalization rate
11.0%
8.5%
9.51%
Maximum
Minimum
2014
Weighted-
average
Capitalization rate
11.5%
8.0%
9.75%
The following sensitivity table outlines the impact of a 0.25% change in the weighted average
capitalization rate on investment properties at December 31, 2015:
Change to fair value if
capitalization rate
increased 0.25%
Change to fair value if
capitalization rate
decreases 0.25%
ComCommercial property
$(255,374)
$269,626
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 $753,746 (2014 - $26,666,348) have no rental revenue associated with them
at December 31, 2015.
Investment properties include land held under operating leases with an aggregate fair value of
$15,691,687 (2014 - $15,416,750) at December 31 2015.
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
2015
$
2014
$
1,647,994
612,571
1,509,802
1,047,863
2,260,565
2,557,665
Direct operating expenses arising from investment properties that generated rental income during the
year was $1,557,740 (2014 - 1,556,367). Direct operating expenses arising from investment properties
that did not generate rental income during the year was $19,011 (2014 - $125,116).
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
8 Property and equipment
Furniture
and
fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2015
Total
$
Cost
At January 1
Additions
Disposals
Impairment
Foreign exchange
adjustment
102,343
1,743
(5,197)
-
177,233
41,344
(369)
-
26,829
-
-
-
2,972,460
-
(54,596)
(219,749)
3,278,865
43,087
(60,162)
(219,749)
9,550
22,551
3,419
374,169
409,689
At December 31
108,439
240,759
30,248
3,072,284
3,451,730
Furniture
and
fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2015
Total
$
Accumulated
depreciation
At January 1
Depreciation
Disposals
Foreign exchange
adjustment
20,202
9,661
(3,184)
67,527
49,399
(369)
10,276
2,642
-
205,910
75,906
(3,569)
303,915
137,608
(7,122)
2,236
6,747
1,464
28,732
39,179
At December 31
28,915
123,304
14,382
306,979
473,580
Net book value at
December 31
79,524
117,455
15,866
2,765,305
2,978,150
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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
-
18,690
137,170
-
(92,439)
(18,690)
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
177,233
26,829
2,972,460
3,278,865
Furniture
and
fixtures
$
Equipment
$
Vehicles
$
Buildings
$
2014
Total
$
Accumulated
depreciation
At January 1
Depreciation
Disposals
Transfers
Foreign
exchange
16,873
5,656
(1,637)
-
26,267
39,058
-
2,172
31,472
10,042
(29,115)
(2,172)
194,206
71,262
-
(49,769)
268,818
126,018
(30,752)
(49,769)
adjustment
(690)
30
49
(9,789)
(10,400)
At December 31
20,202
67,527
10,276
205,910
303,915
Net book value at
December 31
82,141
109,706
16,553
2,766,550
2,974,950
9 Trade payables and accrued liabilities
Trade and accrued payables
Security deposit
Unearned revenue
Deposit on investment property sales
2015
$
450,063
163,668
42,007
48,688
704,426
2014
$
1,403,004
188,970
62,657
271,024
1,925,655
The carrying amounts above reasonably approximate fair value at the consolidated statement of
financial position date. All trade and other payables are current.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
10 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:
2015
$
2014
$
Net income (loss) before income taxes
Combined statutory tax rate
(10,123,298)
26.5%
4,473,714
26.5%
Tax payable (recoverable) based on statutory tax
rate
Effect of:
Permanent differences
Tax rate variances of foreign subsidiaries
assets not recognized
Provision for (recovery of) income taxes
Current
Deferred
(2,682,674)
1,185,534
150,537
2,118,993
220,816
361,829
(1,846,320)
620,889
(192,328)
321,932
42,112
(234,440)
312,890
9,042
Provision
(recovery of)
for
continuing operations
income
taxes
-
(192,328)
321,932
b) 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
In accordance with Canadian tax law, the taxable losses can be forward twenty years. There are
$8,384,826 (2014 - $7,935,753) of non-capital losses relating to the Canadian entity.
The losses expire as follows:
Year of expiry
2030
2031
2032
2033
2034
2035
Non-capital
loss
$
411,389
575,039
1,658,782
2,708,970
2,249,090
781,556
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
2015
$
2014
$
990,109
1,099,141
990,109
1,099,141
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
11 Share capital and contributed surplus
Common shares
The Company is authorized to issue an unlimited number of common and preferred shares.
The issued and outstanding common shares are as follows:
Balance, December 31, 2013
New shares issued
RSAs vested
Options exercised
Number of
shares
34,303,352
125,000
30,393
390,000
Amount
$
52,204,394
250,000
70,815
1,264,250
Balance, December 31, 2014
34,848,745
53,789,459
New shares issued
RSAs vested
640,691
23,393
525,367
54,506
Balance, December 31, 2015
35,512,829
54,369,332
a) Stock options
Balance, January 1, 2014
Granted
Cancelled
Exercised
Forfeited
Number of
options
1,957,000
1,538,000
(297,000)
(390,000)
(360,000)
Weighted
average
exercise
price
$
3.76
1.70
4.20
1.76
4.08
December 31, 2014
2,448,000
2.61
Balance, January 1, 2015
Granted
Cancelled
Forfeited
December 31, 2015
2,448,000
1,575,000
(615,000)
(120,000)
3,288,000
2.61
0.73
3.98
1.56
1.45
The Company has established a share based payment plan (the "Plan") to encourage
its shares by key management personnel (directors and executive
ownership of
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
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, 2015, the Company had 239,890 (2014 - 1,036,874) 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 new Directors of the Company. The options vested immediately.
On April 2, 2015, the Company issued 935,000 options at a price of $0.72 to employees of
the Company. These options vested in two tranches whereas the first tranche vested
immediately and the second tranche will vest on April 2, 2016.
On April 7, 2015, 640,000 options were issued to Directors of the Company at a price of
$0.74. These options vested immediately.
A summary of the Company’s options as at December 31 and changes during the periods
then ended follows:
December
31,
2015
Weighted
average
exercise
price
Balance, beginning of the year
Options cancelled
Options granted
Options exercised
Options forfeited
2,448,000
(615,000)
1,575,000
-
(120,000)
$
2.61
3.98
0.73
-
1.56
December
31,
2014
1,957,000
(297,000)
1,538,000
(390,000)
(360,000)
Balance, end of the year
3,288,000
1.45
2,448,000
Exercisable
2,510,500
1.53
1,385,000
Weighted remaining
average life (years)
3.51
Weighted
average
exercise
price
$
3.76
4.20
1.70
1.76
4.08
2.61
2.46
3.63
50
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
During the year, no options were exercised (2014 – 390,000), however, 23,393 RSAs vested
increasing the shares issued by the same amount.
Additionally during 2015, 120,000 options with a weighted average exercise price of $1.56 were
forfeited and 615,000 options with a weighted average exercise price of $3.98 were cancelled
during this time.
The fair value associated with the options issued in April was calculated using the Black-Scholes
model for options valuation, assuming volatility of 67.5% on the underlying units, a risk free
interest rate ranging from 0.73%-0.76% 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. Prior to 2014, 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 $67,272 (2014- $106,687). The
approximate impact of a decrease of 10% in the volatility assumption would increase net income
of the Company by $73,154 (2014 - $116,905.)
Options outstanding 2015
Number outstanding
130,000
20,000
5,000
125,000
1,078,000
375,000
915,000
640,000
3,288,000
Weighted
average
remaining life
(years)
Weighted
average
exercise price
$
Weighted
average at
grant date
0.32
0.69
0.92
0.17
3.11
3.94
4.26
4.27
3.51
4.20
4.77
4.25
4.13
1.90
1.09
0.72
0.74
1.45
4.04
4.70
4.14
4.09
2.13
1.15
0.74
0.80
1.54
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
Options outstanding 2014
Number outstanding
50,000
130,000
75,000
100,000
190,000
400,000
1,128,000
375,000
2,448,000
Weighted
average
remaining life
(years)
Weighted
average
exercise price
$
Weighted
average at
grant date
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
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:
December
31,
2015
Weighted
average
exercise
price
December
31,
2014
Weighted
average
exercise
price
$
Balance, beginning of period
RSAs forfeited
RSAs vested
46,786
-
(23,393)
Balance, end of the period
23,393
$
-
-
-
-
91,179
(14,000)
(30,393)
46,786
-
-
-
-
The fair value of the restricted shares granted during the 2015 year was $7,954 (2014- $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 2015 year, the Company recorded net compensation expense of $39,527 (2014 -
$127,230) for the Restricted Share Plan within the share based payment expenses.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
b) Earnings per share
The following table summarizes the shares used in calculating earnings (loss) per share:
Weighted average number of shares - basic
Effect of dilutive stock options
2015
$
35,315,357
-
2014
$
34,652,992
-
Weighted average number of shares - diluted
35,315,357
34,652,992
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.
12 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
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, 2015,
the Company’s working capital was $512,555 (2014 - $596,123) and the Company had no debt.
Current assets
Current liabilities
Working capital
2015
$
1,363,271
850,716
2014
$
2,673,124
2,077,001
512,555
596,123
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
13 Financial risk management
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.
Catastrophe risk
The Company obtained
approximately $23,700,000 (2014 - $24,600,000).
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.
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
Accounts receivable
2015
$
1,035,272
222,601
2014
$
1,645,421
151,585
Maximum credit risk exposure on the consolidated
statement of financial position
1,257,873
1,797,006
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 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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
As at December 31, 2015, 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, 2015. The Company does
not have material liabilities that can be called unexpectedly at the demand of a third party.
The following table summarizes the undiscounted cash flows of financial assets and liabilities by
contractual or expected maturity:
December 31, 2015
One year or
less
$
One to two
years
$
No maturity
date
$
Financial Assets
Cash and cash equivalents
Accounts receivables
Financial Liabilities
Trade payables and accrued
liabilities
1,035,272
222,601
1,257,873
704,426
-
-
-
-
-
-
-
-
December 31, 2014
One year or
less
$
One to two
years
$
No maturity
date
$
Financial Assets
Cash and cash equivalents
Accounts receivables
Financial Liabilities
Trade payables and accrued
liabilities
1,645,421
151,585
1,797,006
1,925,655
-
-
-
-
-
-
-
-
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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55
Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
The Company is not directly exposed to interest rate risk at December 31, 2015 and
2014.
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 $4,773,378 (2014 -
$766,111). The approximate impact of a decrease of 10% in the Mongolian Tögrög
against the Canadian dollar would decrease OCI of the Company by $4,339,435 (2014 -
$935,558).
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.
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
14 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
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.
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
2015
$
170,685
492,661
-
2014
$
438,006
929,311
870,540
663,346
2,237,857
15 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.
16 Supplementary cash flow information
Changes in non-working capital arising from
2015
$
2014
$
Other assets
Trade payables and accrued liabilities
Income tax payable
(12,659)
(579,139)
5,056
3,557,875
(2,563,665)
150,206
Changes in non-cash working capital from operating
activities
(586,742)
1,144,416
Income tax paid during the year was $44,528 (2014 - $75,991). No interest was paid during the
year (2014 - $250,230).
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57
Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
17 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.
The Company evaluates performance based on net income (loss) before income taxes.
Investment
Property
$
2,002,512
(1,576,751)
(174,429)
Corporate
$
-
-
-
2015
Total
$
2,002,512
(1,576,751)
(174,429)
(7,926,701)
(219,749)
(431,107)
(348,817)
(132,312)
30,353
(116,182)
61,216
-
-
(546,618)
(739,597)
(5,296)
218
(38)
(7,926,701)
(219,749)
(977,725)
(1,088,414)
(137,608)
30,571
(116,182)
61,178
(8,831,967)
(1,291,331)
(10,123,298)
Rental income
Property operating expenses
Non capitalized development
expense
Unrealized gain on fair value
on
properties
and
adjustment
investment
and
equipment
property
Impairment
Share based payment
Other expenses
Depreciation
Net investment income
Loss on disposal of investment property
Other revenue
Net
income
income taxes
(loss) before
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
Rental income
Property operating expenses
Unrealized gain on fair value
adjustment on
investment properties
Share based payment
Other expenses
Depreciation
Net investment income
Gain on disposal of
investment property
Other revenue
Net income (loss) before
income taxes
Balance as of
December 31, 2015
Total assets
Property and equipment
Investment properties
Expenditures
Property and equipment
Investment properties
Balance as of
December 31, 2014
Total assets
Property and equipment
Investment properties
Expenditures
Property and equipment
Investment properties
Investment
Property
$
1,822,392
(1,556,367)
10,683,896
(603,798)
(1,280,628)
(119,312)
65,537
56,105
40,158
2014
Corporate
$
Total
$
-
-
1,822,392
(1,556,367)
-
(1,235,106)
(3,393,787)
(6,706)
1,069
10,683,896
(1,838,904)
(4,674,415)
(126,018)
66,606
-
261
56,105
40,419
9,107,983
(4,634,269)
4,473,714
Investment
Property
$
50,661,225
2,971,779
46,473,749
43,087
832,245
Investment
Property
$
53,745,233
2,963,284
48,458,517
88,338
10,535,615
Corporate
$
Total
$
153,945
6,371
-
50,815,170
2,978,150
46,473,749
-
-
43,087
832,245
Corporate
$
Total
$
361,358
11,666
-
-
-
54,106,591
2,974,950
48,458,517
88,338
10,535,615
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Mongolia Growth Group Ltd.
Notes to the Consolidated Financial Statements
As at December 31, 2015
Revenue
Property and
equipment
Investment
property
2015
$
2014
$
2015
$
2014
2015
$
$
-
2014
$
-
Canada
-
261
6,371
11,666
Mongolia
1,947,508
1,918,655
2,971,779
2,963,284
46,473,749 48,458,517
1,947,508
1,918,916
2,978,150
2,974,950
46,473,749 48,458,517
18 Other expenses
Administration
Repairs and maintenance
Office
Professional fees
Travel
Advertising
Land and property tax
Insurance
Utilities
Other
2015
$
132,146
71,471
85,571
615,319
108,158
13,257
198,668
113,199
172,140
89,963
2014
$
177,609
110,398
143,048
1,518,494
148,745
48,461
277,350
68,519
143,708
264,678
1,599,892
2,901,010
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Board of Directors
Harris Kupperman
CEO and 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 is Chairman of Mongoljin Private Capital
in Ulaanbaatar. Mr. Dwyer was a New York-based
investment banker
in mergers and
specializing
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 served as Executive Director from
its formation in 2007 to April 2016. Mr. Dwyer received
his MBA from Columbia Graduate School of Business
(Columbia University).
Byambaa Losolsuren
Independent Director
Mrs. Losolsuren is a founder of the Trend Capital LLC,
investment advisory firm. In the past, she was one
of the key partners at UMC, being in charge of asset
management arm, where she launched and managed
three local investment funds. She was instrumental in
drafting of the first Investment Fund Law of Mongolia,
which was successfully passed by the Parliament in
2013. Prior to that, she worked on a number of projects
in the financial sector of Mongolia implemented by the
Asian Development Bank. Mrs. Losolsuren also serves as
an independent director of the local insurance company.
Currently a member of the Economic Council at the
Prime Minister’s Office of Mongolia and a Director of
the Investment and Finance Research Center. Columnist
at the Mongolian Economy journal and at the online
platform www.trends.mn. She holds a BA from the
National University of Mongolia, and MBA degree from
Waseda University, Japan. Earned her PMP designation
from PMI in 2015.
Nick Cousyn
Independent Director
Mr. Cousyn is a Capital Markets 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),
Mongolia’s
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 Mongolia’s Institute
for Finance and Economics. Mr. Cousyn holds a BA in
Economics from the University of California at Riverside.
largest broker and
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 formerly
served in a similar capacity at Assiniboia Capital Corp.,
which built Canada’s largest farmland fund before selling
it to the Canada Pension Plan Investment Board in 2014.
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
the Legacy Group of
of
Inc.,
Companies, Greenfield Carbon Offsetters
on the advisory board of AgFunder.com and Chair of the
board of directors of SIM Canada..
Input Capital Corp,
Robert Scott
Independent Director
Mr. Scott, CPA, CA, CFA brings more than 20 years of
professional experience in corporate 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 currently serves as
the CFO for Riverside Resources (TSXV: RRI) and Nickel
One Resources Inc. (TSXV: NNN) and is also on the board
of Genesis Metals Corp. (TSXV: GIS).
Officers
Harris Kupperman
Genevieve Walkden, MBA, CFP, CAIA
CEO and Chairman of the Board
CFO and Corporate Secretary
Auditors
Legal
Transfer Agent
PricewaterhouseCoopers LLP
Winnipeg, MB
Borden Ladner Gervais LLP
Computershare Investor Services
Calgary, AB
100 University Ave., 8th Floor
Farris, Vaughan, Wills & Murphy LLP
Vancouver, BC
Toronto, ON M5J 2Y1
Tel: 1 800 564 6253
www.investorcentre.com/service
61
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
62
info@mongoliagrowthgroup.com | www.mongoliagrowthgroup.com