RM2.L Regulatory News (RM2)

30 June 2017

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES, CANADA, AUSTRALIA, THE REPUBLIC OF SOUTH AFRICA, THE REPUBLIC OF IRELAND AND JAPAN OR IN ANY OTHER JURISDICTION IN WHICH OFFERS OR SALES WOULD BE PROHIBITED BY APPLICABLE LAW.

This announcement is not an offer to sell or a solicitation to buy securities in any jurisdiction, including the United States, Canada, Australia, the Republic of South Africa, the Republic of Ireland or Japan. Neither this announcement nor anything contained herein shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. Securities may not be offered for sale in the United States absent registration or an exemption from registration.

RM2 International S.A.

Annual results 2016

RM2 International S.A. ("RM2" or the "Company"), the vertically-integrated innovator in pallet development, manufacture, supply and management, today announces its financial results for the year ended 31 December 2016.

John Walsh, RM2's CEO, commented: "Outsourcing our manufacturing operations to hugely experienced partners at Jabil and Zhenshi has given us significant cost benefits, greater flexibility and production volumes and I am pleased with progress at both these facilities. Interest in our BLOCKPal pallets has been strong and I'm confident we now have the right partners and tools to turn that interest into significant deployment."

Amaury de Seze has informed the Board that he will not be standing for re-election to the Board of Directors of RM2 at the next AGM. His tenure ends effective June 30, 2017. R. Ian Molson, on behalf of the Board of Directors of RM2 wishes to express its appreciation to Amaury for his contribution to the Company.

The next AGM will be held on 28 July 2017.

For further information:

The material set forth herein is for informational purposes only and does not constitute an offer of securities for sale in the United States or any other jurisdiction in which such an offer or solicitation is unlawful. The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), or the laws of any state, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state laws. No public offering of securities will be made in the United States.

This announcement has been issued by and is the sole responsibility of the Company. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by any other person as to, or in relation to, the accuracy or completeness of this announcement or any other written or oral information made available to or publicly available to any interested party or its advisers, and any liability therefore is expressly disclaimed.

Notes to Editors

RM2 International S.A. specialises in pallet development, manufacture, supply and management to establish a leading presence in global pallet supply and improve the supply chain of manufacturing and distribution businesses through the effective and efficient use and management of composite pallets. It is quoted on the AIM market of the London Stock Exchange under the symbol RM2.L.

For further information, please visit www.rm2.com

Chairman's and CEO's Statement

This was a year of transition for RM2 as the company transformed its manufacturing base from a wholly-owned operation in Toronto, Canada, into an outsourced model. This was achieved through signing two key manufacturing contracts with Zhenshi and Jabil, both highly respected and experienced industrial partners. These two agreements will give RM2 a well-balanced and significantly more cost effective and flexible manufacturing base.

In November 2016 the Company announced the ELIoT smart pallet, in partnership with AT&T, which contains an integrated device that enables pallets to be accurately tracked and traced. Testing with key clients is progressing as planned.

Outlook

Demand for our durable and innovative pallet remains strong. The Board is confident that with a new, lower cost outsourced manufacturing operation, together with the ELIoT smart pallet, RM2 is set to make good progress in the year ahead. The Board remains confident that RM2 will obtain funding to support its future growth ambitions.

RM2 INTERNATIONAL S.A.

Société Anonyme

Consolidated financial statements and

Consolidated management report and

Report of the Réviseur d'Entreprises Agréé

For the year ended 31 December 2016

Registered Office : 5, rue de la Chapelle

L-1325 LUXEMBOURG

R.C.S. Luxembourg : B 132.740

Table of contents

Consolidated management report

The Directors present their report on the affairs of RM2 International S.A. (the Company) and its subsidiaries, referred to as the Group, together with the audited Consolidated Financial Statements and Independent Auditors' report for the year ended 31 December 2016.

Principal Activities

The main activity of the Group is to manufacture, sell and lease shipping pallets and to provide, where necessary, related logistical services.

The Group operates principally within the upstream logistics market which is focused on the supply of raw materials and components to manufacturers, and target the sale or rental of its pallets and their utilisation within closed loop supply chains of its customers.

In addition, the Group's pallet tracking and management software, the ERICA system provides 'real time' equipment balances throughout supply chains.

Business Review and Key Performance Indicators

The Chairman's statement deals with the review of the business for 2016.

The business report considers the key performance indicators to be the sale or leasing of pallets, assets in inventory and the cash reserves of the business.

Revenue generated by the Group including extraordinary items in 2016 was USD 8.9 m compared to USD 8.0 m in 2015. The Group's rental activity more than doubled over the year, reaching USD 5.7m (2015: USD 2.7m) as pallets deployed in the course of 2015 generated a full year revenue stream in 2016 and a small number of new customers were deployed, with a particular focus in the global food industry (poultry, meat processing and pet care). The active pool of rental pallets amounted to 265k pallets as of December 31, 2016, an increase of 35k over year-end 2015. Pallet sales decreased in 2016 from USD 3.8m to USD 0.4m. An additional USD 1.5m was recognized in Sales revenue for 2016 as an extraordinary item attributed to the sale of raw material and work in progress to one of the Company's new contract manufacturer's, Jabil (2015: nil).

The logistical services revenues (tracking of third party assets), decreased on a USD basis to USD 1.2m (2015: 1.5m) principally due to the fluctuation of the British pound foreign exchange rate over the course of 2016. This activity remains ancillary for the Group and an impairment (USD 0.5m) of the related Goodwill was booked accordingly to the level of activity and forecasts.

As disclosed in the interim accounts, 92k pallets were produced in Canada in the six-month period ended June 30, 2016 and marginal subsequent production occurred over the second semester as the production equipment was dismantled and shipped to China and Mexico. The cost of sales for 2016 has decreased to USD 39.7m (2015: USD 44.5m) but remains high due to the continuing operating cost of the factory in the dismantling phase. In addition, impairments have been recognized to reflect major events through the second semester 2016. Following the signature of the Zhenshi agreement on April 1st, 2016 for the outsourcing of production capacity, the Group contracted on September 22nd, 2016 with Jabil Inc. to deploy a second production centre in Mexico. In the context of transitioning production to Mexico and China, the Group conducted a review of its manufacturing equipment and recognized an impairment of USD 3.2m for the portion of equipment no longer suitable for the updated production strategy. The Group also recognized an impairment on the raw material inventory (2016: USD 1.9m) to reflect the new prices negotiated with suppliers for further purchases in Mexico and China as the Group applied these new prices to invoice the raw material inventory to the manufacturing sub-contractors. Lastly, the Group has impaired the pallet pool based on the expected realizable value on the sale of certain pooled assets below the net book value (USD 5.0m).

The first tranche of the Convertible Preferred Shares was subscribed in July 2016, providing the Group with USD 20.0m.

Unrestricted cash reserves at 31 December 2016 stood at USD 9.8m.

Cash flow for the second semester of 2016 is negative by USD (14.8m), of which USD (3.7m) related to one-time costs related to the manufacturing transfer to Mexico and China and USD (2.0m) related to delayed working capital.

Outlook

These elements are described in Note 26 to the consolidated financial statements.

Going Concern

The Group's financial result for the year ending December 31, 2016 is a loss of USD 52.8m (December 2015: loss of USD 58.8m ; June 2016: loss of USD 24.0m) of which USD 10.6m of impairment reflects major events occurring in the second semester, including equipment no longer suitable for the new production strategy (USD 3.3m), value corrections on raw material inventory (USD 1.9m), lower realization value of deployed pallets currently available for sale as these pallets generate a lower than expected positive free cash-flow (USD 5.0m) and goodwill impairment (USD 0.5m). The cash outflow in 2016 was USD 44.7m, composed of net cash outflows of USD 30.3m and USD 14.4m in the first and second semesters respectively, a reduction of over 50%. Net cash outflows were reduced by the receipt of USD 20.0m from the issuance of convertible preferred shares in the second semester, giving a total net cash outflow for the year of USD 24.7m.

The Canadian plant, which was in dismantling mode during much of 2016, generated a loss of USD 12.0m for the second semester which includes several non-cash items, such as equipment impairment (USD 3.2m) and depreciation (USD 1.6m). Running costs for the second semester 2016 in Canada amounted to USD 5.1m to be added to transition one-time-costs of USD 2.1m.

Non-restricted Cash reserves at December 31, 2016 stood at USD 9.8m.

Situation through December 2017

Non-restricted Cash reserves at May 31, 2017 stood at USD 2.6m.

The business plan and cash flow forecast for the next 12-month period starting from December 31, 2016 (i.e., the going concern analysis period) have been updated by Management using the same conservative assumptions used in the going concern assessment for 2016. The forecasted cash burn for the second half of 2016 of USD 2m per month was recorded to be slightly lower at USD 1.9m per month, and was reduced to circa USD 1.4m per month for the first five months of 2017. The one-time-cost for the manufacturing transition forecasted to be USD 8.8m in the second half of 2016, was recorded at USD 3.5m over the period. A further USD 3.3m of one-time costs was paid out at the end of May 2017 and another USD 1.8m is anticipated for the remainder of 2017.

In addition to the above-mentioned remaining one-time costs, management estimates the cost of business for the last seven months of the year will be circa USD 1.7m per month which includes wind-down costs in Canada, where the Company is actively seeking to terminate its lease obligations. A further conservative estimate of USD 0.6m may also be incurred in relation with Luxembourg VAT.

In Mexico, the first production lines started operating in March of this year. Production capacities have been gradually activated. Through the end of May 2017, Jabil produced and assembled 38k pallets, with the end of June daily production rate nearing 1k pallets. In China, the manufacturing equipment shipped from Toronto is undergoing testing prior to being brought on-line. The lead time to clear customs in China has been significantly higher than expected. As a result, the final shipment was released from customs in April 2017, allowing Zhenshi to commence implementation. Purchase orders have been placed both in China (Zhenshi) and Mexico (Jabil) for an aggregated amount of 180k pallets to be produced and forecasts (to be confirmed) amount to 287k pallets. Should the manufacturers not achieve the target ramp up of production, the activity of the Group would be slowed down and its ability to generate future revenues and cash-inflows be restricted.

Should the quantity of purchased pallets from Jabil be lower than those figuring in the manufacturing agreement, a pricing scheme mechanism will adjust the purchase price (see Note 23.4), subject to the agreement of both parties which ensures an alignment of interests of the different stakeholders. The manufacturing agreement with Zhenshi includes a commitment for the Group to acquire a minimal volume of pallets (see Note 23.4).

The aggregate annual production for the first-year production with the new manufacturing set-up is expected to be 467k pallets, subject to the Group's capacity to implement adequate minimum funding of USD 38.8m to cover issued purchase orders (USD 12.7m) and forecasts (USD 26.1m). Should the Company not be able secure sufficient additional funding, it would not be able to face current liabilities generated by the issuance of the above mentioned purchase orders.

The Company expects to announce imminently an equity issuance sufficient to meet its current cost of business through the end of the year excluding the acquisition of pallets from Mexican and Chinese suppliers mentioned above. The Company will shortly thereafter undertake negotiations to arrange a larger additional financing which is expected to amount to at least USD 65.0m. The outcome of the negotiations as well as the amount to be raised are subject to uncertainties.

The commercial pipeline has been fine-tuned with a particular focus on the food industry where wooden pallets trigger issues such as bacterial contamination and ingression of wood into food products. In addition, high velocity capacity coupled with the ELIoT tracking technology create traction for blue chip customers operating across a broad spectrum of distribution channels.

The actual deployment of pallets into the food industry (7k pallets), coupled with the commercial interest generated by the new tracking technology (ELIoT) in high velocity sectors such as bottle producers, give confidence that the Group will be able to deploy a significant number of pallets in the next 18 months, at which point the Company will have to raise more capital to finance further production. While the Management is very confident, the ability of the Group to deploy this significant number of pallets over such a period is also subject to some uncertainty.

1.6m pallet opportunities constitute the current commercial pipeline, of which 9% represent straight sales and 91% rentals (either flat fee or per trip) and of which 62% are ELIoT pallets and 38% are BLOCKpal pallets. The Group's ELIoT pallets are currently undergoing testing with three blue chip customers using 60 sample pallets, and initial feedback is highly positive. The current stage of development of the ELIoT technology is a first step, pending the availability of CAT-m technology and less expensive chipsets in Q4 2017. However, suppliers of critical components have given the Group enough visibility on the sourcing lead-time (12 weeks from purchase orders to finished pallets) that the Group is able to deploy tens of thousands of units with the current more expensive chipset. The ability of the Group to mature this new product and deliver a sufficient number of pallets to address market's needs is a key challenge and is subject to uncertainty.

In the interim, the Group continues to work on monetizing its assets (inventory of pallets and raw material located in Toronto). These two deals, which remain in negotiation, would generate a cash inflow of up to $7.7m if successful, based on pending offers to potential buyers.

January 2018 and beyond

Once the Group is able to offset its current cost of business with the initial deployment, the Company will need to finance the production of pallets through external facilities until the revenues from deployed pallets cover production costs. Obtaining a sufficient level of financing is a source of uncertainty.

Conclusion

The Directors have analysed the Group's situation and applied their best estimates to assumptions of the future development of the business. The Group acknowledges that there are currently material uncertainties which may cast significant reservations on the Group's ability to continue as a going concern and it is possible that the Group may be unable to realize its assets and discharge its liabilities in the normal course of business. Nonetheless, subject to the uncertainty related to the coming fundraising, the Directors are confident that the Group will have adequate resources to continue its operational existence for the 12 months period starting from December 31, 2016, and accordingly, continue to adopt the going concern basis in preparing the consolidated financial statements.

Dividends

The Directors do not recommend the payment of a dividend on the 9% Convertible Preferred Shares or the Ordinary shares of the company (2015: nil).

Capital Structure

Details of the authorised and issued share capital, together with details of the movements in the Company's issued share capital during the period are shown in Note 13.

As of December 2016, the Company has 397,334 own shares.

Details of the share option scheme are set out in Note 21.

Supplier Payment Policy

The Group's policy is to settle terms of payment with suppliers when agreeing to the terms of each transaction.

Subsequent Events

Subsequent events are described in Note 26 to the Consolidated Financial Statements.

Directors

The Directors who served the Company during the year and up to the date of this report were as follows:

The Director's emoluments (translated into USD at average rate) were in 2016 and 2015, as follows:

The Non-Executive Directors fees were settled by the issue of 1,275,000 ordinary shares in the Company on July 8, 2016 at a price of GBP 0.23 per share. The New Ordinary Shares are restricted from trading until volume weighted average quoted price of the Ordinary Shares for a consecutive 30-day period equals or exceeds GBP 1.00.

Directors' interests

The Directors who held office at 31 December 2016 had the following interests in the ordinary shares (excluding Convertible preferred shares) of the Company:

Of the holdings above 16,900,180 (2015: 15,625,180) consist of Restricted Shares set out below. A Director holding Restricted Shares shall not sell, transfer, mortgage, charge, encumber or otherwise dispose of any of his Restricted Shares as long as certain performance conditions are not fully satisfied (the "Performance Conditions"). The Performance Conditions are linked to the volume weighted average quoted price of the Ordinary Shares (the "Average Price") for a consecutive 30 day period (the "Relevant Period"). If the Average Price is 50% higher than the Placing Price (GBP 0.88) for the Relevant Period, the Performance Condition in respect of one third of the Director's Restricted Shares shall be fulfilled. If the Average Price is 75% higher than the Placing Price for the Relevant Period, the Performance Condition in respect of a further one third of the Director's Restricted Shares shall be fulfilled. If the Average Price is 100% higher than the Placing Price for the Relevant Period, the Performance Condition in respect of the final third of the Director's Restricted Shares shall be fulfilled. If any Performance Conditions are not fully satisfied by ten years after the date of the grant, the Director shall transfer any of his remaining Restricted Shares to the Company at a purchase price equal to the nominal value of the Restricted Shares, being USD 0.01 per share.

The terms of the unvested options is 10 year options vesting over 3 years in equal annual instalments; struck at the money but not exercisable until the stock closes above 100% for a thirty day average closing price.

Corporate Responsibility

The Board recognises its employment, environmental and health and safety responsibilities. It devotes appropriate resources towards monitoring and improving compliance with existing standards.

Employees

The Group is committed to achieving equal opportunities and to complying with relevant anti-discrimination legislation. It is established Group policy to offer employees and job applicants the opportunity to benefit from fair employment, without regard to their sex, sexual orientation, marital status, race, religion or belief, age or disability. Employees are encouraged to train and develop their careers.

The Group has continued its policy of informing all employees of matters of concern to them as employees, both in their immediate work situation and in the wider context of the Group's well-being. Communication with employees is effected through the Board, the Group's management briefings structure, formal and informal meetings and through the Group's information systems.

Following the lay-off initiated early 2016 in the plant located in Toronto, the company terminated 389 employees in the course of 2016, reaching a total of 44 headcounts for the manufacturing operation on Dec 31, 2016.

Research & Development

The Group has performed R&D activity during the year, mainly on the development of the ELIoT technology. The related expenses have been recorded as costs to the profit and loss account.

Risks and uncertainties

These elements are described in Note 24 to the consolidated financial statements.

Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Consolidated Financial Statements and for being satisfied that the Consolidated Financial Statements give a true and fair view. The Directors are also responsible for preparing the Consolidated Financial Statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

Company law requires the Directors to prepare Consolidated Financial Statements for each financial period which give a true and fair view of the state of affairs of RM2 International S.A. (the Company) and the Group and of the profit or loss of the Company and the Group for that period. In preparing those Financial Statements, the Directors are required to:

The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, and disclose with reasonable accuracy at any time the financial position of the Company and the Group.

They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Statement of disclosure to the Independent Auditor

All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Group's Independent Auditor for the purposes of his audit and to establish that the Independent Auditor is aware of that information. The Directors are not aware of any relevant audit information of which the Independent Auditor is unaware.

Independent Auditor

The auditor, Grant Thornton Lux Audit S.A., will be proposed for re-appointment at the forthcoming Annual General Meeting.

Corporate governance report

The Board is committed to proper standards of Corporate Governance, managing the Group in an efficient, effective, entrepreneurial and ethical manner for the benefit of shareholders over the longer term.

In the context of the Group's strategy for growth, the Board will continue to actively review its Corporate Governance at regular intervals.

The Board is responsible for the Group's system of internal control and reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives, and can only provide reasonable and not absolute insurance against material misstatement or loss. The system of internal financial control comprises of controls established to provide reasonable assurance of:

In addition the key procedures on the internal financial control of the Group are as follows:

The Annual General Meeting is the principal forum for dialogue with shareholders.

http://www.rns-pdf.londonstockexchange.com/rns/7093J_1-2017-6-30.pdf 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

Consolidated statement of financial position as at 31 December 2016

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

Consolidated statement of changes in equity

Consolidated Statement of Cash Flows

For the year ended 31 December 2016

The board of directors have authorised for issue these consolidated financial statements on June 27, 2016.

Notes to the Consolidated Financial Statements

1 Corporate information

1.1 General information

RM2 International S.A. (the "Company") is a limited company (Société Anonyme) incorporated and domiciled in Luxembourg with the registration number B132.740. The registered office is located at Rue de la Chapelle 5, L-1325 Luxembourg. The Company is the ultimate parent entity of the RM2 Group (the "Group").

The Group is principally engaged in developing and selling shipping pallets and providing related logistical services.

1.2 Changing strategy

In 2016 the Company announced plans to move its manufacturing operations away from its own facility in Woodbridge, Canada and entered into two strategic contract manufacturing agreements with Zhenshi in China on April 1st, 2016 and with Jabil in Mexico on September 22, 2016. Zhenshi and Jabil produce and sell finished pallets exclusively to RM2 which keeps the full ownership of the manufacturing equipment. These moves were designed to give the Group significant cost savings, greater capacity, increased flexibility and clarity over forecast production.

More information is provided in Notes 3.2, 5, 23 and 26.

2 Basis of preparation

The consolidated financial statements comprise the consolidated financial information of the Group as at 31 December 2016 and are prepared under the historic cost convention as disclosed in the accounting policies below.

The accounting policies which follow set out the policies applied in preparing the consolidated financial statements.

2.1 Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRIC interpretations as issued by the International Accounting Standards Board ("IASB") and IFRS Interpretations Committee (IFRIC) and as adopted by the European Union ("EU").

2.2 Basis of consolidation

The consolidated financial statements comprise the financial information of the Group and its subsidiaries. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial information of the subsidiaries is prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full.

Subsidiaries and business combinations

Subsidiaries are all entities, including structured entities, over which the Group has control. The Group controls an entity when the Group 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. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for the acquisition of subsidiaries.

The consideration transferred on acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the consideration transferred over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the consideration transferred acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit or loss. Acquisition costs are written off to profit or loss.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

The subsidiaries of the Group are listed in Note 23.

3 Summary of significant accounting policies

The principal accounting policies are summarised below:

3.1 Foreign currencies

The Group's consolidated financial statements are presented in United States Dollars ("USD"), which is also the parent company's functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency.

Transactions and balances

Transactions in foreign currencies are initially recorded by the Group's entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.

Differences arising on settlement or translation of monetary items are recognised in profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively).

Group companies

On consolidation, the assets and liabilities of foreign operations are translated into USD at the rate of exchange prevailing at the reporting date and their income statements are translated at average exchange rate prevailing during the financial year. The exchange differences arising on translation for consolidation are recognised in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date.

3.2 Going concern

The Group's financial result for the year ending December 31, 2016 is a loss of USD 52.8m (December 2015: loss of USD 58.8m ; June 2016: loss of USD 24.0m) of which USD 10.6m of impairment reflects major events occurring in the second semester, including equipment no longer suitable for the new production strategy (USD 3.3m), value corrections on raw material inventory (USD 1.9m), lower realization value of deployed pallets currently available for sale as these pallets generate a lower than expected positive free cash-flow (USD 5.0m) and goodwill impairment (USD 0.5m). The cash outflow in 2016 was USD 45.1m, composed of net cash outflows of USD 30.3m and USD 14.8m in the first and second semesters respectively, a reduction of over 50%. Net cash outflows were reduced by the receipt of USD 20.4m from the issuance of convertible preferred shares in the second semester, giving a total net cash outflow for the year of USD 24.7m.

The Canadian plant, which was in dismantling mode during much of 2016, generated a loss of USD 12.0m for the second semester which includes several non-cash items, such as equipment impairment (USD 3.2m) and depreciation (USD 1.6m). Running costs for the second semester 2016 in Canada amounted to USD 5.1m to be added to transition one-time-costs of USD 2.1m.

Non-restricted Cash reserves at December 31, 2016 stood at USD 9.8m.

Situation through December 2017

Non-restricted Cash reserves at May 31, 2017 stood at USD 2.6m.

The business plan and cash flow forecast for the next 12-month period starting from December 31, 2016 (i.e., the going concern analysis period) have been updated by Management using the same conservative assumptions used in the going concern assessment for 2016. The forecasted cash burn for the second half of 2016 of USD 2m per month was recorded to be slightly lower at USD 1.9m per month, and was reduced to circa USD 1.4m per month for the first five months of 2017. The one-time-cost for the manufacturing transition forecasted to be USD 8.8m in the second half of 2016, was recorded at USD 3.5m over the period. A further USD 3.3m of one-time costs was paid out at the end of May 2017 and another USD 1.8m is anticipated for the remainder of 2017.

In addition to the above-mentioned remaining one-time costs, management estimates the cost of business for the last seven months of the year will be circa USD 1.7m per month which includes wind-down costs in Canada, where the Company is actively seeking to terminate its lease obligations. A further conservative estimate of USD 0.6m may also be incurred in relation with Luxembourg VAT.

In Mexico, the first production lines started operating in March of this year. Production capacities have been gradually activated. Through the end of May 2017, Jabil produced and assembled 38k pallets, with the end of June daily production rate nearing 1k pallets. In China, the manufacturing equipment shipped from Toronto is undergoing testing prior to being brought on-line. The lead time to clear customs in China has been significantly higher than expected. As a result, the final shipment was released from customs in April 2017, allowing Zhenshi to commence implementation. Purchase orders have been placed both in China (Zhenshi) and Mexico (Jabil) for an aggregated amount of 180k pallets to be produced and forecasts (to be confirmed) amount to 287k pallets. Should the manufacturers not achieve the target ramp up of production, the activity of the Group would be slowed down and its ability to generate future revenues and cash-inflows be restricted.

Should the quantity of purchased pallets from Jabil be lower than those figuring in the manufacturing agreement, a pricing scheme mechanism will adjust the purchase price (see Note 23.4), subject to the agreement of both parties which ensures an alignment of interests of the different stakeholders. The manufacturing agreement with Zhenshi includes a commitment for the Group to acquire a minimal volume of pallets (see Note 23.4).

The aggregate annual production for the first-year production with the new manufacturing set-up is expected to be 467k pallets, subject to the Group's capacity to implement adequate minimum funding of USD 34.0m to cover issued purchase orders (USD 12.7m) and forecasts (USD 20.3m). Should the Company not be able secure sufficient additional funding, it would not be able to face current liabilities generated by the issuance of the above mentioned purchase orders.

The Company expects to announce imminently an equity issuance sufficient to meet its current cost of business through the end of the year excluding the acquisition of pallets from Mexican and Chinese suppliers mentioned above. The Company will shortly thereafter undertake negotiations to arrange a larger additional financing which is expected to amount to at least USD 65.0m. The outcome of the negotiations as well as the amount to be raised are subject to uncertainties.

The commercial pipeline has been fine-tuned with a particular focus on the food industry where wooden pallets trigger issues such as bacterial contamination and ingression of wood into food products. In addition, high velocity capacity coupled with the ELIoT tracking technology create traction for blue chip customers operating across a broad spectrum of distribution channels.

The actual deployment of pallets into the food industry (7k pallets), coupled with the commercial interest generated by the new tracking technology (ELIoT) in high velocity sectors such as bottle producers, give confidence that the Group will be able to deploy a significant number of pallets in the next 18 months, at which point the Company will have to raise more capital to finance further production. While the Management is very confident, the ability of the Group to deploy this significant number of pallets over such a period is also subject to some uncertainty.

1.6m pallet opportunities constitute the current commercial pipeline, of which 9% represent straight sales and 91% rentals (either flat fee or per trip) and of which 62% are ELIoT pallets and 38% are BLOCKpal pallets. The Group's ELIoT pallets are currently undergoing testing with three blue chip customers using 60 sample pallets, and initial feedback is highly positive. The current stage of development of the ELIoT technology is a first step, pending the availability of CAT-m technology and less expensive chipsets in Q4 2017. However, suppliers of critical components have given the Group enough visibility on the sourcing lead-time (12 weeks from purchase orders to finished pallets) that the Group is able to deploy tens of thousands of units with the current more expensive chipset. The ability of the Group to mature this new product and deliver a sufficient number of pallets to address market's needs is a key challenge and is subject to uncertainty.

In the interim, the Group continues to work on monetizing its assets (inventory of pallets and raw material located in Toronto). These two deals, which remain in negotiation, would generate a cash inflow of up to $7.7m if successful, based on pending offers to potential buyers.

January 2018 and beyond

Once the Group is able to offset its current cost of business with the initial deployment, the Company will need to finance the production of pallets through external facilities until the revenues from deployed pallets cover production costs. Obtaining a sufficient level of financing is a source of uncertainty.

Conclusion

The Directors have analysed the Group's situation and applied their best estimates to assumptions of the future development of the business. The Group acknowledges that there are currently material uncertainties which may cast significant reservations on the Group's ability to continue as a going concern and it is possible that the Group may be unable to realize its assets and discharge its liabilities in the normal course of business. Nonetheless, subject to the uncertainty related to the coming fundraising, the Directors are confident that the Group will have adequate resources to continue its operational existence for the 12 months period starting from December 31, 2016, and accordingly, continue to adopt the going concern basis in preparing the consolidated financial statements.

3.3 Property, plant and equipment

Initial recognition and measurement

Property, plant and equipment ("PPE") are tangible assets used by the Group for its own production or supply of goods or services, or for administrative purposes and are expected to be used during more than one period. PPE is recognised when it is probable that future economic benefits associated with the asset will flow to the Group and if the cost can be measured reliably.

PPE is initially recognised at cost. Such cost includes the purchase price and all cost incurred in bringing the assets to the location and condition for its operation in the manner intended by management. The cost of the PPE includes also the borrowing costs for long-term construction projects if the recognition criteria are met.

The pallet pool is initially recognised at the standard cost of production including all expenses directly attributable to the manufacturing process and portions of related production overheads, based on normal operating capacity.

When significant parts of property, plant and equipment will be required to be replaced, the Group will recognise such parts as individual assets with specific useful lives and depreciate them accordingly. Likewise, when a major inspection will be performed, its cost will be recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs will be recognised in profit or loss as incurred.

Finished goods (under inventory) represent pallets produced and not yet sold or deployed via the pallet pool in property, plant and equipment.

Subsequent measurement

PPE is subsequently measured at cost less any accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

An item of PPE and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. 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 profit or loss when the asset is derecognised.

The residual values, useful lives and methods of depreciation of PPE are reviewed at each financial year end and adjusted prospectively, if appropriate. Further explanation on management estimates and assumptions is disclosed in Note 4.

The Group has not applied revaluation on any of its PPE. An impairment is recognised in the pallet pool classified as fixed assets. The recoverable amount is based on the quantity of pallets classified as fixed asset at year end considering the average quantity of lost and broken pallets to main clients extrapolated to the entire pool.

3.4 Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Group as a lessee

Leases where a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease.

The aggregate benefit of lease incentives is recognised as a reduction to the expense recognised over the lease term on a straight line basis.

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's commencement date at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in long-term and short-term borrowings. The interest element of the finance cost is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and benefits of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Revenue arising on operating leases for pallets is accounted for as on a straight line basis or a usage basis in accordance with the contract.

Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease terms and included in other operating income.

3.5 Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

3.6 Investment property

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, the Group has decided to measure investment properties using the cost model. Investment properties are measured similarly to property, plant and equipment as described in Note 3.3.

The fair value, which reflects market conditions at the reporting date, is disclosed in the Note 7.2 to the consolidated financial statements.

Investment properties are derecognised either when they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the income statement in the period of de-recognition.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner-occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

3.7 Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses, if any.

The useful lives of intangible assets are assessed as finite, except goodwill.

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible assets.

Intangible assets with indefinite useful lives (goodwill) are not amortised, but are tested for impairment annually at the cash-generating unit level (see Note 8 for details and assumptions). The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.

Amortisation is calculated on the straight-line method to write off the cost of each asset to their residual values, over their estimated useful life. The annual amortisation periods are as follows:

3.8 Research and development costs

Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. Amortisation is recorded in cost of sales. During the period of development, the asset is tested for impairment annually.

To date no amounts have been capitalised in respect of the development phase of internal projects.

3.9 Inventories

Inventories are stated at the lower of cost or net realizable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows:

Pallets are held as inventory prior to being deployed in the pallet pool or sold direct to customer.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

When the net realizable value of stock is lower than its cost, provisions for impairment are created to reduce the value of the stock to its net realizable value.

The cost of inventories is recognised as an expense in the period in which the related revenue is recognised.

3.10 Impairment on non-financial assets

Non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset's net selling price and value in use or fair value less cost to sell determined by using discounted cash flow method. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).

The future discounted cash flow method used to determine the value in use or fair value less cost to sell is usually, but not always, based on cash flow projections over for the next 3 years.

Impairment losses of continuing operations are recognised in profit or loss in those expense categories consistent with the function of the impaired asset.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset's or cash-generating unit's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation reserve.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Cash Generating Units (CGUs), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the CGU containing the goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

3.11 Financial instruments

3.11.1 Financial assets

The Group classifies its financial assets in the following categories: at fair value through profit and loss, loans and receivables, held-to-maturity investments and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date.

All financial assets are recognised initially at fair value plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.

The Group's financial assets include cash and short-term deposits, trade and other receivables, other current and non-current assets which are classified in the category of loans and receivables and available-for-sale financial assets. The Group does not have held-to-maturity investments.

3.11.2 Subsequent measurement

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.

After initial measurement, they are subsequently measured at amortised cost using the effective interest rate method ("EIR"), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of comprehensive income. The losses arising from impairment are recognised in the finance costs in the statement of comprehensive income.

3.11.3 De-recognition

De-recognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale.

3.11.4 Impairment of financial assets

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include, but is not limited to, indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments.

3.12 Financial liabilities

3.12.1 Initial recognition and measurement

Financial liabilities are classified as financial liabilities at fair value through profit or loss or other financial liabilities as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs.

The Group's other financial liabilities include trade and other payables, borrowings and long-term payables.

3.12.2 Subsequent measurement

The measurement of financial liabilities depends on their classification as follows:

After initial recognition, other financial liabilities are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the statement of comprehensive income when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the statement of comprehensive income.

Other financial liabilities are classified as current liabilities unless the Group has an unconditional right to defer the settlement of the liability for at least 12 months after the balance sheet date.

3.12.3 De-recognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are subsequently modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of comprehensive income.

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

3.13 Cash and cash equivalents, restricted cash

Cash and cash equivalents, restricted cash are carried in the statement of financial position at fair value. For the purposes of the cash flow statement, cash and cash equivalents are comprised of cash on hand and deposits held on call with banks having an original maturity of 3 months or less. In the statement of financial position, bank overdrafts are included in borrowings under current liabilities.

3.14 Taxes

Current income tax

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. A provision is made for corporation tax for the reporting period using the tax rates that have been substantially enacted for each company at the reporting date in the country where each company operates and generates taxable income.

Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of comprehensive income.

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretations and establishes provisions where appropriate.

Deferred income tax

Deferred income tax is provided for using the liability method on all temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. The deferred tax is calculated on currently enacted tax rates that are expected to apply when the temporary differences reverse. Where an overall deferred taxation asset arises, it is only recognised in the financial statements where its recoverability is foreseen with reasonable certainty.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

3.15 Pensions and other post-employment benefits

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due.

The Group does not operate any defined benefit pension plan.

3.16 Provisions, contingent assets and liabilities

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Provisions are not recognised for future operating losses.

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.

Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision.

In those cases where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, no liability is recognised.

Contingent assets

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Contingent assets are not recognised in the consolidated financial statements. However, when the realisation of income from the contingent asset is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

Contingent liabilities

Contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, or is a present obligation that arises from past events but is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability.

Contingent liabilities are not recognised in the consolidation financial statements.

3.17 Equity, reserves and dividend payments

Issued share capital represents the nominal value of shares that have been issued. Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits.

Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a general meeting prior to the reporting date.

3.18 Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the invoiced value for the sale of goods net of value added tax, rebates and discounts which represents the fair value of the consideration received or receivable. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognised:

Sales of goods

Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods have been transferred to the buyer and the collectability of the related receivables is reasonably assured, regardless of when the payment was made.

Rendering of services

Revenue relating to logistical services is recognised as the services are performed.

Rental income

Pallets

Revenue arising on operating leases for pallets is accounted for as on a straight line basis or a usage basis in accordance with the contract.

Property income

Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease terms and included in revenue due to its operating nature.

Property rental income is recognised within other operating income as it is not considered as related to the primary activity of the Group.

Interest income

Interest income is reported on an accruals basis using the effective interest method.

3.19 Share based payments

The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments of the Group. The fair value of the employee services received in exchange for the grant of the equity instruments is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the instruments granted. At the end of each reporting period, the Group revises its estimates of the number of instruments that are expected to vest based on the non-market vesting conditions and service conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

3.20 Changes in accounting policies and disclosures

(i) The following standards, amendments to standards and new interpretations are mandatory for the first time for the financial period beginning January 1, 2016;

- IAS 19 revised, "Defined Benefit Plans: Employees Contributions";

- Annual improvements to IFRSs 2010-2012 cycle:

§ IFRS 2, "Share-based payment"

§ IFRS 3, "Business combination"

§ IFRS 8, "Operating segments"

§ IFRS 13, "Fair Value Measurement"

§ IAS 7, "Statement of Cash Flows"

§ IAS 16, "Property, Plan and Equipment"

§ IAS 38, "Intangible Assets"

§ IFRS 9, "Financial Instruments"

§ IAS 37, "Provisions, Contingent Liabilities and Contingent Assets"

§ IAS 39, "Financial Instruments - Recognition and Measurement";

- Amendments to IAS 1, "Disclosure Initiative";

- Amendment to IAS 16, "Property, Plant and Equipment" and IAS 38, "Intangible Assets" on depreciation and amortization and IAS 16, "Property, Plant and Equipment" and IAS 41, "Agriculture" related to accounting for bearer plants;

- Amendment to IAS 27, "Equity Method in Separated Financial Statements";

- Amendments to IFRS 10, "Consolidated Financial Statements" (not implemented as the Media segment is consolidated in full, cf. Note 2 - Basis of preparation), IFRS 12, "Disclosure of Interests in Other Entities" and IAS 28, "Associate and Joint Venture" on sale or contribution of assets and other investment entities applying the consolidation exception;

- Amendment to IFRS 11, "Joint Arrangements" on acquisition of an interest in a joint operation;

- Annual improvement 2012-2014 cycle. These amendments include changes from the 2012-204 cycle of the annual improvements projects, that affect four standards: IFRS 5, "Non-current Assets Held For Sale and Discontinued Operations", IFRS 7, "Financial Instruments: Disclosure", IAS 19, "Employee Benefits" and IAS 34, "Interim Financial Reporting". This implies consequential amendments to IFRS 1, "First-Time Adoption of International Finance Reporting Standards".

(ii) New standards, amendments and interpretations issued but not yet effective for the financial year beginning January 1, 2016 and not early adopted.

- IFRS 9, "Financial Instruments" (and related amendment on general hedge accounting). The IASB has published the complete version of IFRS 9 which replaces the guidance in IAS 39. This final version includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the incurred loss impairment model used today; IFRS 9 is effective for annual reporting period beginning on or after January 1, 2018.

- IFRS 14, "Regulatory Deferral Accounts" - effective from 1 January 2016;

- IFRS 15, "Revenue from Contracts with Customers" applies to all contracts with customers except those that are financial instruments, leases or insurance contracts and introduces a five-step process that the Group will have to follow. IFRS 15 will be effective for reporting periods beginning on or after 1 January 2018;

- Amendment to IAS 7, "Statement of Cash Flows", Disclosure initiative - effective from 1 January 2017;

- Amendment to IAS 12, "Income Taxes", recognition of deferred tax assets for unrealised losses - effective from 1 January 2017;

- IFRS 16, "Leases" defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. IFRS 16 requires lessees to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments. IFRS 16 will be effective for reporting periods beginning on or after 1 January 2019;

- Amendments to IFRS 2, "Share-Based Payment", classification and measurement of Share-based payment transactions - effective from 1 January 2018;

- Amendments to IFRS 4, "Insurance Contracts", applying IFRS 9 "Financial instruments" with IFRS 4 - effective from 1 January 2018.

The Group has to assess the impact of the Standards and Interpretations which are in issuance but not yet effective at the date of the opening balance.

4 Significant accounting judgments, estimates and assumptions

The preparation of financial statements conforming to adopt IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and assumptions are based on historical experience and other factors considered reasonable at the time, but actual results may differ from those estimates. Revisions to these estimates are recognised in the period in which they are made.

4.1 Judgments

In the process of applying the Group's accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognised in the consolidated financial information:

Recognition of deferred tax assets

The assessment of the probability of future taxable income against which deferred tax assets can be utilised is based on the Group's latest approved forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. The tax rules in the numerous jurisdictions in which the Group operates are also carefully taken into consideration. If a positive forecast of taxable income indicates the probable use of a deferred tax asset in the foreseeable future, especially when it can be utilised without a time limit, that deferred tax asset is usually recognised in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties are assessed individually by management based on the specific facts and circumstances.

The Group has not recognised any deferred tax assets as there is no certainty of the timing of recovery. For further detail on deferred tax, refer to Note 19.

Trade Receivables

Restricted Shares

The Group has issued restricted shares under the "2013 Option and Incentive Plan".

Management has considered that the restricted shares issued to date should be measured similarly to share options. As per the agreement, the shares granted vest immediately and are accompanied by a restricted share agreement. Management has considered that the restrictions on shares were representative of market related vesting conditions, as the holders of the restricted shares can only dispose of their shares if the quotation price reaches different thresholds, or in certain cases on a specified anniversary following the date of the grant as long as the holder continues to have a business relationship with the Group.

Management has considered that achievement of these market conditions would require time corresponding to the advantage provided to the holders of restricted shares. Management estimated at issuance date that Tranche 1 and 2 would be achieved within 5 years and Tranche 3 within 10 years, therefore, Management applied those durations as vesting periods for the instruments. For the restricted shares that vest on a specified anniversary that anniversary date has been used as the duration of the vesting period.

Restricted shares issued in lieu on non-executive Directors remuneration have the same conditions as the restricted shares issued under the Plan.

For further detail on share-based payments transactions, refer to Note 21.

Preference shares

On July 22, 2016 the Company issued 42,328,042 Convertible Preferred Shares with a nominal value of USD 0.01 per share.

The Board has considered the accounting treatment of these Convertible Preferred Shares under IAS 32. They considered the three main tests to determine the disclosure and have determined that the Preference shares constitute equity instruments under IAS 32.

Group as a lessor - Industrial assets leased to the Chinese manufacturer

The Group has entered in 2016 into a lease agreement on the industrial assets transferred to its Chinese manufacturer. As the Group has still the control over these assets, those are maintained in the Group's balance sheet.

4.2 Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial information were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

The Management has disclosed reasonably possible assumptions and estimates, on the basis of its existing knowledge at year end. Outcomes within the next financial years that are different from these assumptions could require a material adjustment to the carrying amount of the asset or liability affected.

Share-based payments

The Group measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share (options), volatility and risk-free interest rate, dividend yield and making assumptions about them.

During both years, the Group issued restricted shares and options under the 2013 Option and Incentive Plan.

The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 21.

Employee Stock Option Plan ("ESOP")

The Group has granted awards pursuant to the 2013 Option and Incentive Plan ("ESOP") to its directors and some of its employees and consultants. The fair value of the plan at grant date is based upon actuarial assumptions estimated by the management and disclosed in Note 21.2.

Measurement of property, plant and equipment, pallet pool and investment property

The Group holds a building property which is used for both Group administrative purpose and rental to third parties. Therefore, the management has determined that the building accounting should be split between the part used by the Group, classified as property, plant and equipment, and the part rented to third parties, classified as investment property.

The initial cost of acquisition of the building is for both the building construction and the land. In determining the part of the acquisition cost related to the land, by default of explicit description in the notarial deed, the Management has made the assumption that 25% of the initial cost was related to the land.

In determining the measurement of each part of the building (PPE and investment property), the management has determined the split based on the surface used for each purpose. Management has also determined that the depreciation should be made using straight line method and over a useful life of 30 years.

Due to the inability of Management to determine the residual value at the end of the useful life, the Management has made the assumption that the residual value is nil and, therefore, the depreciation is computed on the entire value of the building cost.

The pallet pool is recognised at an amount based on standard cost of production (considering a theoretical annual nominal quantity of 2,500,000 pallets) including all expenses directly attributable to the manufacturing process and portions of related production overheads, based on normal operating capacity, and carried at this cost net of impairment and depreciation.

Finished goods and work in progress

Finished goods and work in progress are recognised at an amount based on standard cost of production including all expenses directly attributable to the manufacturing process and portions of related production overheads, based on normal operating capacity.

Management consider that this is a fair reflection of the cost of the pallets.

Pallet Pool

The pallet pool is depreciated over 5 years. Management have assessed the durability of the pallets supported by external testing and consider that this is a fair reflection of their estimated useful life. The residual value is estimated to be nil.

Management will review the useful life of the pallets at each reporting date.

Impairment of Goodwill

The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the determination of a discount rate in order to calculate the present value of the cash flows.

In assessing impairment, Management estimates the recoverable amount of cash generating units based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate (see Note 8 for details and assumptions).

5 Property, plant and equipment - Others

The Group has no liens and encumbrances on its property, plant and equipment, other than the mortgage discussed in Note 5.5 below. In 2016, the Group has capital commitments on the development and acquisition of property, plant and equipment in Canada for USD 184,476 (2015: USD 5,763,349).

There were no borrowing costs capitalised during any period.

5.1 Land & Building

As at 31 December 2016 and 2015, these assets represent the leasehold improvements in the Canadian factory and the part of a building located in Chatel, Switzerland used by the Group for both administrative purpose and for rental. The cost of the property related to the administrative purpose is classified within property, plant and equipment.

As part of the strategic reorganisation of the Group (see Note 1.2), the leasehold improvements have been fully impaired during the year 2016.

5.2 Plant & Equipment - Others

As at 31 December 2016, these assets represent mainly remaining equipment located in the Canadian factory. This remaining equipment still in Canada is mainly made of additional assembly capacities that will be whether transferred in 2017 to the industrial partners in China and Mexico (see Notes 1.2 and 5.3) or will be kept idle in Canada waiting for future assignment. The equipment dedicated to a future transfer are kept at their depreciated net book value for an amount of USD 2,531,601. The idle equipment has been subject to an impairment testing: items considered as not usable in the future have been fully impaired during the year 2016 for an amount of USD 2,948,729; other remaining items have been subject to an impairment testing and a value correction has been deducted during the year 2016 up to an amount of USD 304,794.

As at 31 December 2015, these assets represented mainly the production lines in service in the Canadian factory located in Woodbridge, Canada.

5.3 Plant & Equipment - China/Mexico

As a result of the new manufacturing strategy, the Group moved a significant portion of its industrial assets in Mexico and China; the net book value of transferred assets amounts to USD 21,398,628. RM2 is still the economical owner of the equipment located in China and Mexico.

5.4 Construction in progress

As at 31 December 2016 and 2015, the Group has several items as PPE corresponding to machines that are not yet completed for the production of pallets. These items are presented as construction in progress and are not amortized.

5.5 Security on property, plant & equipment for liabilities

The Group has granted a security interest over the property held in Switzerland in return for the CHF 1,800,000 bank loan amounting to USD 1,766,520 (2015: CHF 1,900,000 - USD 1,914,060).

6 Property, plant and equipment - Pallet pool

The Group has decided to disclose the pallet pool as a separate heading and therefore have disclosed the Pallet Pool in a separate note.

The impairment deducted from the net book value of the pallet pool is broken down as follows:

The Group recognized a value adjustment on the pool of pallets deployed (under the above caption Impairment estimation for potential losses on pallets disposals). Pallets deployed into a specific customer generate a positive free cash-flows which is below the expectations. The Group entered into discussions with the customer to improve the economics of the deal. The outcome of the discussion is likely to be a sale of such pallets. However the deal is still pending and the Group recognized a value correction as the realistic realization price is below the net book value of these assets.

7 Investment property

The investment property is a building used by the Group for both administrative purpose and for rental. The cost of the property related to the administrative purpose is classified within property, plant and equipment. The cost for the rental part is classified as investment property.

The Group has granted a security interest over the property held in Switzerland in return for the CHF 1,800,000 bank loan USD 1,766,520 (2015: CHF 1,900,000 - USD 1,914,060).

7.1 Revenue from investment property

(*) included within other operating income (see Note 18.1).

7.2 Fair value of investment property

The investment property is measured at cost. The fair value of the property as at 31 December 2016 has been determined by Régie Châtel S.A., an independent external appraiser, on 10 April 2017. Régie Châtel S.A. is a specialist in valuing such investment properties. The fair value of the property has been determined using the rental income and the construction value. The valuation has been determined with the following primary inputs:

8 Intangible assets

The Group has no intangible assets pledged as security for liabilities.

The Group has no contractual commitment for the acquisition of intangible assets.

The licence acquired in 2014 for USD 250,000 is for the use of new pallets following development of those pallets. As these are currently not being used, no amortization has been calculated on this amount. The management considers that no impairment is necessary on this licence.

8.1 Impairment of Goodwill

The goodwill represents the intangible value of the business acquired at the end of 2013 and known as "Equipment Tracking". Management has identified the relevant Cash Generating Unit as it is merged into the legal entity based in Wales with other pure RM2 departments (IT, EMEA Sales and RM2 pallets tracking).

Management has reviewed the carrying value in use of goodwill by assessing the future cash flows of the Cash Generating Unit to which the goodwill relates over the next 5 years. Using a 9% discount rate (2015: 9%), the weighted average costs of capital of the group, management have identified that there is an impairment as at December 31, 2016 USD 485,637 (2015: USD Nil). If the weighted average costs of capital of the group had been 3% higher than management's estimate (for example 12% instead of 9%), the group would have recognized a further impairment against goodwill of USD 12,926.

9 Financial assets and liabilities

9.1 Interest-bearing loans and borrowings

CHF 1,800,000 bank loan

The loan is secured by a mortgage on the building held by the Group in Switzerland for a total value of CHF 2,470,000 (2015: CHF 2,470,000) and by transfer of rental income to the lender.

9.2 Hedging activities and derivatives.

The Group has not entered into any hedging activity during periods covered by the consolidated financial statements.

9.3 Fair values

The Group estimates that the fair value of the financial assets and liabilities approximates their carrying amount as these are mainly composed of short-term receivables and payables and mainly composed of fixed interest long-term loans without advance fees.

9.3.1.1 Fair value hierarchy

The Group has no financial instruments carried at fair value as at 31 December 2016 or 31 December 2015.

10 Inventories

The cost of inventory sold and recognised as an expense during the year was USD 2,192,663 (2015: USD 2,407,751).

10.1 Raw materials

As a consequence of its strategic alliance (see Note 1.2), the closing of the Canadian factory and the move of its plant and equipment to China and Mexico, the Group has surplus of raw inventories in its premises in Canada. In order to speed up the ramp up of the Mexican manufacturer and as the Group has been successful in negotiating lower prices of raw material (fiberglass and resin) with suppliers of previous Canadian operations, the Group sold a portion of its inventory to Jabil using the new lower price in line with the expected and agreed production cost. The Group has initiated the sales of this raw material with a discount on their original acquisition value in 2016. Moreover, a part of the raw materials (fiberglass) has been detected as being of a lower quality than expected.

On this basis, an impairment on raw material has been booked in 2016 for an amount of USD 1,478,480 (2015: USD Nil).

Disposals of raw materials have continued in 2017, using the same pattern.

10.2 Work in progress

For the same reason, the stock of work in progress has started to be sold in 2016 to the Mexican manufacturer. Disposals of raw materials have continued in 2017 on the same discount basis. On this basis, an impairment on work in progress has been booked in 2016 for an amount of USD 386,553 (2015: USD Nil).

10.3 Finished goods - pallets

Finished goods represent pallets produced and not yet sold or deployed via the pallet pool in property, plant and equipment.

The Group is considering in 2017 a disposal transaction of 92k pallets located in Toronto at an unusual price, with a maximum accounting loss of circa USD 2.5m. While this price is below the average net book value of the stock of pallets at year end, it has not been considered for the impairment of the finished stocks as the Management considers this transaction is not in the normal course of business and the operation has no connection with the 2016 accounting year.

11 Trade and other receivables

The ageing of the trade receivables as at 31 December 2016 is detailed below:

The Group has deducted a value correction for impairment of the Canadian HST, Luxembourg and UK VAT receivables for USD 686,203 (2015: USD 41,946).

The other tax receivables primarily relate to Harmonised Sales Tax (HST) balances due from Canada, VAT due from Luxembourg and VAT due from United Kingdom.

12 Cash and short-term deposits