KGIC Inc. (formerly Loyalist Group Limited) CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Transcription

1 (formerly Loyalist Group Limited) CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 UNAUDITED NOTICE TO READER The accompanying condensed consolidated interim unaudited financial statements of the Company have been prepared by and are the responsibility of the Company s management. The Company s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor.

2 (formerly Loyalist Group Limited) CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS UNAUDITED INDEX PAGE Financial Statements Condensed Consolidated Interim Balance Sheets 1 Condensed Consolidated Interim Statements of Earnings (Loss) and Comprehensive Earnings (Loss) 2 Condensed Consolidated Interim Statements of Changes in Equity 3 Condensed Consolidated Interim Statements of Cash Flows 4 Notes to the Condensed Consolidated Interim Financial Statements 5-41

3 CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS AS AT September 30, December 31, (Restated- Note 29) ASSETS CURRENT Cash and cash equivalents $ 4,068,475 $ 1,038,570 Short-term investments - 467,092 Inventory 273, ,282 Trade and other receivables (Note 7) 8,649,093 12,695,702 Prepaid expenses (Note 8) 5,553,893 7,087,482 Short-term loans receivable (Note 23) - 342,157 18,545,397 21,872,285 NON-CURRENT Non-current investments - 79,650 Capital assets (Note 9) 2,783,705 5,087,251 Rent deposits 542,043 2,257,617 Intangible assets (Note 10) 10,373,197 13,174,649 Goodwill (Note 11) 6,184,243 12,675,396 Unallocated purchase price allocation (Notes 4, 5 and 6) 2,892,412 6,866,317 Assets classified as held for sale (Note 6) 5,351,069-28,126,669 40,140,880 $ 46,672,066 $ 62,013,165 LIABILITIES CURRENT Lines of credit (Note 12) $ - $ 318,600 Bank debt (Note 12) 8,900,000 7,420,329 Trade and other payables 4,832,129 6,579,789 Optimization Plan (Note 22) 999,253 - Current taxes payable 458, ,096 Loan payable (Note 23) 711, ,756 Deferred revenue (Note 8) 17,109,100 17,985,506 Current portion of lease inducement 83,995 91,136 33,093,829 33,683,212 NON-CURRENT Convertible debenture (Note 13) 4,110,644 3,923,712 Long-term debt (Note 12) - 2,655,000 Provision for severance benefits - 1,020,291 Long-term portion of lease inducement 262, ,177 Preferred shares (Note 14) 7,261,613 - Liabilities classified as held for sale (Note 6) 7,409,481-52,137,932 41,605,392 EQUITY Share capital (Note 15) 46,313,752 37,017,224 Equity component of convertible debenture (Note 13) 1,113,449 1,113,449 Share-based payments reserve (Note 16) 813, ,316 Warrants reserve (Note 17) 1,044, ,645 Contributed surplus 151, ,031 Retained earnings (Deficit) (54,927,973) (18,718,933) Accumulated other comprehensive income (loss) 112,278 (71,165) (5,380,011) 20,495,567 Non-controlling interest (85,855) (87,794) (5,465,866) 20,407,773 $ 46,672,066 $ 62,013,165 Going concern (Note 1) Subsequent events (Note 26) Commitments and contingencies (Note 24) Approved on behalf of the Board: Shawn Klerer (Signed) Paul Haber (Signed) Chief Executive Officer & Director Director 1

4 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE EARNINGS (LOSS) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2015 and MONTHS ENDED 9 MONTHS ENDED September September 30, , 2015 September 30, 2015 September 30, 2014 REVENUE Tuition fees $ 10,697,813 $ 15,630,501 $ 26,424,556 $ 43,405,481 Other income (Note 18) 2,685,839 3,995,606 7,907,703 9,120,451 13,383,652 19,626,107 34,332,259 52,525,932 DIRECT COSTS (Note 19) 10,755,540 11,251,838 28,457,047 30,279,987 2,628,112 8,374,269 5,875,212 22,245,945 OTHER EXPENSES General and administrative (Note 20) 5,718,313 5,857,334 19,265,616 16,671,442 Amortization of capital assets and intangible assets 38,543 40, , ,260 5,756,856 5,898,271 19,383,125 16,782,702 INCOME (LOSS) BEFORE UNDERNOTED ITEMS AND INCOME TAXES (3,128,744) 2,475,998 (13,507,913) 5,463,243 Foreign exchange gain (loss) (191) (8,127) 2,029 (8,467) Interest and accretion (Notes 12, 13 and 14) (469,533) (156,127) (1,045,249) (546,942) Impairment of goodwill and unallocated purchase price (Notes 4,5, and 11) - - (17,613,767) - Impairment of capital assets and intangible assets (Notes 9 and 10) (191,157) - (3,440,142) - Share-based compensation (Note 16) (82,440) - (147,879) - Acquisition and restructuring costs (Note 21) (24,029) (282,370) (449,744) (605,685) Optimization Plan costs (Note 22) - - (1,000,000) - INCOME (LOSS) BEFORE INCOME TAXES (3,896,094) 2,029,374 (37,202,665) 4,302,149 INCOME TAX RECOVERY (EXPENSE) - (144,128) - 484,627 INCOME (LOSS) FROM CONTINUING OPERATIONS (3,896,094) 1,885,246 (37,202,665) 4,786,776 INCOME (LOSS) FROM DISCONTINUED OPERATIONS (644,411) - (1,896,851) - Recovery from discontinued operations (Note 6) 2,892,412-2,892,412 - INCOME (LOSS) AFTER INCOME TAXES $ (1,648,093) $ 1,885,246 $ (36,207,104) $ 4,786,776 Attributable to equity holders of the Company $ (1,646,034) $ 1,880,442 $ (36,205,165) $ 4,761,471 Non-controlling interest (2,059) 4,804 (1,939) 25,305 NET INCOME (LOSS) $ (1,648,093) $ 1,885,246 $ (36,207,104) $ 4,786,776 OTHER COMPREHENSIVE INCOME (LOSS) Exchange difference on translating foreign operations (149,241) - 183,443 - COMPREHENSIVE INCOME (LOSS) $ (1,797,334) $ 1,885,246 $ (36,023,661) $ 4,786,776 Weighted average shares outstanding Basic 179,169, ,814, ,340, ,109,401 Weighted average shares outstanding Diluted 179,169, ,032, ,340, ,661,457 Earnings (loss) per share attributable to equity holders of the Company Basic continuing operations $ (0.022) $ $ (0.216) $ Diluted continuing operations $ (0.022) $ $ (0.216) $ Basic discontinued operations $ $ - $ $ - Diluted discontinued operations $ $ - $ $ - Basic continuing and discontinued operations $ (0.009) $ $ (0.210) $ Diluted continuing and discontinued operations $ (0.009) $ $ (0.210) $

5 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 Equity Accumulated Component Share Other of Based Retained Compre- Non- Share Convertible Payments Warrants Contributed Earnings hensive Controlling Total Capital Debenture Reserve Reserve Surplus (Deficit) Income (loss) Interest Equity Balance at December 31, 2014 $ 37,017,224 $ 1,113,449 $ 665,316 $ 338,645 $ 151,031 $ (18,718,933) $ (71,165) $ (87,794) $ 20,407,773 Comprehensive income (loss) for the period (36,209,040) 183,443 1,939 (36,023,658) Share-based compensation (Note 16) , ,879 Warrants issued (Note 17) , ,612 Shares issued (Note 15) 9,296, ,296,528 Balance at September 30, 2015 $ 46,313,752 $ 1,113,449 $ 813,195 $ 1,044,257 $ 151,031 $ (54,927,973) $ 112,278 $ (85,855) $ (5,465,866) Balance at December 31, 2013 $ 24,329,804 $ 1,113,449 $ 262,898 $ 261,829 $ - $ 806,220 $ - $ (92,368) $ 26,681,832 Comprehensive income (loss) for the period ,761,471-25,305 4,786,776 Share-based compensation (Note 16) 25,935 - (10,935) ,000 Warrants issued (Note 17) , ,331 Shares issued (Note 15) 10,543, ,543,274 Balance at September 30, 2014 $ 34,899,013 $ 1,113,449 $ 251,963 $ 435,160 $ - $ 5,567,691 $ - $ (67,063) $ 42,200,213 3

6 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND MONTHS ENDED 9 MONTHS ENDED September September 30, , 2015 September 30, 2015 September 30, 2014 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income (loss) $ (1,648,093) $ 1,885,246 $ (36,207,104) $ 4,786,776 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 557, ,367 1,672,240 1,112,593 Accretion (Note 13 and 14) 98,783 55, , ,500 Provision for doubtful accounts (Note 7) 35, , , ,586 Share-based payments (Note 15) 82, ,879 - Impairment (recovery) of goodwill and unallocated purchase price (Notes 4, 5 and 11) (2,892,412) - 14,721,355 - Impairment of capital assets and intangible assets (Notes 9 and 10) 191,157-3,440,142 - Lease inducement (22,651) (11,235) (67,953) (140,092) Rent deposits 127,875 (95,743) 39,907 (79,781) Severance provision 31, ,469 - Exchange rate change (149,241) - 183,443 - Deferred tax expense (recovery) (628,755) Changes in working capital balances (Note 25) (1,037,772) (4,336,719) 4,122,100 (4,455,743) (4,624,730) (1,867,472) (10,995,094) 1,144,084 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Payments for capital assets and intangible assets (Note 9 and 10) (119,414) (848,458) (1,438,632) (3,231,540) Proceeds from sale of short-term investments 193, ,197 - Acquisition of subsidiaries, net of cash acquired - - (3,744,105) (9,378,276) 74,241 (848,458) (4,754,540) (12,609,816) CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Lines of credit and bank debt (Note 12) 439, ,000 (1,350,922) 270,000 Loan payable(note 23) (18,500) - (118,500) - Long-term debt (Note 12) 35,000-4,067,500 - Issuance of preferred shares, net of share issuance costs (Note 14) 7,682,999-7,682,999 - Issuance of common shares, net of share issuance costs (Note 15) - - 8,795,346 8,954,334 8,138, ,000 19,076,423 9,224,334 NET CHANGE 3,588,367 (2,305,930) 3,326,789 (2,241,398) Cash and cash equivalents in assets held for sale (296,884) - (296,884) - CASH AND CASH EQUIVALENTS, beginning of period 776,992 2,537,778 1,038,570 2,473,246 CASH AND CASH EQUIVALENTS, end of period $ 4,068,475 $ 231,848 $ 4,068,475 $ 231,848 4

7 1. General information and going concern uncertainty (a) KGIC Inc. (previously, Loyalist Group Limited, the "Company") was incorporated as Alberta Inc. by Certificate of Incorporation issued pursuant to the provisions of the Business Corporations Act (Alberta) on September 20, The Company is listed on the TSXV. The Company's head office is 1255 Bay Street, Suite 800, Toronto, ON M5R 2A9. The financial statements were authorized for issue by the Board of Directors on November 19, (b) The Company is in breach of several covenants relating to its revolving operating credit facility and term loan acquisition credit facility as disclosed in Note 12. On June 26, 2015, the Company entered into a Forbearance Agreement with the lender that requires the repayment of the term loan acquisition facility of approximately $8,900,000 by September 30, On August 11, 2015, the Company entered into an amendment of the Forbearance Agreement extending the repayment date to June 30, 2016 based on achieving certain conditions. The credit facility repayment date in the Amendment Agreement will be further extended to September 30, 2016 if Montrusco exercises their common share purchase warrants prior to June 30, 2016 and at least $4 million of the cash proceeds from the warrant exercise is used by the Company to reduce the amount owing under the credit facility (Note 14). On October 1, 2015, the lender accepted a revised cash flow forecast which will apply during the forbearance period, along with a relaxation of certain covenants from September 14, 2015 to November 30, (c) These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ( IFRS ) on a going concern basis which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company has experienced operating losses and cash outflows from operations in the third quarter of 2015 and current liabilities exceed current assets by $14,548,432 as of September 30, There is uncertainty of the Company s ability to fund operations, raise capital or alternate debt financing or remedy its breach with its existing lender, which casts significant doubt as to the Company s ability to continue as a going concern. These consolidated financial statements do not reflect any adjustments to the carrying value of the assets and liabilities which may be required should the Company be unable to continue as a going concern. Such adjustments could be material. 5

8 2. Significant accounting policies Basis of preparation Basis of consolidation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of financial statements as issued by International Accounting Standards Board ("lasb"), including IAS 34, Interim Financial Reporting. These statements should be read in conjunction with the annual financial statements and related notes for the year ended December 31, 2014, which have been prepared in accordance with IFRS as issued by the IASB The consolidated financial statements include the accounts of the Company and its subsidiaries, PGIC Toronto Inc. ("PGIC Toronto"), Pan Pacific Career College Inc (formerly Universal College of Language Inc.) ("UCL"), PGIC Vancouver Studies Inc. ("PGIC"), PGIC Career College Inc. ("PGCC"), Western Town College Ltd. ("WTC"), B.C. Ltd. ("WTBC Vancouver"), Western Town Business College Ltd. ("WTBC Toronto"), Cornerstone Academic College of ESL, Teacher Training and Test Preparation Inc. ( CAC ), in Toronto, Ontario, Victoria International Academy ( VIA ) and Victoria International Academy of Teacher Training ( VIATT ) in British Columbia, Loyalist Group Korea ("LOYKOR"), Pan Pacific College Inc ( PPC ), Urban International School ( UIS ), MTI Community College Ltd ( MTi ), KGIC Language College (2010) Corp ( KGIC ), KGIC Business College (2010) Corp ( KGIBC Study English in Canada Inc. ( SEC Toronto ), Study English in Canada (Vancouver) Inc. ( SEC Vancouver ), Upper Career College of Business & Technology Inc. ( UCCBT Toronto ) and Upper Career College of Business & Technology (Vancouver) Inc. ( UCCBT Vancouver ), Uhak.com Co.,LTD. ( Uhak ) and Kim Okran International Studies Centre Inc. ( Kim Okran ). All of the Company s subsidiaries are wholly-owned except for PGIC Toronto in which the Company has 96.2% of ownership. The consolidated financial statements incorporate the financial statements of the Company and entities over which it has control. Control is achieved when it is exposed to, or has the rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its powers over the investee. All significant intercompany transactions and balances are eliminated on consolidation. Total comprehensive income (loss) of subsidiaries is attributed to the shareholders of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. 6

9 2. Significant accounting policies (continued) Use of judgements and estimates The preparation of financial statements in conformity with IFRS requires management to make estimates, assumptions and judgements that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates included in these consolidated financial statements are valuation of warrants, recognition of deferred tax assets and liabilities, purchase price allocation, the allocation of equity and liability components of convertible debt, share-based compensation, accounts receivable written off during the year due to doubtful collectability, useful lives of tangible and intangible assets and the assumptions used in impairment analyses. The most significant judgements are the valuation methodologies applied for warrants, options and preferred shares, impairment assessments for tangible and intangible assets, determination of functional currency, the recording of deferred tax assets and liabilities and the allocation of purchase price. Actual results could differ from management's best estimates as additional information becomes available in the future. Business combinations Business combinations are accounted for using the acquisition method. The consideration for the acquisition is measured at the fair values of the assets transferred, the liabilities assumed and the equity interests issued at the acquisition date. The excess of the consideration over the fair value of the identifiable net assets acquired is recorded as goodwill. Transaction costs that are incurred in connection with a business combination are expensed as incurred. Any costs associated with the issuance of equity securities are recorded as a reduction of share capital. On an acquisition-by-acquisition basis, any non-controlling interest is measured either at fair value of the non-controlling interest or at the fair value of the proportionate share of the net assets acquired. Any contingent consideration such as working capital adjustments and escrowed shares is measured at the fair value on acquisition date and is included as part of the consideration transferred. The fair value of the contingent consideration is re-measured at each reporting date with the corresponding gain or loss being recognized in net income or loss. 7

10 2. Significant accounting policies (continued) Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are offset when there is a legally enforceable right to offset the amounts and the Company intends to settle on a net basis. The Company's financial assets and financial liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics, and the Company's designation of such instruments. Classification choices for financial assets include: - Fair value through profit or loss ("FVTPL"): measured at fair value with changes in fair value on re-measurement recorded in comprehensive income; - Held to maturity: non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity; and are recorded at amortized cost with gains or losses recognized in net income or loss in the period that the asset is derecognized or impaired; - Available for sale: non-derivative financial assets not classified in any other category; and are measured at fair value with changes in fair value recognized in other comprehensive income for the current period until realized through disposal or impairment; and - Loans and receivables: non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are measured at amortized cost with gains and losses recognized in net income or loss in the period that the financial asset is derecognized or impaired. Financial instruments include cash and cash equivalents, short-term investment, trade and other receivables, short-term loans receivable, noncurrent investment, revolving operating facility, trade and other payables, short-term loan, term loan acquisition facility, convertible debenture and preferred shares. Cash and cash equivalents, short-term investments, noncurrent investment are classified as FVTPL, trade and other receivables, short-term loans receivable are classified as loans and receivables. Revolving operating facility, trade and other payables, short-term loan, term loan acquisition facility, convertible debenture and preferred shares are classified as other financial liabilities. 8

11 2. Significant accounting policies (continued) Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the financial assets have been impacted. For all financial assets, objective evidence of impairment could include: - Significant financial difficulty of the issuer or counterparty; or - Default or delinquency in interest or principal payments; or - Probability that the borrower will enter bankruptcy or financial reorganization. For certain categories of financial assets, such as receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. The carrying amount of financial assets is reduced by the impairment loss directly for all financial assets with the exception of receivables, where the carrying amount is reduced through the use of an allowance account. When a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in net income or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, 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. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. As at September 30, 2015 there was a restricted cash balance of $165,000 (December 31, $165,000). 9

12 2. Significant accounting policies (continued) Capital assets Capital assets are measured at cost less accumulated amortization and accumulated impairment losses. Where the costs of certain components of capital assets are significant in relation to the total cost of the item, they are accounted for and amortized separately. Amortization expense is recognized in earnings using the amortization rates as follows: Furniture and fixtures Office equipment Computer equipment Leasehold improvements Textbooks Vehicles - 20% diminishing balance basis - 20% diminishing balance basis % diminishing balance basis - 6 years straight-line - 20% diminishing balance basis - 20% diminishing balance basis The Company reviews the amortization rate and the amortization method at each reporting date. Impairment of capital assets At each reporting date, the Company reviews the carrying amounts of its capital assets to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit ("CGU") to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount is the higher of the fair value less costs to sell of the asset or the asset's value in use. The value in use is determined by estimating the future cash flows projected to be generated by these assets on a pre-tax basis. These cash flows are discounted at a rate reflecting the estimated time value of money and risk associated with the asset or CGU. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in net income or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount to the extent that the carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in net income or loss. 10

13 2. Significant accounting policies (continued) Lease inducement Intangible assets Lease inducements received from the landlord are deferred with the benefit of the rental inducement accounted for as a reduction of rental expense over the term of the lease, resulting in a constant rental charge over the term of the lease. The Company's finite life and indefinite life intangible assets are recorded at their cost which, for intangible assets acquired in business combinations, represents the fair value at the acquisition date. Trade names are intangible assets with an indefinite life because they have no legal lives. They are not subject to amortization and are tested for impairment annually or more frequently when indicated by changes in events or circumstances. An impairment of an indefinite life intangible asset is recorded when, and to the extent that, the carrying value of an indefinite life intangible asset exceeds the fair value of the related indefinite life intangible asset with fair values of the indefinite life intangible assets being determined pursuant to generally accepted valuation methodologies. Finite life intangible assets, which include textbook project, curricula, software platform and the Company's ERP system, are carried at cost less accumulated amortization and impairment. The assets are amortized over their estimated useful lives disclosed in Note 10. Finite life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable through future discounted net cash flows from the use or disposal of the related finite life intangible asset. Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company's CGU's that are expected to benefit from the synergies of the business combination. When the net of the amounts assigned to identifiable net assets exceeds the cost of the purchase, the excess is eliminated, to the extent possible, by a pro-rata allocation to certain noncurrent assets, with the balance presented as an extraordinary gain. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill was last reviewed during the second quarter of 2015 and next review is expected to be performed prior to the issuance of year ended December 31, 2015 financial statements. Specifically, goodwill impairment is determined by comparing the fair values of each CGU to its carrying amount, including goodwill. If the fair value of each CGU exceeds its carrying amount, goodwill is not considered to be impaired and the second step is not required. If the carrying amount of a CGU exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of the CGU goodwill. 11

14 2. Significant accounting policies (continued) Goodwill (continued) Convertible debenture Revenue recognition The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined to the assets and liabilities of the CGU. The excess of the fair value of the CGU over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The Company accounts for its convertible debenture in accordance with the substance of the contractual arrangement on initial recognition. Therefore, as a result of the conversion feature of the debenture, the Company's convertible instrument has been segregated between debt and equity based on the fair value of non-convertible debt. The difference between the estimated fair value of the debt at issuance and the face amount is reflected as "Equity portion of convertible debenture" in equity. The debt component is being accreted to the principal face amount as additional interest expense over the term of the liability using the effective interest rate method. On conversion, the amount reflected in equity is reclassified to share capital. Revenue from a contract to provide service is recognized by reference to the stage of completion of the contract. Tuition fees revenue is recognized on a straight-line basis over the period of instruction. Tuition fees paid in advance of course offerings are recorded as deferred revenue and recognized in revenue over the period of instruction. Non-operating, agency commission and other income such as housing income, textbook income, registration fees, internship fees and interest are recognized when earned. The Company evaluates the collectability of receivables on an ongoing basis. A provision for the impairment of receivables involves management judgment and includes the review of individual receivables based on individual customer creditworthiness, current economic trends and analysis of historical bad debts. Comprehensive income per share Basic comprehensive income (loss) per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted comprehensive income per common share is determined by adjusting the weighted average number of common shares outstanding for the effects of all potentially dilutive common share options and warrants. In the current year, diluted comprehensive loss per common share has not been presented as it is anti-dilutive. 12

15 2. Significant accounting policies (continued) Income taxes Income tax is recognized in net income or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years. Deferred tax is recorded using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences do not result in deferred tax assets or liabilities: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting or taxable loss; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the date of the statement of financial position. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets and liabilities are offset when there is legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Foreign currency translation Foreign currency amounts are translated into Canadian dollars as follows: Monetary assets and liabilities are translated at the exchange rates in effect at the date of the statement of financial position. Nonmonetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the foreign currency rates prevailing at the date of the transaction except for amortization, which is translated at historical rates. Translation gains or losses are included in net income or loss. The functional currency of the Company, PGIC Toronto, UCL, PGIC, PGCC, WTC, WTBC Vancouver, WTBC Toronto, CAC, VIA and VIATT, KGIC, KGIBC, MTi, UlS, PPC, SEC Toronto, SEC Vancouver, UCCBT Toronto and UCCBT Vancouver is the Canadian dollar. The functional currency of LOYKOR, Uhak and Kim Okran is the South Korean Won (Won). 13

16 2. Significant accounting policies (continued) Share-based compensation plan The share-based compensation plan allows Company employees and consultants to acquire shares of the Company. The fair value of sharebased payment awards granted is recognized as an employee or consultant expense with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value is measured at grant date and each tranche is recognized on a graded vesting basis over the period during which the share purchase options vest. The fair value of the share-based payment awards granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the awards were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of awards, for which the related service and non-market vesting conditions are expected to be met. For equity-settled share-based payment transactions, the Company measures the goods or services received and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which cases, the Company measured their value and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Severance and retirement benefits Employees who have been with Uhak and Kim Okran for more than one year are entitled to lump-sum payments based on salary rates and length of service at the time they leave Uhak and Kim Okran. The Uhak and Kim Okran s estimated liability under the plan, which would be payable if all employees left at the end of the reporting period, is accrued in the accompanying statements of financial position. Through March 1999, under the National Pension Scheme of Korea, a certain portion of retirement allowances for employees used to be transferred to the National Pension Fund. The amount transferred reduced the severance and retirement benefit amount to be paid to the employees when they leave the Company and is accordingly reflected in the accompanying financial statements as a reduction of the retirement and severance benefits liability. However, due to a regulation effective April 1999, such transfers to the National Pension Fund are no longer required. 14

17 2. Significant accounting policies (continued) Preferred shares Trade receivables, deferred revenue and prepaid expenses Changes in accounting policies: Preferred shares with mandatory redemption on a specific date area classified as liabilities. The dividends on these preferred shares are recognized in the consolidated statement of income and comprehensive income as interest expense. Trade receivable, deferred revenue and prepaid expenses include invoiced amounts related to registered student booking weeks that are scheduled to commence after the reporting date. Effectively, the student has been accepted and registered by the school for a study period in the future. The Company has adopted a policy to provide for cancellation and modification provision based on historical data and industry experience. IAS 32 Financial Instruments: Presentation was amended by the IASB in December Offsetting Financial Assets and Financial Liabilities amendment addresses inconsistencies identified in applying some of the offsetting criteria. The amendment is effective for annual periods beginning on or after January 1, IAS 36 Impairment of Assets was amended by the IASB in June Recoverable Amount Disclosures for Non-Financial Assets amendment modifies certain disclosure requirements about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendment is effective for annual periods beginning on or after January 1, There was no impact on the adoption of these policies on the consolidated financial statements. Recent accounting pronouncements: IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. A new hedge accounting model is introduced and represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements. The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions. Effective for annual periods beginning on or after January 1, Earlier application is permitted. 15

18 2. Significant accounting policies (continued) Recent accounting Pronouncements (continued): IFRS 15 Revenue from Contracts with Customers was issued by the IASB in May The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. Earlier application is permitted. IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue Barter Transactions Involving Advertising Services. Effective for annual periods beginning on or after January 1, Earlier application is permitted. 16

19 3. Risk management Risk management overview Fair value of financial Instruments Credit risk Liquidity risk The Company's activities are exposed to a variety of financial risks such as credit risk, liquidity risk, and market risk. This section contains information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. The Company employs risk management strategies and policies to ensure that any exposures to risk are in compliance with the Company's business objectives and risk tolerance levels. The fair values of trade and other receivables and trade and other payables approximate their carrying values due to the short-term maturity of those instruments. The fair values of loan receivable, shortterm investments, non-current investments, short-term debt, loans payable, long-term debt, convertible debenture and preferred shares approximate their carrying values as they bear interest at market floating rates or fixed rates consistent with market rates for similar debt. The significance of inputs used in making fair value measurements are examined and classified according to a fair value hierarchy. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly, and are based on valuation models and techniques where the inputs are derived from quoted indices. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Cash and cash equivalents and short-term investments are considered level 1 in the fair value hierarchy. Credit risk is the risk of an unexpected loss if a third party to a financial instrument fails to meet its contractual obligations. The Company's exposure to credit risk includes cash and cash equivalents, trade and other receivables, short-term investments. The Company's maximum exposure to credit risk is equal to the carrying value of these financial assets. The Company reduces its credit risk by: maintaining its bank accounts and short-term investments at large financial institutions, and monitoring trade and other receivables. Liquidity risk is the risk of the Company's inability to meet its financial obligations as they come due. As of September 30, 2015, the Company s current liabilities exceed current assets by $14,548,432 (As of December 31, 2014, current liabilities exceed current assets by $11,810,927). Of this amount, $17,109,100 relates to deferred revenue (Note 8), which is expected to be settled through the performance of service in the normal course. $8,900,000 is subject to a Forbearance Agreement (Note 12). The Company has reduced liquidity risk by raising funds during the quarter (Note 14). 17

20 3. Risk management (continued) Liquidity risk (continued) Currency risk Interest rate risk Capital management The Company has no current commitments for capital expenditures as of the date hereof. Trade and other payables are due within the next 12 months. Convertible debentures are due November 30, 2018, and are interest only, until their maturity date. Preferred shares are due July, August and September 2017, and interest is paid or accrued on a quarterly basis. As at September 30, 2015, the Company did not meet the working capital ratio financial covenant and other covenants of its credit facility (Note 12). The dividends on these preferred shares are recognized in the consolidated statement of income and comprehensive income as interest expense. A significant change during the period in the currency exchange rates between the Canadian Dollar relative to the U.S. Dollar and Won would not have had a significant effect on the Company's results of operations during the nine months ended September 30, 2015 and Interest rate risk arises from the possibility that changes in interest rates will affect future cash flow or fair values of financial instruments. The Company faces interest rate risk from its short- term investments and short and long term debt. As at September 30, 2015, based on a 1% change in interest rates the estimated sensitivity of the Company s income was ($89,000) (2014 ($104,000)) based on an increase and $89,000 (2014 $104,000) based on a decrease. The Company defines capital as lines of credit, bank debt, loan payable, debt component of convertible debenture, long term debt, preferred shares, share capital, equity component of convertible debenture, sharebased payments reserve, warrants reserve, contributed surplus, accumulated other comprehensive income (loss) and the retained earnings (deficit) which totals $15,603,502 (December 31, $35,642,964). The Company sets its capital structure in proportion to risk. The Company continually monitors economic and general business conditions and makes adjustments accordingly to maintain or adjust the capital structure. To do so, the Company may issue new common shares, or other forms of capital, including preferred shares, convertible debentures, and secured or unsecured debts. The Company has changed its Capital Management approach in 2015 compared to 2014, in order to address its near term liquidity requirements. The Company is subject to externally imposed capital requirements which are primarily related to financial covenants in the Company s credit facilities, and the corresponding Forbearance Agreement (and Forbearance Amendment Agreement). In addition, certain of the Company s school operations require cash balances or letters of credit to be maintained in order to cover deferred revenue obligations. 18

21 4. Acquisition of Uhak The Company acquired all of the issued and outstanding securities of Uhak effective December 1, Consideration included the following: (a) $4,906,740 was paid on December 5, 2014; (b) $2,800,000 was paid through the issuance of 5,384,615 common shares of the Company at $0.52 per share on December 9, ,230,769 of the shares were deposited into escrow and to be released over a two-year period subject to adjustment pursuant to the terms of the Escrow Agreement. (c) In December 2014, pursuant to a separate agreement, the Company sold net accounts receivable of $1,606,740 to the seller of Uhak (Note 7). The Company provisionally allocated the purchase price as follows: Net assets acquired (at fair value) Non-current investments $ 77,025 Capital assets 995,008 Rent deposits 1,545,091 Long term debt (2,567,500) Provision for severance benefits (980,260) Impairment of unallocated purchase price 8,466,317 $ 7,535,681 Consideration comprised of: Sale of accounts receivable (c) $ 1,606,740 Cash payment (a) (c) 3,300,000 Shares (b) 2,800,000 Assumed working capital (171,059) $ 7,535,681 Assumed working capital comprised of: Cash and cash equivalents $ 874,538 Accounts receivable 988,061 Short term investment 446,563 Prepaid expenses 227,206 Short term loan receivable 331,351 Accounts payable and accrued liabilities (2,388,560) Short term debt (308,100) $ 171,059 19

22 5. Acquisition of Kim Okran The Company acquired all of the issued and outstanding securities of Kim Okran effective January 22, Consideration included the following: (a) $3,900,000 was paid on January 20, 2015 in cash drawn from term loan acquisition facility; (b) $750,000 was paid through the issuance of 1,442,307 common shares of the Company at $0.52 per share on January 23, % of the shares were deposited into escrow and to be released over a one-year period subject to adjustment pursuant to the terms of the Escrow Agreement. (c) In January 2015, pursuant to a separate agreement, the Company sold net accounts receivable of $1,150,000 to the seller of Kim Okran (Note 7). The Company provisionally allocated the purchase price as follows: Net assets acquired (at fair value) Rent deposits $ 241,173 Provision for severance benefits (17,915) Impairment of unallocated purchase price 4,256,297 $ 4,479,555 Consideration comprised of: Sale of accounts receivable (c) $ 1,150,000 Cash payment (a) (c) 2,750,000 Shares (b) 750,000 Assumed working capital (170,445) $ 4,479,555 Assumed working capital comprised of: Cash and cash equivalents $ 155,895 Accounts receivable 97,381 Prepaid expenses 11,097 Accounts payable and accrued liabilities (93,928) $ 170,445 The operating results of Kim Okran, from January 23, 2015 to September 30, 2015 are included in Note 6. 20

23 6. Assets classified as held for sale and discontinued operations Subsequent to September 30, 2015, the Company entered into an agreement to sell all of the issued and outstanding securities of Uhak to an arms-length third party. The agreement closed on October 28. The total sale price for the transaction is as follows: (a) $20,000 was received on closing and $80,000 is to be divided into 4 equal monthly installments which will be received beginning 3 months following the date of closing. (b) 0.5% of 2016 gross revenue, 1% of 2017 gross revenue and 1% of 2018 gross revenue of Uhak to be received within 2 months after each fiscal year; and (c) the Company s intercompany debt of $750,000 owed to Uhak was forgiven on closing. Sale proceeds Cash (a) $ 20,000 Installments (a) 80,000 Present value of estimated rebates (b) 140,000 Debt forgiveness (c) 750,000 Gross sale proceeds $ 990,000 Recovery of unallocated purchase price Gross sale proceeds $ 990,000 Estimated transaction costs (30,000) Net sale proceeds 960,000 Estimated carrying value of net liabilities held for sale (1,851,332) Estimated recovery of purchase price $ 2,811,332 21

24 6. Assets classified as held for sale and discontinued operations (continued) Subsequent to September 30, 2015, the Company entered into an agreement to sell all of the issued and outstanding securities of Kim Okran to an arms-length third party. The agreement closed on November 6, The total sale price for the transaction is as follows: (a) 1% of 2016 gross revenue, 1% of 2017 gross revenue and 1% of 2018 gross revenue of Kim Okran to be received within 2 months after each fiscal year; and (b) $130,000 owed to the Company was forgiven on closing. Sale proceeds (loss) Present value of estimated rebates (a) $ 14,000 Debt forgiveness (b) (130,000) Gross loss from sale $ (116,000) Recovery of unallocated purchase price Gross loss from sale $ (116,000) Estimated transaction costs (10,000) Net loss from sale (126,000) Estimated carrying value of net liabilities held for sale (207,080) Estimated recovery of purchase price $ 81,080 22