Mongolia Growth Group Ltd.
Annual Report 2019

Plain-text annual report

2019 Annual Report Table of Contents Letter to Shareholders ................................................................................................................................. 3 Management Discussion & Analysis ........................................................................................................... 5 Consolidated Financial Statements ............................................................................................................ 27 Corporate Information ................................................................................................................................ 67 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 MGG undertakes its own property acquisitions and repositions outdated properties, relying on in-house services for all facets of both the investment portfolio and development side of the business.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, Frustratingly, yet another year has come and passed without any substantial progress at our business. Our capital continues to earn sub-par (ie. negative) returns and the vast majority of it remains stranded in Mongolia. Despite how bleak that sounds, our team has continued to perform admirably under difficult circumstances. During 2019, we kept our properties mostly full, had negligible bad debt expense, dramatically increased the returns from our 3rd party agency business and even managed to liquidate a number of properties near year-end. That said, I remain frustrated with our pace of progress, our continued losses and our inability to extract capital from Mongolia so that we can invest it somewhere else that has positive return expectations. Let me start by talking about what’s working. Gen and I spent 9 years building an amazing Mongolian team that is capable of nearly anything—unfortunately, this team has been hamstrung by repeated cycles of economic crisis. Despite this fact, over the past three years, they created a 3rd party agency business that literally did not exist previously—more importantly, our team on the ground mostly did it on their own, through trial and error, in a country that has never had a history of agency brokerage. This business produced approximately $97,000 of revenue during the second half of 2019 (14% of our revenue in Mongolia) and did it at a decent gross margin. I am confident that this business will continue to grow and we remain focused on investing additional resources into this business while also trying to add property management services. We believe we’re uniquely equipped to offer these management services to property owners and believe that much like the brokerage business; once we can prove ourselves on a handful of properties, we’ll become dominant in this sector. With the positives out of the way, let’s return to reality— the Mongolian economy has continued to muddle along lethargically. While headline numbers show a mid- single-digit GDP growth rate, a more accurate reading would be that economic conditions have simply stopped getting worse—not gotten substantially better. Recent extraordinary measures taken by the Government of Mongolia to combat the Coronavirus have led to many of our tenants experiencing extreme financial strain—even beyond the worst of the crisis during 2015 and 2016. While our bad debt expense has been minimal to date, we are not optimistic about 2020. As always, we will soldier on, as best as possible. Besides; by now, economic crisis is our modus operandi. Our priorities are to protect our capital, retain our highly-skilled Mongolia team, ring- fence key property assets and divest non-core assets so that we can invest in something with economic returns. If the Mongolian Government takes actions to grow the economy, we will be in the unique position to rapidly pivot our attentions back to Mongolia—if not, hopefully we will have diversified and grown this company. During the past few years, we have focused on extracting capital from Mongolia so that we could invest in something else. I apologize for being somewhat amorphous, but we still do not know what we want to invest in—only that it needs to be a business with positive cash flow that would stop our balance sheet from slowly shrinking. Unfortunately, to date, we are no further along in identifying this business. During 2019, we looked at a number of businesses but could not come to terms on any transaction. In a world awash with liquidity, we refuse to overpay. If we cannot get the deal we want, we’d prefer to let the capital remain invested in public securities—hopefully experiencing securities gains. In order to fund any prospective acquisition that we may ultimately identify, we’ll need capital. While we occasionally have gotten lucky over the past few years on a handful of asset sales, we have rarely sold enough assets to do much more than offset our operating cash burn annually—which isn’t long-term sustainable. During this summer, Gen and I, with the guidance of our board, made the decision to dramatically reduce the offering prices of the assets that we’d like to sell. While these prices are below our carrying costs, we also value the ability to move forward with diversifying this business. During the fall of 2019, we began to aggressively market properties at unusually attractive prices and were able to finally increase the rate of asset sales. We are confident that there are cash-rich buyers in Mongolia 3 Mongolia Growth Group Ltd |$500,000 against it so that they could earn interest beyond the facility stand-by fee. Adding to our frustration, a year later, when we actually wanted to use our remaining line of credit, a line that that we had been paying for access to, the bank refused to honor their written commitments to us. With an expensive loan and a pointless line of credit, we chose to repay the loan and move on. Returning back to our overall business, my hope remains that as we successfully monetize certain property assets in Mongolia, we can increase the size of our public securities portfolio and begin to actually increase book value through future realized gains on our securities portfolio along with the economic benefits of any business in North America that we may start or acquire. In summary, while we remain optimistic about Mongolia’s long-term future, we are realistic about our own company’s predicament. Our property business is subscale and we expect that when combined with our corporate overhead it will likely produce operating losses (excluding potential gains from our public securities portfolio) for the foreseeable future. The only viable business that we see in Mongolia is our 3rd party agency business. While we intend to keep some of our better property assets in hopes of a recovery in Mongolia, we remain focused on selling non-core property assets (particularly in office and re-development) so that we can diversify the business. I remain of the opinion that our shares are undervalued. During the fourth quarter, the Company re-purchased 107,500 shares under our Normal Course Issuer Bid at a cost of $25,802.50. However, this reduced pace of share re-purchases is primarily related to our desire to husband cash for future acquisitions. Sincerely, Harris Kupperman CEO and Chairman of the Board and if we have to reduce our prices sufficiently to meet them, so be it. However, as a result of our own experiences along with reduced liquidity in the market, particularly for larger property assets, we recognized a reduction in carrying value of $1,347,662. While I believe that we sold these assets for less than they were worth, I do not regret a single sale and accept the conservative judgement of our property valuation firm. Based on the prices that we sell future assets at, we may experience further impairments to our portfolio’s carrying value. Our securities portfolio produced a $358,826 realized loss and a $454,824 unrealized gain, along with a $228,761 foreign exchange gain for the quarter. I would like to note that our portfolio is invested in a highly concentrated manner and often a handful of positions comprise the majority of the portfolio. Therefore, I would expect the portfolio to be substantially more volatile than an index fund and focus your attention on realized gains—which are indicative of where investments were underwritten compared to fair value. Unrealized gains can and will fluctuate wildly based on movements in our holdings— however if we purchased these investments at an attractive enough valuation, they should eventually accrete towards fair value and allow us to continue realizing gains. During 2019, sizable changes in our securities portfolio relate to two E&P companies that have continued to decline in value—one of which we realized for a substantial loss over the course of the year. Additional losses were realized in put spreads related to an automotive company along with put spreads on various equity indexes. Offsetting this, we had realized and unrealized gains in a number of shipping equities along with other smaller positions that do not deserve mention. Overall, I’m unhappy with how our securities portfolio has performed over the past eighteen months. I am a value investor who focuses on undervalued businesses, particularly those undergoing some sort of business inflection. Over time, this strategy has worked well; however there are times when it is horribly out of favor—particularly when most global equity markets have continued marching higher, led by companies with accelerating losses. The pockets of value that I see, are in companies trading at low-single digit earnings multiples and substantial discounts to net asset value—unfortunately, these sorts of cash-generative businesses remain shunned by the market. Naturally, this has contributed to the poor performance of our public securities over the past eighteen months. Like all things in life, equity markets move in cycles. At some point in this cycle, our holdings will be in favor and we will see the benefits of owning what we own. While I like to bemoan our performance, after currency gains, we did produce a positive return in 2019, though first quarter 2020 results were less kind to us. In terms of our balance sheet, during the fourth quarter of 2019, we used the proceeds from asset sales to retire the USD $500,000 of debt that we had with a top-4 Mongolian bank. We originally entered into a USD $1 million line of credit with this bank, only to learn that they expected us to draw USD 4 | Mongolia Growth Group LtdMONGOLIA GROWTH GROUP LTD. Management Discussion & Analysis December 31, 2019 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, 2019 (the “MD&A”), compared with the year ended December 31, 2018. As of January 1, 2011, the Corporation adopted International Financial Reporting Standards (“IFRS”). This MD&A provides an overall discussion, followed by analyses of the performance of the Corporation’s major reportable segments. The reporting and presentation currency in the consolidated financial statements and in this discussion and analysis is the Canadian dollar, unless otherwise noted. This MD&A is dated April 7, 2020 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, 2019 and December 31, 2018 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. 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 and Executive Strategy sections of this MD&A. 5 Mongolia Growth Group Ltd |Section 1 – Overview During 2019, the Corporation’s rental revenues decreased by 7% when compared to 2018, which was largely a result of lower rental rates and fewer rental properties due to disposals. Throughout 2019, rental rates were relatively stable. Despite a very weak economy, the Corporation has been able to achieve almost full occupancy rates, with office space and retail occupancy rates of 97% and 100% respectively at year end. Due to a tightening in liquidity in the economy, the Corporation recorded an unrealized fair value loss of $1,347,662 on its investment properties portfolio during the year (2018 – gain $1,892,577) as larger value assets dropped in value. During the year, the Corporation acquired one retail property ($48,213) through a swap transaction on the sale of an office building and 75 meters in an office building ($143,196) acquired through another swap transaction which was classified in accounts receivable at year end as the title was received in early 2020 (2018 - nil). During this period, the Corporation sold three investment properties for total proceeds of $2,221,346 resulting in a net loss of $302,959 on these transactions. In comparison, during the year ended December 31, 2018, three investment properties were sold for cash consideration of $547,955 resulting in a net gain of $38,592 on these transactions. Proceeds from the sales of assets during the year were used for working capital purposes, the repayment of all outstanding debt (USD $500,000), the acquisition of publicly traded securities, 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. During the year, the Mongolian Tögrög depreciated versus the Canadian dollar from 1,941 MNT/CAD on December 31, 2018 to 2,095 on December 31, 2019; an 8% decrease during the year. This depreciation led to a $1,831,600 other comprehensive loss (2018– $140,375). Economic Overview Starting in 2012, the Mongolian government initiated a program to restrict and inhibit foreign investment. Additionally, various government officials made statements designed to intimidate foreign investors, followed by arbitrary arrests of foreign employ- ees and confiscations of foreign investments. These actions led to a dramatic slow-down in foreign direct investment (FDI) and an exodus of foreign investors. The economy would have entered a crisis sooner, if not for expansionary fiscal policy and monetary stimulus from the Central Bank of Mongolia. However, by 2014, even this stimulus was insufficient to avert an economic crisis. Despite official statistics that tended to show moderate economic growth, the Corporation is of the opinion that the economy had been in contraction from 2014 until mid-2018, though the rate of contraction had varied based on economic policy. During the second half of 2018, the Corporation noticed the first green shoots in many years, though there is no way to know if the recovery will be sustainable. Recent statements by prominent politicians that were designed to embarrass and belittle China have resulted in China dramatically reducing imports of raw commodities. This has led to a slowing in economic activity during recent months. Furthermore, changes to tax rates, particularly related to mining licenses has served to further dissuade foreign investment. During the past eight years, Mongolia has had five Prime Ministers, seven Cabinets and even more substantial turnover within most ministries. This has led to inconsistent policy-making, arbitrary decision-making and a general focus amongst ministers for personal gain, hurting all investors—as their tenures tend to be short. The two recent People’s Party governments have made statements that are more supportive of foreign investment—however these statements have rarely been backed up by actions that would actually tempt anyone to invest in Mongolia. Furthermore, despite statements of support for foreign investment, multiple investors are waiting for government approvals for their businesses to move forward and there has been a continued net divestment amongst most existing foreign investors. Management believes that the current economic slowdown 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 sustainable economic growth. Management remains a believer in the long-term growth potential of Mongolia. Beginning in February of 2020, the Government of Mongolia undertook extra-ordinary actions in order to limit the spread of COVID-19 or other COVID-19 related impacts. These actions included closing borders, closing schools, reducing gatherings and drastic limitations on business operations. As long-term investors in Mongolia, the Corporation welcomes these actions that keep the people of Mongolia safe from COVID-19; however, it is anticipated that these actions will lead to a severe economic crisis. Since the initiation of these actions, the Corporation has experienced a material reduction in rental revenues received. At this time, there is no way to know the ultimate impact of these extra-ordinary actions upon the economy or the Corporation. Property Overview During the boom years at the beginning of this decade, multiple sizable property developments were initiated. Despite an eco- nomic crisis that began in 2014, many of these developments were ultimately completed, while new projects have continually been initiated—despite weak demand for these properties. There also remains a sizable shadow inventory of partially completed projects that may recommence development at any time. 6 | Mongolia Growth Group LtdDespite substantial new supply over the past few years, well-placed office and retail space in the city-center has been absorbed with rental rates starting to stabilize at a new lower level. However, there is concern that stalled projects will enter the market during a period of weak demand, while banks may be forced to liquidate distressed property assets due to the IMF bailout. Due to insufficient liquidity in the banking system and tightened monetary policies, large property assets saw a decrease in value during the end of the year. Should liquidity start to flow back into the system, Management believes that well placed city-center properties will be the first to recover in valuation. However, the Corporation is unsure of the ultimate impact of COVID-19 on the economy of Mongolia. Management cautions investors that it is focused on continuing to dispose of non-core property assets when possible in order to recycle capital into investments in North America including the potential acquisition or initiation of an operating business along with the purchase of publicly traded securities. Additionally, recycled capital will be used for the ongoing NCIB along with working capital needs. 7 Mongolia Growth Group Ltd |Section 2 - Executing the Strategy Core Business During the past nine 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 through disposition and includes dedicated departments that manage maintenance, leasing, marketing and tenant management. Management believes it has a strong team in place to manage the business on an ongoing basis. 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 and has seen a sizable increase in interest in using its brokerage operation as awareness spreads in the Ulaanbaatar market. The Corporation intends to aggressively target this brokerage opportunity through its website at www.MGGproperties.com. The Corporation has continued to have occupancy levels that are in excess of current market conditions and it credits its leasing and property management teams with this success. Additionally, bad debt expense has remained below expectations, though the outcome of COVID-19 on collections is unclear at this time. Management believes that its current property operations are not at a sufficient scale to be cash flow positive. As such, the Corporation is looking at various investment opportunities outside Mongolia, in order to diversify its business. During 2017, 2018 and 2019, Management spent substantial time evaluating a number of businesses, but has not decided to move forward on any acquisition. Additionally, the Corporation has made investments in certain publicly traded securities. Management plans to continue to dispose of property assets in order to increase its ownership of publicly traded securities and fund potential future investments outside Mongolia. The Corporation may be forced to take on additional borrowings or issue equity in order to finance these future investments. The Corporation anticipates that revenues and EBITDA will decline in future quarters as properties are sold to fund working capital needs, investments in public securities, its NCIB program and future potential business acquisitions. Additionally, the Corporation anticipates an increase in operating expenses in future quarters, primarily as a result of an increase in payroll along with due diligence expenses related to potential acquisitions outside of Mongolia. The Corporation expects to finance losses with additional property sales, borrowings and potentially dilutive equity offerings. Portfolio 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, Property and Equipment, and Other Assets. Fluctuations in the values of the Corporation’s property portfolio during the year can be attributed to changes in valuations, properties sold, and the change in value of the functional currency (Mongolian Tögrög) versus the Canadian dollar. Investment Properties Investment Properties include properties held to earn rental revenue, for capital appreciation and/or for redevelopment. Investment Properties are initially valued at fair value, which is the purchase price plus any directly attributable expenditure. 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, 2019; The following table represents properties classified as Investment Properties, as of December 31, 2019; Office Retail Land and Redevelopment Total # of Properties 1 17 2 20 2019 Value at 31-Dec-19 $CDN 1,033,875 12,307,380 5,490,730 18,831,985 # of Properties 2 17 3 22 2018 Value at 31-Dec-18 $CDN 2,103,862 14,160,720 8,151,278 24,415,860 Property and Equipment Property and Equipment Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the property. Properties 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 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 losses. All repairs and maintenance costs to these properties are charged to the consolidated statement of operations during the the period in which they occur unless eligible for capitalization. The Corporation’s headquarters, purchased in October 2011, falls within this category. The following table represents properties classified as Property and Equipment, as of December 31, 2019; 8 # of Properties # of Properties 2019 Value at 31-Dec-19 $CDN 1,389,068 - - 1,389,068 1 - - 1 2018 Value at 31-Dec-18 $CDN 1,723,044 - - 1,723,044 1 - - 1 A summary of MGG’s property portfolio occupancy rates is set forth in the following table; 31 –Dec- 2019 Occupancy Rate* 31 –Dec- 2018 Occupancy Rate* 31 –Dec- 2017 Occupancy Rate* 96.9% 100.0% 98.8% 94.9% 100.0% 98.1% 97.2% 100.0% 98.5% Weighted Average** * Occupancy rates are calculated on a per meter basis; ** Weighted Average is calculated based on total meters available for lease Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s office space continued to improve throughout the year even while vacancy levels throughout the city have remained high as additional supply has entered the market. The Corporation’s Tuguldur Center continues to maintain strong occupancy rates throughout the year and ended the year with average weekly occupancy of over 95% compared to much lower rates in previous years. Management attributes its success throughout the portfolio to increased marketing initiatives, industry leading property management and realistic price expectations. Management believes it is easier to sell properties when there is no tenant. Therefore, vacancy may increase as the Corporation chooses not to renew leases in order to dispose of properties. These properties are not included in the Land and Redevelopment Occupancy Rates Office Retail Total Office Retail occupancy rate. Leasing Schedule rates. 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 the prevailing market MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 8 | Mongolia Growth Group Ltd The following table represents properties classified as Investment Properties, as of December 31, 2019; The following table represents properties classified as Investment Properties, as of December 31, 2019; Land and Redevelopment Land and Redevelopment Office Office Retail Retail Total Total # of Properties # of Properties 1 1 17 17 2 2 20 20 2019 Value at 31-Dec-19 2019 Value at 31-Dec-19 $CDN 1,033,875 $CDN 1,033,875 12,307,380 12,307,380 5,490,730 5,490,730 18,831,985 18,831,985 # of Properties # of Properties 2 2 17 17 3 3 22 22 2018 Value at 31-Dec-18 2018 Value at 31-Dec-18 $CDN 2,103,862 $CDN 2,103,862 14,160,720 14,160,720 8,151,278 8,151,278 24,415,860 24,415,860 Property and Equipment Property and Equipment Properties are classified as Property and Equipment if the Corporation occupies more than 10% of the property. Properties 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 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 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, the period in which they occur unless eligible for capitalization. The Corporation’s headquarters, purchased in October 2011, falls within this category. period in which they occur unless eligible for capitalization. The Corporation’s headquarters, purchased in October 2011, falls falls within this category. within this category. The following table represents properties classified as Property and Equipment, as of December 31, 2019; The following table represents properties classified as Property and Equipment, as of December 31, 2019; The following table represents properties classified as Property and Equipment, as of December 31, 2019; Office Office Retail Retail Land and Redevelopment Land and Redevelopment Total Total # of Properties # of Properties 1 1 - - - - 1 1 2019 2019 Value at 31-Dec-19 Value at 31-Dec-19 $CDN $CDN 1,389,068 1,389,068 - - - - 1,389,068 1,389,068 # of Properties # of Properties 1 1 - - - - 1 1 Occupancy Rates Occupancy Rates Occupancy Rates A summary of MGG’s property portfolio occupancy rates is set forth in the following table; A summary of MGG’s property portfolio occupancy rates is set forth in the following table; A summary of MGG’s property portfolio occupancy rates is set forth in the following table; 31 –Dec- 2018 31 –Dec- 2018 Occupancy Rate* Occupancy Rate* 94.9% 94.9% 100.0% 100.0% 31 –Dec- 2019 31 –Dec- 2019 Occupancy Rate* Occupancy Rate* 96.9% 96.9% 100.0% 100.0% Office Office Retail Retail 2018 2018 Value at 31-Dec-18 Value at 31-Dec-18 $CDN $CDN 1,723,044 1,723,044 - - - - 1,723,044 1,723,044 31 –Dec- 2017 31 –Dec- 2017 Occupancy Rate* Occupancy Rate* 97.2% 97.2% 100.0% 100.0% Weighted Average** Weighted Average** 98.8% 98.8% 98.1% 98.1% 98.5% 98.5% * Occupancy rates are calculated on a per meter basis; * Occupancy rates are calculated on a per meter basis; ** Weighted Average is calculated based on total meters available for lease * Occupancy rates are calculated on a per meter basis; ** Weighted Average is calculated based on total meters available for lease ** Weighted Average is calculated based on total meters available for lease Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s office Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s office space continued to improve throughout the year even while vacancy levels throughout the city have remained high as Demand for retail space has remained strong, despite a difficult economy. Occupancy levels for the Corporation’s office space space continued to improve throughout the year even while vacancy levels throughout the city have remained high as continued to improve throughout the year even while vacancy levels throughout the city have remained high as additional supply additional supply has entered the market. The Corporation’s Tuguldur Center continues to maintain strong occupancy rates additional supply has entered the market. The Corporation’s Tuguldur Center continues to maintain strong occupancy rates has entered the market. The Corporation’s Tuguldur Center continues to maintain strong occupancy rates throughout the year throughout the year and ended the year with average weekly occupancy of over 95% compared to much lower rates in throughout the year and ended the year with average weekly occupancy of over 95% compared to much lower rates in and ended the year with average weekly occupancy of over 95% compared to much lower rates in previous years. Management previous years. Management attributes its success throughout the portfolio to increased marketing initiatives, industry attributes its success throughout the portfolio to increased marketing initiatives, industry leading property management and previous years. Management attributes its success throughout the portfolio to increased marketing initiatives, industry leading property management and realistic price expectations. realistic price expectations. leading property management and realistic price expectations. Management believes it is easier to sell properties when there is no tenant. Therefore, vacancy may increase as the Corporation Management believes it is easier to sell properties when there is no tenant. Therefore, vacancy may increase as the Management believes it is easier to sell properties when there is no tenant. Therefore, vacancy may increase as the chooses not to renew leases in order to dispose of properties. These properties are not included in the occupancy rate. Corporation chooses not to renew leases in order to dispose of properties. These properties are not included in the Corporation chooses not to renew leases in order to dispose of properties. These properties are not included in the occupancy rate. Leasing Schedule occupancy rate. In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter lease Leasing Schedule Leasing Schedule durations with most tenants. Management’s experience is that this practice is in line with local industry standards, with the In order to reduce the Corporation’s exposure to currency fluctuations and inflation, the Corporation targets shorter lease expectation that once leases expire, existing tenants are offered the first right to re-lease the space at the prevailing market rates. 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 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 the prevailing market expectation that once leases expire, existing tenants are offered the first right to re-lease the space at the prevailing market rates. rates. Most Recent Retail Lease Signings Lease Renewal Date Lease Type SqM Office Lease Office Lease Office Lease Office Lease Office Lease Office Lease Retail Lease Retail Lease Office Lease Office Lease Office Lease Office Lease Retail Lease Office Lease Office Lease Office Lease Oct-19 Oct-19 Oct-19 Oct-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Dec-19 Dec-19 Dec-19 Dec-19 MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A Old Price Per Meter (Mongolian Tögrög) 35,000 25,000 20,000 25,000 25,000 25,000 46,464 2,000 22,000 22,801 20,000 25,000 35,486 25,000 25,000 35,000 New Price Per Meter (Mongolian Tögrög) 35,000 25,000 20,000 25,000 25,000 25,000 46,464 2,000 22,000 22,801 20,000 25,000 35,486 25,000 25,000 35,000 31 100 21 15 90 14 125 300 12 60 24 39 201 14 54 36 8 8 Percent Increase (decrease) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% The weighted average remaining lease length increased to 8.1 months in December 2019 compared to 7.6 months in The weighted average remaining lease length increased to 8.1 months in December 2019 compared to 7.6 months in December 2018, calculated as a percentage of monthly revenues. December 2018, calculated as a percentage of monthly revenues. Contractually Obligated Rental Revenue 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 9 2020 2021 Retail Office Redevelopment As noted previously, the Corporation has been able to increase rental rates during 2019 in local currency terms; however, this increase in rental rates is only sustainable if the economy continues to recover. The Corporation believes that the majority of its existing leases are roughly at market rates. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 9 Mongolia Growth Group Ltd | Lease Type Lease Renewal Date SqM Old Price Per Meter New Price Per Meter Percent (Mongolian Tögrög) (Mongolian Tögrög) Increase (decrease) Most Recent Retail Lease Signings Office Lease Office Lease Office Lease Office Lease Office Lease Office Lease Retail Lease Retail Lease Office Lease Office Lease Office Lease Office Lease Retail Lease Office Lease Office Lease Office Lease Oct-19 Oct-19 Oct-19 Oct-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Dec-19 Dec-19 Dec-19 Dec-19 31 100 21 15 90 14 125 300 12 60 24 39 14 54 36 201 35,000 25,000 20,000 25,000 25,000 25,000 46,464 2,000 22,000 22,801 20,000 25,000 35,486 25,000 25,000 35,000 35,000 25,000 20,000 25,000 25,000 25,000 46,464 2,000 22,000 22,801 20,000 25,000 35,486 25,000 25,000 35,000 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% The weighted average remaining lease length increased to 8.1 months in December 2019 compared to 7.6 months in December 2018, calculated as a percentage of monthly revenues. Contractually Obligated Rental Revenue 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2020 2021 Retail Office Redevelopment As noted previously, the Corporation has been able to increase rental rates during 2019 in local currency terms; however, this increase in rental rates is only sustainable if the economy continues to recover. The Corporation believes that the majority of its existing leases are roughly at market rates. As noted previously, the Corporation has been able to increase rental rates during 2019 in local currency terms; however, this increase in rental rates is only sustainable if the economy continues to recover. The Corporation believes that the Publicly Traded Securities majority of its existing leases are roughly at market rates. As at December 31, 2019, the Corporation held long positions in 14 different publicly traded companies including warrants and options with a total value of approximately $4,275,000. The Corporation had a short put option position in one publicly traded company with a total value of approximately $23,300. Publicly Traded Securities As at December 31, 2019, the Corporation held long positions in 14 different publicly traded companies including warrants and options with a total value of approximately $4,275,000. The Corporation had a short put option position in one publicly traded company with a total value of approximately $23,300. The Corporation realized losses of $358,826 (2018 – gain $995,716) from realized sales of public securities during the year and a foreign exchange gain of $228,761 (2018 – loss of $147,335). At year end, the Corporation had unrealized gains on public securities of $454,824 (2018 – loss of $608,297). The Corporation anticipates that its public security portfolio will experience volatility beyond the normal volatility of its property portfolio and the timing of gains and losses will be unpredictable. The Corporation realized losses of $358,826 (2018 – gain $995,716) from realized sales of public securities during the year and a foreign exchange gain of $228,761 (2018 – loss of $147,335). At year end, the Corporation had unrealized gains on public securities of $454,824 (2018 – loss of $608,297). The Corporation anticipates that its public security portfolio will experience During 2019, the Corporation primarily experienced realized and unrealized losses in its holdings of two energy related volatility beyond the normal volatility of its property portfolio and the timing of gains and losses will be unpredictable. securities, a put spread on an automotive company and various index put option spreads. During 2019, the Corporation primarily experienced realized and unrealized gains in investments in the shipping sector. These gains and losses were offset by less material gains and losses on other investments, some of which were unrealized at year-end. The Corporation primarily adheres to an investment style strongly grounded on a valuation framework that would often be classified as “value investing.” Additionally, the Corporation seeks out “event-driven” opportunities when appropriate. During 2019, the Corporation primarily experienced realized and unrealized losses in its holdings of two energy related securities, a put spread on an automotive company and various index put option spreads. During 2019, the Corporation primarily experienced realized and unrealized gains in investments in the shipping sector. These gains and losses were offset by less material gains and losses on other investments, some of which were unrealized at year-end. The Corporation primarily adheres to an investment style strongly grounded on a valuation framework that would often be classified as “value investing.” Additionally, the Corporation seeks out “event-driven” opportunities when appropriate. Over the past few years, value investing has been out of favor and many companies with low price to cash flow or low price to book value multiples have seen their share prices continue to decline. Management believes that this is primarily responsible for investment returns that have underwhelmed since the summer of 2018. Management cannot determine when undervalued stocks will again appreciate but intends to continue with its rigorous valuation-based investment strategy. Over the past few years, value investing has been out of favor and many companies with low price to cash flow or low price to book value multiples have seen their share prices continue to decline. Management believes that this is primarily responsible for investment returns that have underwhelmed since the summer of 2018. Management cannot determine when undervalued stocks will again appreciate but intends to continue with its rigorous valuation-based investment strategy. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 9 The Corporation’s public securities as of December 31, 2019 are broken out in the following sectors; The Corporation’s public securities as of December 31, 2019 are broken out in the following sectors; Long Portfolio Industry Sector Transportation & logistics Financials Natural gas Uranium Consumer services Metals and Mining Electrical equipment Options Other long equities Short Put Option Portfolio Industry Sector Options Percentage 38.5% 25.5% 13.2% 11.2% 9.6% 7.2% 6.3% 2.9% 1.2% Percentage -0.6% As at December 31, 2019, the Corporation had borrowed $586,325 using margin supplied by its broker, which is included in the Corporation’s total Marketable Securities Portfolio value. Management considers its equity positions to be liquid and as such, these margin borrowings were netted out of the Corporation’s marketable securities and not reflected in the Corporation’s cash on the balance sheet. As at December 31, 2019, the Corporation had borrowed $586,325 using margin supplied by its broker, which is included in the Corporation’s total Marketable Securities Portfolio value. Management considers its equity positions to be liquid and as such, these margin borrowings were netted out of the Corporation’s marketable securities and not reflected in the Corporation’s cash on the balance sheet. Management views investment activities in public securities to be complementary to its core property business and a potentially attractive use for excess property sale proceeds. Management intends to increase the size of its securities portfolio over time. Management views investment activities in public securities to be complementary to its core property business and a potentially attractive use for excess property sale proceeds. Management intends to increase the size of its securities portfolio over time. Subsequent to year end, due to declines in global market indexes, the Corporation’s portfolio has experienced a decline in value. 10 Subsequent to year end, due to declines in global market indexes, the Corporation’s portfolio has experienced a decline in value. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 10 | 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 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- 2019 1,140,830 (3,250,446) (4,257,182) (0.10) (0.10) 26,077,221 1,407,393 24,669,828 32,767,499 0.75 Year ended 31-Dec- 2018 1,471,649 1,557,343 1,416,968 0.05 0.05 31,017,823 1,970,518 29,047,305 33,243,999 0.87 Year ended 31-Dec- 2017 1,772,242 (3,097,214) (4,396,960) (0.09) (0.09) 29,405,831 1,649,251 27,756,580 33,696,599 0.83 Revenue from Investment Properties Revenue from Investment Properties For the year end December 31, 2019, rental revenue from Investment Properties were $1,287,353 versus $1,384,840 in the For the year end December 31, 2019, rental revenue from Investment Properties were $1,287,353 versus $1,384,840 in the prior prior year. The decrease year-over-year was attributable to a decrease in the local currency and fewer investment year. The decrease year-over-year was attributable to a decrease in the local currency and fewer investment properties. properties. Gain/loss on sale of Investment Properties Gain/loss on sale of Investment Properties For the year end December 31, 2019, the Corporation reported a net loss of $302,959 on the sale of three investment properties versus a gain of $38,592 in the prior year on the sale of three properties. The loss was due to a decrease in value of the proper- For the year end December 31, 2019, the Corporation reported a net loss of $302,959 on the sale of three investment ties throughout the year. properties versus a gain of $38,592 in the prior year on the sale of three properties. The loss was due to a decrease in value of the properties throughout the year. Revenue from Other Sources Revenue from Other Sources Revenue from other sources consists of late fees and other income, principally the Corporation’s brokerage business. For the year Revenue from other sources consists of late fees and other income, principally the Corporation’s brokerage business. For ending December 31, 2019, revenues from other sources totaled $156,436 compared to $48,217 for the year ending December 31, 2018. Revenues increased due to increased traction in the Corporation’s brokerage business. the year ending December 31, 2019, revenues from other sources totaled $156,436 compared to $48,217 for the year ending December 31, 2018. Revenues increased due to increased traction in the Corporation’s brokerage business. Income Taxes Income Taxes The Corporation has subsidiaries in Mongolia that are subject to income taxes and, accordingly, has provided for current and The Corporation has subsidiaries in Mongolia that are subject to income taxes and, accordingly, has provided for current deferred income taxes with respect to those subsidiaries. and deferred income taxes with respect to those subsidiaries. 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 liability on the balance Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between the sheet decreased by $155,606 during the year (Q4 2018 - $235,067 increase) primarily due to sale of investment properties and carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The deferred tax liability on the an unrealized loss on the fair value of investment properties. balance sheet decreased by $155,606 during the year (Q4 2018 - $235,067 increase) primarily due to sale of investment properties and an unrealized loss on the fair value of investment properties. Fair Value Adjustment on Investment Properties As elected under IFRS, the Corporation’s investment portfolio is subsequently measured at fair value in the Corporation’s finan- Fair Value Adjustment on Investment Properties cial statements. As of December 31, 2019, the Corporation had approximately 70% of its Investment Properties Portfolio valued As elected under IFRS, the Corporation’s investment portfolio is subsequently measured at fair value in the Corporation’s by an international valuation firm and the remaining 30% were valued by Management. For the year ended December 31, 2019, financial statements. As of December 31, 2019, the Corporation had approximately 70% of its Investment Properties the fair value adjustment to investment properties was a loss of $1,347,662 compared to a gain of $1,892,577 for the same pe- riod in 2018. The Corporation currently has a standing agreement with the owner of a 42 sq. meter apartment leading it to be included in this property’s land title. 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. In this agreement, the Corporation had an obligation to complete the construction of a new building by the end of 2017 and the agreement has not yet been extended. The Corporation has incurred an unrealized MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 11 11 Mongolia Growth Group Ltd | fair value loss of $1,436,256 (2018 - $1,711,065) in excess of the fair value adjustment calculated by the international valuation firm and included a liability of $131,438 (2018 - $141,887) on the Corporation’s balance sheet to reflect this liability. These ad- justments are Management’s estimate of the markets perception of the risk related to this agreement. Unrealized public securities investment gain/loss During the year, the Corporation had unrealized gains of $454,824 (2018 - $608,297 loss). This increase in value was primarily a result of appreciation in the value of various investments, particularly in the shipping sector. Realized public securities investment gain/loss During the year, the Corporation had a realized investment loss of $358,826 compared to a realized investment gain of $995,716 in 2018. This realized investment loss was primarily a result of the Corporation realizing losses on an investment in an energy producer, a put spread in the automobile sector and a put spread on index options, offset by other realized gains. Share Repurchase During the year, the Corporation repurchased 404,500 of its common shares under its Normal Course Issuer Bid (NCIB) at an average price of $0.30 (2018-443,500, $0.29 average). As at December 31, 2019, the Corporation held 35,000 shares in Treasury to be cancelled during the first quarter of 2020 (2018- 107,000). 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, 2019, the property operating expenses were $1,055,102 compared to $860,376 during the same period in 2018, representing an increase of approximately 23%. This increase was primarily due to an increase in salaries and commissions paid in Mongolia. Corporate Expenses Corporate expenses include senior management and board of director compensation, share-based expenses, listing fees, profes- sional fees, technology, travel, investment research expenses and administrative costs. For the year ending December 31, 2019, general and administration expenses increased to $1,067,158 from $813,973 in 2018. This increase from the previous year is primarily attributed to commissions owed to a consulting Company not affiliated with senior management employees as well as investment research expenses incurred for managing the Corporation’s marketable securities portfolio. Currency The Mongolian Tögrög has fluctuated significantly over the past five years. The Mongolian Tögrög has depreciated 6.8%, 5.1%, 11.5% and 5.3% in 2011, 2012, 2013 and 2014 respectively versus the Canadian Dollar while appreciating 11.4% in 2015 and depreciating 28.5% in 2016, a further 4.3% in 2017, 0.7% in 2018 and 8% in 2019. The fluctuation in the currency is reflected in the Corporation’s financial statements, most notably in the investment property portfolio, as it is the largest item on the bal- ance 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, 2019, the Corporation recognized a foreign exchange adjustment loss of $1,760,121 (2018 - loss of $150,835) to its investment property portfolio due to the 8% depreciation of the local currency during the year. Operating Profit (Loss) Overall, the Corporation reported an Operating profit or an Adjusted EBITDA loss of $929,972 during 2019 (2018 – loss of $523,313). The decrease in EBITDA over the previous year was due to lower revenues and an increase in expenses compared to the previous year. 12 | Mongolia Growth Group LtdOperating Profit (Loss) Overall, the Corporation reported an Operating profit or an Adjusted EBITDA loss of $929,972 during 2019 (2018 – loss of $523,313). The decrease in EBITDA over the previous year was due to lower revenues and an increase in expenses compared to the previous 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 Add/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 Add back reclassification of accumulated other comprehensive income on disposal of subsidiary Total Adjusted EBITDA 2019 $ (3,315,654) 73,294 (18,793) 2018 $ 1,815,069 77,361 (324,646) (3,261,153) 1,567,784 1,506,317 (2,091,097) 824,864 - (929,972) (523,313) Net Income Net Income For the year ended December 31, 2019, the Corporation experienced a net loss of $3,250,446 compared to a net income of For the year ended December 31, 2019, the Corporation experienced a net loss of $3,250,446 compared to a net income of $1,557,343 for the year ended December 31, 2018. This difference is primarily attributed to the substantial unrealized loss $1,557,343 for the year ended December 31, 2018. This difference is primarily attributed to the substantial unrealized loss on on fair value adjustment on investment properties of $1,347,662 during the year (2018 – gain of $1,892,577), a fair value adjustment on investment properties of $1,347,662 during the year (2018 – gain of $1,892,577), a reclassification of reclassification of accumulated other comprehensive income on the disposal of a subsidiary (2018 – nil) as well as realized accumulated other comprehensive income on the disposal of a subsidiary (2018 – nil) as well as realized losses on marketable losses on marketable securities of $358,826 (2018 - $995,716 gain). securities of $358,826 (2018 - $995,716 gain). Management cautions investors that the Corporation is primarily focused on increasing shareholder value on a per share basis. Management cautions investors that the Corporation is primarily focused on increasing shareholder value on a per share This means that operationally, management is more concerned with long-term asset appreciation at the expense of short-term basis. This means that operationally, management is more concerned with long-term asset appreciation at the expense of profitability. short-term profitability. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 13 13 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 along with cash Mongolia Growth Group’s primary sources of capital are cash generated from equity issuance, financing and asset sales. 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 activities The following table provides an overview of the Corporation’s cash flows from operating, financing and investing activities for the for the year ended December 31, 2019 and 2018. year ended December 31, 2019 and 2018. Net change in cash related to: Operating Investing Financing Effects of exchange rates on cash Net change in cash during the period 31-Dec-19 $ (502,836) 1,487,827 (801,197) (191,950) (8,156) For the year ending 31-Dec-18 $ (611,744) (363,517) (126,243) 206,144 (895,360) Overall, the Corporation had cash outflows of $8,156 during 2019 compared to cash outflows of $895,360 in 2018. The Corporation Overall, the Corporation had cash outflows of $8,156 during 2019 compared to cash outflows of $895,360 in 2018. The had significant cash inflows from Investing offset by outflows from Operating and Financing. The changes in components of cash Corporation had significant cash inflows from Investing offset by outflows from Operating and Financing. The changes in flows for the year ended December 31, 2019, compared to the year ended December 31, 2018, were the result of the following components of cash flows for the year ended December 31, 2019, compared to the year ended December 31, 2018, were factors: the result of the following factors: • Operating–The Corporation experienced a moderate decrease in Operating cash outflows for the year ended 2019 versus outflows for the year ended 2018 due to an increase in non-cash working capital balances. • Operating–The Corporation experienced a moderate decrease in Operating cash outflows for the year ended 2019 versus outflows for the year ended 2018 due to an increase in non-cash working capital balances. • Investing–The Corporation experienced significant Investing cash inflows for the year ended 2019 due to net sales of marketable securities and by the disposal of investment properties. In comparison, 2018 saw a net purchase Investing–The Corporation experienced significant Investing cash inflows for the year ended 2019 due to net of marketable securities offset by a net disposal of investment properties. sales of marketable securities and by the disposal of investment properties. In comparison, 2018 saw a net • Financing–Financing cash outflow occurred due to the repayment of the Corporation’s bank loan combined with the purchase of marketable securities offset by a net disposal of investment properties. repurchase of 404,500 shares during the year versus 443,500 shares during the 2018 year. • • To date, the Corporation has been able to meet all of its capital and other cash requirements from its internal sources of cash. As Financing–Financing cash outflow occurred due to the repayment of the Corporation’s bank loan combined at December 31, 2019, the Corporation had approximately $737,255 (2018 - $745,411) in cash and cash equivalents as well as with the repurchase of 404,500 shares during the year versus 443,500 shares during the 2018 year. $3,689,304 in marketable securities, which it considers to be liquid and available to be sold at any time should the Corporation require cash. Due to the expectation that the Corporation’s cash position will worsen in future quarters, the Corporation is To date, the Corporation has been able to meet all of its capital and other cash requirements from its internal sources of focused on increasing liquidity and cash reserves in Canada through asset sales. cash. As at December 31, 2019, the Corporation had approximately $737,255 (2018 - $745,411) in cash and cash equivalents Total Assets as well as $3,689,304 in marketable securities, which it considers to be liquid and available to be sold at any time should the Corporation require cash. Due to the expectation that the Corporation’s cash position will worsen in future quarters, the As of December 31, 2019, the Corporation had $5,809,586 (2018 - $4,809,169) in current assets out of which $737,255 (2018 - Corporation is focused on increasing liquidity and cash reserves in Canada through asset sales. $745,411) was held in cash. The increase in current assets is due to an increase in accounts receivable (other assets) for the sale of a property that took place at the end of the year. Total Assets The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment Properties. Investment As of December 31, 2019, the Corporation had $5,809,586 (2018 - $4,809,169) in current assets out of which $737,255 (2018 Properties are carried at Fair Market Value and decreased during the year to $18,831,985 (2018 -$24,415,860) due to a reduction - $745,411) was held in cash. The increase in current assets is due to an increase in accounts receivable (other assets) for in the number of properties as well as a significant unrealized loss on fair value adjustment. the sale of a property that took place at the end of the year. Property and Equipment, which primarily consists of properties that are measured at their cost base, decreased from $1,792,794 in 2018 to $1,435,650 in 2019 primarily due to an impairment on the Corporation’s headquarters in line with the unrealized loss The majority of the Corporation’s assets are classified as Non-Current Assets, mainly Investment Properties. Investment on fair value adjustment of its Investment Properties.. Properties are carried at Fair Market Value and decreased during the year to $18,831,985 (2018 -$24,415,860) due to a reduction in the number of properties as well as a significant unrealized loss on fair value adjustment. Total Liabilities As of December 31, 2019, the Corporation had current liabilities of $825,506 (2018 - $1,233,025) consisting primarily of payables Property and Equipment, which primarily consists of properties that are measured at their cost base, decreased from and accrued liabilities. The decrease was due to the Corporation’s loan which was classified as short term debt at the end of 2018 $1,792,794 in 2018 to $1,435,650 in 2019 primarily due to an impairment on the Corporation’s headquarters in line with and repaid in December 2019. the unrealized loss on fair value adjustment of its Investment Properties. As of December 31, 2019, the only non-current liability on the balance sheet are deferred income taxes of $581,887 (Q4 2018- $737,493). Management considers all other current cash commitments to be immaterial and operational in nature. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 14 14 | Mongolia Growth Group Ltd Total Liabilities Total Liabilities As of December 31, 2019, the Corporation had current liabilities of $825,506 (2018 - $1,233,025) consisting primarily of As of December 31, 2019, the Corporation had current liabilities of $825,506 (2018 - $1,233,025) consisting primarily of payables and accrued liabilities. The decrease was due to the Corporation’s loan which was classified as short term debt at payables and accrued liabilities. The decrease was due to the Corporation’s loan which was classified as short term debt at the end of 2018 and repaid in December 2019. the end of 2018 and repaid in December 2019. As of December 31, 2019, the only non-current liability on the balance sheet are deferred income taxes of $581,887 (Q4 As of December 31, 2019, the only non-current liability on the balance sheet are deferred income taxes of $581,887 (Q4 2018-$737,493). 2018-$737,493). Management considers all other current cash commitments to be immaterial and operational in nature. Management considers all other current cash commitments to be immaterial and operational in nature. Total Equity Total Equity Total Equity The equity of the Corporation consists of one class of common shares. The equity of the Corporation consists of one class of common shares. The equity of the Corporation consists of one class of common shares. Outstanding Outstanding Common shares Common shares Options to buy common shares Options to buy common shares * As at December 31, 2019, the Corporation held 35,000 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2020 (2018-107,000). * As at December 31, 2019, the Corporation held 35,000 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2020 (2018-107,000). * As at December 31, 2019, the Corporation held 35,000 of the common shares outstanding in Treasury to be cancelled during the first quarter of 2020 (2018-107,000). * As of April 7, 2020, the Corporation had 32,398,499 shares outstanding, no shares held in treasury, and no options outstanding. * As of April 7, 2020, the Corporation had 32,398,499 shares outstanding, no shares held in treasury, and no options outstanding. * As of April 7, 2020, the Corporation had 32,398,499 shares outstanding, no shares held in treasury, and no options outstanding. Options Outstanding Options Outstanding Options Outstanding At December 31, 2019, the Corporation had 1,420,000 options that were exercisable (December 31, 2018; 3,103,000). At December 31, 2019, the Corporation had 1,420,000 options that were exercisable (December 31, 2018; 3,103,000). At December 31, 2019, the Corporation had 1,420,000 options that were exercisable (December 31, 2018; 3,103,000). The chart below shows the historical option grants and options outstanding as of December 31, 2019. The chart below shows the historical option grants and options outstanding as of December 31, 2019. The chart below shows the historical option grants and options outstanding as of December 31, 2019.. 31-Dec 19 31-Dec 19 32,767,499* 32,767,499* 1,420,000 1,420,000 31-Dec-18 31-Dec-18 33,243,999* 33,243,999* 3,103,000 3,103,000 Option Price Option Price 1.64 1.64 1.75 1.75 1.9 1.9 4.2 4.2 4.77 4.77 4.25 4.25 4.0 4.0 4.13 4.13 1.09 1.09 0.72 0.72 0.74 0.74 0.38 0.38 Total Total Granted Granted 100,000 100,000 300,000 300,000 1,363,000 1,363,000 900,000 900,000 175,000 175,000 150,000 150,000 190,000 190,000 475,000 475,000 375,000 375,000 935,000 935,000 640,000 640,000 350,000 350,000 Expired Expired Forfeited Forfeited Cancelled Cancelled Exercised Exercised - - 50,000 50,000 1,078,000 1,078,000 205,000 205,000 20,000 20,000 5,000 5,000 - - 125,000 125,000 300,000 300,000 - - - - 280,000 280,000 - - - - 85,000 85,000 408,000 408,000 100,000 100,000 50,000 50,000 - - 75,000 75,000 75,000 75,000 80,000 80,000 75,000 75,000 70,000 70,000 - - - - - - 287,000 287,000 55,000 55,000 95,000 95,000 190,000 190,000 275,000 275,000 - - - - - - - - 100,000 100,000 250,000 250,000 200,000 200,000 - - - - - - - - - - - - - - - - - - Total Options Total Options Outstanding Outstanding - - - - - - - - - - - - - - - - - - 855,000 855,000 565,000 565,000 - - Total Total Exercisable Exercisable - - - - - - - - - - - - - - - - - - 855,000 855,000 565,000 565,000 - - Non Non exercisable exercisable - - - - - - - - - - - - - - - - - - - - - - - - 5,953,000 5,953,000 2,063,000 2,063,000 1,018,000 1,018,000 902,000 902,000 550,000 550,000 1,420,000 1,420,000 1,420,000 1,420,000 - - Acquisitions and Dispositions Acquisitions and Dispositions Acquisitions and Dispositions During the year ended December 31, 2019, the Company sold three investment properties for proceeds with a value of During the year ended December 31, 2019, the Company sold three investment properties for proceeds with a value of During the year ended December 31, 2019, the Company sold three investment properties for proceeds with a value of $2,221,346 resulting in a net loss of $302,959 on these transactions. One of these properties was disposed of through its $2,221,346 resulting in a net loss of $302,959 on these transactions. One of these properties was disposed of through its $2,221,346 resulting in a net loss of $302,959 on these transactions. One of these properties was disposed of through its interest interest in its Endymion LLC (note 21). The proceeds received consisted of $2,029,937 in cash, and $191,409 in investment interest in its Endymion LLC (note 21). The proceeds received consisted of $2,029,937 in cash, and $191,409 in investment in its Endymion LLC (note 21). The proceeds received consisted of $2,029,937 in cash, and $191,409 in investment properties, of properties, of which $1,145,568 and $143,196 respectively are classified within accounts receivable at December 31, 2019 properties, of which $1,145,568 and $143,196 respectively are classified within accounts receivable at December 31, 2019 which $1,145,568 and $143,196 respectively are classified within accounts receivable at December 31, 2019 (note 7). (note 7). (note 7). In comparison, during the year ended December 31, 2018, three investment properties were sold for cash consideration of $547,955 resulting in net gain of $38,592 on these transactions. In comparison, during the year ended December 31, 2018, three investment properties were sold for cash consideration of In comparison, during the year ended December 31, 2018, three investment properties were sold for cash consideration of $547,955 resulting in net gain of $38,592 on these transactions. Related Party Transactions $547,955 resulting in net gain of $38,592 on these transactions. Parties are generally considered to be related if the parties are under common control or if one party has the ability to control Related Party Transactions Related Party Transactions the other party or can exercise significant influence or joint control over the other party in making financial and operational Parties are generally considered to be related if the parties are under common control or if one party has the ability to decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not 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 merely the legal form. control the other party or can exercise significant influence or joint control over the other party in making financial and Key management personnel of the Corporation include all directors and executive management. The summary of operational decisions. In considering each possible related party relationship, attention is directed to the substance of the operational decisions. In considering each possible related party relationship, attention is directed to the substance of the Key management personnel of the Corporation include all directors and executive management. The summary of compensation compensation for key management personnel is as follows: relationship, not merely the legal form. relationship, not merely the legal form. for key management personnel is as follows: Related Party Transactions Salaries and other short-term benefits to officers Director fees Share-based payments to directors and officers MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 2019 $ 481,213 40,000 - 521,213 2018 $ 340,439 40,000 - 15 15 380,439 As at December 31, 2019, amounts due to related parties totaled approximately $48,118, comprised of accrued directors Off-Balance Sheet Items fees and fees owed to management (2018 - $57,000) were included in trade payables and accrued liabilities. An amount of As of December 31, 2019, the Corporation had no off-balance sheet items. $20,867 is owed to the Company by a company controlled by the CEO. Off-Balance Sheet Items As of December 31, 2019, the Corporation had no off-balance sheet items. Events Subsequent to Year End • • • Since January 1, 2020, the Corporation has repurchased 334,000 of its shares at an average price of $0.22/share and cancelled 369,000 shares. 15 The Corporation sold 2 properties for proceeds of approximately $413,000 and a net gain of $nil The Corporation partially suspended operations at its headquarters and reduced its agency brokerage operation in order to reduce the potential for the spread of COVID-19. Additionally, numerous tenants have been unable to pay contracted rents. The Corporation is actively working with tenants during this difficult environment but does not believe that it will be able to collect a material percentage of rent that was due in the first quarter. The Corporation is unable to determine future collection rates. Since the initiation of these actions, the Company has experienced a material reduction in rental revenues received. It is reasonable to expect there could be a material negative impact on the fair values of investment properties and/or marketable securities, however at this time the potential effect cannot be quantified. At this time, there is no way to know the ultimate impact of these extra-ordinary actions upon the economy or the Company. • As disclosed in the Corporation’s March 16, 2020 press 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 Corporation on the open market in accordance with the policies of the TSXV. Up to 2,500,000 common shares, representing up to approximately 7.7% of the 32,569,499 Common Shares as of March 16th, 2020, of the Issuer currently issued and outstanding, or approximately 9.9% of the 25,292,549 common shares constituting the Issuer’s current Public Float (as defined in the Policies of the Exchange). Securities Sought Duration The Issuer intends to commence purchasing its common shares under the Normal Course Issuer Bid three clear trading days following acceptance of the same by the TSX Venture Exchange (the “Exchange”) The Normal Course Issuer Bid will terminate on the date that is one year from the date on which purchases commence. Method of Acquisition Purchases will be affected through the facilities of the Exchange. Purchase and payment for the common shares of the Issuer will be made by the Issuer in accordance with Exchange requirements. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 16 Mongolia Growth Group Ltd | Events Subsequent to Year End • Since January 1, 2020, the Corporation has repurchased 334,000 of its shares at an average price of $0.22/share and cancelled 369,000 shares. • The Corporation sold 2 properties for proceeds of approximately $413,000 and a net gain of $nil • The Corporation partially suspended operations at its headquarters and reduced its agency brokerage operation in order to reduce the potential for the spread of COVID-19. Additionally, numerous tenants have been unable to pay contracted rents. The Corporation is actively working with tenants during this difficult environment but does not believe that it will be able to collect a material percentage of rent that was due in the first quarter. The Corporation is unable to determine future collection rates. Since the initiation of these actions, the Company has experienced a material reduction in rental revenues received. It is reasonable to expect there could be a material negative impact on the fair values of investment properties and/or marketable securities, however at this time the potential effect cannot be quantified. At this time, there is no way to know the ultimate impact of these extra-ordinary actions upon the economy or the Company. • As disclosed in the Corporation’s March 16, 2020 press 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 Corporation on the open market in accordance with the policies of the TSXV. Securities Sought: Up to 2,500,000 common shares, representing up to approximately 7.7% of the 32,569,499 Common Shares as of March 16th, 2020, of the Issuer currently issued and outstanding, or approximately 9.9% of the 25,292,549 common shares constituting the Issuer’s current Public Float (as defined in the Policies of the Exchange). Duration: The Issuer intends to commence purchasing its common shares under the Normal Course Issuer Bid three clear trading days following acceptance of the same by the TSX Venture Exchange (the “Exchange”) The Normal Course Issuer Bid will terminate on the date that is one year from the date on which purchases commence. Method of Acquisition: Purchases will be affected through the facilities of the Exchange. Purchase and payment for the common shares of the Issuer will be made by the Issuer in accordance with Exchange requirements. Member and Broker: The Normal Course Issuer Bid will be conducted by M Partners Inc. of 70 York Street, Suite 1560, Toronto ON M5J 1S9; Phone: (416) 603-7381. Consideration Offered: Purchases of common shares under the Normal Course Issuer Bid will be conducted at applicable Market Prices in accordance with Exchange requirements. Completion of purchases under the bid will be subject to the Issuer having sufficient funds to acquire the common shares and continue to meet its working capital requirements throughout the course of the bid. The Issuer may in the normal course of its business operations, subject to market conditions, sell one or more of its investment properties to fund acquisitions throughout the course of the bid. Reasons for the Normal Course Issuer Bid: The Issuer 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 Issuer believes that in such circumstances, the purchase of the common shares of the Issuer may represent an appropriate and desirable use of the Issuer’s funds and further enhance market stability. Persons Acting Jointly or in Concert with the Issuer: No person is acting jointly and in concert with the Corporation in connection with the Bid. Valuation: After making reasonable enquiry, the Issuer is not aware of any appraisal or valuation of the Issuer’s securities that has been prepared within the preceding two years. In connection with the preparation of its audited financial statements for the financial year ending December 31, 2019, the Issuer engaged CBRE Limited, an arm’s length property valuator, to prepare the following independent valuation reports (the “Valuation”) in respect of the Issuer’s Mongolian real estate investment assets: • report entitled “Retail Valuation Report – Ulaanbaatar, Mongolia”, dated March 13, 2018, which ascribed a value of 591,000,000 MNT (Mongolian Togrogs) to the Issuer’s material retail real estate investment assets as at December 31, 2018; • report entitled “Land Valuation Report – Ulaanbaatar, Mongolia”, dated March 13, 2018, which ascribed a value of 30,070,000,000 MNT (Mongolian Togrogs) to the Issuer’s material land investment assets as at December 31, 2018; • report entitled “Office Valuation Report – Ulaanbaatar, Mongolia”, dated March 13, 2018, which ascribed an aggregate value of 3,344,000,000 MNT (Mongolian Togrogs) to the Issuer’s material office real estate investment assets as at December 31, 2018 The Valuations were prepared for internal accounting purposes and the Issuer does not have permission to share the Valuations externally. 16 | Mongolia Growth Group LtdPrevious Purchases: The Issuer has purchased 665,000 of its common shares at an average price of $0.25 within the past 12 months. Acceptance by Insiders, Affiliates and Associates: To the knowledge of the Issuer, no director, senior officer or other Insider of the Issuer or any associate or affiliate of the Issuer or any insider of the Issuer currently intends to sell common shares under the Normal Course Issuer 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 Issuer’s common shares whose shares are purchased under the bid. 17 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 2019 30,194 (3,013,557) (0.10) 26,077,221 32,989,169 32,767,499 Q3 2019 377,605 (679,160) (0.02) 31,942,398 33,049,028 32,891,499 Q2 2019 372,167 178,237 0.01 30,121,056 33,104,645 32,954,499 Q1 2019 360,864 264,034 0.01 30,969,616 33,113,966 33,136,999 Q4 2018 367,916 (577,451) (0.02) 31,017,823 33,352,911 33,243,999 Q3 2018 389,934 2,279,078 0.08 31,844,685 33,412,466 33,379,499 Q2 2018 357,051 128,671 0.00 30,111,915 33,464,179 33,379,499 Q1 2018 356,748 (272,955) (0.01) 30,142,591 33,530,605 33,476,999 Revenue Revenue During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $30,194 (Q4 2018 -$367,916) of During the fourth quarter, the Corporation’s real estate subsidiary earned total revenue of $30,194 (Q4 2018 -$367,916) of which which rental income earned was $301,771 (Q4 2018 - $338,500). This rental income decrease is attributed to lower rental rental income earned was $301,771 (Q4 2018 - $338,500). This rental income decrease is attributed to lower rental rates as well rates as well as fewer investment properties. The quarterly revenue number also includes other revenue earned from as fewer investment properties. The quarterly revenue number also includes other revenue earned from miscellaneous sources miscellaneous sources such as late fees, advertising and from the sale of investment properties. During the fourth quarter, such as late fees, advertising and from the sale of investment properties. During the fourth quarter, the Corporation experienced a loss on the sale of investment properties of $302,959 (2018 – gain of $10,110), which negatively affected the Corporation’s the Corporation experienced a loss on the sale of investment properties of $302,959 (2018 – gain of $10,110), which revenue. negatively affected the Corporation’s revenue. During the 4th quarter of 2019, the Corporation also incurred an unrealized loss on fair value adjustment on investment properties During the 4th quarter of 2019, the Corporation also incurred an unrealized loss on fair value adjustment on investment and impairment of PP&E of $1,506,317 compared to an unrealized gain on fair value adjustment of $855,161 during Q4 2018. properties and impairment of PP&E of $1,506,317 compared to an unrealized gain on fair value adjustment of $855,161 Expenses during Q4 2018. Quarterly expenses related to corporate operations totaled $438,214 (Q4 2018 - $193,871). This increase was due to commissions Expenses owed to a consulting Company not affiliated with senior management employees. Quarterly expenses related to corporate operations totaled $438,214 (Q4 2018 - $193,871). This increase was due to Net Income commissions owed to a consulting Company not affiliated with senior management employees. During the quarter, the Corporation experienced a loss of $3,013,557 in comparison to a loss of $577,451 in the same quarter of the previous year. This difference is mainly attributed to the significant fair value adjustment loss recorded during the fourth Net Income quarter of 2019 compared to a fair value adjustment gain recorded during the fourth quarter of 2018. During the quarter, the Corporation experienced a loss of $3,013,557 in comparison to a loss of $577,451 in the same quarter of the previous year. This difference is mainly attributed to the significant fair value adjustment loss recorded during the fourth quarter of 2019 compared to a fair value adjustment gain recorded during the fourth quarter of 2018. MONGOLIA GROWTH GROUP LTD., Q4 2019 MD&A 18 18 | 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 circum- stances. 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 the consolidated financial statements include the following: Fair value of investment properties 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 by dollar value annually. The remaining balance of investment properties was valued internally. 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. This fair value assumes that the Company is in possession of the property’s land and property titles where applicable. Management judges that the Company has the appropriate titles for each of the properties classified as Investment Properties. Properties whereby Management judges that the Company’s titles are at risk, have been impaired to reflect the level of risk estimated by Management. 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. From 2016 to 2019, the Corporation has had difficulty in converting Mongolian Tögrög to U.S. Dollars at large Mongolian banks. This difficulty has persisted in subsequent periods, but to a lesser degree. 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. Due to the economic crisis, businesses are increasingly paying for transactions using various forms of barter such as used equipment, apartments, vehicles, future services and livestock. To date, the Corporation has only agreed to receive barter items in extreme circumstances and has a strong preference to avoid using barter in transactions. As the economic crisis worsens, barter transactions may become a more substantial percentage of overall economic transactions. As a result, the Corporation may be forced to receive barter items at a higher frequency. These barter items are often difficult to value and monetize and may cause other difficulties for the Corporation that are impossible to predict. Beginning in February of 2020, the Government of Mongolia undertook extra-ordinary actions in order to limit the spread of COVID-19 or other COVID-19 related impacts. These actions included closing borders, closing schools, reducing gatherings and drastic limitations on business operations. As long-term investors in Mongolia, the Corporation welcomes these actions that keep the people of Mongolia safe from COVID-19; however, it is anticipated that these actions will lead to a severe economic crisis. Since the initiation of these actions, the Corporation has experienced a material reduction in rental revenues received. At this time, there is no way to know the ultimate impact of these extra-ordinary actions upon the economy or the Corporation. 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. Management 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 suf- ficient future taxable profit will be available to allow all or part of a previously unrecognized deferred tax asset to be recovered. Estimates of future taxable income are based on forecasted cash flows from operations, available tax planning opportunities and expected timing of reversals of taxable temporary differences. 19 Mongolia Growth Group Ltd |Valuation of Marketable Securities The Company recognizes marketable securities 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, judgement is required to establish fair values. Significant judgments made in the preparation of these consolidated financial statements include the following areas: Judgement is required in determining whether an asset meets the criteria for classification as assets held for sale and or as discontinued operations in the consolidated financial statements. Criteria considered by management include the existence of and commitment to a plan to dispose of the assets, the expected selling price of the assets, the probability of the sale being completed within an expected timeframe of one year and the period of time any amounts have been classified within assets held for sale. Management reviews the criteria for assets held for sale each quarter and reclassifies such assets to or from this financial position category as appropriate. On completion of the sale, Management exercises judgement as to whether the sale qualifies as a discontinued operation. As at December 31, 2019 and 2018, Management has made the judgment that none of the Corporation’s assets meet the criteria to be classified as held for sale. While this is due to a number of factors, a primary reason is that due to the conditions of the Mongolian economy and the lack of liquidity in the market, management was unable to conclude that the sale of any significant size asset could be considered highly probable. Judgement is required in determining whether the Company’s Investment property and land use rights titles are at risk. As at December 31, 2019 and 2018, Management has made the judgment that Investment Properties whereby the land title has recently expired but is expected to be renewed in the near future should continue to be classified as Investment Properties. Properties whereby Management judges that the Company’s titles are at risk, have been impaired to reflect the level of risk estimated by Management. . 20 | 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 vari- ous 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 partici- pants 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, 2019. As at December 31, 2019, the Corporation had working capital of $4,984,080 (2018- $3,576,144) 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. Market Risk Market risk is the risk that the fair value of, or future cash flows from, the Corporation’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 Corporation is exposed to market risk in trading its investments and unfavorable market conditions could result in dispositions of investments at less than favorable prices. Property Title Risk Mongolian law has strong protections for property assets; however, implementation of Mongolian law is often arbitrary, with high degrees of corruption and incompetence. Additionally, laws frequently change, which can invalidate a property title. To date, the Corporation has only had one of its property assets confiscated by the Government of Mongolia; however, the Corpo- ration believes that there is a possibility that it will have additional assets confiscated by the Government of Mongolia or stolen by private individuals during future periods. The Corporation is currently not aware of any individual asset that is in imminent danger of being confiscated or stolen. 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 ex- penses are incurred in U.S. and Canadian Dollars. Therefore, a depreciation in the Mongolian Tögrög against the US and Canadian Dollar will reduce EBITDA. The exchange rate continues to be volatile and there is an expectation that volatility may continue for the foreseeable future. 21 Mongolia Growth Group Ltd |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. Preliminary growth estimates according to the National Statistics Office for 2019 2019 was 5,1% year-over-year, while inflation estimates were 5.2% according to Mongol Bank. Management cautions investors that official economic numbers often deviate materially from actual underlying economic conditions. Additionally, the Corporation is not able to accurately predict the ultimate impact of COVID-19 on the economy of Mongolia. 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 oth- erwise 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 15 on December 31, 2019 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 Corpora- tion, returns of the Corporation may be negatively affected. In addition, the regulatory or tax environment for securities, deriva- tives 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 Corporation currently has a standing agreement with the owner of a 42 sq. meter apartment which has been included in one of the Corporation’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. In this agreement, the Corporation had an obligation to complete the construction of a new building by the end of 2017 and the agreement was not extended. A liability of $131,438 is currently included in the Corporation’s balance sheet to reflect this liability. In addition, the Corporation has recognized a $1,436,256 (2018 - $1,711,065) unrealized fair value loss on this property in excess of the fair value adjustment calculated using the valuation approaches described. This adjustment is Management’s estimate of the market’s perception of the risk related to this agreement. While the Corporation has received legal advice that it is not at a substantial risk of losing 22 | Mongolia Growth Group Ltdthe property in question, interpretations of Mongolian law can be varied and arbitrary. The Corporation cautions investors that should it lose this property, it would result in a material reduction in the Corporation’s overall assets and fair value (4.3 million dollars current carrying value). In addition, there is the potential that the 84 sq. meter liability could inhibit the sale or develop- ment of this asset in future periods. 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 im- perfect 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 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 Cor- poration 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 repre- sentation 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 eco- nomic 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 circumstanc- es. These factors may affect the level and volatility of securities prices and the liquidity of the Corporation’s investments. Unex- pected 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. 23 Mongolia Growth Group Ltd |Highly Volatile Markets The prices of financial instruments in which the Corporation’s assets may be invested can be highly volatile and may be influ- enced 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 eco- nomic 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 capitaliza- tions. 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 compa- nies generally have potential for rapid growth, they often involve higher risks because they may lack the management experi- ence, 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 Corporation securities. 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 sound- ness 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, mar- ket 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 Corpora- tion. 24 | Mongolia Growth Group LtdCurrency and Exchange Rate Risks The Corporation’s assets will be denominated in multiple currencies. The Corporation will report their results in Canadian dol- lars. 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 re- quirements, 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 mar- ket 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. Future Acquisitions and Business Diversification Management is currently evaluating future acquisitions of businesses and operating assets that are not related to investments within Mongolia. There can be no certainty that the Corporation will acquire any business. Additionally, if the Corporation ac- quires part or all of a business outside of Mongolia, it may dilute management’s focus on current operations within Mongolia. Additionally, shareholders who desire a Mongolia focused investment vehicle may sell shares of the Corporation if they do not desire investments outside of Mongolia. There can be no certainty that the Corporation can raise adequate funding to finance an acquisition of a business outside of Mongolia or that diversification of the Corporation’s business is in the best interest of the Corporation. Capital spent on researching businesses outside of Mongolia will increase operating expenses and operating losses as long as such due diligence is ongoing. 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 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. Changes in accounting policies including initial adoption The following accounting policies were adopted during the year ended December 31, 2019: IFRS 16 – Leases The Company has adopted the following revised standards, along with any consequential amendments, effective January 1, 2019. 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. To prepare for this standard the Company reviewed its existing agreements to determine whether the accounting for any leases would be impacted from adopting IFRS 16. The Company is primarily party to agreements in which it is the lessor, for which the accounting has remained substantially unchanged. The agreements to which the Company is a lessee relate to Mongolian 25 Mongolia Growth Group Ltd |government land leases, however the lease payments are nominal and did not qualify for recognition. There was no impact on the Company’s consolidated financial statements from the adoption of IFRS 16. IFRIC 23 - Uncertainty over Income Tax Treatments New standard to clarify the accounting for uncertainties in income taxes. The interpretation provides guidance and clarifies the application of the recognition and measurement criteria in IAS 12 “Income Taxes” when there is uncertainty over income tax treatments. The interpretation is effective for annual periods beginning on or after January 1, 2019. There was no impact on the Company’s consolidated financial statements from the adoption of IFRIC 23. The Corporation is not aware of any upcoming standards or policy changes expected to have a material impact on its financial statements. Additional Information Additional information relating to Mongolia Growth Group Ltd., including its interim financial statements, is available on SEDAR at www.sedar.com. 26 | Mongolia Growth Group LtdMongolia Growth Group Ltd. Consolidated Financial Statements December 31, 2019 (expressed in Canadian dollars) 27 Mongolia Growth Group Ltd |Mongolia Growth Group Ltd. Consolidated Financial Statements December 31, 2016 (Expressed in Canadian dollars) INDEPENDENT AUDITOR’S REPORT To the Shareholders of Mongolia Growth Group Ltd. Opinion We have audited the accompanying consolidated financial statements of Mongolia Growth Group Ltd. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018 and the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information obtained at the date of this auditor's report includes Management’s Discussion and Analysis. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 28 2 | P a g e | Mongolia Growth Group Ltd Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Company's internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 3 | P a g e 29 Mongolia Growth Group Ltd | We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Erez Bahar. Vancouver, Canada April 7, 2020 “DAVIDSON & COMPANY LLP” Chartered Professional Accountants 30 4 | P a g e | 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 owned (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) Marketable securities sold short (note 6) Income taxes payable Short term debt (note 11) Non-current liabilities Deferred income tax liability (note 12) Total liabilities Equity Share capital (note 13) Contributed surplus Accumulated other comprehensive loss Deficit Total equity 2019 $ 2018 $ 737,255 3,689,304 1,383,027 5,809,586 18,831,985 1,435,650 20,267,635 745,411 3,946,202 117,556 4,809,169 24,415,860 1,792,794 26,208,654 26,077,221 31,017,823 767,732 23,340 34,434 - 825,506 542,913 - 9,210 680,902 1,233,025 581,887 737,493 1,407,393 1,970,518 53,504,935 6,849,976 (14,233,385) (21,451,698) 53,625,230 6,849,976 (13,226,649) (18,201,252) 24,669,828 29,047,305 Total equity and liabilities 26,077,221 31,017,823 Commitment and contingencies (note 17) Subsequent events (note 22) Approved by the Board of Directors “ Robert Scott ” Director “ Harris Kupperman ” Director 5 | P a g e 31 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Consolidated Statements of Operations For the years ended December 31 (Expressed in Canadian dollars) Revenue Rental income Gain (loss) on disposal of investment property (note 8) Other revenue Total revenue Expenses Salaries and wages Other expenses (note 20) Depreciation (note 9) 2019 $ 2018 $ 1,287,353 (302,959) 156,436 1,384,840 38,592 48,217 1,140,830 1,471,649 693,852 1,585,145 73,294 543,888 1,265,284 77,361 Total operating expenses (2,352,291) (1,886,533) Interest income Unrealized gain (loss) on fair value adjustment on Investment properties (note 8) 5,617 21,847 (1,347,662) 1,892,577 Impairment of property and equipment (note 9) Reversal of impairment loss of property and equipment (note 9) Unrealized gain (loss) on marketable securities (note 6) Realized gain (loss) on marketable securities (note 6) Foreign currency gain (loss) Finance costs Reclassification of accumulated other comprehensive income on disposal of subsidiary (note 21) (158,655) - 454,824 (358,826) 208,195 (82,822) (824,864) - 198,520 (608,297) 995,716 (185,790) (84,620) - Total other income (expenses) (2,104,193) 2,229,953 Net income (loss) before income taxes (3,315,654) 1,815,069 Income taxes (note 12) 65,208 (257,726) Net income (loss) for the year (3,250,446) 1,557,343 Net income (loss) per share (note 13) Basic From net income (loss) for the year Diluted From net income (loss) for the year (0.10) (0.10) 0.05 0.05 The accompanying notes are an integral part of these consolidated financial statements. 32 6 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Consolidated Statements of Comprehensive Income (Loss) For the years ended December 31 (Expressed in Canadian dollars) 2019 $ 2018 $ Net income (loss) for the year (3,250,446) 1,557,343 Other comprehensive 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 Items subsequently reclassified to income or loss Reclassification of accumulated other comprehensive (1,831,600) (140,375) income on disposal of subsidiary (note 21) 824,864 - Total comprehensive income (loss) (4,257,182) 1,416,968 The accompanying notes are an integral part of these consolidated financial statements. 7 | P a g e 33 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Consolidated Statements of Changes in Equity For the years ended December 31 (Expressed in Canadian dollars) Balance at January 1, 2018 Net income for the year Other comprehensive loss Share capital $ Contributed surplus $ Accumulated other comprehensive loss $ Deficit $ Total $ 53,751,473 - - 53,751,473 6,849,976 - - 6,849,976 (13,086,274) - (140,345) (13,226,649) (19,758,595) 1,557,343 - (18,201,252) 27,756,580 1,557,343 (140,375) 29,173,548 Share repurchase (126,243) - - - (126,243) Balance at December 31, 2018 53,625,230 6,849,976 (13,226,649) (18,201,252) 29,047,305 Share capital $ Contributed surplus $ Accumulated other comprehensive loss $ Deficit $ Total $ Balance at January 1, 2019 Net loss for the year Reclassification (note 21) Other comprehensive loss 53,625,230 - - - 53,625,230 6,849,976 - - - 6,849,976 (13,226,649) - 824,864 (1,831,600) (14,233,385) (18,201,252) (3,250,446) - - (21,451,698) 29,047,305 (3,250,446) 824,864 (1,831,600) 24,790,123 Share repurchase (120,295) - - - (120,295) Balance at December 31, 2019 53,504,935 6,849,976 (14,233,385) (21,451,698) 24,669,828 The accompanying notes are an integral part of these consolidated financial statements. 34 8 | P a g e | Mongolia Growth Group Ltd Mongolia Growth Group Ltd. Consolidated Statements of Cash Flow As at December 31, 2019 Cash provided by (used in) Operating activities Net income (loss) for the year Items not affecting cash Depreciation (note 9) Deferred taxes Allowance for doubtful tax receivables (note 7) Realized loss on disposal of property and equipment Realized (gain) loss on disposal of investment properties (note 8) Impairment of property and equipment (note 9) Reversal of impairment loss of property and equipment (note 9) Unrealized (gain) loss on marketable securities (note 6) Realized (gain) loss on marketable securities (note 6) Unrealized (gain) loss on fair value adjustment on investment properties (note 8) Reclassification of accumulated other comprehensive income on disposal of subsidiary (note 21) Net change in non-cash working capital balances (note 18) Financing activities Share repurchase (note 13) Loan payment (note 11) Investing activities Net sales (purchases) of marketable securities (note 6) Net disposal (acquisition) of property and equipment Net disposal of investment properties, net of taxes (note 8) Effect of exchange rates on cash Increase (decrease) in cash Cash – Beginning of year 2019 $ 2018 $ (3,250,446) 1,557,343 73,294 (155,606) (13,806) - 302,959 158,655 - (454,824) 358,826 77,361 235,067 (35,642) 511 (38,592) - (198,520) 608,297 (995,716) 1,347,662 (1,892,577) 824,864 - (808,422) (682,468) 305,586 (502,836) 70,724 (611,744) (120,295) (680,902) (801,197) (126,243) - (126,243) 604,998 (1,540) (889,494) (21,978) 884,369 1,487,827 547,955 (363,517) 183,794 (1,101,504) (191,950) 206,144 (8,156) (895,360) 745,411 1,640,771 Cash – End of year 737,255 745,411 *Supplementary cash flow information (note 18) The accompanying notes are an integral part of these consolidated financial statements. 9 | 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 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 operating through the ownership of commercial investment property assets in Ulaanbaatar, Mongolia. The Company’s common shares were previously listed on the Canadian Securities Exchange (CSE). On January 9, 2013, the Company filed an application for the de-listing of the common shares from the CSE 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, 2019, 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, Zulu LLC, Crescent City LLC and Oceanus LLC (together “the investment property operations”). Endymion LLC, was disposed of during the year. The investment property operations are conducted in Big Sky Capital LLC and its subsidiaries. No active business operations occur in Oceanus LLC at this time. MGG’s marketable securities are currently held in a brokerage account owned by Mongolia (Barbados) Corp. At December 31, 2019 and 2018, the principal subsidiaries of the Company, their geographic locations, and the ownership interest held by the Company, were as follows: Name Mongolia (Barbados) Corp. MGG Properties LLC Principal Activity Holding Company and Brokerage Account Holding Company and Real estate operations Holding Company and Real estate operations Carrollton LLC Real estate operations Biggie Industries LLC Real estate operations Big Sky Capital LLC Endymion LLC Orpheus LLC Zulu LLC Crescent City Oceanus Real estate operations Real estate operations Real estate operations Real estate operations Real estate operations Ownership December 31, 2019 100% December 31, 2018 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Location Barbados Mongolia Mongolia Mongolia Mongolia Mongolia Mongolia Mongolia Mongolia Mongolia 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, 2019, 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. 36 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 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. These financial statements have been prepared on a going concern basis, meaning that the Company will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. The consolidated financial statements, including the notes to the consolidated financial statements, are presented in Canadian dollars ($) which is the Company’s presentation currency and the functional currency of the parent Company. The functional currency of the Company’s operating subsidiaries is the Mongolian National Tögrög (MNT). These consolidated financial statements were approved by the Board of Directors of the Company for issue on April 7, 2020. 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 and marketable securities at fair value. 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 profit and loss. c. Financial instruments Financial assets On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income (“FVOCI”); or (iii) fair value through profit or loss (“FVTPL”). The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at fair value net of transaction costs that are directly attributable to its acquisition except for financial assets at FVTPL where transaction costs are expensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive. 11 | 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 c. Financial instruments (continued) The classification determines the method by which the financial assets are carried on the balance sheet subsequent to inception and how changes in value are recorded. Cash and receivables are measured at amortized cost with subsequent impairments recognized in profit or loss and marketable securities are classified as FVTPL. Impairment An ‘expected credit loss’ impairment model applies which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period. In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Financial liabilities Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the balance sheet subsequent to inception and how changes in value are recorded. Trade payables and accrued liabilities, and short term debt are classified as other financial liabilities and carried on the balance sheet at amortized cost. Marketable securities sold short are carried FVTPL. As at December 31, 2019, the Company does not have any derivative financial liabilities. Fair value of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Marketable securities are classified as fair value through profit or loss. All financial instruments which are measured at their amortized cost approximate their fair value due to the short term nature of those instruments. 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: 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 38 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 c. Financial instruments (continued) 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. The Company has determined the estimated fair values of its financial instruments based upon appropriate valuation methodologies. The levels of the fair value inputs used in determining estimated fair value of the Company’s financial assets at fair value through profit or loss as at December 31, 2019 and 2018, is shown below. Marketable securities Marketable securities sold short Marketable securities December 31, 2019 Level 1 Level 2 Level 3 Estimated fair values $3,689,304 $ 3,689,304 $23,340 $23,340 $ 3,712,644 $ 3,712,644 - - - - - - December 31, 2018 Level 1 Level 2 Level 3 Estimated fair values $3,946,202 $3,946,202 $3,946,202 $3,946,202 - - - - At December 31, 2019 and 2018 there were no financial assets or liabilities measured and recognized in the statement of financial position at fair value that would be categorized as level 2 and 3 in the fair value hierarchy above. 13 | 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 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 which is most often the purchase price plus any directly attributable expenditures. Investment properties are subsequently measured at fair value, which reflects market conditions at the date of the consolidated statement of financial position. Gains or losses arising from changes in the fair value of investment properties are recognized in the consolidated statement of operations in the year they arise. A key characteristic of an investment property is that it generates cash flows largely independently of the other assets held by an entity. Subsequent expenditure is included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the consolidated statement of operations during the financial period in which they occur. Substantially all of the Company’s income generating properties and properties under development are investment properties. Properties under development are measured at cost. Certain land leases held under an operating lease are classified as investment properties when the definition of an investment property is met. At inception these leases are recognized at the lower of the fair value of the property and the present value of the minimum lease payments. Some properties may be partially occupied by the Company, with the remainder being held for rental income or capital appreciation. If that part of the property occupied by the Company can be sold separately, the Company accounts for the portions separately. The portion that is owner-occupied is accounted for under IAS 16, and the portion that is held for rental income, capital appreciation or both is treated as investment property under IAS 40. When the portions cannot be sold separately, the whole property is treated as investment property only if an insignificant portion is owner-occupied. The Company considers the owner-occupied portion as insignificant when the property is more than 90% held to earn rental income or capital appreciation. In order to determine the percentage of the portions, the Company uses the size of the property measured in square metres. The fair value of investment properties was based on the nature, location and condition of the specific asset. The fair value is calculated at December 31 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. e. Assets held for sale Non-current 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 properties measured under the fair value model and held for sale continue to be measured by the guidelines of IAS 40 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 e. Assets held for sale (continued) 40 – Investment Property. All other assets held for sale are stated at the lower of carrying amounts and fair value less selling costs. An asset that is subsequently reclassified as held and in use, with the exception of investment property measured under the fair value model, is measured at the lower of its recoverable amount and the carrying value that would have been recognized had the asset never been classified as held for sale. f. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. The Company’s specific revenue recognition criteria are as follows: i) Rental revenue The Company has not transferred substantially all of the benefits and risk of ownership of its investment properties, and therefore, the Company accounts for leases with its tenants as operating leases. Rental revenue includes all amounts earned from tenants related to lease agreements including property tax and operating cost recoveries. The Company reports 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 and discounts 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. 15 | 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 h. Property and equipment (continued) Property and equipment is subsequently measured at cost less accumulated depreciation, less any accumulated impairment losses. All repairs and maintenance costs are charged to the consolidated statement of operations during the period in which they occur. Depreciation is recognized in the consolidated statement of operations and is provided on a straight-line basis over the estimated useful life of the assets as follows: Buildings Furniture and fixtures Equipment Straight-line over 40 years Straight-line over 5 to 10 years Straight-line over 1 to 5 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 Other Comprehensive Income (“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 42 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 i. Income taxes (continued) a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable income, it is not accounted for. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where, in the opinion of Management, it is probable that future taxable profit will be available against which the deferred tax asset can be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates, on the date the changes in tax laws and rates have been enacted or substantively enacted. j. Foreign exchange transactions Foreign currency transactions are translated at the rate of exchange in effect on the dates they occur. Gains and losses arising as a result of foreign currency transactions are recognized in the current year consolidated statement of operations. 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, in accumulated other comprehensive income. k. Comprehensive income Comprehensive income consists of net income (loss) and OCI. OCI includes changes in unrealized gains (losses) on the translation of financial statement operations with Mongolian Tögrög functional currency. l. Share capital and deferred share issuance costs Ordinary shares issued by the Company are classified as equity. Costs directly identifiable with the raising of capital will be charged against the related share issue, net of any tax effect. Costs related to shares not yet issued are recorded as deferred financing costs. These costs will be deferred until the issuance of the shares to which the costs relate, at which time the costs 17 | 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 l. Share capital and deferred share issuance costs (continued) will be charged against the related share issuance or charged to operations if the shares are not issued. m. 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. n. 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. o. 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. p. 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. 44 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 p. Provisions and contingent liabilities (continued) 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. q. Marketable Securities The Company presents results from trading marketable securities on both a realized and unrealized basis separately in profit and loss. A realized gain or loss is recorded upon transfer of ownership of a marketable security, calculated as proceeds (net of broker fees) less its cost which is measured on a first-in-first-out (“FIFO”) basis. Unrealized gains and losses are the fair value adjustments to positions still held at reporting dates. Any margin borrowings are offset to marketable securities because the Company has both the legal right and intention to settle these positions on a net basis with the related marketable securities. r. Current Accounting Policy Changes IFRS 16 Leases The Company has adopted the following revised standards, along with any consequential amendments, effective January 1, 2019. 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 inflation-linked measurement 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. includes non-cancellable lease payments (including To prepare for this standard the Company reviewed its existing agreements to determine whether the accounting for any leases would be impacted from adopting IFRS 16. The Company is primarily party to agreements in which it is the lessor, for which the accounting has remained substantially unchanged. The agreements to which the Company is a lessee relate to Mongolian government land leases, however the lease payments are nominal and did not qualify for recognition. There was no impact on the Company’s consolidated financial statements from the adoption of IFRS 16. IFRIC 23 - Uncertainty over Income Tax Treatments New standard to clarify the accounting for uncertainties in income taxes. The interpretation provides guidance and clarifies the application of the recognition and measurement criteria in IAS 12 “Income Taxes” when there is uncertainty over income tax treatments. The interpretation is effective for annual periods beginning on or after January 1, 2019. There was no impact on the Company’s consolidated financial statements from the adoption of IFRIC 23. 19 | 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 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 by dollar value annually. The remaining balance of investment properties was valued internally. 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. This fair value assumes that the Company is in possession of the property’s land and property titles where applicable. Management judges that the Company has the appropriate titles for each of the properties classified as Investment Properties. Properties whereby Management judges that the Company’s titles are at risk, have been impaired to reflect the level of risk estimated by Management.  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 - The Company recognizes marketable securities 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, judgement is required to establish fair values.  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 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 46 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 4 Significant accounting estimates and judgements (continued) and consequently what effect, if any, they could have on the future financial position of the Company. Significant judgements made in the preparation of these consolidated financial statements include the following:  Judgement is required in determining whether an asset meets the criteria for classification as assets held for sale and or as discontinued operations in the consolidated financial statements. Criteria considered by management include the existence of and commitment to a plan to dispose of the assets, the expected selling price of the assets, the probability of the sale being completed within an expected time frame of one year and the period of time any amounts have been classified within assets held for sale. The Company reviews the criteria for assets held for sale each quarter and reclassifies such assets to or from this financial position category as appropriate. On completion of the sale, management exercises judgement as to whether the sale qualifies as a discontinued operation.  As at December 31, 2019 and 2018, Management has made the judgment that none of the Company’s assets meet the criteria to be classified as held for sale. While this is due to a number of factors, a primary reason is that due to the conditions of the Mongolian economy and the lack of liquidity in the market, management was unable to conclude that the sale of any significant size asset could be considered highly probable.  Judgement is required in determining whether the Company’s Investment property and land use rights titles are at risk. As at December 31, 2019 and 2018, Management has made the judgment that Investment Properties whereby the land title has recently expired but is expected to be renewed in the near future should continue to be classified as Investment Properties. Properties whereby Management judges that the Company’s titles are at risk, have been impaired to reflect the level of risk estimated by Management. 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 Total cash 2019 $ 1,475 33,018 13 702,762 2018 $ 1,483 458,787 285,141 737,255 745,411 Cash is not collateralized. The carrying amount of cash approximates fair value. 21 | 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 5 Cash (continued) 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 2019 $ 2,154 31,600 700,609 2,892 2018 $ 2,139 423,087 283,002 37,183 737,255 745,411 The unrated balance relates to one private bank in Barbados (2018 – one), one brokerage company in Canada (2018 – one) and one brokerage company in the United States (2018 – one). 6 Marketable Securities Common shares of public companies: Fair value - beginning of the year Net purchases / (sales) Securities sold short Foreign exchange gain (loss) Unrealized gain (loss) Realized gain (loss) Change in margin borrowings Fair value - end of the year Cash transferred out of brokerage account during the year 7 Other assets Accounts receivable less: Allowance for doubtful accounts Prepaid expenses 2019 $ 2018 $ 3,946,202 (238,417) 23,340 228,761 454,824 (358,826) (366,580) 2,816,624 1,109,237 - (147,335) (608,297) 995,716 (219,743) 3,689,304 3,946,202 605,000 - 2019 $ 1,342,624 - 40,403 2018 $ 92,280 (13,806) 39,082 1,383,027 117,556 The increase in accounts receivable is attributed to a $190,928 receivable to be paid in monthly instalments during the first 8 months of the year, one investment property to be transferred to the Company with a value of $143,196 for the sale of a property and proceeds of $954,640 for the sale of an additional property which was received subsequent to year end. 48 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 8 Investment properties Balance - beginning of year Additions Acquisitions Transfer from other asset Disposals Fair value adjustment Foreign exchange adjustments 2019 $ 2018 $ 24,415,860 22,887,521 48,213 - (2,524,305) (1,347,662) (1,760,121) - 295,960 (509,363) 1,892,577 (150,835) Balance – end of year 18,831,985 24,415,860 During the year ended December 31, 2019, the Company sold three investment properties for proceeds with a value of $2,221,346 resulting in a net loss of $302,959 on these transactions. One of these properties was disposed of through its interest in its Endymion LLC (note 21). The proceeds received consisted of $2,029,937 in cash, and $191,409 in investment properties, of which $1,145,568 and $143,196 respectively are classified within accounts receivable at December 31, 2019 (note 7). In comparison, during the year ended December 31, 2018, three investment properties were sold for cash consideration of $547,955 resulting in net gain of $38,592 on these transactions. Investment properties by major category are as follows: Office Retail Land and redevelopment sites 2019 $ 1,033,875 12,307,380 5,490,730 2018 $ 2,103,862 14,160,720 8,151,278 18,831,985 24,415,860 Investment properties with an aggregate fair value of $13,213,176 (2018 - $14,087,466) were valued by an external independent valuation professional who is deemed to be a 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 were valued internally. 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. 23 | 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 8 Investment properties (continued) 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 redevelopment. 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. In this agreement, the Company had an obligation to complete the construction of a new building by the end of fiscal 2017 and the agreement was not extended. A liability of $131,438 is currently included in the Company’s trade payables and accrued liabilities (note 10) to reflect this liability. In addition, the Company has recognized an unrealized fair value loss of $1,436,256 (2018-$1,711,065) in excess of the fair value adjustment calculated using the valuation approaches described. This adjustment is Management’s estimate of the markets perception of the risk related to this agreement, and is included within the unrealized gain (loss) on fair value adjustment on Investment properties within profit and loss. 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 2019 Weighted- average Capitalization rate 11.25% 9.5% 9.6% Maximum Minimum 2018 Weighted- average Capitalization rate 11.0% 9.5% 10.0% The following sensitivity table outlines the impact of a 0.25% change in the weighted average capitalization rate on investment properties at December 31, 2019: Change to fair value if capitalization rate increased 0.25% Change to fair value if capitalization rate decreases 0.25% Commercial property (59,733) 56,697 Additional valuation assumptions include the rental revenue per square meter, grade quality of the property and comparable market data. 50 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) Investment properties of $4,308,769 (2018 - $nil) have no rental revenue associated with them at December 31, 2019. Investment properties include land use rights held under operating leases with an aggregate fair value of $5,490,730 (2018 – $8,151,278) at December 31, 2019. Certain investment properties held by the Company are leased out (the Company is the lessor) under operating leases. The future minimum lease payments under non-cancellable leases are as follows: Less than 1 year Between 1 and 5 years Beyond 5 years 2019 $ 772,222 299,333 - 2018 $ 1,242,141 115,976 - 1,071,555 1,358,117 Direct operating expenses arising from investment properties that generated rental income during the year was $1,050,283 (2018 – $860,376). Direct operating expenses arising from investment properties that did not generate rental income during the year was $4,819 (2018 - $nil). The Company’s operating leases, in which the Company is the lessor, are structured such that the weighted average length of the leases as at December 31, 2019 was 8.1 months (7.6 months as at December 2018), calculated as a percentage of monthly revenues. 25 | 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 9 Property and equipment Furniture and fixtures $ Equipment $ Buildings $ 73,702 - - - (2,758) 135,758 1,540 (4,994) - (3,860) 2,110,307 - - (158,655) (151,006) Cost At January 1 Additions Disposals Impairment Foreign exchange adjustment 2019 Total $ 2,319,767 1,540 (4,994) (158,655) (157,624) At December 31 70,944 128,444 1,800,646 2,000,034 Furniture and fixtures $ Equipment $ Buildings $ 2019 Total $ Accumulated depreciation At January 1 Depreciation Disposals Foreign exchange adjustment 38,507 7,000 - (460) 101,203 13,808 (4,994) (2,258) 387,263 52,486 - (28,171) 526,973 73,294 (4,994) (30,889) At December 31 45,047 107,759 411,578 564,384 Net book value at December 31 25,897 20,685 1,389,068 1,435,650 During the year ended December 31, 2019 the Company recognized an impairment on its corporate office building of $158,655 (2018 – reversal of $198,520) which was implied by the same valuation methodology described in note 8. 52 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 (continued) Furniture and fixtures $ Equipment $ Buildings $ 2018 Total $ Cost At January 1 Additions Disposals Reversal of impairment Foreign exchange adjustment 75,227 - (1,045) - (480) 147,208 6,076 (16,567) 1,907,537 15,902 - 2,129,972 21,978 (17,612) - 198,520 198,520 (959) (11,652) (13,091) At December 31 73,702 135,758 2,110,307 2,319,767 Furniture and fixtures $ Equipment $ Buildings $ Accumulated depreciation At January 1 Depreciation Disposals Foreign exchange adjustment 32,144 7,268 (534) (371) 107,121 14,406 (16,567) (3,757) 335,811 55,687 - (4,235) 2018 Total $ 475,076 77,361 (17,101) (8,363) At December 31 38,507 101,203 387,263 526,973 Net book value at December 31 35,195 34,555 1,723,044 1,792,794 10 Trade payables and accrued liabilities Trade and accrued payables Property commitment (note 8) Security deposit Unearned revenue 2019 $ 506,351 131,438 107,023 22,920 2018 $ 231,167 141,887 129,581 40,278 767,732 542,913 The carrying amounts above reasonably approximate fair value at the consolidated statement of financial position date. All trade and other payables are current. 27 | 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 11 Short term and long term debt Current Non-current 2019 $ - - - 2018 $ 680,902 - 680,902 In December 2017, the Company obtained a two year USD $1,000,000 credit facility through a commercial bank in Mongolia. The loan was secured by various property assets and guarantees from the Company’s Mongolian subsidiaries. The Company made an initial draw of USD $500,000 in December 31, 2017 and was fully repaid in December 2019, along with all interest owed (note 18). 12 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: Net income (loss) before income taxes Combined statutory tax rate 2019 $ 2018 $ (3,315,654) 26.5% 1,815,069 26.5% Tax payable (recoverable) based on statutory tax rate Effect of: Permanent differences (879,000) 481,000 (99,000) 263,000 Change in statutory, foreign tax, foreign exchange rates and other 527,792 (436,274) Adjustment to prior years provision versus statutory tax returns and expiry of non-capital losses Change in unrecognised deductible tax differences Total income tax expense (recovery) Provision for (recovery of) income taxes Current Deferred (139,000) 524,000 (65,208) (55,000) 5,000 257,726 90,398 (155,606) 22,659 235,067 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. 54 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 12 Income taxes (continued) 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. The significant components of the Company’s deferred tax assets and liabilities are as follows: Deferred Tax Assets (liabilities) Property and equipment Investment properties Allowable capital losses Non-capital losses available for future period 2019 $ 51,000 (581,887) 98,000 3,036,000 2,603,113 2018 $ 51,000 (737,493) 98,000 2,512,000 1,923,507 Unrecognized deferred tax assets (3,185,000) (2,661,000) Net deferred tax liability (581,887) (737,493) 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 2019 Expiry Date Range 2018 Expiry Date Range Property and equipment Allowable capital losses Non-capital losses available for future period 194,000 No expiry date 371,000 No expiry date 194,000 No expiry date 371,000 No expiry date 11,458,000 2030 to 2039 9,480,000 2030 to 2038 Tax attributes are subject to review, and potential adjustment by tax authorities. 13 Share capital and contributed surplus Common shares The Company is authorized to issue an unlimited number of common and preferred shares. The issued and outstanding common shares are as follows: Balance, December 31, 2017 Shares re-purchased Treasury stock cancelled Balance, December 31, 2018 Shares re-purchased Treasury stock cancelled Number of shares 33,696,599 - (452,600) 33,243,999 Amount $ 53,751,473 (126,243) - 53,625,230 - (476,500) (120,295) - Balance, December 31, 2019 32,767,499 53,504,935 29 | 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 13 Share capital and contributed surplus (continued) As at December 31, 2019, the Company held 35,000 (2018 -107,000) shares in treasury to be cancelled during the first quarter of 2020. Stock options 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, 2019, the Company had 1,856,750 (2018 – 221,400) 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: Weighted average exercise price $ December 31, 2018 Weighted average exercise price $ December 31, 2019 3,103,000 (1,623,000) - - - (60,000) 1,420,000 1,420,000 Balance, beginning of the year Options expired Options cancelled Options granted Options exercised Options forfeited Balance, end of the year Exercisable Weighted remaining average life (years) 1.13 1.49 - - - 0.72 0.73 0.73 3,103,000 - - - - - 3,103,000 3,103,000 - 0.26 - 1.13 - - - - - 1.13 1.13 0.77 56 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 13 Share capital and contributed surplus (continued) Options outstanding December 31, 2019 Number outstanding Number exercisable Weighted average remaining life (years) Weighted average exercise price $ 855,000* 565,000* 855,000 565,000 1,420,000 1,420,000 0.25 0.27 0.26 0.72 0.74 0.73 *These options have expired subsequent to December 31, 2019. Options outstanding December 31, 2018 Number outstanding Number exercisable Weighted average remaining life (years) Weighted average exercise price $ 1,043,000 300,000 915,000 565,000 280,000 1,043,000 300,000 915,000 565,000 280,000 3,103,000 3,103,000 0.17 0.94 1.25 1.27 0.21 0.77 1.90 1.09 0.72 0.74 0.38 1.13 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 2019 $ 32,989,169 - 2018 $ 33,352,911 - Weighted average number of shares - diluted 32,989,169 33,352,911 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. 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. 31 | 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 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. There was no change in the Company’s strategy or objective in managing capital since the prior year. There are no externally imposed capital requirements at year end. 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. Current assets Current liabilities Working capital 2019 $ 2018 $ 5,809,586 (825,506) 4,809,169 (1,233,025) 4,984,080 3,576,144 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, 2019, the Company’s working capital was $4,984,080 (2018 - $3,576,144). 15 Financial risk management The Board of Directors ensures that management has put appropriate risk management processes in place. Through the Audit Committee, the Board oversees such risk management procedures and controls. Management provides updates to the Audit Committee on a quarterly basis with respect to risk management. Catastrophe risk Effective March 27, 2020, the Company obtained insurance on buildings and all permanent fixtures totalling approximately $11,700,000 (March 21, 2019 - $13,500,000). 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. 58 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 15 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 Marketable Securities 2019 $ 737,255 1,342,624 - 3,689,304 2018 $ 745,411 92,280 (13,806) 3,946,202 Maximum credit risk exposure on the consolidated statement of financial position 5,769,183 4,770,087 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 5). 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 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, 2019, 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 marketable securities as at December 31, 2019. 33 | 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 15 Financial risk management (continued) The following table summarizes the undiscounted cash flows of financial assets and liabilities by contractual or expected maturity: Financial Assets Cash Accounts receivables less: Allowance for doubtful accounts One year or less $ 737,255 1,342,624 - 2,079,879 Financial Liabilities Trade payables and accrued liabilities Securities sold short 767,732 23,340 791,072 December 31, 2019 One to two years $ No maturity date $ - - - - - - - - - - - - - - Financial Assets Cash Accounts receivables Less:Allowance for doubtful accounts Financial Liabilities Trade payables and accrued liabilities Bank Loan One year or less $ December 31, 2018 One to two years $ No maturity date $ 745,411 92,280 (13,806) 823,885 542,913 680,902 1,223,815 - - - - - - - - - - - - - - 60 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 15 Financial risk management (continued) 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, 2019 and 2018. 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 $2,614,644 (2018 - $2,460,080). 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. The approximate impact of a fluctuation of 10% in the price of the marketable securities would impact the value of the marketable securities by $425,226. 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. 35 | 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 15 Financial risk management (continued) The Company’s management believes that its interpretation of the relevant legislation is appropriate and the Company’s tax positions will be sustained. 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. 16 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 Director fees 2019 $ 481,213 40,000 521,213 2018 $ 340,439 40,000 380,439 As at December 31, 2019, amounts due to related parties totaled approximately $48,118 comprised of accrued directors fees and fees owed to management (2018 - $57,000) were included in trade payables and accrued liabilities. An amount of $20,867 is owed to the Company by a company controlled by the CEO. 17 Commitments and contingencies From time to time and in the normal course of business, claims against the Company may be received. On the basis of Management’s assessments and professional legal advice, Management is of the opinion that no material losses will be incurred and no provision or disclosure has been made in these consolidated financial statements. The Company 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 redevelopment. 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. In this agreement, the Company had an obligation to complete the construction of a new building by the end of fiscal 2017 and the agreement was not extended. The Company has received a demand letter from the owner of the apartment on April 24, 2019 in an amount of approximately $280,000 for lost rental income since 2013, along with approximately $4,000 per month until the matter is settled. Management believes that the majority of the claim is without merit and will not be successful, and therefore has not recongized a provision with regards to this claim. However, $131,438 is currently included in the Company’s trade payables and accrued liabilities (note 10) to reflect the contractual liability to provide an apartment. In addition, the Company has recognized an unrealized fair value loss of $1,436,256 (2018-$1,711,065) in the carrying value of the related investment property, representing management’s estimate of the markets perception of the risk related to this agreement (note 8). 62 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 17 Commitments and contingencies (continued) 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. 18 Supplementary cash flow information Changes in non-working capital arising from Other assets Trade payables and accrued liabilities Income tax payable 2019 $ (25,230) 252,461 78,355 2018 $ 32,644 38,575 (495) Changes in non-cash working capital from operating activities 305,586 70,724 Consideration in the form of cash and investment properties for sale of investment properties were classified as other assets (note 7) at December 31, 2019 and received subsequent to year end totalling $1,288,764. Investment properties received as part of the consideration for the sale of investment properties was $48,213. During the year ended December 31, 2018, the Company reclassified $295,960 from other assets relating to a deposit on a sale of an investment property which completed during the year ended December 31, 2018. During the year ended December 31, 2018, long term debt of $629,448 was reclassified to short term debt. Income tax paid during the year was $32,637 (2018 - $34,656). Interest paid during the year was $82,776 (2018 - $84,620). 37 | 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 19 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 Unrealized loss on investment properties Impairment of PPE Unrealized mark to market gain Other expenses Depreciation Net investment income loss on disposal of investment property Other revenue Foreign currency gain (loss) Realized loss on marketable securities Finance cost Reclassification of other comprehensive income on disposal of subsidiary accumulated Investment Property $ 1,287,353 (1,055,102) (1,347,662) (158,655) - (156,737) (73,294) 5,489 (302,959) 156,433 (10,601) - (82,775) Corporate $ - - - - 454,824 (1,067,158) - 128 - 3 218,796 (358,826) (47) 2019 Total $ 1,287,353 (1,055,102) (1,347,662) (158,655) 454,824 (1,223,895) (73,294) 5,617 (302,959) 156,436 208,195 (358,826) (82,822) (824,864) - (824,864) Net income (loss) before income taxes (2,563,374) (752,280) (3,315,654) Investment Property $ Corporate $ 1,384,840 (860,376) 1,892,577 198,520 - (134,823) (77,361) 21,741 38,592 48,217 - (84,620) (56,185) - - - - (608,297) (813,973) - 106 - - 995,716 - (129,605) 2018 Total $ 1,384,840 (860,376) 1,892,577 198,520 (608,297) (948,796) (77,361) 21,847 38,592 48,217 995,716 (84,620) (185,790) Rental income Property operating expenses Unrealized gain on investment properties Reversal of Impairment of PPE Unrealized mark to market loss Other expenses Depreciation Net investment income Gain on disposal of investment property Other revenue Realized gain on marketable securities Finance cost Foreign currency loss Net income (loss) before income taxes 2,371,122 (556,053) 1,815,069 64 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 19 Segment information (continued) Balance as of December 31, 2018 Total assets Property and equipment Investment properties Expenditures Property and equipment Investment properties Investment Property $ 26,608,077 1,792,794 24,415,860 21,978 - Corporate $ Total $ 4,409,746 - - 31,017,823 1,792,794 24,415,860 - - 21,978 - Total liabilities 1,774,396 196,122 1,970,518 Balance as of December 31, 2019 Total assets Property and equipment Investment properties Expenditures Property and equipment Investment properties Investment Property $ 22,329,807 1,435,650 18,831,985 1,540 48,213 Corporate $ Total $ 3,747,414 - - 26,077,221 1,435,650 18,831,985 - - 1,540 48,213 Total liabilities 981,946 425,447 1,407,393 Trade payables and accrued liabilities Revenue Property and equipment Investment property 2019 $ 2018 $ 2019 $ 2018 $ 2019 $ 2018 $ 2019 $ 2018 $ Canada Mongolia 402,107 365,625 196,122 346,791 - 1,140,830 - 1,471,649 - 1,435,650 - 1,792,794 - 18,831,985 24,415,860 - 767,732 542,193 1,140,830 1,471,649 1,435,650 1,792,794 18,831,985 24,415,860 39 | P a g e 65 Mongolia Growth Group Ltd | Mongolia Growth Group Ltd. Notes to the Consolidated Financial Statements For the year ended December 31 20 Other expenses Investor relations Investment research expense Repairs and maintenance Office Professional fees Travel Advertising Land and property tax Insurance Utilities Allowance for doubtful tax receivables Other 21 Disposal of subsidiary 2019 $ 25,808 53,194 66,858 70,633 888,056 51,626 22,832 115,250 65,889 156,489 (13,807) 82,317 2018 $ 47,809 - 55,674 92,585 616,346 72,041 8,248 114,352 54,988 136,080 (35,642) 102,803 1,585,145 1,265,284 On December 26th, 2019, the Company disposed of its interest in its Endymion LLC subsidiary as a result of the sale of one of its land packages. The Company held 100% of the shares of Endymion LLC where the only assets and liabilities were related to the property. In connection with the sale, the Company received consideration of $1,288,764 compared to net assets of $1,502,981 resulting in a loss of $214,217 classified within loss on disposal of investment property in profit and loss. Endymion LLC had $824,864 other comprehensive income and it was reclassified to profit and loss. 22 Subsequent events  Since January 1, 2020, the Company has repurchased 334,000 of its shares at an average price of $0.22/share and cancelled 369,000 shares.  The Company sold 2 properties for proceeds of approximately $413,000 and a net gain of $nil  Beginning in February of 2020, the Government of Mongolia undertook extra-ordinary actions in order to limit the spread of COVID-19 or other COVID-19 related impacts. These actions included closing borders, closing schools, reducing gatherings and drastic limitations on business operations. As long-term investors in Mongolia, the Corporation welcomes these actions that keep the people of Mongolia safe from COVID-19; however it is anticipated that these actions will lead to a severe economic crisis. Since the initiation of these actions, the Company has experienced a material reduction in rental revenues received. It is reasonable to expect there could be a material negative impact on the fair values of investment properties and/or marketable securities, however at this time the potential effect cannot be quantified. At this time, there is no way to know the ultimate impact of these extra-ordinary actions upon the economy or the Company. 66 40 | P a g e | Mongolia Growth Group Ltd Nick Cousyn Independent Director the U.S. with extensive experience 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 in relationship management and trading which spanned equities, fixed income, derivatives and distressed debt. While based in the US, some of the firms he worked for included Deutsche Bank, Banque Populaire, Wells Fargo and First Horizon National Bank. During his tenure in Mongolia, Mr. Cousyn has served as Chief Communications Officer for Petro Matad and Chief Operating Officer and head of research for BDSec (MO:BDS), Mongolia’s largest broker and investment bank. Mr. Cousyn also served as Co-Chair of the Business Council of Mongolia Capital Market Working Group and was 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 and is the co-founder of Terra Explorers, a London registered company focused on Oil Exploration and Production in Mongolia. 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. 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, Radicle Group Inc, Greenfield Carbon Offsetters Inc., and on the advisory board of AgFunder. Board of Directors Harris Kupperman CEO and Chairman of Mongolia Growth Group Ltd Mr. Kupperman is a co-founder of Mongolia Growth Group and has been the Executive Chairman of the Corporation since March 2014. Mr. Kupperman was the President and CEO of the Corporation from February 2011 to March 2014 and returned as CEO in December 2014. Mr. Kupperman publishes AdventuresInCapitalism. com; a site dedicated to uncovering unique opportunities around the world. He is currently the President of Praetorian Capital Fund, a small cap, event-driven hedge fund based in Miami Beach. 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. Jim 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 2016. He is also an independent director of other Mongolian-based entities including Golomt Bank, Mandal Insurance and Mongolian Mutual Finance Group. Mr.Dwyer received a BBA from the University of Notre Dame and an MBA from Columbia Graduate School of Business (Columbia University). 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 issuers on the TSX Venture Exchange & the Canadian Securities Exchange. 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 67 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 68 info@mongoliagrowthgroup.com | www.mongoliagrowthgroup.com | Mongolia Growth Group Ltd

Continue reading text version or see original annual report in PDF format above