Mongolia Growth Group Ltd.
Annual Report 2016

Plain-text annual report

2016 Annual Report Table of Contents Letter to Shareholders ................................................................................................................................. 3 Management Discussion & Analysis ........................................................................................................... 4 Consolidated Financial Statements ............................................................................................................ 23 Corporate Information ................................................................................................................................ 65 Mongolia Growth Group Ltd. Mongolia Growth Group Ltd. (MGG) is a leading publicly traded property investment 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 MGG undertakes its own property acquisitions, develops brownfield land assets and repositions outdated properties, relying on in-house services for all facets of both the investment portfolio and development side of the business.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, 2016 has seen us demonstrate continued progress in terms of reducing costs, improving efficiencies and keeping AFFO losses to a minimum. On the cost side, 2016 showed a $571,303 (21%) reduction in costs before non-capitalized development expense, depreciation and equity compensation when compared with fiscal 2015. We are continuing to work on finding additional cost cuts however potential savings appear to be largely exhausted after two years of aggressive cost reductions. Adjusted Funds From Operations (AFFO) improved significantly year over year from a loss of $581,338 in 2015 to a loss of $199,829 in 2016. Offsetting these improvements in our overall operations, our revenues in Mongolian Tögrög terms have continued to slide throughout 2016, with this slide further exacerbated by the 28.5% decline against the Canadian Dollar since the beginning of 2016. Unfortunately, our AFFO continues to be negative and trends in the Mongolian economy indicate that this negative AFFO will accelerate from here over at least the next few quarters—even before factoring in the rapidly depreciating Mongolian Tögrög. We’ve done all that we could to reduce costs, find new sources of revenue and insulate shareholders from the accelerating decline of the Mongolian economy. Unfortunately, I suspect that this will not be enough to get us to positive AFFO and the next few quarters will be quite bleak before the Mongolian economy hopefully bottoms. Following this, I suspect that the tremendous glut of commercial property that has recently come online and is expected to come online over the next few years, will lead to an oversupply in property that will take at least a few years and likely quite longer to be absorbed, leading to stubbornly high vacancy and dramatically lower rental rates than we have had to contend with over the past few years. These factors will likely forestall any recovery in property values for many years into the future. Unfortunately, we have not reached the scale needed to support the cost structure of being a publicly traded company and are unlikely to do so without raising substantial additional capital— which is unlikely to be available to us on acceptable terms for quite some time. As a result of this, I do not see a logical event path that gets us beyond roughly break-even AFFO for the foreseeable future, even if rental rates recover dramatically from here. As CEO and largest shareholder, I clearly recognize that owning a collection of property that continues to have negative AFFO, while depreciating in value is a very unattractive outcome. Now that our AFFO losses have stabilized at a much reduced level, we have the flexibility to chart a new course that hopefully has better future returns for shareholders. As we review the property market, we have concluded that values are likely to be stable at best and potentially depreciating in US and Canadian Dollar terms for many years into the future. Since the start of 2016, we have been trying to dispose of multiple assets with negligible operating income on the best terms possible, so that we can increase liquidity as we try and determine the correct path forward. Unfortunately, we have struggled to make sales as domestic demand for property assets remains soft and bank funding is difficult to come by. Additionally, it may take quite some time before the economy recovers sufficiently for us to make more than token asset sales. I believe in the long-term future of Mongolia and believe that we have an outstanding portfolio of property assets along with a highly skilled team to manage them. Regrettably, this hasn’t been sufficient for us to create value for shareholders and it appears that it will not be sufficient in the future either. Our goal over the past two years, since I returned as CEO, has been to lose less money and preserve as much value for shareholders as possible. This continues to be our goal. Offsetting this rather negative outlook for our business, during 2016, one of our offshore subsidiaries purchased 19,000,000 shares of Mongolian Mining Corporation (975 – Hong Kong Stock Exchange) at an average cost of 14 Hong Kong cents. At the end of the year, we showed a mark-to-market gain of CDN $731,041 on this position. We intend to continue seeking out attractive publicly traded investment opportunities both in Mongolia and abroad, where we can use our excess liquidity from property sales to earn attractive returns on capital as we await redeployment of this capital. Despite everything that I’ve said above, I believe that our shares are highly undervalued. During the year, the Corporation repurchased 812,500 at an average price of $0.35. Despite our very limited liquidity, I believe that repurchasing shares remains a good use of our capital and the Corporation will continue on this path as long as the shares remain highly undervalued and we have sufficient liquidity to continue repurchasing shares. The current economic situation in Mongolia is bleak and likely to get worse—yet I haven’t lost hope in the ultimate future for MGG and intend to continue increasing my shareholdings over time. Sincerely, Harris Kupperman CEO and Chairman of the Board 3 Mongolia Growth Group Ltd |MONGOLIA GROWTH GROUP LTD. Management Discussion & Analysis December 31, 2016 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, 2016 (the “MD&A”), compared with the year ended December 31, 2015. 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 March 30, 2017 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, 2016 and December 31, 2015 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 | Mongolia Growth Group LtdSection 1 – Overview Financial and Operational Overview During the fourth quarter of 2016, the Corporation continued to focus on reducing costs in the midst of a weakening Mongolian economy; however cost reductions were partially offset by continued declines in rental revenues on assets that experienced lease renewals along with continued depreciation of the Mongolian Tögrög against the Canadian Dollar. Offsetting this, a number of properties that were developed by the Corporation in prior periods began to pay rent. During 2016, FFO improved significantly from a loss of $755,767 in 2015 to an FFO gain of $157,405 in 2016. AFFO improved from a loss of $581,338 in 2015 to a loss of $199,829 in 2016. These improvements were due to a 21.4% reduction in costs before depreciation, equity compensation and non-capitalized development expenses when compared with 2015 due to several one-time events captured in the expenses for the year. The Corporation’s rental revenue decreased by 10.9% compared to the prior year, which was largely as a result of increased vacancies in the office sector, increasing amount of rental discounts provided to tenants and a weaker currency. Additionally, the Corporation was forced to reduce rental rates on many property assets when leases came up for renewal. The Corporation’s office space experienced higher vacancy rates than usual due to the departure of a significant tenant at the Corporation’s head office. The Corporation is working to increase the occupancy at this property, but has struggled to fill this space due to an oversupply of office space and a weakening economy. Additionally, rental rates have continued to decline, particularly in the office market, leading to an expectation that rental revenue will continue to decline in future quarters. While the Corporation has experienced a low level of bad debt expense thus far in the economic crisis, an increasing number of tenants are showing stress in their businesses and there is no certainty on whether the Corporation’s bad debt expense will increase in future periods. Weakness in the economy has led to decreases in the Corporation’s occupancy rates particularly in the office space sector which had an occupancy rate of 84.9% at the end of the year dragging down the Corporation’s overall weighted average occupancy rate to 91.0%. Due to a significant deterioration of the local economy, the Corporation recorded an unrealized fair value loss of $5,728,003 on its investment properties portfolio during 2016 (2015-$7,926,701). If property values continue to decline, the Corporation will likely need to record unrealized fair value losses in future periods. During the year, the Corporation disposed of 4 investment properties for proceeds of $970,241. Proceeds from the sales of assets during the year were used for working capital purposes and its Normal Course Issuer Bid (NCIB) program. It is anticipated that the Corporation will continue to dispose of properties in future quarters in order to fund working capital needs, future public securities purchases along with the renewed NCIB program. As of December 31, 2016, the Corporation had five investment properties at a fair value of $2,132,267 classified as available for sale. (Q4 2015 – four classified as available for sale at a fair value of $2,970,114). During the year, the Mongolian Tögrög depreciated versus the Canadian dollar from 1,438 MNT/CAD on December 31, 2015 to 1,848 MNT/CAD on December 31 2016; a 28.5% decrease during the year. This depreciation led to a $10,651,263 other comprehensive loss (2015 – 6,471,774 gain) during the year. Subsequent to the end of the quarter, the Mongolian Tögrög has continued to experience a steady and continuous decline. During the year, the Corporation has experienced some difficulty in converting Mongolian Tögrög to U.S. Dollars as banks seem to have a shortage of U.S. Dollars. At times, banks have imposed various daily limits on convertibility that have hindered the Corporation’s ability to convert even small quantities of currency. The Corporation continues to transfer money back to its Canadian headquarters, however there is no certainty that the Mongolian banks will continue to allow such transfers in the future. The Corporation tries to keep as little of its cash reserves in Mongolian Tögrög as is possible to operate the business. Economic Overview From 2009 until 2014, the Mongolian real estate sector benefitted from local economic growth. The majority of this growth was 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 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 led to a substantial increase in the gross production of the local economy. Since 2015, according to official government statistics, the Mongolian economy has witnessed a decrease in its growth rate, with this decline accelerating since then. 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. Despite government statistics indicating overall economic growth, many sectors of the economy are under severe economic distress, with most business people believing that the economy has in fact been experiencing a dramatic contraction since sometime in 2014. Additionally, statistical indexes that are not affiliated with the Mongolian Government, such as the World Economics Sales Managers Index, indicate that the economy has likely been contracting since early 2014. This economic 5 Mongolia Growth Group Ltd |contraction has impacted the property sector where vacancies have increased while rental rates have declined dramatically— even before taking into account the decline in the currency. It is anticipated that certain austerity initiatives undertaken related to the recently announced IMF loan, will serve to further impair current economic conditions. Additionally, there is uncertainty that the IMF package will be implemented. 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 continued their decline throughout 2016. While most data is anecdotal, office rental prices in the downtown core have declined between 50-80%, while retail lease rates have declined by approximately a third in Mongolian Tögrög terms over the past 12-18 months. These declines are further magnified by the decline in the currency against the Canadian Dollar. Recently, a number of prestigious office buildings have offered highly aggressive rates in order to fill vacancies, including elongated free rental periods or even offering rental rates that are below the levels needed to support property taxes and utilities. Based on those indicative rates, the Corporation would experience a substantial decline in rental rates for existing office assets and it is expected that the Corporation’s rental revenues will decline substantially in future periods. Additionally, there are a sizable number of office buildings and retail mini-malls that are expected to be completed before the end of 2017. These properties are expected to put substantial additional pressure on rental rates as they represent very sizable increases in supply at a time when demand continues to decline due to businesses downsizing or ceasing operations. The Corporation cautions investors that in future periods it may be forced to accept rental rates that do not cover basic operating costs such as utilities and property tax, even before considering additional allocated overhead management costs. In such a situation, it would be expected that AFFO losses would expand dramatically from 2016 levels. Additionally, such lease rates may last for an elongated period of time and substantially deplete the Corporation’s liquidity. 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. Recently, a number of banks that had been hesitant to sell properties at a loss have begun to market these prices at sizable discounts to the valuations on their balance sheets. If sales are completed at large discounts to current prices, it would impact the fair value of the Corporation’s assets and may lead to future sizable unrealized losses to the fair value of the Corporation’s portfolio assets. Recent comments by the IMF have indicated that as part of the bail-out program, it intends to ensure that local banks are adequately capitalized and regulated. This may force domestic banks to raise additional capital and/or sell assets to improve their liquidity and risk capital levels. Such sales would severely impact current property values. Management cautions shareholders that property prices have historically been, and will continue to be, volatile. It is expected that property prices will continue to decline for the foreseeable future. Management expects a continued demand for well-located street-level retail space, with a reduced demand level for office space. 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 and attributes its success to the size and capability of its leasing and marketing organization though it has often had to offer substantial discounts in order to fill spaces. For more information on leasing, visit http://www. MGGProperties.com. The Corporation is focused on maintaining high levels of occupancy, even if it needs to continually lower rental rates. MGG has seen a slight 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 with a goal of keeping properties fully occupied at the cost of lowering rents. It is anticipated that many existing leases will be re-negotiated to substantially lower rates when they expire over the next few quarters. It is expected that market rental rates will continue to decline, especially when converted back to Canadian dollars. 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 or existing tenants demand that the Corporation reduces rental rates. 6 | Mongolia Growth Group LtdSection 2 ‐ Executing the Strategy  Core Business   During the past six years, Management and employees have worked hard to build up the infrastructure needed to  manage MGG’s institutional property platform. This platform is unique in Mongolia and is one of the only platforms  capable of managing assets through the full cycle of ownership from acquisition and development, through disposition  and  includes  dedicated  departments  that  manage  maintenance,  leasing,  marketing  and  tenant  management.  Management believes it has a strong team in place to lead the Corporation into its next phase of growth.   Section 2 - Executing the Strategy Due to MGG’s unique platform, the Corporation has added third party leasing and property management to its focus,  in order to leverage its existing resources. Management believes that it has excess capacity to handle these functions  Core Business and has seen a sizable increase in interest in using its brokerage operation as awareness spreads in the Ulaanbaatar  During the past six years, Management and employees have worked hard to build up the infrastructure needed to manage MGG’s market. The Corporation intends to more actively target this brokerage opportunity now that its website is renewed  institutional property platform. This platform is unique in Mongolia and is one of the only platforms capable of managing assets and relaunched at www.MGGproperties.com.   through the full cycle of ownership from acquisition and development, through disposition and includes dedicated departments that manage maintenance, leasing, marketing and tenant management. Management believes it has a strong team in place to Since  inception,  MGG  has  acquired  a  number  of  redevelopment  properties.  To  date,  the  Corporation  has  also  lead the Corporation into its next phase of growth. remodeled, rebuilt and completed additions on properties. During 2014 and 2015, the Corporation spent substantial  resources on redeveloping its Tuguldur retail center property; however these redevelopment efforts have been put  Due to MGG’s unique platform, the Corporation has added third party leasing and property management to its focus, in order to on  hold  due  to  a  slowing  economy  and  uncertainty  regarding  the  ability  to  lease  added  space  due  to  the  rapidly  leverage its existing resources. Management believes that it has excess capacity to handle these functions and has seen a sizable increase in interest in using its brokerage operation as awareness spreads in the Ulaanbaatar market. The Corporation intends to increasing vacancy level in the city. The Corporation did complete a 334 meter extension to Tuguldur during early  more actively target this brokerage opportunity now that its website is renewed and relaunched at www.MGGproperties.com. 2016 and a lease was signed with a well‐respected Mongolian tenant in early 2016. This tenant began to pay rent  during the third quarter of 2016. Due to the project going over budget and the sizable decline in market rents from  Since inception, MGG has acquired a number of redevelopment properties. To date, the Corporation has also remodeled, rebuilt and completed additions on properties. During 2014 and 2015, the Corporation spent substantial resources on redeveloping its when the project began until a lease was signed, this development project did not hit internal return targets, further  Tuguldur retail center property; however these redevelopment efforts have been put on hold due to a slowing economy and validating the Corporation’s decision to cease all further development spending. As part of its cost savings initiative,  uncertainty regarding the ability to lease added space due to the rapidly increasing vacancy level in the city. The Corporation did the Corporation has eliminated its development department as it is expected that there will be no need for additional  complete a 334 meter extension to Tuguldur during early 2016 and a lease was signed with a well-respected Mongolian tenant in space  in  Ulaanbaatar  for  many  years  into  the  future.  The  Corporation  is  currently  evaluating  its  strategy  for  the  early 2016. This tenant began to pay rent during the third quarter of 2016. Due to the project going over budget and the sizable Corporation’s  development  pipeline  as  it  will  no  longer  have  the  internal  resources  to  develop  them  and  a  decline in market rents from when the project began until a lease was signed, this development project did not hit internal return targets, further validating the Corporation’s decision to cease all further development spending. As part of its cost savings monetization of these assets will increase the Corporation’s liquidity.   initiative, the Corporation has eliminated its development department as it is expected that there will be no need for additional space in Ulaanbaatar for many years into the future. The Corporation is currently evaluating its strategy for the Corporation’s Portfolio  development pipeline as it will no longer have the internal resources to develop them and a monetization of these assets will increase the Corporation’s liquidity. Mongolia Growth Group’s properties are located in the Downtown and the Central Business District of Ulaanbaatar.   Within the financial statements, MGG classifies properties in each of the following categories; Investment Properties,  Portfolio Property and Equipment, and Other Assets/Prepaid Deposits. Fluctuations in the values of the Corporation’s property  Mongolia Growth Group’s properties are located in the Downtown and the Central Business District of Ulaanbaatar. portfolio during the quarter can be attributed to changes in valuations, properties purchased and sold, and the change  in value of the functional currency (Mongolian Tögrög) versus the Canadian dollar.    Within the financial statements, MGG classifies properties in each of the following categories; Investment Properties, Property and Equipment, and Other Assets/Prepaid Deposits. Fluctuations in the values of the Corporation’s property portfolio during the quarter can be attributed to changes in valuations, properties purchased and sold, and the change in value of the functional Investment Properties   currency (Mongolian Tögrög) versus the Canadian dollar. Investment  Properties  include  properties  held  to  earn  rental  revenue,  for  capital  appreciation,  and/or  for  Investment Properties redevelopment. Investment Properties are initially valued at fair value, which is the purchase price plus any directly  Investment Properties include properties held to earn rental revenue, for capital appreciation, and/or for redevelopment. attributable  expenditure.  Investment  Properties  are  subsequently  valued  at  fair  value,  which  reflects  market  Investment Properties are initially valued at fair value, which is the purchase price plus any directly attributable expenditure. conditions at the date of the statement of financial position.  Investment Properties are subsequently valued at fair value, which reflects market conditions at the date of the statement of financial position. The following table represents properties classified as Investment Properties, as of December 31, 2016;  The following table represents properties classified as Investment Properties, as of December 31, 2016; Residential  Office  Retail   Land and Redevelopment  Total  # of Properties  2  3  23  3  31  Property and Equipment 2016  Value at 31‐Dec‐16  $CDN  250,320  2,976,642  16,505,234  9,769,154  29,501,350  # of Properties  1  3  26  4  34  2015   Value at 31‐Dec‐15  $CDN   285,170   4,649,657    25,842,765    15,696,158    46,473,750   Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the property. Properties classified as Property and Equipment are measured at cost less accumulated depreciation, less any accumulated impairment losses. All repairs and maintenance costs to these properties are charged to the consolidated statement of operations during the period in which they occur unless eligible for capitalization. The Corporation’s headquarters, purchased in October 2011, falls within this category. During the year, the Corporation’s headquarters building has experienced an increase in vacancy as a sizable tenant ended its lease in March 2016 and the Corporation has struggled to lease the space since this time. MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 8 7 Mongolia Growth Group Ltd |                              Property and Equipment  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  depreciation,  less  any  Properties  are  classified  as  Property  and  Equipment  if  the  Corporation  occupies  more  than  10%  of  the  property.   accumulated impairment losses. All repairs and maintenance costs to these properties are charged to the consolidated  Properties  classified  as  Property  and  Equipment  are  measured  at  cost  less  accumulated  depreciation,  less  any  Property and Equipment  statement of operations during the period in which they occur unless eligible for capitalization. The Corporation’s  accumulated impairment losses. All repairs and maintenance costs to these properties are charged to the consolidated  Properties  are  classified  as  Property  and  Equipment  if  the  Corporation  occupies  more  than  10%  of  the  property.   headquarters, purchased in October 2011, falls within this category. During the year, the Corporation’s headquarters  statement of operations during the period in which they occur unless eligible for capitalization. The Corporation’s  Properties  classified  as  Property  and  Equipment  are  measured  at  cost  less  accumulated  depreciation,  less  any  building has experienced an increase in vacancy as a sizable tenant ended its lease in March 2016 and the Corporation  headquarters, purchased in October 2011, falls within this category. During the year, the Corporation’s headquarters  accumulated impairment losses. All repairs and maintenance costs to these properties are charged to the consolidated  building has experienced an increase in vacancy as a sizable tenant ended its lease in March 2016 and the Corporation  has struggled to lease the space since this time.   statement of operations during the period in which they occur unless eligible for capitalization. The Corporation’s  has struggled to lease the space since this time.   headquarters, purchased in October 2011, falls within this category. During the year, the Corporation’s headquarters  The following table represents properties classified as Property and Equipment, as of December 31, 2016;  building has experienced an increase in vacancy as a sizable tenant ended its lease in March 2016 and the Corporation  The following table represents properties classified as Property and Equipment, as of December 31, 2016;  has struggled to lease the space since this time.   2015  2016  # of Properties  # of Properties  Value at 31‐Dec‐16  2016  $CDN  Value at 31‐Dec‐16  ‐  $CDN  1,672,645  ‐  2016  ‐  1,672,645  Value at 31‐Dec‐16  ‐  ‐  $CDN  1,672,645  ‐  ‐  1,672,645  1,672,645  ‐  ‐  1,672,645  The following table represents properties classified as Property and Equipment, as of December 31, 2016;  The following table represents properties classified as Property and Equipment, as of December 31, 2016; # of Properties  1  1  1  ‐  1  ‐  # of Properties  ‐  2  ‐  1  2  1  ‐  ‐  2  # of Properties  ‐  1  ‐  ‐  1  ‐  # of Properties  ‐  1  ‐  ‐  1  1  ‐  ‐  1  Residential  Office  Residential  Retail   Office  Land and Redevelopment  Retail   Total  Land and Redevelopment  Residential  Total  Office  Other Assets/ Prepaid Deposits  Retail   Land and Redevelopment  Other Assets/ Prepaid Deposits  Investment property purchases where the Corporation has paid either the full or partial purchase proceeds to the  Total  seller, but the Corporation has not yet received the official land or building title from the Mongolian Property office,  Investment property purchases where the Corporation has paid either the full or partial purchase proceeds to the  are recorded at cost as Prepaid Deposits on Investment Properties and classified within other assets.  seller, but the Corporation has not yet received the official land or building title from the Mongolian Property office,  Other Assets/ Prepaid Deposits Other Assets/ Prepaid Deposits  are recorded at cost as Prepaid Deposits on Investment Properties and classified within other assets.  Investment property purchases where the Corporation has paid either the full or partial purchase proceeds to the seller, but the Investment property purchases where the Corporation has paid either the full or partial purchase proceeds to the  The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December 31,  Corporation has not yet received the official land or building title from the Mongolian Property office, are recorded at cost as seller, but the Corporation has not yet received the official land or building title from the Mongolian Property office,  2016;  The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December 31,  Prepaid Deposits on Investment Properties and classified within other assets. are recorded at cost as Prepaid Deposits on Investment Properties and classified within other assets.  2016;  The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December 31, 2016; 2015   The following table represents properties classified as Prepaid Deposits on Investment Properties, as of December 31,  2016;  Value at 31‐Dec‐15  2015  $CDN  Value at 31‐Dec‐15  99,316  $CDN  2,665,989  99,316  2015  ‐  2,665,989  Value at 31‐Dec‐15  ‐  ‐  $CDN  2,765,305  ‐  99,316  2,765,305  2,665,989  ‐  ‐  2,765,305  # of Properties  # of Properties  2016  # of Properties  # of Properties  ‐  ‐   Residential  ‐  ‐   Office  ‐  Residential  ‐   ‐  ‐   Retail   ‐  Office  ‐   # of Properties  # of Properties  1*          1*  Land and Redevelopment  ‐  ‐   Retail   1                   1  Total  1*          1*  Land and Redevelopment  ‐  Residential  ‐   * This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.   1                   1  Total  ‐  ‐   Office  * 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. ‐  ‐   Retail   Occupancy Rates  1*          1*  Land and Redevelopment  Occupancy Rates Occupancy Rates  1                   1  Total  A summary of MGG’s property portfolio occupancy rates is set forth in the following table:  * This land asset is part of one of the land packages outlined in the Investment Properties section and is not a standalone land package.   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:  2016  Value at 31‐Dec‐16  $CDN  Value at 31‐Dec‐16  ‐  $CDN  ‐  2016  ‐  ‐  ‐  Value at 31‐Dec‐16  42,759  ‐  $CDN  42,759  42,759  ‐  42,759  ‐  ‐  42,759  42,759  Occupancy Rates  A summary of MGG’s property portfolio occupancy rates is set forth in the following table:  31 –Dec‐ 2016  Occupancy Rate*  31 –Dec‐ 2016  Occupancy Rate*  84.9%  84.9%  95.1%  31 –Dec‐ 2016  91.0%  95.1%  Occupancy Rate*  91.0%  84.9%  31 –Dec‐ 2015  Occupancy Rate*  31 –Dec‐ 2015  Occupancy Rate*  91.7%  91.7%  84.4%  31 –Dec‐ 2015  87.4%  84.4%  Occupancy Rate*  87.4%  91.7%  Office  Office  Retail  2015   Value at 31‐Dec‐15  $CDN  Value at 31‐Dec‐15  ‐  $CDN  ‐  2015   ‐  ‐  ‐  Value at 31‐Dec‐15  69,727   ‐  $CDN  69,727   69,727   ‐  69,727   ‐  ‐  69,727   69,727   31 –Dec‐ 2014  Occupancy Rate*  31 –Dec‐ 2014  Occupancy Rate*  98.2%  98.2%  91.2%  31 –Dec‐ 2014  94.2%  91.2%  Occupancy Rate*  94.2%  98.2%  95.1%  * Occupancy rates are calculated on a per meter basis; Weighted Average**  Retail  * Occupancy rates are calculated on a per meter basis;   Weighted Average**  ** Weighted Average is calculated based on total meters available for lease  Office  ** 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  Retail  Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s office space, Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s  Weighted Average**  excluding its headquarters building, which lost a major tenant at the beginning of the year, have been good even while vacancy office space, excluding its headquarters building, which lost a major tenant at the beginning of the year, have been  Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s  * Occupancy rates are calculated on a per meter basis;   levels throughout the city have increased significantly as additional supply has entered the market. The Corporation’s Tuguldur good even while vacancy levels throughout the city have increased significantly as additional supply has entered the  office space, excluding its headquarters building, which lost a major tenant at the beginning of the year, have been  ** Weighted Average is calculated based on total meters available for lease  Center has experienced a continued improvement in occupancy throughout the year and ended the year with average weekly market. The Corporation’s Tuguldur Center has experienced a continued improvement in occupancy throughout the  good even while vacancy levels throughout the city have increased significantly as additional supply has entered the  occupancy of over 90% compared with occupancy of approximately 60% for much of 2015. Management attributes its success Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s  year and ended the year with average weekly occupancy of over 90% compared with occupancy of approximately  throughout the portfolio due to increased marketing initiatives, industry leading property management and realistic price market. The Corporation’s Tuguldur Center has experienced a continued improvement in occupancy throughout the  office space, excluding its headquarters building, which lost a major tenant at the beginning of the year, have been  expectations. year and ended the year with average weekly occupancy of over 90% compared with occupancy of approximately  good even while vacancy levels throughout the city have increased significantly as additional supply has entered the  The Corporation would like to caution shareholders that it is experiencing abnormally high levels of tenant turnover and market. The Corporation’s Tuguldur Center has experienced a continued improvement in occupancy throughout the  occupancy levels can fluctuate dramatically between months as tenants break leases. It is expected that turnover will increase year and ended the year with average weekly occupancy of over 90% compared with occupancy of approximately  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. Additionally, the Corporation often experiences added tenant improvement expenses when tenants break leases. During 2016, this expense was unusually elevated compared to prior years and may continue in 2017. MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 91.0%  87.4%  94.2%  84.4%  91.2%  9 9 9 Leasing Schedule In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter lease durations with most tenants. Management’s experience is that this practice is in line with 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. 8 | Mongolia Growth Group Ltd                                                                                                                                             60%  for  much  of  2015.  Management  attributes  its  success  throughout  the  portfolio  due  to  increased  marketing  initiatives, industry leading property management and realistic price expectations.   The Corporation would like to caution shareholders that it is experiencing abnormally high levels of tenant turnover  and occupancy levels can 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. Additionally, the Corporation often experiences added tenant improvement  expenses when tenants break leases. During 2016, this expense was unusually elevated compared to prior years and  may continue in 2017.  Leasing Schedule  In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter  lease  durations  with  most  tenants.  Management’s  experience  is  that  this  practice  is  in  line  with  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.  During the first quarter of 2017, approximately 699 meters of leases, representing about $12,000 in monthly rental revenue will expire. During the first quarter of 2017, approximately 699 meters of leases, representing about $12,000 in monthly rental  revenue will expire.  80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Retail Office Redevelopment 2017 2018 2019 2020 The weighted average remaining lease increased to 10.9 months in December 2016 from 10.4 months in December  2015, calculated as a percentage of monthly revenues.  The weighted average remaining lease increased to 10.9 months in December 2016 from 10.4 months in December 2015, 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 crisis, many companies are suffering which is reflected in lower market rental rates in aggregate.  It  is  expected  that  the  Corporation’s  rental  revenue  may  decline  as  leases  are  renewed  at  current  market  rates.  Offsetting this fact, many of the Corporation’s prior leases were signed at rates that did not reflect peak market rates.  It is Management’s belief that most existing leases are at rates that are above current prevailing market rates. With the current economic crisis, many companies are suffering which is reflected in lower market rental rates in aggregate. It is expected that the Corporation’s rental revenue may decline as leases are renewed at current market rates. Offsetting this fact, many of the Corporation’s prior leases were signed at rates that did not reflect peak market rates. Lease Type  Lease Renewal Date  SqM  Old Price Per Meter  (Mongolian Tögrög)  New Price Per Meter  (Mongolian Tögrög)  Most Recent Retail Lease Signings  Office Lease  Office Lease  Office lease  Retail Lease  Office lease  Office lease  Office lease  Office lease  Office lease  Office lease  Office lease  Office lease  Office lease  Office lease  16‐Oct  16‐Oct  16‐Oct  16‐Nov  16‐Nov  16‐Nov  16‐Nov  16‐Nov  16‐Nov  16‐Nov  16‐Nov  16‐Dec  16‐Dec  16‐Dec  22  54  12  169  24  20  60  24  55  33  30  23  85  54  30,000  30,000  35,000  35,608  31,958  30,000  25,000  25,000  25,454  39,393  40,000  30,000  30,000  40,000  MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 10 Percent   Increase  (decrease)  ‐24.24%  ‐32.10%  0.00%  3.33%  ‐37.42%  ‐16.67%  ‐20.00%  ‐20.00%  ‐21.43%  ‐23.84%  ‐30.00%  ‐33.33%  ‐33.33%  ‐32.50%  22,727  20,370  35,000  36,795  20,000  25,000  20,000  20,000  20,000  30,000  28,000  20,000  20,000  27,000  Publicly Traded Securities Publicly Traded Securities  During the year, one of the Corporation’s offshore subsidiaries purchased 19,000,000 shares of Mongolian Mining Corporation During the year, one of the Corporation’s offshore subsidiaries purchased 19,000,000 shares of Mongolian Mining  at an average cost of approximately 14.2 Hong Kong cents for gross proceeds of $453,698. As of the end of the year, the shares Corporation at an average cost of approximately 14.2 Hong Kong cents for gross proceeds of $453,698. As of the end  were worth $1,184,825 for a pre-tax gain of $731,041. These shares were purchased for investment purposes. of  the  year,  the  shares  were  worth  $1,184,825  for  a  pre‐tax  gain  of  $731,041.  These  shares  were  purchased  for  investment purposes.  The Corporation continues to evaluate various investment opportunities in globally traded public securities. The Corporation views investment activities in public securities to be complimentary to its core property business and a potentially attractive use The  Corporation  continues  to  evaluate  various  investment  opportunities  in  globally  traded  public  securities.  The  for excess property sale proceeds awaiting re-deployment. The Corporation intends to increase the size of its securities portfolio Corporation views investment activities in public securities to be complimentary to its core property business and a  over time. potentially  attractive  use  for  excess  property  sale  proceeds  awaiting  re‐deployment.  The  Corporation  intends  to  increase the size of its securities portfolio over time.     9 MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 11 Mongolia Growth Group Ltd |                            Section 3 – Results of Operations  Section 3 – Results of Operations Selected Annual Financial Information (CAD) Selected Annual Financial Information (CAD)  Total Revenue  Income     Net Income/ (loss) attributable to equity holders  of the Corporation  Total Comprehensive income/ (loss) attributable  to equity holders of the Corporation  Basic earnings per share ("EPS") (in CAD)  Net income/ (loss)     Diluted EPS (in CAD)  Net Income/ (loss)  Balance Sheet  Total Assets  Total liabilities  Total Equity  Shares Outstanding at year end  Book Value per share  Year ended   31‐Dec‐ 2016  Year ended   31‐Dec‐ 2015  Year ended   31‐Dec‐ 2014  1,609,966  1,947,508  1,918,916   (5,662,784)  (9,930,970)   (16,314,047)  (3,459,196)  (0.16)  (0.16)  34,511,276  1,978,836  32,532,440  34,806,599  0.93  (0.28)  (0.28)  50,815,170  1,840,825  48,974,345  35,512,829  1.38  4,151,782  2,631,084  0.12  0.12  54,106,591  3,176,142  50,930,449  34,848,745  1.46  Revenue from Investment Properties Revenue from Investment Properties  For the year end December 31, 2016, rental revenue from Investment Properties was $1,783,896 versus $2,002,512 in the prior For the year end December 31, 2016, rental revenue from Investment Properties was $1,783,896 versus $2,002,512  year. The decrease year over year was primarily attributable to leases being renewed at lower rates as well as a decrease in the in the prior year. The decrease year over year was primarily attributable to leases being renewed at lower rates as  local currency versus the Canadian dollar. well as a decrease in the local currency versus the Canadian dollar.   Gain/loss on sale of Investment Properties Gain/loss on sale of Investment Properties  For the year end December 31, 2016, the Corporation reported a net loss of $223,532 on the sale of four investment properties versus a net loss of $116,182 in the prior year on the sale of ten properties. For the year end December 31, 2016, the Corporation reported a net loss of $223,532 on the sale of four investment  properties versus a net loss of $116,182 in the prior year on the sale of ten properties.     Revenue from Other Sources Revenue from other sources consists of late fees and other income. For the year ending December 31, 2016, revenues from other Revenue from Other Sources  sources totaled $49,602 compared to $61,178 for the year ending December 31, 2015. Revenues decreased due to a lower gain on disposal of fixed asset than the previous year. Revenue from other sources consists of late fees and other income. For the year ending December 31, 2016, revenues  from  other  sources  totaled  $49,602  compared  to  $61,178  for  the  year  ending  December  31,  2015. Revenues  Income Taxes decreased due to a lower gain on disposal of fixed asset than the previous year.  The Corporation has subsidiaries in Mongolia that are subject to income taxes and, accordingly, has provided for current and deferred income taxes with respect to those subsidiaries. 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 deferred tax income of $143,126 for the The  Corporation  has  subsidiaries  in  Mongolia  that  are  subject  to  income  taxes  and,  accordingly,  has  provided  for  year ended December 31, 2016 (2015 $238,472 income), is due to a difference in the fair value of the properties in Mongolia current and deferred income taxes with respect to those subsidiaries.    and depreciation claimed for income tax purposes. The deferred tax liability on the balance sheet decreased $365,774 during the year (Q4 2015 -109,032). The foreign exchange impact of the deferred tax liability of $222,648 (2015 $129,440) for the year Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between  ending December 31, 2016, is recorded in other comprehensive loss. the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The deferred tax  Following an internal review in early 2015, the Corporation determined that it had been overpaying certain taxes to the Canadian income of $143,126 for the year ended December 31, 2016 (2015 $238,472 income), is due to a difference in the fair  government during the period from 2011 until early 2015. The Tax Authorities agreed with the Corporation’s findings related value of the properties in Mongolia and depreciation claimed for income tax purposes. The deferred tax liability on  to this tax issue. On October 3, 2016, the Corporation received a refund for $333,475. The Corporation intends to continue to the  balance  sheet  decreased  $365,774  during  the  year  (Q4  2015  ‐109,032).  The  foreign  exchange  impact  of  the  monitor its tax liabilities. deferred  tax  liability  of  $222,648  (2015  $129,440)  for  the  year  ending  December  31,  2016,  is  recorded  in  other  At year end, the Company reviewed its taxes receivable and determined that the Value Added Tax (VAT) amount that was not comprehensive loss.  projected to be received/offset by the end of 2017 ($85,526) should be expensed and recorded as doubtful receivables. MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 12 10 | Mongolia Growth Group Ltd                                                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, 2016, the Corporation had approximately 58% of its Investment Properties Portfolio including its head office (classified in PP&E) valued by an international valuation firm and the remaining 42% (27 properties) were valued by Management. For the year ended December 31, 2016, the fair value adjustment to investment properties was a loss of $5,728,003 compared to a loss of $7,926,701 for the same period in 2015. Unrealized short-term investment gain During the year, one of the Corporation’s offshore subsidiaries purchased 19,000,000 shares of Mongolian Mining Corporation (Ticker Symbol 975: Hong Kong Stock Exchange) at an average price of approximately 14.2 Hong Kong cents. At the end of the quarter, the shares closed at 36.0 Hong Kong cents, leading to a pre-tax gain after currency adjustments of CDN $731,041. The Corporation currently has no other publicly traded security positions, but continues to evaluate potential additional investments in publicly traded securities. Share Repurchase During the year, the Corporation repurchased 812,500 of its common shares under its Normal Course Issuer Bid (NCIB) at an average price of $0.35. As at December 31, 2016, the Company held 86,500 shares in Treasury to be cancelled during the first quarter of 2017. 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, 2016 the property operating expenses were $1,354,014 compared to $1,576,751 during the same period in 2015, representing a decrease of approximately 14%. This decrease was primarily due to a reduction in the number of properties in the portfolio along with certain expense reductions as the Corporation becomes more efficient. Corporate Expenses Corporate expenses include senior management’s compensation, share-based costs, listing fees, professional fees, technology, travel and administrative costs. For the year ending December 31, 2016 general and administration expenses decreased to $503,987 from $1,291,511 in 2015. This decrease from the previous year is primarily attributed to a reduction in share based payment expense, a reversal in corporate tax expense as well as ongoing cost cutting initiatives. Currency Note 8 in the financial statements discloses the foreign exchange adjustment, which flows through the investment  The Mongolian Tögrög has fluctuated significantly over the past five years. The Mongolian Tögrög has depreciated 6.8%, 5.1%, property classification during each period. As at December 31, 2016 the Corporation recognized a significant foreign  11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the Canadian Dollar while appreciating 11.4% in 2015 and exchange adjustment loss of $10,148,384 (2015 ‐gain of $6,144,456) to its investment property portfolio due to the  depreciating 28.5% in 2016. The fluctuation in the currency is reflected in the Corporation’s financial statements, most notably in 28.5% depreciation of the local currency during the year.   the investment property portfolio, as it is the largest item on the balance sheet. Note 8 in the financial statements discloses the foreign exchange adjustment, which flows through the investment property classification during each period. As at December 31, Operating Profit (Loss)   2016 the Corporation recognized a significant foreign exchange adjustment loss of $10,148,384 (2015 -gain of $6,144,456) to its investment property portfolio due to the 28.5% depreciation of the local currency during the year. In total the Corporation reported an Operating loss or an Adjusted EBITDA loss $307,586 during 2016 (2015 – loss of  Operating Profit (Loss) $1,869,811). The Improvement in EBITDA since last year is due to the cost saving initiatives implemented during the  year.   In total the Corporation reported an Operating loss or an Adjusted EBITDA loss $307,586 during 2016 (2015 – loss of $1,869,811). The Improvement in EBITDA since last year is due to 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/gains / Finance Expense  EBITDA  Subtract Fair Value Adjustment Gain (Add back loss) on all  properties including impairments on PPE and Other Assets  Total Adjusted EBITDA  2016  $  (5,763,752)  124,523  (751,311)  (6,390,540)  2015  $  (10,123,298)  137,608  (30,571)  (10,016,261)  6,082,954  8,146,450          (307,586)           (1,869,811)   Funds From Operations ("FFO")  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 (REALpac) recommends  that FFO be determined by reconciling FFO from net income.  During  2016,  negative  FFO  improved  to  an  income  of  $157,405  in  2016  from  a  loss  of  $755,767  in  2015.  The  improvement is primary due to a continued reduction in expenses.   11 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 2016, the Company’s AFFO loss decreased from $581,338 in 2015 to $199,829.  It should be noted that FFO and AFFO include certain one‐time costs related to the Corporation’s cost cutting plan  that were not sufficiently large to be broken out, but their exclusion would have further reduced the Corporation’s  AFFO loss for the year.   MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 14 Mongolia Growth Group Ltd |                  Funds From Operations (“FFO”) 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 (REALpac) recommends that FFO be determined by reconciling FFO from net income. During 2016, negative FFO improved to an income of $157,405 in 2016 from a loss of $755,767 in 2015. The improvement is primary due to a continued reduction in expenses. 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 2016, the Company’s AFFO loss decreased from $581,338 in 2015 to $199,829. It should be noted that FFO and AFFO include certain one-time costs related to the Corporation’s cost cutting plan that were not sufficiently large to be broken out, but their exclusion would have further reduced the Corporation’s AFFO loss for the year. Reconciliation of FFO and AFFO  Reconciliation of FFO and AFFO The analysis below shows a reconciliation of the Corporation’s net income to FFO and AFFO for the year ended December 31, The  analysis  below  shows  a  reconciliation  of  the  Corporation’s  net  income  to  FFO  and  AFFO  for  the  year  ended  2016 December 31, 2016  Net Income for the period  Add (deduct) items not affecting cash  Unrealized loss on fair value adjustment of investment properties  Impairment of property and equipment  Impairment of other assets  Unrealized change in short‐term investments  Depreciation and amortization   Loss (gain) from sales of investment properties  Tax on sales on investment property  Deferred Taxes  Allowance for doubtful VAT Receivable  Share Based Payments   Funds From Operations   Add (deduct)   Development costs not capitalized   Corporate tax refund  Forfeited purchase down payment  Adjusted Funds From Operations  Per Unit – Basic  Funds From Operations  Adjusted Funds From Operations   Year ended   31‐December  2016  ($)  Year ended  31‐December  2015  ($)  (5,662,784)  (9,930,970)  5,728,003  343,506  11,445  (731,041)  124,523  7,926,701  219,749  ‐  ‐  137,608                           223,532                               116,182      20,656  (143,126)  85,526  157,165  157,405  ‐  (333,475)  (23,759)  (199,829)  (0.00)  (0.01)  35,710  (238,472)  977,725  (755,767)  174,429  ‐  (581,338)  (0.02)  (0.01)  Per Unit – Diluted  Funds From Operations  Adjusted Funds From Operations   (0.00)  (0.01)  (0.02)  (0.01)  *As of Q3 2016, the Company changed its policy on the calculation of deferred taxes in the calculation of FFO and AFFO.  The Company now calculates the change in  *As of Q3 2016, the Company changed its policy on the calculation of deferred taxes in the calculation of FFO and AFFO. The Company now calculates the change in deferred taxes by deferred taxes by adding back the effects of foreign exchange movements to change in deferred tax on the balance sheet. As such, the 2015 deferred tax number  adding back the effects of foreign exchange movements to change in deferred tax on the balance sheet. As such, the 2015 deferred tax number does not match the number reported in does not match the number reported in the 2015 MD&A (‐$109,032).  For further information on the calculation of deferred tax, please see the income tax note on  the 2015 MD&A (-$109,032). For further information on the calculation of deferred tax, please see the income tax note on page 10 of the Annual Report. page 12 of the MD&A.  Net Income Net Income  For the year ended December 31, 2016, the Corporation incurred a net loss of $5,662,784, compared to a net loss of $9,930,970 for the year ended December 31, 2015. This significant loss is attributed to the substantial unrealized loss on fair value adjustment For the year ended December 31, 2016, the Corporation incurred a net loss of $5,662,784, compared to a net loss of  on investment properties portfolio of $5,728,003 (2015 – loss of $7,926,701). $9,930,970 for the year ended December 31, 2015. This significant loss is attributed to the substantial unrealized loss  Management cautions investors that the Corporation is primarily focused on increasing shareholder value on a per share basis. on fair value adjustment on investment properties portfolio of $5,728,003 (2015 – loss of $7,926,701).   This means that operationally, management is more concerned with long-term asset appreciation at the expense of short-term cash flow. 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.   12 MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 15 | Mongolia Growth Group Ltd                                                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  Mongolia Growth Group’s primary sources of capital are cash generated from equity issuance, financing and asset sales. along with cash flows from 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  investing  The following table provides an overview of the Corporation’s cash flows from operating, financing and investing activities for the activities for the year ended December 31, 2016 and 2015.  year ended December 31, 2016 and 2015. Net change in cash related to:  Operating  Investing  Financing  Effects of exchange rates on cash  Net change in cash during the period  31‐Dec‐16  $  713,163  475,685  (285,023)  (57,610)  846,215  For the year ending   31‐Dec‐15  $  (1,391,362)  642,001  ‐  139,212  (610,149)  Overall, the Corporation had cash inflows during 2016 compared to cash outflows in 2015. The Company’s cash inflows were Overall, the Corporation had cash inflows during 2016 compared to cash outflows in 2015. The Company’s cash inflows  generated through investing activities from the disposal of investment properties and through an increase in non-cash working were generated through investing activities from the disposal of investment properties and through an increase in  capital balance. The changes in components of cash flows for the year ended December 31, 2016 compared to the year ended December 31, 2015 were the result of the following factors: non‐cash working capital balance. The changes in components of cash flows for the year ended December 31, 2016  compared to the year ended December 31, 2015 were the result of the following factors:  • Operating–Operating cash inflows for the year ended 2016 increased primarily due to a positive change in non-cash working capital due to a deposit received on the sale of an investment property, as well as lower operating costs. • Operating–Operating cash inflows for the year ended 2016 increased primarily due to a positive change in  non‐cash working capital due to a deposit received on the sale of an investment property, as  • Investing–Investing cash inflows for the year ended 2016 decreased due to short-term investments in marketable well as lower operating costs.  securities made during the year offset by a lower disposal of investment properties than the previous year. •  Investing–Investing cash inflows for the year ended 2016  decreased due to short‐term investments in  • Financing–Financing cash outflows occurred due to the repurchase of 812,500 shares during the year. The Corporation marketable  securities  made  during  the  year  offset  by  a  lower  disposal  of  investment  properties than the previous year.  did not repurchase any shares during the same period in 2015. To date, the Corporation has been able to meet all of its capital and other cash requirements from its internal sources of cash. • Financing–Financing cash outflows occurred due to the repurchase of 812,500 shares during the year.  The  As at December 31, 2016, the Corporation had approximately $1,881,487 (2015 - $1,035,272) in cash and cash equivalents. Due Corporation did not repurchase any shares during the same period in 2015.  to the expectation that AFFO will worsen in future quarters, the Corporation is focused on increasing liquidity and cash reserves in Canada through asset sales. To date, the Corporation has been able to meet all of its capital and other cash requirements from its internal sources  Total Assets of cash. As at December 31, 2016, the Corporation had approximately $1,881,487 (2015 ‐ $1,035,272) in cash and cash  As of December 31, 2016, the Corporation had $3,204,065 (2015 - $1,363,271) in Current Assets out of which $1,881,487 (2015 equivalents. Due to the expectation that AFFO will worsen in future quarters, the Corporation is focused on increasing  - $1,035,272) was held in cash and cash equivalents. The increase in cash is due to the selling of 4 investment properties during liquidity and cash reserves in Canada through asset sales.   the year as well as a cash deposit received prior to year-end for the sale of an investment. In addition, during the year, the Corporation purchased short term investments which Management considers to be liquid and available to be sold at any time Total Assets  should the Corporation require cash. As  of  December  31,  2016,  the  Corporation  had  $3,204,065  (2015  ‐  $1,363,271)  in  Current  Assets  out  of  which  The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment Properties. Investment $1,881,487 (2015 ‐ $1,035,272) was held in cash and cash equivalents. The increase in cash is due to the selling of 4  Properties are carried at Fair Market Value and decreased during the year to $29,501,350 (2015 -$46,473,749) the year by way of a dispositions, a large unrealized loss on fair value adjustment further magnified by an large decrease in the Mongolian Tögrög investment  properties  during  the  year  as  well  as  a  cash  deposit  received  prior  to  year‐end  for  the  sale  of  an  versus the Canadian dollar during the year. investment.  In  addition,  during  the  year,  the  Corporation  purchased  short  term  investments  which  Management  considers to be liquid and available to be sold at any time should the Corporation require cash.  Property and Equipment, which primarily consists of properties that are measured at their cost base, decreased from $2,978,150 in 2015 to $1,805,861 in 2016 primarily due to a decrease in the Canadian dollar versus the Mongolian Tögrög. The  majority  of  the  Corporation’s  assets  are  classified  as  Non‐Current  Assets,  mainly  Investment  Properties.   Total Liabilities Investment  Properties  are  carried  at  Fair  Market  Value  and  decreased  during  the  year  to  $29,501,350  (2015  ‐ As of December 31, 2016, the Corporation had current liabilities of $1,354,501 (2015 - $850,716) consisting of payables and $46,473,749) the year by way of a dispositions, a large unrealized loss on fair value adjustment further magnified by  accrued liabilities. The increase is due to a deposit of $673,585 received for the sale of an investment property. an large decrease in the Mongolian Tögrög versus the Canadian dollar during the year.   As of December 31, 2016, the Corporation had no long term debt outstanding. The only non-current liability on the balance sheet is deferred income taxes. Deferred tax liabilities decreased slightly during the year to $624,335 in 2016 (2015 - $990,109) due to Property and Equipment, which primarily consists of properties that are measured at their cost base, decreased from  the decrease in value of the Corporation’s property portfolio. $2,978,150 in 2015 to $1,805,861 in 2016 primarily due to a decrease in the Canadian dollar versus the Mongolian  Tögrög.  MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 16 13 Mongolia Growth Group Ltd |                              Total Liabilities  Total Liabilities  property.    As  of  December  31,  2016,  the  Corporation  had  current  liabilities  of  $1,354,501  (2015  ‐  $850,716)  consisting  of  payables and accrued liabilities. The increase is due to a deposit of $673,585 received for the sale of an investment  As  of  December  31,  2016,  the  Corporation  had  current  liabilities  of  $1,354,501  (2015  ‐  $850,716)  consisting  of  payables and accrued liabilities. The increase is due to a deposit of $673,585 received for the sale of an investment  Expired  Granted  Forfeited  Cancelled  31‐Dec‐15  35,512,829  31‐Dec‐15  3,288,000  35,512,829  3,288,000  31‐Dec 16  34,806,599*  31‐Dec 16  3,358,000  34,806,599*  3,358,000  * As at December 31, 2016, the Company held 86,500 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2017.  property.    As of December 31, 2016, the Corporation had no long term debt outstanding. The only non‐current liability on the  balance sheet is deferred income taxes. Deferred tax liabilities decreased slightly during the year to $624,335 in 2016  As of December 31, 2016, the Corporation had no long term debt outstanding. The only non‐current liability on the  (2015 ‐ $990,109) due to the decrease in value of the Corporation’s property portfolio.     balance sheet is deferred income taxes. Deferred tax liabilities decreased slightly during the year to $624,335 in 2016  (2015 ‐ $990,109) due to the decrease in value of the Corporation’s property portfolio.     Total Equity  The equity of the Corporation consists of one class of common shares.  Total Equity Total Equity  Outstanding  The equity of the Corporation consists of one class of common shares. The equity of the Corporation consists of one class of common shares.  Common shares  Outstanding  Options to buy common shares  Common shares  Options to buy common shares  * As at December 31, 2016, the Company held 86,500 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2017.  * As at December 31, 2016, the Company held 86,500 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2017. Options Outstanding  Options Outstanding At December 31, 2016, the Corporation had 3,358,000 options that were exercisable (December 31, 2015; 2,510,500).  Options Outstanding  At December 31, 2016, the Corporation had 3,358,000 options that were exercisable (December 31, 2015; 2,510,500). At December 31, 2016, the Corporation had 3,358,000 options that were exercisable (December 31, 2015; 2,510,500).  The Chart below shows the historical option grants and options outstanding as of December 31, 2016.  The Chart below shows the historical option grants and options outstanding as of December 31, 2016. The Chart below shows the historical option grants and options outstanding as of December 31, 2016.  Total  Option Price  Exercisable  Total  ‐   Exercisable  ‐   ‐   1,078,000  ‐   ‐   1,078,000  ‐   ‐   ‐  ‐   ‐   ‐  ‐   ‐   375,000  ‐   915,000  375,000  640,000  915,000  350,000  640,000   3,358,000   350,000   3,358,000   Total Options  Outstanding  Total Options  ‐   Outstanding  ‐   ‐   1,078,000  ‐   ‐   1,078,000  ‐   ‐   ‐  ‐   ‐   ‐  ‐   ‐   375,000  ‐   915,000  375,000  640,000  915,000  350,000  640,000  3,358,000  350,000  3,358,000  Non  exercisable  Non  ‐  exercisable  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  1.64  Option Price  1.75  1.64  1.9  1.75  4.2  1.9  4.77  4.2  4.25  4.77  4.0  4.25  4.13  4.0  1.09  4.13  0.72  1.09  0.74  0.72  0.38  0.74  Total  0.38  Total  100,000  Granted  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  350,000  640,000   5,953,000   350,000   5,953,000   ‐    Expired   50,000   ‐    ‐   50,000    205,000   ‐   20,000    205,000   5,000   20,000   ‐   5,000   125,000   ‐   ‐    125,000   ‐   ‐   ‐   ‐   ‐   ‐    405,000   ‐    405,000   ‐   Cancelled  ‐   ‐   ‐   ‐   287,000  ‐   55,000  287,000  95,000  55,000  190,000  95,000  275,000  190,000  ‐   275,000  ‐   ‐   ‐   ‐   ‐   ‐    902,000   ‐    902,000   100,000  Exercised  250,000  100,000  200,000  250,000  ‐   200,000  ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐   ‐    550,000   ‐    550,000   ‐   Forfeited  ‐   ‐   85,000  ‐   408,000  85,000  100,000  408,000  50,000  100,000  ‐   50,000  ‐   ‐   ‐   ‐   20,000  ‐   ‐   20,000  ‐   ‐    738,000   ‐    738,000   Acquisitions and Dispositions Acquisitions and Dispositions  During 2016, the Corporation did not acquire any properties (2015 – nil). During the period, the company had capital expenditures Acquisitions and Dispositions  During 2016, the Corporation did not acquire any properties (2015 – nil). During the period, the company had capital  of $77,839, however these expenditures were offset by the cancellation of an unfinished contract of $55,222, resulting in net capital expenditures of $22,617 during the period. (2015 - $832,245) During the year, the Corporation disposed of four investment expenditures of $77,839, however these expenditures were offset by the cancellation of an unfinished contract of  During 2016, the Corporation did not acquire any properties (2015 – nil). During the period, the company had capital  properties for cash proceeds of $970,241, resulting in a net loss of $223,532. During 2015, ten investment properties were sold $55,222, resulting in net capital expenditures of $22,617 during the period. (2015 ‐ $832,245) During the year, the  Related Party Transactions  expenditures of $77,839, however these expenditures were offset by the cancellation of an unfinished contract of  for cash consideration of $1,669,455 resulting in net loss of $116,182. Corporation disposed of four investment properties for cash proceeds of $970,241, resulting in a net loss of $223,532.  $55,222, resulting in net capital expenditures of $22,617 during the period. (2015 ‐ $832,245) During the year, the  Related Party Transactions During  2015,  ten  investment  properties  were  sold  for  cash  consideration  of  $1,669,455  resulting  in  net  loss  of  Parties are generally considered to be related if the parties are under common control or if one party has the ability  Corporation disposed of four investment properties for cash proceeds of $970,241, resulting in a net loss of $223,532.  $116,182.  to control the other party or can exercise significant influence or joint control over the other party in making financial  Parties are generally considered to be related if the parties are under common control or if one party has the ability to control During  2015,  ten  investment  properties  were  sold  for  cash  consideration  of  $1,669,455  resulting  in  net  loss  of  the other party or can exercise significant influence or joint control over the other party in making financial and operational and  operational  decisions.  In  considering  each  possible  related  party  relationship,  attention  is  directed  to  the  $116,182.  decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not substance of the relationship, not merely the legal form.   merely the legal form. Exercised  Key  management  personnel  of  the  Company  include  all  directors  and  executive  management.  The  summary  of  Key management personnel of the Company include all directors and executive management. The summary of compensation for compensation for key management personnel is as follows:  key management personnel is as follows:  Related Party Transactions  Salaries and other short‐term benefits to officers  Share‐based payments to directors and officers  2016  $  2015  $  186,341 107,722 294,063 MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 170,685 492,661 663,346 17 Off-Balance Sheet Items Off‐Balance Sheet Items   As of December 31, 2016, the Corporation had no off-balance sheet items. As of December 31, 2016, the Corporation had no off‐balance sheet items.  MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 17 Events Subsequent to Year End    Subsequent to year end, the Corporation disposed of one property for $1,441,660 with a book value at year  end of $1,481,887. The Corporation had received a deposit of $669,800 during Q4 2016.  14 As disclosed in the Corporation’s February 28, 2017 News Release, the Corporation announced that the TSX  Venture Exchange (the “Exchange”) had accepted a Notice of Intention to renew its normal course issuer bid  to purchase outstanding common shares of the Company on the open market in accordance with the policies  of the TSXV.  Securities Sought:  Up to 2,850,000 common shares (representing up to approximately 8.3% of the  34,524,099 common shares of the Corporation currently issued and outstanding, or approximately 9.9% of  the 28,592,349 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 March 1, 2017, and the Bid will end no later than March 1,  2018.  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.    Previous Purchases:   In the 12 months preceding the commencement of the Bid, the Corporation has  purchased 1,008,500 of its shares at an average price of $0.37 per common share.   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,  2015,  the  Corporation  engaged,  an  arm’s  length  property  valuator,  to  prepare  three  MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 18 | Mongolia Growth Group Ltd                                                     Events Subsequent to Year End • Subsequent to year end, the Corporation disposed of one property for $1,441,660 with a book value at year end of $1,481,887. The Corporation had received a deposit of $669,800 during Q4 2016. • The Corporation repurchased 196,000 of its shares at an average price of $0.34/share. • As disclosed in the Corporation’s February 28, 2017 News Release, the Corporation announced that the TSX Venture Exchange (the “Exchange”) had accepted a Notice of Intention to renew its normal course issuer bid to purchase outstanding common shares of the Company on the open market in accordance with the policies of the TSXV. Securities Sought: Up to 2,850,000 common shares (representing up to approximately 8.3% of the 34,524,099 common shares of the Corporation currently issued and outstanding, or approximately 9.9% of the 28,592,349 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 March 1, 2017, and the Bid will end no later than March 1, 2018. 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. Previous Purchases: In the 12 months preceding the commencement of the Bid, the Corporation has purchased 1,008,500 of its shares at an average price of $0.37 per common share. 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, 2015, 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 15 Mongolia Growth Group Ltd |Section 5 ‐ Quarterly Information  Section 5 - Quarterly Information Quarterly Results  Quarterly Results The following table is a summary of select quarterly information over the previous eight quarters:  The following table is a summary of select quarterly information over the previous eight quarters: Revenue   Net income (loss)   Income (loss) per  common share  Total Assets  Weighted Average  Shares (No.)  Ending Shares (No.)  Q4 2016  348,301  196,138  Q3 2016  433,302  434,059  Q2 2016     338,203  (6,017,609)  Q1 2016  490,160  (275,372)  Q4 2015  526,949  (5,503,493)  Q3 2015  340,871  (2,701,490)  Q2 2015  501,936  (1,352,996)  Q1 2015  577,752  (372,991)  0.00  0.01  (0.17)  (0.01)  (0.16)  (0.08)  (0.04)  (0.01)  34,511,276  36,767,186  41,480,240  46,241,247  50,815,170  54,495,461  54,790,433  55,548,676  35,297,108  35,430,404  35,444,217  35,512,829  35,315,357  35,248,810  35,114,612  34,848,745  34,806,599  35,372,099  35,397,599  35,512,829  35,512,829  35,512,829  35,512,829  34,848,745  Revenue  Revenue During  the  fourth  quarter,  the  Corporation’s  real  estate  subsidiary  earned  total  revenue  of  $348,301  (Q4  2015  ‐ During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $348,301 (Q4 2015 -$526,949) of $526,949)  of which  rental  income  earned  was  $406,410  (Q4  2015  ‐ $491,837).  The majority  of  this  rental  income  which rental income earned was $406,410 (Q4 2015 - $491,837). The majority of this rental income decrease is attributed to lower rental rates and a decline in the currency. The quarterly revenue number also includes other revenue earned from decrease is attributed to lower rental rates and a decline in the currency. The quarterly revenue number also includes  miscellaneous sources such as late fee, advertising and from sale of investment properties. During the fourth quarter, the other revenue earned from miscellaneous sources such as late fee, advertising and from sale of investment properties.  Corporation experienced a loss on sale of investment properties of $62,279 (2015 – gain of $22,455), which negatively affected During the fourth quarter, the Corporation experienced a loss on sale of investment properties of $62,279 (2015 –  the Corporation’s revenue. gain of $22,455), which negatively affected the Corporation’s revenue.  During the 4th quarter of 2016, the Corporation also incurred an unrealized loss on fair value adjustment of $166,594 compared to an unrealized loss on fair value adjustment of $5,655,640 during Q4 2015. During the 2016 year, a large part of the unrealized During the 4th quarter of 2016, the Corporation also incurred an unrealized loss on fair value adjustment of $166,594  fair value adjustment loss was taken during the second quarter. compared to an unrealized loss on fair value adjustment of $5,655,640 during Q4 2015. During the 2016 year, a large  Expenses part of the unrealized fair value adjustment loss was taken during the second quarter.  Quarterly expenses related to corporate operations totaled $71,328 (Q4 2015 - $38,119). This increase is due to an increase in legal expenses during the quarter. Expenses  Net Income Quarterly expenses related to corporate operations totaled $71,328 (Q4 2015 ‐ $38,119). This increase is due to an  increase in legal expenses during the quarter.   During the quarter, the Corporation experienced an income of $196,138 in comparison to a loss of $5,503,493 in the same quarter of the previous year. This difference is manly attributed to the significant fair value adjustments loss recorded in the fourth quarter of 2015 compared to the second quarter 2016.  Net Income  During the quarter, the Corporation experienced an income of $196,138 in comparison to a loss of $5,503,493 in the  same quarter of the previous year. This difference is manly attributed to the significant fair value adjustments loss  recorded in the fourth quarter of 2015 compared to the second quarter 2016.  MONGOLIA GROWTH GROUP LTD., Q4 2016 MD&A 20 16 | Mongolia Growth Group Ltd                    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, 2016, the unrealized loss on fair value adjustment of $5,728,003 (2015 - loss of $7,926,701). 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 risk free interest rate for the expected life of the options and future forfeiture rates. For the year ending December 31, 2016, the cost of the share based payments totaled $157,165 (2015 - $977,725). 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. During 2016, the Corporation has had difficulty in converting Mongolian Tögrög to U.S. Dollars at large Mongolian banks or to wire that money to Canada. There can be no certainty regarding the ability to convert or wire money from Mongolia in the future. Mongolia recently signed an agreement with the IMF. There is no certainty regarding the demands that the IMF may make upon Mongolia for austerity or the impacts that this may have on the economy of Mongolia. 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, 2016, the Corporation has identified five (2015- four) investment properties, with a fair value of $2,132,267 (December 31, 2015 - $2,970,114), 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. 17 Mongolia Growth Group Ltd |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. Recently, there have been rumors that various commercial banks in Mongolia could fail. There is no way to tell if these rumors are accurate however, starting in early July, the Corporation has had difficulty in converting Mongolian Tögrög into U.S. Dollars. If banks are unwilling or unable to give the Corporation access to its U.S. Dollar deposits, the Corporation could experience severe liquidity issues. 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. Recently, the Corporation has experienced an increase in late rental payments. The Corporation believes that it will collect all of this debt, but there is no certainty that this will occur. Liquidity Risk Under certain market conditions, such as during volatile markets or when trading in a security or market is otherwise impaired, the liquidity of the Corporation’s portfolio positions may be reduced. In addition, the Corporation may from time to time hold large positions with respect to a specific type of financial instrument, which may reduce the Corporation’s liquidity. During such times, the Corporation may be unable to dispose of certain financial instruments, including longer-term financial instruments, which would adversely affect its ability to rebalance its portfolio. In addition, such circumstances may force the Corporation to dispose of financial instruments at reduced prices, thereby adversely affecting its performance. If there are other market participants seeking to dispose of similar financial instruments at the same time, the Corporation may be unable to sell such financial instruments or prevent losses relating to such financial instruments. Furthermore, if the Corporation incurs substantial trading losses, the need for liquidity could rise sharply while its access to liquidity could be impaired. In addition, in conjunction with a market downturn, the Corporation’s counterparties could incur losses of their own, thereby weakening their financial condition and increasing the Corporation’s exposure to their credit 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, 2016. As at December 31, 2016, the Corporation had working capital of $1,849,564 (2015- $512,555) 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, 2016, the Corporation does not have any material contractual obligations. Market Risk Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in market prices. The value of the financial instruments can be affected by changes in interest rates, foreign exchange rates, and equity and commodity prices. The Company is exposed to market risk in trading its investments and unfavorable market conditions could result in dispositions of investments at less than favorable prices. 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. All of the Corporation’s revenues are received in Mongolian Tögrög while approximately half of the Corporation’s expenses are incurred in U.S. and Canadian Dollars. Therefore, a depreciation in the Mongolian Tögrög against the US and Canadian Dollar will reduce AFFO. The exchange rate continues to be volatile and there is an expectation that the rate of currency depreciation could increase. 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 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. 18 | Mongolia Growth Group LtdPreliminary growth estimates according to the National Statistics Office for 2016 was 1% while year over year inflation estimates were 1.1% according to Mongol Bank. Recently, Mongolia reached an initial agreement with the International Monetary Fund for a three-year program that includes a $440 million loan package as part of a $5.5 billion bailout. However, there is no certainty that this bailout will be finalized. 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. 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 (Note 14 on December 31, 2016 Financial Statements). Unless the context otherwise requires, references to the “Corporation” include the Corporation and its subsidiaries and affiliates collectively, including Mongolia Barbados Corp. Changes in Investment Strategies The Corporation may alter its investment strategies and restrictions without prior approval by shareholders to adapt to changing circumstances. Possible Negative Impact of Regulation The regulatory environment is evolving and changes to it may adversely affect the Corporation. To the extent that regulators adopt practices of regulatory oversight that create additional compliance, transaction, disclosure or other costs for the Corporation, returns of the Corporation may be negatively affected. In addition, the regulatory or tax environment for securities, derivatives and related instruments is evolving and may be subject to modification by government or judicial action that may adversely affect the value of the investments held by the Corporation. The effect of any future regulatory or tax change on the Corporation is impossible to predict. Property Specific Risk The Company currently has a standing agreement with the owner of a 42 sq. meter apartment which has been included in one of the Company’s properties classified as land and development. The agreement entitles the owner of the apartment to 84 sq. meters of space on the first floor of a new building to be built on this land. The agreement expires at the end of 2017 and has not yet been extended. A liability of $149,081 is currently included in the Company’s balance sheet to reflect this liability. Management has no certainty that the agreement will be extended beyond 2017. Use of Derivatives The Corporation may use derivative instruments. The use of derivatives in general presents additional risks to those applicable to trading only in the underlying assets. To the extent of the Corporation’s investment in derivatives it may take a credit risk with respect to parties with whom it trades and may also bear the risk of settlement default. When used for hedging purposes, an imperfect or variable degree of correlation between price movements of the derivative instrument and the underlying investment sought to be hedged may prevent the Corporation from achieving the intended hedge effect or expose the Corporation to the risk of loss. In addition, derivative instruments may not be liquid at all times, so that in volatile markets the Corporation may not be able to close out a position without incurring a loss. No assurance can be given that short sales, hedging, leverage and other techniques and strategies utilized by the Corporation to hedge its exposure will not result in material losses. Custody Risk and Broker or Dealer Insolvency The Corporation does not control the custodianship of all of its assets. The Corporation’s assets will be held in one or more accounts maintained for the Corporation by its broker or brokers. Such brokers are subject to various laws and regulations in 19 Mongolia Growth Group Ltd |various jurisdictions that are designed to protect their customers in the event of their insolvency. However, the practical effect of these laws and their application to the Corporation’s assets are subject to substantial limitations and uncertainties. Because of the large number of entities and jurisdictions involved and the range of possible factual scenarios involving the insolvency of a broker or any sub-custodians, agents or affiliates, it is impossible to generalize about the effect of their insolvency on the Corporation and its assets. Investors should assume that the insolvency of any of the brokers or such other service providers would result in the loss of all or a substantial portion of the Corporation’s assets held by or through such brokers and/or the delay in the payment of withdrawal proceeds. Investment and Trading Risks in General All trades made by the Corporation risk the loss of capital. The Corporation may utilize trading techniques or instruments, which can, in certain circumstances, maximize the adverse impact to which a client’s account may be subject. No guarantee or representation is made that the Corporation’s investment program will be successful, and investment results may vary substantially over time. Many unforeseeable events, including actions by various government agencies, and domestic and international economic and political developments may cause sharp market fluctuations which could adversely affect the Corporation’s portfolio and performance. General Economic and Market Conditions The success of the Corporation’s activities may be affected by general economic and market conditions, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws, and national and international political circumstances. These factors may affect the level and volatility of securities prices and the liquidity of the Corporation’s investments. Unexpected volatility or illiquidity could impair the Corporation’s profitability or result in losses. Issuer–Specific Changes The value of an individual security or particular type of security can be more volatile than, and can perform differently from the market as a whole. Portfolio Turnover The Corporation has not placed any limits on the rate of portfolio turnover and portfolio securities may be sold without regard to the time they have been held when, in the opinion of the Corporation, investment considerations warrant such action. A high rate of portfolio turnover involves correspondingly greater expenses than a lower rate. Liquidity of Underlying Investments Some of the securities in which the Corporation may invest may be thinly traded. There are no restrictions on the investment of the Corporation in illiquid securities. It is possible that the Corporation may not be able to sell or repurchase significant portions of such positions without facing substantially adverse prices. If the Corporation is required to transact in such securities before its intended investment horizon, the performance of the Corporation, could suffer. Highly Volatile Markets The prices of financial instruments in which the Corporation’s assets may be invested can be highly volatile and may be influenced by, among other things, specific corporate developments, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. The Corporation is subject to the risk of the failure of any of the exchanges on which the Corporation’s positions trade or of their clearinghouses. Emerging Markets The Corporation may invest in the securities of companies which operate in some emerging markets. Operating in emerging markets involves additional risks because companies in emerging markets may be less regulated and not subject to the same standards, reporting practices and disclosure requirements that apply in more developed markets. In addition, some emerging markets and legal systems may not adequately protect investor rights. Small- to Medium- Capitalization Companies The Corporation may invest a portion of its assets in the securities of companies with small- to medium-sized market capitalizations. While the Corporation believes these investments often provide significant potential for appreciation, those securities may involve higher risks in some respects than do investments in securities of larger companies. For example, while smaller companies generally have potential for rapid growth, they often involve higher risks because they may lack the management experience, financial resources, product diversification, and competitive strength of larger companies. In addition, in many instances, the frequency and volume of their trading may be substantially less than is typical of larger companies. As a result, the securities of smaller companies may be subject to wider price fluctuations. When making large sales, the Corporation may have to sell portfolio holdings at discounts from quoted prices or may have to make a series of small sales over an extended period of time due to the trading volume of smaller company securities. 20 | Mongolia Growth Group LtdFixed Income Securities The Corporation may occasionally invest in bonds or other fixed income securities of issuers, including, without limitation, bonds, notes and debentures issued by corporations. Fixed income securities pay fixed, variable or floating rates of interest. The value of fixed income securities in which the Corporation invests will change in response to fluctuations in interest rates. In addition, the value of certain fixed-income securities can fluctuate in response to perceptions of credit worthiness, political stability or soundness of economic policies. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). If fixed income investments are not held to maturity, the Corporation may suffer a loss at the time of sale of such securities. Equity Securities To the extent that the Corporation holds equity portfolio investments, or short positions in equities, it will be influenced by stock market conditions in those jurisdictions where the securities held by the Corporation, are listed for trading and by changes in the circumstances of the issuers whose securities are held by the Corporation. Options Selling call and put options is a highly specialized activity and entails greater than ordinary investment risk. The risk of loss when purchasing an option is limited to the amount of the purchase price of the option, however investment in an option may be subject to greater fluctuation than an investment in the underlying security. In the case of the sale of an uncovered option there can be potential for an unlimited loss. To some extent this risk may be hedged by the purchase or sale of the underlying security. Shorting Selling a security short (“shorting”) involves borrowing a security from an existing holder and selling the security in the market with a promise to return it at a later date. Should the security increase in value during the shorting period, losses will incur to the Corporation. There is in theory no upper limit to how high the price of a security may go. Another risk involved in shorting is the loss of a borrow, a situation where the lender of the security requests its return. In cases like this, the Corporation, must either find securities to replace those borrowed or step into the market and repurchase the securities. Depending on the liquidity of the security shorted, if there are insufficient securities available at current market prices, the Corporation, may have to bid up the price of the security in order to cover the short position, resulting in losses to the Corporation. Trading Costs The Corporation may engage in a high rate of trading activity resulting in correspondingly high costs being borne by the Corporation. Currency and Exchange Rate Risks The Corporation’s assets will be denominated in multiple currencies. The Corporation will report their results in Canadian dollars. The Corporation expects to report allocations of profit and loss for income tax purposes in Canadian dollars. Changes in currency exchange rates may affect the value of the Corporation’s portfolio and the unrealized appreciation or depreciation of investments. Leverage The Corporation may use financial leverage by borrowing funds against the assets of the Corporation. Leverage increases both the possibilities for profit and the risk of loss for the Corporation. From time to time, the credit markets are subject to periods in which there is a severe contraction of both liquidity and available leverage. The combination of these two factors can result in leveraged strategies being required to sell positions typically at highly disadvantageous prices in order to meet margin requirements, contributing to a general decline in a wide range of different securities. Illiquidity can be particularly damaging to leveraged strategies because of the essentially discretionary ability of dealers to raise margin requirements, requiring leveraged strategy to attempt to sell positions to comply with such requirements at a time when there are effectively no buyers in the market at all or at any but highly distressed prices. These market conditions have in the past resulted in major losses. Such conditions, although unpredictable, can be expected to recur. 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 since December 31, 2013 annual filings. The new certification reflects what the Corporation considers to be a more appropriate level of CEO and CFO certification given the size and nature of the Corporation’s operations. This certification requires the certifying officers to state that: they have reviewed the interim MD&A and consolidated financial statements; they have determined that there is no untrue statement of a material fact, or any omission of material fact required 21 Mongolia Growth Group Ltd |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. 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, 2017 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. 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 liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39. 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. 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. Additional Information Additional information relating to Mongolia Growth Group Ltd., including its interim financial statements, is available on SEDAR at www.sedar.com. 22 | Mongolia Growth Group LtdMongolia Growth Group Ltd. Consolidated Financial Statements December 31, 2016 (expressed in Canadian dollars) 23 Mongolia Growth Group Ltd |Mongolia Growth Group Ltd. Consolidated Financial Statements December 31, 2016 (Expressed in Canadian dollars) INDEPENDENT AUDITORS' REPORT To the Shareholders of Mongolia Growth Group Ltd. We have audited the accompanying consolidated financial statements of Mongolia Growth Group Ltd., which comprise the consolidated statement of financial position as at December 31, 2016, and the consolidated statements of operations, comprehensive loss, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. 24 2 | P a g e | Mongolia Growth Group Ltd Opinion In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Mongolia Growth Group Ltd. as at December 31, 2016 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other Matters The consolidated financial statements of Mongolia Growth Group Ltd. for the year ended December 31, 2015 were audited by another auditor who expressed an unmodified opinion on those statements on April 19, 2016. Vancouver, Canada Chartered Professional Accountants “DAVIDSON & COMPANY LLP” March 30, 2017 3 | P a g e 25 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Consolidated Statements of Financial Position As at December 31 (Expressed in Canadian dollars) Assets Current assets Cash (note 5) Marketable securities (note 6) Other assets (note 7) Non-current assets Investment properties (note 8) Property and equipment (note 9) Total assets Liabilities Current liabilities Trade payables and accrued liabilities (note 10) Income taxes payable Non-current liabilities Deferred income tax liability (note 11) Total liabilities Equity Share capital (note 12) Contributed surplus Accumulated other comprehensive loss Deficit Total equity 2016 $ 2015 $ 1,881,487 1,184,825 137,753 3,204,065 29,501,350 1,805,861 31,307,211 1,035,272 - 327,999 1,363,271 46,473,749 2,978,150 49,451,899 34,511,276 50,815,170 1,192,397 162,104 1,354,501 704,426 146,290 850,716 624,335 990,109 1,978,836 1,840,825 54,130,373 6,849,976 (11,786,528) (16,661,381) 54,369,332 6,738,875 (1,135,265) (10,998,597) 32,532,440 48,974,345 Total equity and liabilities 34,511,276 50,815,170 Commitment and contingencies (note 16) Subsequent events (note 20) Approved by the Board of Directors “Robert Scott” Director “Brad Farquhar” Director The accompanying notes are an integral part of these consolidated financial statements. 26 4 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Consolidated Statements of Operations For the year ended December 31 (Expressed in Canadian dollars) Revenue Rental income Loss on disposal of investment property Other revenue Total revenue Expenses Salaries and wages Other expenses (note 19) Development expense Share based payment (note 12) Depreciation (note 9) 2016 $ 2015 $ 1,783,896 2,002,512 (223,532) (116,182) 61,178 49,602 1,609,966 1,947,508 876,670 1,217,192 - 157,165 124,523 1,065,273 1,599,892 174,429 977,725 137,608 Total expenses 2,375,550 3,954,927 Net investment income 20,270 30,571 Unrealized loss on fair value adjustment on Investment properties (note 8) Impairment of Property and equipment (note 9) Impairment of Other assets Unrealized gain on short-term investments (note 6) Recovery of consumption tax (5,728,003) (343,506) (11,445) 731,041 333,475 (7,926,701) (219,749) - - - Net loss before income taxes (5,763,752) (10,123,298) Income taxes (note 11) Net loss for the year Net loss per share (note 12) Basic From net loss for the year Diluted From net loss for the year 100,968 192,328 (5,662,784) (9,930,970) (0.16) (0.16) (0.28) (0.28) The accompanying notes are an integral part of these consolidated financial statements. 5 | P a g e 27 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Consolidated Statements of Comprehensive Loss For the year ended December 31 (Expressed in Canadian dollars) 2016 $ 2015 $ Net loss for the year (5,662,784) (9,930,970) 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 (10,651,263) 6,471,774 Total comprehensive loss (16,314,047) (3,459,196) The accompanying notes are an integral part of these consolidated financial statements. 28 6 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Consolidated Statements of Changes in Equity For the year ended December 31 (Expressed in Canadian dollars) Share capital $ Contributed surplus $ Accumulated other comprehensive loss $ Deficit $ Total $ Balance at January 1, 2015 Net loss for the year Other comprehensive income 53,789,459 - - 53,789,459 Liability settled by equity Share based payments Share capital issued (note 12) 525,367 - 54,506 5,815,656 - - 5,815,656 - 977,725 (54,506) (7,607,039) - 6,471,774 (1,135,265) (1,067,627) 50,930,449 (9,930,970) (9,930,970) 6,471,774 - 47,471,253 (10,998,597) - - - - - - 525,367 977,725 - Balance at December 31, 2015 54,369,332 6,738,875 (1,135,265) (10,998,597) 48,974,345 Share capital $ Contributed surplus $ Accumulated other comprehensive loss $ Deficit $ Total $ 54,369,332 6,738,875 (1,135,265) (10,998,597) 48,974,345 - - 54,369,332 - - 6,738,875 - (10,651,263) (11,786,528) (5,662,784) - (16,661,381) (5,662,784) (10,651,263) 32,660,298 46,064 (258,313) - (26,710) (46,064) - 157,165 - - - - - - - - - - (258,313) 157,165 (26,710) 54,130,373 6,849,976 (11,786,528) (16,661,381) 32,532,440 Balance at January 1, 2016 Net loss for the year Other comprehensive loss Share capital issued (note 12) Share repurchase Share based payments Treasury stock Balance at December 31, 2016 The accompanying notes are an integral part of these consolidated financial statements. 7 | P a g e 29 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Consolidated Statements of Cash Flows For the year ended 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 9) Share based payments (note 12) Deferred taxes (note 11) Bad debt write off Allowance for doubtful tax receivables (note 7) Realized loss (gain) on disposal of property and equipment Realized loss (gain) on disposal of investment properties (note 8) Impairment of property and equipment Impairment of other assets Unrealized gain on marketable securities (note 6) Unrealized loss (gain) on fair value adjustment on investment properties (note 8) 2016 $ 2015 $ (5,662,784 ) (9,930,970) 124,523 157,165 (365,774) 5,930 85,526 8,671 223,532 343,506 11,445 (731,041) 137,608 977,725 (234,440) - - (17,175) 116,182 219,749 - - 5,728,003 7,926,701 (71,298) (804,620) Net change in non-cash working capital balances (note 17) 784,461 (586,742) Financing activities Share repurchase Investing activities Acquisition of marketable securities (note 6) Disposal (acquisition) of property and equipment - Net Acquisition of investment properties (note 8) Disposal of investment properties, net of taxes (note 8) Effect of exchange rates on cash Increase (decrease) in cash Cash – Beginning of year 713,163 (1,391,362) (285,023) (285,023) - - (453,698) (18,241) (22,617) 970,241 - 27,128 (832,245) 1,447,118 475,685 642,001 903,825 (749,361) (57,610) 139,212 846,215 (610,149) 1,035,272 1,645,421 Cash – End of year 1,881,487 1,035,272 The accompanying notes are an integral part of these consolidated financial statements. 30 8 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements As at December 31, 2016 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, 2016, 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, Oceanus LLC and Uya Ra 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. MGG’s publicly traded securities are currently held in a brokerage account owned by Mongolia Barbados Corp. The Company is registered in Alberta, Canada, with its Head Office at its registered and records 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 on Seoul St. in Ulaanbaatar, Mongolia. At December 31, 2016, the Company is organized into two segments based on the business operations: • 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 • 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). 31 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 2 Basic of presentation (continued) These consolidated financial statements were approved by the Board of Directors of the Company for issue on March 31, 2017. 3 Significant accounting policies a. Basis of measurement The consolidated financial statements have been prepared on a historical cost basis, 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. 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. 32 10 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 Financial instruments (continued) 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 fair value of the consideration paid for the acquisition of the investment. After initial measurement, loans and receivables are measured at amortized cost, using the effective interest rate method, less any impairment losses. Amortized cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Impairment on financial assets All financial assets other than FVTPL instruments are assessed for impairment at each reporting date. The Company assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired, if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flows of the financial asset or group of financial assets. Financial liabilities Financial liabilities are classified as other financial liabilities, based on the purpose for which the liability was incurred, and are comprised of trade payables and accrued liabilities. These liabilities are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method. This ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the statement of financial position. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Trade payables and accrued liabilities represent liabilities for goods and services provided to the Company prior to the end of the period which are unpaid. Trade payable amounts are unsecured and are usually paid within 30 days of recognition. Fair value of financial instruments Fair value represents the price at which a financial instrument could be exchanged in an orderly market, in an arm’s length transaction between knowledgeable and willing parties who are under no compulsion to act. Financial assets and liabilities recorded at fair value in the consolidated statement of financial position are measured and classified in a hierarchy consisting of three levels for disclosure purposes. The three levels are based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows: 11 | P a g e 33 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities • 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) • 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 • 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 oof 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. 34 12 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 d. Investment properties (continued) Properties under development are measured at cost. Certain land leases held under an operating lease are classified as investment properties when the definition of an investment property is met. At inception these leases are recognized at the lower of the fair value of the property and the present value of the minimum lease payments. Some properties may be partially occupied by the Company, with the remainder being held for rental income or capital appreciation. If that part of the property occupied by the Company can be sold separately, the Company accounts for the portions separately. The portion that is owner-occupied is accounted for under IAS 16, and the portion that is held for rental income, capital appreciation or both is treated as investment property under IAS 40. When the portions cannot be sold separately, the whole property is treated as investment property only if an insignificant portion is owner-occupied. The Company considers the owner-occupied portion as insignificant when the property is more than 90% held to earn rental income or capital appreciation. In order to determine the percentage of the portions, the Company uses the size of the property measured in square metres. The fair value of investment properties was based on the nature, location and condition of the specific asset. The fair value is calculated at December 31 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. 13 | P a g e 35 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 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 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 Cash includes cash held at banks or on hand and demand deposits. 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. 36 14 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 h. Property and equipment (continued) 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. 15 | P a g e 37 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 i. Income taxes (continued) 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. At reporting dates, monetary items are translated at the closing rate of exchange in effect at the consolidated statement of financial position date. 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: • Assets and liabilities are translated at the closing rate of exchange in effect at the • 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. • Equity items are translated at their historical rates. • 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 Other Comprehensive Income “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. 38 16 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 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. 17 | P a g e 39 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 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, 2017 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. 40 18 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 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. 19 | P a g e 41 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 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. 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: • Fair value of investment properties – The estimate of fair value of investment properties is the most critical accounting estimate to the Company. An external appraiser estimates the fair value of the majority of investment properties annually. The fair value of investment properties is based on the nature, location and condition of the specific asset. The fair value of investment properties represents an estimate of the price that would be made in an arm’s length transaction between knowledgeable, willing parties. • The Company operates in the emerging real estate market of Mongolia, which given its current economic, political and industry conditions, gives rise to an increased inherent risk given the lack of reliable and comparable market information. The significant estimates underlying the fair value determination are disclosed in note 8. Changes in assumptions about these factors could materially affect the carrying value of investment properties. • Valuation of marketable securities and investments - The Company recognizes marketable securities and investments at fair value. Fair value is determined on the basis of market prices from independent sources, if available. If there is no market price, then the fair value is determined by using valuation models with inputs derived from observable market data where possible but where observable data is not available, judgment is required to establish fair values. 42 20 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 • Accuracy of share based compensation expense – The estimate of the ultimate expense arising from share based compensation plans is another critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimate of the share based compensation expense recorded by the Company. The ultimate expense is estimated by using a number of key assumptions such as the expected volatility of the share price, the dividends expected on the shares, the risk-free interest rate for the expected life of the option and future forfeiture rates. Further information on key assumptions including sensitivity analysis is included in note 12. • 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, 21 | P a g e 43 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 5 Cash Cash at banks earns interest at floating rates based on daily bank deposit rates. The component of cash accounts currently consists only of cash amounts held in banks or on hand. The following table discloses the geographical location of cash: Barbados Canada Mongolia 2016 $ 45,275 13 1,408,483 427,729 2015 $ 7,003 137,930 890,339 1,881,487 1,035,272 Cash is not collateralized. The carrying amount of cash approximates fair value. The credit quality of cash 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 Total cash 2016 $ $ $ 3,300 1,359,463 424,506 94,218 2015 $ 3,245 137,853 887,171 7,003 1,881,487 1,035,272 The unrated balance relates to one private bank in Barbados (2015 – one), one investment company in Canada (2015 – nil) and one investment company in the United States (2015 – nil). 6 Marketable Securities Common shares of public companies: Fair value - beginning of the year Purchases Foreign exchange gains Unrealized gains Fair value - end of the year 2016 $ 2015 $ - 453,698 86 731,041 1,184,825 - - - - - 44 22 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 7 Other assets Accounts receivable less: Allowance for doubtful accounts Prepaid expenses Prepaid deposits on investment properties 2016 $ 161,514 (85,526) 19,006 42,759 137,753 2015 $ 222,601 - 35,671 69,727 327,999 Prepaid deposit on investment properties relates to one property for which a title has not been obtained. 23 | P a g e 45 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 8 Investment properties Balance - beginning of year Additions Acquisitions Capital expenditures Transfer from prepaid deposits Transfer from property and equipment Disposals Fair value adjustment Foreign exchange adjustments 2016 $ 2015 $ 46,473,749 48,458,517 - 22,617 - 75,144 (1,193,773) (5,728,003) (10,148,384) - 832,245 750,869 - (1,785,637) (7,926,701) 6,144,456 Balance – end of year 29,501,350 46,473,749 During the year ended December 31, 2016, the Company recorded a $5,728,003 unrealized fair value loss (2015 - $7,926,701 loss) on its investment properties. Four investment properties were sold during the year for total cash consideration of $970,241 (net of taxes), resulting in a net loss of $223,532 on these transactions. In comparison, during the year ended December 31, 2015, ten investment properties were sold for cash consideration of $1,669,455 resulting in net loss of $116,182 on these transactions. As of December 31, 2016, included in investment properties are five (2015 – four) investment properties actively being marketed for sale that are to be disposed without redevelopment with a fair value of $2,132,267 (December 31, 2015 - $2,970,114). As at December 31, 2016, a deposit of $673,585 (2015 – $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 2016 $ 250,320 2,976,642 16,505,234 9,769,154 2015 $ 285,170 4,649,657 25,842,764 15,696,158 29,501,350 46,473,749 Investment properties with an aggregate fair value of $16,459,265 (2015 - $40,075,384) and an office building classified as property and equipment of $1,672,645 (2015 - $2,765,305), 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 remaining balance of investment properties was valued internally. 46 24 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 8 Investment properties (continued) 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. The Company currently has a standing agreement with the owner of a 42 sq. meter apartment which has been included in one of the Company’s properties classified as land and development. The agreement entitles the owner of the apartment to 84 sq. meters of space on the first floor of a new building to be built on this land. The agreement expires at the end of 2017 and has not yet been extended. A liability of $149,081 is currently included in the Company’s balance sheet to reflect this liability. Management has no certainty that the agreement will be extended beyond 2017. If the agreement is not extended, the Company could face an impairment. As of today, the Company cannot determine thee of any future impairment. Under the fair value hierarchy, the fair value of the Company's investment properties is considered a level three, as defined in note 3. The key valuation assumptions for commercial investment properties are as follows: Maximum Minimum 2016 Weighted- average Capitalization rate 11.5% 9.0% 10.1% Capitalization rate 11.0% 8.5% 9.5% Maximum Minimum 2015 Weighted- average 25 | P a g e 47 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 8 Investment properties (continued) The following sensitivity table outlines the impact of a 0.25% change in the weighted average capitalization rate on investment properties at December 31, 2016: Change to fair value if capitalization rate increased 0.25% Change to fair value if capitalization rate decreases 0.25% Com Commercial property $(118,393) $132,157 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 $101,551 (2015 - $753,746) have no rental revenue associated with them at December 31, 2016, consisting of one property held for sale that management has determined is easier to sell while vacant. The 2015 amount consisted of a different property where the Company had not yet received the property title and was not available for rent. Investment properties include land held under operating leases with an aggregate fair value of $9,769,154 (2015 – $15,696,158) at December 31 2016. Certain investment properties held by the Company are leased out by the Company under operating leases. The future minimum lease payments under non-cancellable leases are as follows: Less than 1 year Between 1 and 5 years 2016 $ 2015 $ 1,145,691 444,230 1,647,994 612,571 1,589,921 2,260,565 Direct operating expenses arising from investment properties that generated rental income during the year was $1,350,803 (2015 – $1,557,740). Direct operating expenses arising from investment properties that did not generate rental income during the year was $3,211 (2015 - $19,011). 48 26 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 9 Property and equipment Furniture and fixtures $ Equipment $ Vehicles $ Buildings $ Total $ 2016 Cost At January 1 Additions Disposals Transfers Impairment Foreign exchange adjustment 108,439 2,235 (7,163) - - 240,759 288 (493) - - 30,248 - (26,310) - - 3,072,284 24,833 - (85,042) (343,506) 3,451,730 27,356 (33,966) (85,042) (343,506) (24,554) (55,473) (3,938) (674,272) (758,237) At December 31 78,957 185,081 - 1,994,297 2,258,335 Furniture and fixtures $ Equipment $ Vehicles $ Buildings $ Total $ 2016 Accumulated depreciation At January 1 Depreciation Transfers Disposals Foreign exchange adjustment 28,915 9,375 - (3,765) 123,304 46,418 - (21) 14,382 1,074 - (12,395) 306,979 67,656 (9,898) - 473,580 124,523 (9,898) (16,181) (8,321) (41,717) (3,061) (66,451) (119,550) At December 31 26,204 127,984 Net book value at December 31 52,753 57,097 - - 298,286 452,474 1,696,011 1,805,861 27 | P a g e 49 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 9 Property and equipment (continued) Furniture and fixtures $ Equipment $ Vehicles $ Buildings $ Total $ 2015 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 $ Total $ 2015 Accumulated depreciation At January 1 Depreciation Disposals Foreign exchange 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) adjustment 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 10 Trade payables and accrued liabilities Trade and accrued payables Security deposit Unearned revenue Deposit on investment property sales 2016 $ 340,492 135,357 42,963 673,585 1,192,397 2015 $ 450,063 163,668 42,007 48,688 704,426 The carrying amounts above reasonably approximate fair value at the consolidated statement of financial position date. All trade and other payables are current. 50 28 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 11 Income taxes a) Effective tax rate The income tax expense reflects an effective tax rate that differs from the combined tax rate for Canadian federal and provincial corporate taxes for the following: 2016 $ 2015 $ Net income (loss) before income taxes Combined statutory tax rate (5,763,752) 26.5% (10,123,298) 26.5% Tax payable (recoverable) based on statutory tax rate Effect of: Permanent differences Change in statutory, foreign tax, foreign exchange rates and other Change in unrecognised deductible tax differences Provision for (recovery of) income taxes Current Deferred (1,527,395) (2,682,674) 1,635,962 (153,284) (56,251) (100,968) 150,537 2,118,993 220,816 (192,328) 264,806 (365,774) 42,112 (234,440) Provision (recovery of) for continuing operations income taxes - (100,968) (192,328) 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. 29 | P a g e 51 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 11 Income taxes (continued) The significant components of the Company’s deferred tax assets and liabilities are as follows: Deferred Tax Assets (liabilities) Investment properties 2016 2015 $ (624,335) $ (990,109) Net deferred tax liability $ (624,335) $ (990,109) The significant components of the Company’s temporary differences, unused tax credits and unused tax losses that have not been included on the consolidated statement of financial position are as follows: Temporary Differences 2016 Expiry Date Range 2015 Expiry Date Range Property and equipment Canadian eligible capital (CEC) 11,000 No expiry date 14,000 No expiry date 179,000 No expiry date 193,000 No expiry date Allowable capital losses 60,000 No expiry date 741,000 No expiry date Non-capital losses available for future period 8,625,000 2030 to 2036 8,510,000 2030 to 2035 Tax attributes are subject to review, and potential adjustment, by tax authorities. Following an internal review in early 2015, the Corporation determined that it had been overpaying certain taxes to the Canadian government during the period from 2011 until early 2015. The Tax Authorities agreed with the Corporation’s findings related to this tax issue. On October 3, 2016, the Corporation received a refund for $333,475, which is included in profit and loss. The Corporation intends to continue to monitor its tax liabilities. At year end, the Company reviewed its taxes receivable and determined that the Value Added Tax (VAT) amount that was not projected to be received/offset by the end of 2017 ($85,526) should be expensed and recorded as doubtful receivables. 52 30 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 12 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: Number of shares Amount $ Balance, December 31, 2014 34,848,745 53,789,459 New shares issued RSAs vested Balance, December 31, 2015 Shares re-purchased Treasury stock RSAs vested Balance, December 31, 2016 640,691 23,393 525,367 54,506 35,512,829 (726,000) - 19,770 34,806,599 54,369,332 (258,313) (26,710) 46,064 54,130,373 As at December 31, 2016, the Company held 86,500 shares in Treasury to be cancelled during the first quarter of 2017. a) Stock options Balance, January 1, 2015 Granted Cancelled Forfeited December 31, 2015 Balance, January 1, 2016 Granted Expired Forfeited December 31, 2016 Number of options 2,448,000 1,575,000 (615,000) (120,000) 3,288,000 3,288,000 350,000 (280,000) - 3,358,000 Weighted average exercise price $ 2.61 0.73 3.98 1.56 1.45 1.45 0.38 4.21 - 1.11 31 | P a g e 53 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 12 Share capital and contributed surplus (continued) The Company has established a share based payment plan (the "Plan") to encourage ownership of its shares by key management personnel (directors and executive management), employees and other key service providers, and to provide compensation for certain services. The Plan provides for the issuance of stock options in an aggregate number of up to 10% of the Company’s issued and outstanding shares, calculated from time to time and are exercisable within a maximum of ten (10) years. The vesting period for all options is at the discretion of the directors. The exercise price will be set by the directors at the time of grant and cannot be less than the discounted market price of the Company’s common shares. At December 31, 2016, the Company had 122,660 (2015 – 239,890) common shares available for the granting of future options under the new plan. The Company does not have any cash-settled transactions. Full details of the Company’s option plan can be found in “Schedule C” of the Management Information Circular on the Company’s website and filed on Sedar. A summary of the Company’s options as at December 31 and changes during the years then ended follows: December 31, 2016 Weighted average exercise price Balance, beginning of the year Options Expired Options cancelled Options granted Options exercised Options forfeited 3,288,000 (280,000) - 350,000 - - $ 1.45 4.21 - 0.38 - - December 31, 2015 2,448,000 - (615,000) 1,575,000 - (120,000) Balance, end of the year 3,358,000 1.11 3,288,000 Exercisable 3,358,000 2,510,500 Weighted remaining average life (years) 2.74 Weighted average exercise price $ 2.61 - 3.98 0.73 - 1.56 1.45 1.53 1.49 During the year, no options were exercised (2015 – nil). Additionally during 2016, 280,000 options (2015- nil) with a weighted average exercise price of $4.21 expired. The fair value of $64,372 associated with the options issued in March 2016 was calculated using the Black-Scholes model for options valuation, assuming volatility of 67.5% on the underlying units, a risk free interest rate of 0.54%, an expected option life of 3 years, a dividend rate of 0% 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. 54 32 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 12 Share capital and contributed surplus (continued) The approximate impact of an increase of 1o% in the volatility assumption for the options issued in the current year would increase net loss of the Company by $7,669 (2015- $67,272). The approximate impact of a decrease of 10% in the volatility assumption would decrease net loss of the Company by $8,062 (2015 - $73,154.) Options outstanding 2016 Number outstanding Number exercisable Weighted average remaining life (years) Weighted average exercise price $ Weighted average at grant date 1,078,000 375,000 915,000 640,000 350,000 3,358,000 1,078,000 375,000 915,000 640,000 350,000 3,358,000 2.10 2.94 3.25 3.27 2.21 2.74 1.90 1.09 0.72 0.74 0.38 1.11 2.13 1.15 0.74 0.40 0.40 1.21 Options outstanding 2015 Number outstanding Number exercisable Weighted average remaining life (years) Weighted average exercise price $ Weighted average at grant date 130,000 20,000 5,000 125,000 1,078,000 375,000 915,000 640,000 3,288,000 130,000 20,000 5,000 125,000 758,000 375,000 457,500 640,000 2,510,500 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 33 | P a g e 55 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 12 Share capital and contributed surplus (continued) Restricted Stock Awards The Company has also adopted a Restricted Stock Award plan (“the RSA Plan”) whereby it can grant RSAs to directors, officers, employees, and technical consultants of the Company. The maximum number of RSAs that may be reserved for issuance under the RSA Plan is limited to 200,000 Common Shares and will be subject to the aggregate limits set forth under the Option Plan, such that unvested Common Shares under the RSA Plan will be considered “Common Shares reserved for issuance” under the Share Option Plan. The Restricted Period in respect to the Restricted Shares shall end once the Restricted Shares shall become vested. One third of each grant of Restricted Shares will vest on each of the first, second and third anniversaries of the grant date. The Company has granted restricted stock of the Company to certain individuals under the terms of the RSA plan of the Company. Full details of the Company’s RSA plan can be found in “Schedule B” of the Management Information Circular on the Company’s website and filed on Sedar. The number of restricted shares granted under the Restricted Stock Award Plan was as follows: December 31, 2016 December 31, 2015 Balance, beginning of year RSAs forfeited RSAs vested Balance, end of the year 23,393 (3,623) (19,770) - 46,786 - (23,393) 23,393 The fair value of the restricted shares granted during the 2016 year was $40,064 (2015- $7,954) 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 2016 year, the Company recorded net compensation expense of $10,686 (2015 - $39,527) for the Restricted Share Plan within the share based payment expenses. 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 35,297,108 - 2016 $ 2015 $ 35,315,357 - Weighted average number of shares - diluted 35,297,108 35,315,357 56 34 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 Basic earnings (loss) per share are derived by dividing net income (loss) for the year by the weighted average number of common shares outstanding for the period. The effect of potentially dilutive securities is excluded if they are anti-dilutive. There have been no significant capital transactions from the reporting date to the date of this filing which have had a material impact on earnings per share. 13 Management of capital structure The Company’s objective when managing capital is to ensure the Company is capitalized in a manner which provides a strong financial position for its shareholders. The Company’s capital structure includes equity and working capital. In managing its capital structure, the Company considers future investment and acquisition opportunities, potential 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, 2016, the Company’s working capital was $1,849,564 (2015 - $512,555) and the Company had no debt. Current assets Current liabilities Working capital 14 Financial risk management 2016 $ 3,204,065 1,354,501 2015 $ 1,363,271 850,716 1,849,564 512,555 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 During 2016, the Company obtained insurance on buildings and all permanent fixtures totalling approximately $22,770,000 (2015 - $23,700,000). 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 receivables. 35 | P a g e 57 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 14 Financial risk management (continued) 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 Accounts receivable less: Allowance for doubtful accounts 2016 $ 1,881,487 161,514 (85,526) 2015 $ 1,035,272 222,601 - Maximum credit risk exposure on the consolidated statement of financial position 1,957,475 1,257,873 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 (note 4). The Company is exposed to credit risk as an owner of real estate in that tenants may become unable to pay the contracted rents. The Company mitigates this risk by carrying out appropriate credit checks and related due diligence on the significant tenants. The Company’s properties are diversified across residential and commercial classes. Liquidity risk Liquidity risk is the risk of having insufficient cash resources to meet financial obligations without raising funds at unfavourable rates or selling assets on a forced basis. Liquidity risk arises from the general business activities and in the course of managing the assets and liabilities. The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company’s business are met primarily by funds generated from operations, liquid investments and income and other returns received on investments. Cash provided from these sources is used primarily for investment property operating expenses. As at December 31, 2016, 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, 2016. The Company does not have material liabilities that can be called unexpectedly at the demand of a third party. 58 36 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 14 Financial risk management (continued) The following table summarizes the undiscounted cash flows of financial assets and liabilities by contractual or expected maturity: December 31, 2016 One year or less $ One to two years $ No maturity date $ Financial Assets Cash Accounts receivables less: Allowance for doubtful accounts Financial Liabilities Trade payables and accrued liabilities 1,881,487 161,514 (85,526) 1,957,475 1,192,397 - - - - - - - - - - December 31, 2015 One year or less $ One to two years $ No maturity date $ 1,035,272 222,601 1,257,873 704,426 - - - - - - - - Financial Assets Cash Accounts receivables Financial Liabilities Trade payables and accrued liabilities 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. The Company is not directly exposed to interest rate risk at December 31, 2016 and 2015. 37 | P a g e 59 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 14 Financial risk management (continued) 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 a fluctuation of 10% in the Mongolian Tögrög against the Canadian dollar would impact the OCI of the Company by $3,076,824 (2015 - $4,773,378). 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. The Company’s marketable securities are exposed to other price 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. 60 38 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 15 Related party transactions Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise significant influence or joint control 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 16 Commitments and contingencies 2016 $ 186,341 107,722 294,063 2015 $ 170,685 492,661 663,346 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. 17 Supplementary cash flow information Changes in non-working capital arising from Other assets Trade payables and accrued liabilities Income tax payable 2016 $ 32,350 696,958 55,153 2015 $ (12,659) (579,139) 5,056 Changes in non-cash working capital from operating activities 784,461 (586,742) Income tax paid during the year was $43,987 (2015 - $44,528). Interest paid during the year was nil (2015 - nil). During the year ended December 31, 2016 $75,144 (2015 – nil) was transferred from property and equipment to investment properties (note 8). During the year ended December 31, 2016 $46,064 was reclassified from contributed surplus to share capital which was the fair value of RSA’s vested (note 12). 39 | P a g e 61 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 18 Segment information The Company’s operations are conducted in two reportable segments; Investment Property Operations and Corporate. The Company reports information about its operating segments based on the way management organizes and reports the segments within the organization for making operating decisions and evaluating performance. Investment Property operations consist of commercial and residential investment property in Mongolia held for the purposes of rental revenue, capital appreciation or redevelopment. These properties are managed by Big Sky Capital LLC and its subsidiaries. The Company evaluates performance based on net income (loss) before income taxes. Rental income Property operating expenses Non capitalized development expense Unrealized gain on fair value on adjustment investment properties Impairment of PPE and Other Assets Unrealized Mark to Market gain Share based payment Other expenses Depreciation Net investment income Loss on disposal of investment property Other revenue Recovery of consumption tax Net income (loss) before income taxes Investment Property $ 1,783,896 (1,354,014) - Corporate $ - - - 2016 Total $ 1,783,896 (1,354,014) - (5,728,003) - (5,728,003) (354,951) - (59,062) (340,335) (118,152) 17,925 (223,532) 47,602 - 731,041 (98,103) (399,513) (6,371) 2,345 2,000 333,475 (354,951) 731,041 (157,165) (739,848) (124,523) 20,270 (223,532) 49,602 333,475 (6,328,626) 564,874 (5,763,752) 62 40 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 18 Segment information (continued) Rental income Property operating expenses Non capitalized development expense Unrealized gain on fair value adjustment on investment properties and property and equipment Impairment of PPE and Other Assets Share based payment Other expenses Depreciation Net investment income Loss on disposal of investment property Other revenue Net income (loss) before income taxes Balance as of December 31, 2016 Total assets Property and equipment Investment properties Expenditures Property and equipment Investment properties Balance as of December 31, 2015 Total assets Property and equipment Investment properties Expenditures Property and equipment Investment properties Investment Property $ 2,002,512 (1,576,751) (174,429) Corporate $ 2015 Total $ - - - 2,002,512 (1,576,751) (174,429) (7,926,701) - (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) (219,749) (977,725) (1,088,414) (137,608) 30,571 (116,182) 61,178 (8,831,967) (1,291,331) (10,123,298) Investment Property $ 31,867,291 1,805,861 29,501,350 27,356 22,617 Investment Property $ 50,661,225 2,971,779 46,473,749 Corporate $ Total $ 2,643,985 - - - - 34,511,276 1,805,861 29,501,350 27,356 22,617 Corporate $ 153,945 6,371 - Total $ 50,815,170 2,978,150 46,473,749 43,087 832,245 - - 43,087 832,245 41 | P a g e 63 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 18 Segment information (continued) Revenue Property and equipment Investment property Canada Mongolia 2016 $ 2015 $ 2016 $ 2015 2016 $ 2,000 - - 6,371 $ - 2015 $ - 1,607,966 1,947,508 1,805,861 2,971,779 29,501,350 46,473,749 1,609,966 1,947,508 1,805,861 2,978,150 29,501,350 46,473,749 19 Other expenses Investor Relations Repairs and maintenance Office Professional fees Travel Advertising Land and property tax Insurance Utilities Bad debt Allowance for doubtful tax receivables Other 2016 $ 25,470 90,997 69,825 397,442 55,969 16,331 175,939 58,388 150,529 5,930 85,526 84,846 2015 $ 132,146 71,471 85,571 615,319 108,158 13,257 198,668 113,199 172,140 - - 89,963 1,217,192 1,599,892 20 Subsequent events • Subsequent to year end, the Corporation disposed of one property for $1,441,660 with a book value at year end of $1,481,887. The Corporation had received a deposit of $669,800 during Q4 2016. • The Corporation repurchased 196,000 of its shares at an average price of $0.34/share. 64 42 | P a g e | Mongolia Growth Group Ltd 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 Ltd in Ulaanbaatar. Mr. Dwyer was a New York- based investment banker specializing in mergers and acquisitions for 30 years and completed over 100 M&A transactions. In addition, he founded and managed M&A departments for two major investment banking firms: Shearson Loeb Rhoades and UBS-North America. Mr. Dwyer first visited Mongolia in 2001 to represent the Government of Mongolia as lead investment banker for the privatization of its largest bank, Trade & Development Bank. Thereafter, he served as lead investment banker for the privatization of the largest Government owned retail bank, Khan Bank. He co-founded the Business Council of Mongolia (BCM) and 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. 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 Mongolia and other frontier economies in Asia. Mr. Farquhar is a trained financial planner. He received a MPA in Electoral Governance from Griffith University in Australia, studied political science at Carleton University, and completed a BA at Providence College. Mr. Farquhar is a Director of Input Capital Corp, the Legacy Group of Companies, Greenfield Carbon Offsetters Inc., on the advisory board of AgFunder.com and Chair of the board of directors of SIM Canada. Robert Scott Independent Director Mr. Scott, CPA, CA, CFA brings more than 20 years of professional experience in accounting, corporate finance, 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, and has served on the management teams and boards of numerous Canadian publicly traded companies with a strong track record of cost effectively running operations. Mr. Scott has also listed several companies on the TSX Venture Exchange gaining extensive IPO, RTO, regulatory and reporting experience, and currently holds senior management and board positions with a number of TSX Venture Exchanges Issuers. Officers Harris Kupperman Genevieve Walkden, MBA, CFP, CAIA CEO and Chairman of the Board CFO and Corporate Secretary Auditors Legal Transfer Agent Davidson & Company LLP Vancouver, BC 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 65 Mongolia Growth Group Ltd |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 66 info@mongoliagrowthgroup.com | www.mongoliagrowthgroup.com | Mongolia Growth Group Ltd

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