Eloro Resources Ltd. — Annual Report 2023

Mar 28, 2024

Management’s Responsibility for Financial Statements

The Consolidated Financial Statements are the responsibility of the management of Hammond Power Solutions Inc. These statements have been prepared in accordance with IFRS Accounting Standards (“IFRS”), using management’s best estimates and judgements where appropriate.

Management is responsible for the reliability and integrity of the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and other financial information contained in the report. In the preparation of these statements, estimates were sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgement and have been properly reflected in the accompanying Consolidated Financial Statements. Management is responsible for the maintenance of a system of internal controls designed to provide reasonable assurances that the assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities through the Audit Committee of the Board, which is composed of all of the directors, of whom six are non-management directors. The Audit Committee meets periodically with management and the auditors to satisfy itself that management’s responsibilities are properly discharged, to review the Consolidated Financial Statements and to recommend approval of the Consolidated Financial Statements to the Board of Directors.

KPMG LLP, the independent auditors appointed by the shareholders, has audited the Company’s Consolidated Financial Statements in accordance with Canadian generally accepted auditing standards, and their report follows. The independent auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings as to the integrity of the financial reporting process.

Adrian Thomas Chief Executive Officer

Richard C. Vollering Corporate Secretary & Chief Financial Officer

March 27, 2024

Independent Auditor’s Report

To the Shareholders of Hammond Power Solutions Inc.

Opinion

We have audited the consolidated financial statements of Hammond Power Solutions Inc. (the Entity), which comprise:

• the consolidated statements of financial position as at end of December 31, 2023 and end of December 31, 2022

• the consolidated statements of operations for the years then ended

• the consolidated statements of comprehensive income for the years then ended

• the consolidated statements of changes in equity for the years then ended

• the consolidated statements of cash flows for the years then ended

• and notes to the consolidated financial statements, including a summary of material accounting policy information (Hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2023 and December 31, 2022, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with IFRS Accounting Standards.

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “ Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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Annual Report 2023

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements for the year ended December 31, 2023. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report.

Evaluation of the carrying value of goodwill for the India cash generating unit

Description of the matter

We draw attention to Notes 2(d)(i), 3(g) and 13 of the financial statements. The goodwill balance is $11,736 thousand, of which, $7,975 thousand relates to the Hammond Power Solutions Private Limited (“India”) cash generating unit (“CGU”). The Entity conducts its annual impairment assessment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of a CGU may not be recoverable. Performing impairment testing requires management to determine the estimated recoverable amount of the relevant cash-generating units on the basis of projected future cash flows. The determination of the recoverable amount requires management to make significant estimates and assumptions which include projected revenue, projected gross margin rates, terminal growth rates, and the discount rate.

Why the matter is a key audit matter

We identified the evaluation of the goodwill impairment analysis for the India CGU as a key audit matter. There is a significant risk of misstatement as changes to certain significant estimates and assumptions could have a significant effect on the recoverable amount of the India CGU. As a result, significant auditor judgment was required in evaluating the results of the audit procedures.

How the matter was addressed in the audit

The following are the primary procedures we performed to address this key audit matter:

• We compared the Entity’s historical projected revenue and projected gross margin rates to actual results to assess the Entity’s ability to accurately project revenue and gross margin rates.

• We performed sensitivity analyses over the projected revenue and gross margin rate assumptions by using average actual growth rates realized in previous years to assess the impact on the Entity’s determination that the estimated recoverable amount of the CGU exceeded its carrying value.

• We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the appropriateness of the discount rate assumption used in the estimated recoverable amount, by comparing it to a discount rate range that was independently developed using publicly available information and considering risks specific to the CGU.

Other Information

Management is responsible for the other information. Other information comprises:

• the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.

• the information, other than the financial statements and the auditor’s report thereon, included in a document entitled “Annual Report 2023”.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions and the Annual Report 2023 as at the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditor’s report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

42 Hammond Power Solutions

In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Entity’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

• The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Entity to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Chartered Professional Accountants,

Licensed Public Accountants

The engagement partner on the audit resulting in this auditor’s report is Alexandra Duret.

March 27, 2024 Kitchener, ON, Canada

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Annual Report 2023

Consolidated Statements of Financial Position

(in thousands of dollars)

As at

	December 31, 2023		December 31, 2022
Assets
Current assets
Cash and cash equivalents (note 4)	$ 52,591	$	28,126
Accounts receivable (note 5)	128,030		86,701
Inventories (note 6)	114,590		106,353
Income taxes receivable	4,278		1,995
Prepaid expenses and other assets(notes 7 and 8)	9,949		6,948
Total current assets	309,438		230,123
Non-current assets
Property, plant and equipment (note 9)	65,841		41,742
Investment in properties (note 10)	2,940		3,121
Deferred tax assets (note 17)	11,798		8,013
Intangible assets (note 12)	6,590		7,650
Goodwill(note 13)	11,736		12,024
Total non-current assets	98,905		72,550
Total assets	$ 408,343	$	302,673
Liabilities
Current liabilities
Bank operating lines of credit (note 14)	$ 18,471	$	6,154
Accounts payable and accrued liabilities (notes 18 and 27)	126,360		92,301
Deferred revenue (note 22)	5,721		10,607
Income taxes payable	4,602		2,342
Provisions (note 21)	3,923		1,840
Currentportion of lease and other liabilities (notes 15 and 27)	6,388		4,434
Total current liabilities	$ 165,465	$	117,678
Non-current liabilities
Provisions (note 21)	307		979
Deferred tax liabilities (note 17)	22		117
Long-termportion of lease and other liabilities (notes 15 and 27)	12,171		7,005
Total non-current liabilities	12,500		8,101
Total liabilities	$ 177,965	$	125,779
Shareholders’ Equity
Share capital (note 18)	15,761		15,240
Contributed surplus	2,289		2,376
Accumulated other comprehensive income	8,630		12,431
Retained earnings	203,698		146,847
Total shareholders’ equity	$ 230,378	$	176,894
Commitments (note 16)
Subsequent events(note 30)
Total liabilities and shareholders’ equity	$ 408,343	$	302,673

See accompanying Notes to Consolidated Financial Statements.

On behalf of the Board:

William G. Hammond Chair of the Board

==> picture [82 x 27] intentionally omitted <==

David Wood Audit Chair

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Hammond Power Solutions

Consolidated Statements of Operations

Years ended December 31, 2023 and 2022 (in thousands of dollars except for per share amounts)

Consolidated Statements of Operations Years ended December 31, 2023 and 2022 (in thousands of dollars except for per share amounts)
2023		2022
Sales (note 22) $ 710,064	$	558,464
Cost of sales (notes 6) 479,053		393,279
Gross margin 231,011		165,185
Selling and distribution (note 27) 76,283		62,263
General and administrative 68,007		43,481
$ 144,290	$	105,744
Earnings from operations 86,721		59,441
Finance and other costs Interest expense 1,320		1,596
Foreign exchange loss (gain) 1,280		(96)
Share of income of investment in joint venture, net of tax (note 11) –		(4)
Other (note 27) 127		776
Net finance and other costs 2,727		2,272
Earnings before income taxes 83,994		57,169
Income tax expense (recovery) (note 17): Current 23,961		15,234
Deferred (3,366)		(2,893)
20,595		12,341
Net earnings $ 63,399	$	44,828
Earnings per share (note 19) Basic earnings per share $ 5.33	$	3.79
Diluted earnings per share $ 5.33	$	3.77

See accompanying Notes to Consolidated Financial Statements.

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Annual Report 2023

Consolidated Statements of Comprehensive Income

Years ended December 31, 2023 and 2022 (in thousands of dollars)

	2023		2022
Net earnings	$ 63,399	$	44,828
Other comprehensive income
Items that will be recognized within profit and loss:
Foreign currencytranslation differences for foreign operations	(3,801)		10,322
Other comprehensive (loss) income, net of income tax	(3,801)		10,322
Total comprehensive income	$ 59,598	$	55,150

See accompanying Notes to Consolidated Financial Statements.

46 Hammond Power Solutions

Consolidated Statements of Changes in Equity

Years ended December 31, 2023 and 2022 (in thousands of dollars)

		SHARE	CONTRIBUTED	CONTRIBUTED		AOCI*	RETAINED	TOTAL
		CAPITAL		SURPLUS			EARNINGS	SHAREHOLDERS’
								EQUITY
Balance at January 1, 2022	$	14,886	$	2,432	$	2,109	$ 106,575	$ 126,002
Total comprehensive income for the period
Net income		–		–		–	44,828	44,828
Other comprehensive income
Foreign currencytranslation differences		–		–		10,322	–	10,322
Total other comprehensive income		–		–		10,322	–	10,322
Total comprehensive income for the period		–		–		10,322	44,828	55,150
Transactions with owners, recorded directly
in equity
Dividends to equity holders (note 18)		–		–		–	(4,556)	(4,556)
Stock options exercised (note 18)		354		(56)		–	–	298
Total transactions with owners		354		(56)		–	(4,556)	(4,258)
Balance at December 31, 2022	$	15,240	$	2,376	$	12,431	$ 146,847	$ 176,894
Balance at January 1, 2023	$	15,240	$	2,376	$	12,431	$ 146,847	$ 176,894
Total comprehensive income for the period
Net income		–		–		–	63,399	63,399
Other comprehensive income
Foreign currencytranslation differences		–		–		(3,801)	–	(3,801)
Total other comprehensive income		–		–		(3,801)	–	(3,801)
Total comprehensive income for the period		–		–		(3,801)	63,399	59,598
Transactions with owners, recorded directly
in equity
Dividends to equity holders (note 18)		–		–		–	(6,548)	(6,548)
Stock options exercised (note 18)		521		(87)		–	–	434
Total transactions with owners		521		(87)		–	(6,548)	(6,114)
Balance at December 31, 2023	$	15,761	$	2,289	$	8,630	$ 203,698	$ 230,378

*AOCI – Accumulated other comprehensive income See accompanying Notes to Consolidated Financial Statements.

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Annual Report 2023

Consolidated Statements of Cash Flows

Years ended December 31, 2023 and 2022 (in thousands of dollars)

nsolidated Statements of Cash Flows nded December 31, 2023 and 2022 (in thousands of dollars)
2023	2022
Cash flows from operating activities Net earnings $ 63,399 $	44,828
Adjustments for: Share of income of investment in joint venture –	(4)
Depreciation of property, plant and equipment, right-of-use assets and investment properties 9,381	7,196
Amortization of intangible assets 1,300	3,785
Provisions 2,713	419
Interest expense 1,320	1,596
Income tax expense 20,595	12,341
Unrealized loss on derivatives 1,138	276
Share-based compensation expense 19,954	2,183
119,800	72,620
Change in non-cash workingcapital(note 25) (51,708)	(19,539)
Cash generated from operating activities 68,092	53,081
Income taxpaid (23,984)	(16,068)
Cashprovided from operatingactivities 44,108	37,013
Cash flows from investing activities Repayment of note and lease receivable 1,193	173
Acquisition (note 11) –	(3,515)
Acquisition of property, plant and equipment (20,169)	(8,646)
Acquisition of intangible assets (384)	(686)
Cash used in investingactivities (19,360)	(12,674)
Cash flows from financing activities Proceeds from issue of share capital (note 18) 434	298
Cash dividends paid (note 18) (6,548)	(4,556)
Net advances (repayments) of bank operating lines of credit 12,317	(13,113)
Interest paid (867)	(1,277)
Payment of lease liabilities (note 15) (3,906)	(3,004)
Payment of contingent consideration (675)	(651)
Cashprovided by (used in)financingactivities 755	(22,303)
Foreign exchange on cash and cash equivalents held in a foreign currency (1,038)	1,792
Cash acquired in business combination (notes 11) –	3,393
Increase in cash and cash equivalents 24,465	7,221
Cash and cash equivalents at beginning of period 28,126	20,905
Cash and cash equivalents at end ofperiod $ 52,591 $	28,126

See accompanying Notes to Consolidated Financial Statements.

48

Hammond Power Solutions

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

1. Reporting entity

Hammond Power Solutions Inc. (“HPS” or “the Company”) is a corporation domiciled in Canada. The address of the Company’s registered office is 595 Southgate Drive, Guelph, Ontario. The Company’s Class A subordinate voting shares are listed on the Toronto Stock Exchange and trade under the symbol HPS.A.

The consolidated financial statements of the Company comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group primarily is involved in the design and manufacture of custom electrical magnetics, cast resin, custom liquid filled distribution and power transformers and standard electrical transformers, serving the electrical and electronic industries. The Group has manufacturing plants in Canada, the United States (“U.S.”), Mexico and India.

2. Basis of preparation

a) Statement of compliance

These consolidated financial statements have been prepared in accordance with IFRS Accounting Standards (“IFRS”), and were approved by the Board of Directors on March 27, 2024.

b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for inventories carried at net realizable value, derivative financial instruments and share based payments which are measured at fair value, and the initial present value of finance leases receivable which are determined using cash flows implicit in the lease and a discount rate reflecting the interest rate implicit in the lease. Assets acquired and liabilities assumed in connection with business combinations are recorded based on their fair values at the date of acquisition, and contingent consideration granted concurrent with a business combination is recognized initially at fair value, with subsequent measurement occurring at fair value. Changes in the fair value of contingent consideration are recorded either through the statement of operations, or through equity, depending on the characteristics of the consideration granted.

c) Functional and presentation currency

The functional currency of the Group’s entities is the currency of their primary economic environment.

In individual companies, transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities in foreign currencies at the reporting date are re-measured to the functional currency at the exchange rate at that date. Any resulting exchange differences are taken to the statement of operations. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

On consolidation, assets and liabilities of Group entities reported in their functional currencies are translated into the Canadian dollar, being the presentation currency, at the exchange rate on the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using average exchange rates for the month during which the transactions occurred. Foreign currency differences are recognized in other comprehensive income in the cumulative translation account within accumulated other comprehensive income.

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Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

The functional currency of the Company’s Canadian operations and its subsidiaries are as follows:

Canadian and Subsidiary Operations	Functional Currency	Functional Currency
Hammond Power Solutions Inc. Delta Transformers Inc.	Canadian dollar	($)
Hammond Power Solutions, Inc. Mesta Electronics LLC 11020 Parker Drive LLC Hammond Power Solutions Latin America S. de R.L. de C.V.	U.S. dollar	($ USD)
Hammond Power Solutions S. A. de C.V.	Mexican Peso	(Pesos)
Hammond Power Solutions S.p.A. Continental Transformers s.r.l.	Euro	(EU €)
Hammond Power Solutions Private Limited	Rupee	(INR)

d) Use of estimates and judgements

The preparation of the consolidated financial statements in conformity with IFRS requires Management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

i) Critical judgements in applying accounting policies

The following are the critical judgements, apart from those involving estimations, that Management has made in the process of applying the Group’s accounting policies and that have the most significant effects on the amounts recognized in the consolidated financial statements.

Cash generating units

As indicated in note 3(g) and 3(k); the Group conducts its impairment tests at the individual asset level or, where the recoverable amount cannot be determined for an individual asset, or for goodwill, at the cash generating unit (“CGU”) level. The Group defines its CGUs based on the way it monitors and derives economic benefits from the acquired goodwill and intangibles. A cash-generating unit is the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The identification of a cash-generating unit involves judgment.

The Company has defined its cash generating units primarily as each manufacturing and contract manufacturing location, due to the fact that each location is managed separately and has its own dedicated human resources and property, plant and equipment. Each manufacturing facility produces products largely independent of the other facilities and is ultimately responsible for producing products that generate revenue. Management monitors the performance of each manufacturing unit through the use of profitability analysis, and also considers the profitability of each manufacturing unit relative to the Group’s business plan.

50 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Initial lease term

The Group leases certain manufacturing facilities, warehouse facilities, vehicles and other assets. In determining the value of a right-of-use asset and lease liability, IFRS 16 requires the Group to determine the lease payments to be made over the initial term of the lease, including renewal options which are reasonably certain to be exercised. Such payments are then discounted based on the interest rate implicit in the lease or the Group’s incremental borrowing rate. In determining the initial lease term, Management makes an assessment of the renewal periods available to the Group within each lease and evaluates the likelihood and corresponding time horizon of available renewal options. Such assessments involve judgment and ultimately may differ from the terms of leases actually experienced.

Operating segments

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The determination of operating segments involves judgment. Management has determined that the Group operates as a single operating segment, being the design, manufacture and sale of transformers.

Identification of acquired assets and liabilities

IFRS 3, Business Combinations, requires acquirers to recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed. The identification of acquired assets and liabilities involves judgment.

ii) Key sources of estimation uncertainty

The following are the key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the consolidated financial statements within the next twelve months.

Recoverability of goodwill and intangible assets

The Group tests annually or more frequently if necessary, whether goodwill or other long-lived assets have suffered any impairment in accordance with the accounting policies provided in note 3(g) and 3(k). Performing impairment testing requires management to determine the estimated recoverable amount of the relevant cashgenerating units on the basis of projected future cash flows using internal business plans or forecasts, and discounting these cash flows to appropriately reflect the time value of money.

The key assumptions made by management in deriving the recoverable amount are i) projected revenue, ii) projected gross margin rates, iii) terminal growth rates, and iv) the discount rate.

Impairment assessments inherently involve judgement as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the Company’s assumptions as to prices, costs or other factors that may result in changes in the Company’s estimates of future cash flows. Failure to realize the assumed revenues at an appropriate gross

51

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

margin or failure to improve the financial results of a CGU could result in impairment losses in the CGU in future periods.

For assumptions relating to impairment testing, refer to note 13.

Determination of fair value of acquired long-lived assets, intangible assets, and assumed liabilities

IFRS 3, Business Combinations, requires acquirers to recognize the identifiable assets acquired and liabilities assumed at fair value. The determination of fair value requires Management to make estimates around the value an independent third party, under no compulsion to act, would pay for an asset acquired or liability assumed on a standalone basis. Where possible, Management engages third-party appraisers to assist in the determination of the fair value of real property acquired. The fair value of acquired intangible assets are generally determined using discounted cash flow models and involve the use of cash flow forecasts, market-based discount rates, and/or market-based royalty rates. The fair values of liabilities assumed is generally based on discounted cash flow models which involve the use of market-based discount rates. The development of cash flow forecasts involve the use of estimates, which may differ from actual cash flows realized. Assumptions are involved in the determination of discount rates and royalty rates.

Provisions for warranty claims

The Group records a provision for warranties based on historical warranty claim information and anticipated warranty claims, based on a weighted probability of possible outcomes.

The key assumptions made by management in recording the provision are i) warranty cost, ii) probability of claim, and iii) quantum of units which may be subject to any warranty claim.

Quantifying provisions inherently involves judgment, and future events and conditions may impact these assumptions. Differences in actual future experience from the assumptions utilized may result in a greater or lower warranty cost. For further information on the Group’s provisions, refer to note 21.

3. Summary of significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by all Group entities.

On January 1, 2023 the Company adopted amendments within IAS 1 Presentation of Financial Statements related to the Disclosure of Accounting Policies. The changes required an entity to disclose material rather than significant accounting policies and provided guidance identifying material accounting policies relevant to users of the financial statements. Accordingly, management reviewed its accounting policies and updated the accounting policy information within this note to align with these amendments.

a) Basis of consolidation

The consolidated financial statements include the accounts of Hammond Power Solutions Inc. and its whollyowned subsidiaries:

• Hammond Power Solutions, Inc.

• Hammond Power Solutions, S.A. de C.V.

• Delta Transformers Inc.

52

Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

• Hammond Power Solutions Private Limited

• Continental Transformers s.r.l.

• Hammond Power Solutions S.p.A.

• Mesta Electronics LLC

• 11020 Parker Drive LLC

• Hammond Power Solutions Latin America S. de R.L. de C.V.

Joint operations arise from an arrangement in which the interested parties are bound by a contract which gives two or more parties joint control of the arrangement, and those parties have rights to the assets and obligations for the liabilities relating to the arrangement. The Company has a 50% interest in Glen Ewing Properties, an unincorporated co-tenancy. The consolidated financial statements include the Group’s share of the entity’s assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis.

Prior to obtaining control during the prior year, the Company held a 55% equity interest in the Corefficient joint venture (“Corefficient”). The Company applied the equity method of accounting for its investment in Corefficient on the basis that it did not have the power to direct the key activities of the joint venture Corefficient. Under the equity method of accounting, interests in joint ventures are initially recognized in the Consolidated Statements of Financial Position at initial cost and adjusted thereafter to recognize the Group’s share of profits or losses and movements in other comprehensive income in the income statement and in other comprehensive income respectively. Effective February 28, 2022, the Company and the joint venturer agreed to divide the operations. As a result of this transaction, the Company now owns 100% of the equity and voting interests of the entity and continued the business within Hammond Power Solutions Latin America S. de R.L. de C.V. and continues to operate the entity as a wholly owned subsidiary of the Group.

All significant inter-company transactions and balances have been eliminated.

b) Financial instruments

Financial assets and financial liabilities, including derivatives, are recognized on the consolidated statement of financial position when the Group becomes a party to the financial instrument or derivative contract.

The Group classifies its financial assets and financial liabilities in the following measurement categories i) those to be measured subsequently at fair value (either through other comprehensive income or through profit or loss) and ii) those to be measured at amortized cost. The classification of financial assets depends on the business model for managing the financial assets and the contractual terms of the cash flows. Financial liabilities are classified as those to be measured at amortized cost unless they are designated as those to be measured subsequently at fair value through profit or loss (irrevocable election at the time of recognition). For assets and liabilities measured at fair value, gains and losses are either recorded in profit or loss or other comprehensive income.

The Group reclassifies financial assets when and only when its business model for managing those assets changes. Financial liabilities are not reclassified.

• The Group has applied the following classifications:

• Cash and cash equivalents, accounts receivable and lease are classified as assets at amortized cost and are

• measured using the effective interest rate method. Interest income is recorded in the consolidated

53

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

• statement of operations, as applicable.

• Accounts payable, accrued liabilities and bank operating lines of credit are classified as other financial

• liabilities and are measured at amortized cost using the effective interest rate method. Interest expense is recorded in the consolidated statement of operations, as applicable.

• Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are

• subsequently re-measured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument,

• and if so, the nature of the item being hedged and the type of hedge relationship designated. The Group has

• not historically designated such items as hedging instruments and accordingly changes in fair value are recorded through the statement of operations.

• Contingent consideration issued in connection with a business combination that meets the definition of a

• financial liability is initially recognized at fair value at the acquisition date and is subsequently re-measured

• at fair value at the end of each reporting period, with changes recognized through the statement of operations.

All financial instruments are required to be measured at fair value on initial recognition, plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of the subsequent accounting periods.

The Group assesses all information available, including, on a forward-looking basis, the expected credit losses associated with its assets carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. To assess whether there is a significant increase in credit risk, the Group compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition based on all information available, and reasonable and supportive forward-looking information. For trade receivables only, the Group applies the simplified approach as permitted by IFRS 9 which requires expected lifetime losses to be recognized from initial recognition of receivables.

c) Cash and cash equivalents

Cash and cash equivalents include cash and short-term deposits with maturities of three months or less.

54 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

d) Property, plant and equipment

Property, plant and equipment are shown in the statement of financial position at their historical cost. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Depreciation is provided on components that have homogenous useful lives by using the straight-line method so as to depreciate the initial cost down to the residual value over the estimated useful lives. The estimated useful lives for the current and comparative periods are as follows:

• Buildings 14-30 years

• • Leaseholds and improvements lesser of 5 years and lease term

• • Machinery and equipment 4-10 years

• • Office equipment 4-10 years

• • Land is not depreciated

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

Assets included in construction-in-progress are not depreciated until the assets are available for use. Idle assets that are available for use are depreciated.

e) Intangible assets other than goodwill

Intangible assets that are acquired either separately or in a business combination are recognized when they are identifiable and can be reliably measured. Intangible assets are considered to be identifiable if they arise from contractual or other rights, or if they are separable (i.e. they can be disposed of either individually or together with other assets). Intangible assets comprise finite life intangible assets.

Finite life intangible assets are those for which there is an expectation of obsolescence that limits their useful economic life or where the useful life is limited by contractual or other terms. They are amortized over the shorter of their contractual or useful economical lives.

The estimated useful lives for the current and comparative periods are as follows:

• Customer lists and relationships 15 years

• • Technology and other patents 10-20 years

• • Software and other 4-14 years • Branding 5-15 years

Amortization methods, useful lives and residual values are reviewed at each year-end and adjusted if appropriate.

55

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

f) Research and development expenses

Research expenses are recognized as expenses in the financial period incurred.

Development expenses are recognized as an intangible asset if the Group can demonstrate the technical feasibility of making the intangible asset ready for commissioning or sale; its intention to complete the intangible asset and use or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of the appropriate resources (technical, financial or other) to complete development and use or sell the intangible asset; and its ability to provide a reliable estimate of expenses attributable to the intangible asset during its development.

g) Business Combinations and Goodwill

The Group accounts for business combinations using the acquisition method when the acquired set of activities and assets meets the definition of a business and control is transferred to the Group. In determining whether a particular set of activities and assets is a business, the Group assesses whether the set of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability to produce outputs.

For an acquisition achieved in stages, under which the Group did not previously control an investee but subsequently obtains control, the carrying value of the Group’s investment is remeasured to fair value immediately prior to the business combination, with any gain or loss reflected through the statement of operations.

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amount 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 cash generating units that are expected to benefit from the synergies of the business combination, and is tested for impairment at least annually and upon the occurrence of an indication of impairment.

The impairment tests are performed at the CGU level. The Group defines its CGUs based on the way it monitors and derives economic benefits from the acquired goodwill and intangibles. The impairment tests are performed by comparing the carrying value of the assets of these CGUs with the greater of its value in use and its fair value, less costs to sell. The value in use is based on their future projected cash flows discounted

56 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

to the present value at an appropriate pre-tax discount rate. The cash flows correspond to estimates made by Group management in financial and strategic business plans covering a period of five years. They are then projected beyond five years using a steady or declining terminal growth rate given that the Group businesses are of a long-term nature. The Group assesses the uncertainty of these estimates by conducting sensitivity analyses. The discount rate used approximates the CGUs weighted average cost of capital, with business risk incorporated into the development of the cash flow projections.

An impairment loss in respect of goodwill is never subsequently reversed. The Group completed its annual goodwill impairment tests at December 31, 2023.

h) Investment properties

Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business use in the production or supply of goods or services or for administrative purposes. The Group measures its investment properties, being the property held by Glen Ewing Properties and the Italian Marnate properties, at historical cost.

i) Inventories

Inventories are valued at the lower of cost and net realizable value.

The cost of inventories is based on the first-in first-out principle and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

When circumstances which previously caused inventories to be written down to their net realizable value no longer exist, the previous impairment is reversed.

j) Impairment of property, plant and equipment and finite life intangible assets

The Group periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. Consideration is given at each reporting date to determine whether there is any indication of impairment of the carrying amounts of the Group’s property, plant and equipment and finite life intangible assets. The Group reviews for impairment of long-lived assets, or asset groups, held and used whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

The recoverable amount is the greater of the fair value less cost of disposal and value in use. If the recoverable amount cannot be determined for one individual asset, the Group conducts its impairment test at the CGU level. In assessing value in use, the estimated future cash flows are discounted to their present value, based on the time value of money and the risks specific to the country where the assets are located. Assets that suffer impairment are assessed for possible reversal of the impairment at each reporting date.

Annual Report 2023 57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

k) Share-based payment transactions

Stock option plan

The Group has a stock-based compensation plan, which is described in note 17. The Group accounts for all stock-based payments using the fair value based method.

Under the fair value based method, compensation cost for stock options and direct awards of stock is measured at fair value at the grant date. Compensation cost is recognized in earnings on a straight-line basis over the relevant vesting period, with a corresponding amount recorded in contributed surplus. The amount recognized as an expense, is adjusted to reflect the number of awards for which the related services are expected to be met. Upon exercise of a stock option, share capital is recorded at the sum of the proceeds received and the related amount of contributed surplus.

Deferred share unit plan

The Company maintains a deferred share unit plan (“DSU Plan”) for its senior-executive management and Directors. Under the DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value of the deferred compensation. The number of DSUs issued to each holder are increased as dividends on common shares are paid to compensate the holders for dividends paid on a quarterly basis, while the DSUs are outstanding.

Under IFRS, DSUs are classified as cash-settled share-based payment transactions as the participants shall receive cash following a Redemption Event, as defined in the DSU Plan. DSUs do not contain any vesting conditions or forfeiture provisions, as they are issued in exchange for deferred compensation. As such, the Company recognizes the expense and the liability to pay for eventual redemption when DSUs are issued. Thereafter, the Company re-measures the fair-value of the liability at the end of each reporting date and the date of settlement, with the difference recognized in income or expense for the period. The fair value of DSUs is determined in accordance with the DSU Plan, which uses the average closing price for HPS shares for the five trading days immediately preceding the relevant date. The DSU liability is included within accrued liabilities.

Long Term Incentive Plan

The Company maintains a long-term Incentive plan (“LTIP”) for the Executive Officers of the Company. This plan replaces the Deferred Share Unit plan for executives. The LTIP consists of an annual grant made to the Chief Executive officer and other executive officers of Performance Share Units (“PSU”) and Restricted Share Units (“RSU”). According to the plan, the PSUs constitute 60% of the total grant and will vest at the end of a three-year period at a ratio of 0% - 150%, depending on whether management met pre-determined EPS and return on net asset (“RONA”) targets. The RSUs constitute the remaining 40% of the grant and will vest at the end of a threeyear period at 100%. The increase or decrease in value of the vested PSU’s and RSU’s over the three-year period will be determined by the increase or decrease of the share price.

The annual grant is determined by the Compensation Committee, and are currently set at 35% of the executive’s salary and 50% of CEO’s salary. The grant vests after a three-year performance period and is dependent on continuous employment with the Company over that period, with exceptions for retirement and involuntary terminations. After vesting, the value of the PSUs and RSUs will be determined based on the PSU

58 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

vesting factor and the share price. The value will be paid in cash to the participant, after which, the PSUs and RSUs will be extinguished. Under IFRS, RSUs and PSUs are classified as cash-settled share-based payment transactions as the participants shall receive cash following a Redemption Event, as defined in the LTIP Plan. LTIP units contain vesting conditions, as they are issued in exchange for deferred compensation. As such, the Company recognizes the expense and the liability to pay for eventual redemption when RSUs and PSUs are issued. Thereafter, the Company re-measures the fair-value of the liability at the end of each reporting date and the date of settlement, with the difference recognized in income or expense for the period. The fair value of RSUs and PSUs is determined in accordance with the LTIP Plan, which uses the average closing price for HPS shares for the five trading days immediately preceding the relevant date. The LTIP liability is included within accrued liabilities.

l) Provisions

Provisions comprise liabilities of uncertain timing or amounts that arise from restructuring plans, environmental, litigation, commercial or other risks. Provisions are recognized when there exists a legal or constructive obligation stemming from a past event and when the future cash outflows can be reliably estimated. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. A restructuring provision relating to a sale or termination of a line of business, the closure of business locations in a country or region, changes in management structure or fundamental reorganizations that have a material effect of the nature or focus of the Group’s operations are recognized when the Group has a detailed, formal plan for the restructuring that identifies:

• The business or part of a business concerned;

• The principal locations affected;

• The location, function and approximate number of employees affected;

• The expenditures that will be undertaken; and

• When the plan will be implanted.

Notwithstanding the above, no provision is recorded until such time a valid expectation by those affected by the plan has been raised.

m) Revenue

The Group recognizes revenue using a 5-step approach:

• Step 1: Identify the contract(s) with a customer.

• Step 2: Identify the performance obligations in the contract.

• Step 3: Determine the transaction price.

• Step 4: Allocate the transaction price to the performance obligations in the contract.

• Step 5: Recognize revenue when (or as) the Group satisfies a performance obligation.

The Group considers a performance obligation satisfied when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. A performance obligation represents a good and service (or a bundle of goods or services) that is distinct or a series of distinct goods or services

Annual Report 2023 59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

that are substantially the same. The Group typically satisfies its performance obligation upon shipment of its transformers. Any required testing or compliance requirements will have been satisfied prior to shipment of the transformer. Payment is typically due within 30 days of shipment, with limited customers being granted extended terms of up to 60 days. As a result, consideration is generally fixed and does not contain any significant financing components. The Group has a return policy for credit on standard stocked items and no custom build product can be returned. Historically, returns have been minimal and are expected to continue to remain low. The Group’s product is purchased with a standard warranty and there is no option to purchase any additional warranty coverage.

A contract asset represents the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer that is not yet unconditional. In contrast, a receivable represents the Group’s unconditional right to consideration in that only the passage of time is required before payment of that consideration is due.

A contract liability represents the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer.

Incremental costs to obtain a contract are typically short-term in nature and the Group applies the practical expedient permitted under IFRS 15 to recognize such costs as an expense when incurred if the amortization of the asset that the Group would have otherwise recognized is less than one year.

n) Income taxes

Income tax expense comprises current and deferred tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

o) Employee benefits

The Group maintains a defined contribution plan, which is described in note 20, and have short-term employee benefits.

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, are recognized as an employee benefit expense in profit or loss in the periods in which services are rendered by employees.

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash

60 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

p) Finance income and finance costs

Finance income and finance costs comprise interest income, interest expense on borrowings, foreign currency losses (including changes in fair value of derivative foreign currency financial instruments measured at fair value through profit and loss).

Foreign currency gains and losses are reported on a net basis.

q) Earnings per share

The Group presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing net earnings of the Group by the weighted average number of common shares outstanding during the reporting period. Diluted EPS are computed similar to basic EPS except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that proceeds from such exercises along with any unamortized stock-based compensation were used to acquire common shares at the average market price during the year.

r) Leases

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The rightof-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The group applies a single discount rate to the portfolio of leases with reasonably similar characteristics.

The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate or the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

The Group does not recognize right-of-use assets and lease liabilities for contracts that have a lease term of 12 months or less or are low-value assets (under $5,000).

s) New accounting pronouncements adopted during the period

The Group adopted the following amendments in its financial statements for the annual period beginning on January 1, 2023. The adoption of the amendments did not have a material impact on the consolidated financial statements.

• Definition of accounting estimates (Amendments to IAS 8);

61

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

• Disclosure initiative – accounting policies (Amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements); and

• Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes).

t) New accounting pronouncements

The International Accounting Standards Board has issued the following Standards, Interpretations and Amendments to Standards that are not yet effective, have not yet been adopted by the Group and are not expected to have a material impact on the consolidated financial statements.

• The following amendments are effective for the annual period beginning on January 1, 2024:

• Classification of liabilities as current or non-current (Amendments to IAS 1) and Non-current liabilities

• with covenants (Amendments to IAS 1);

• Lease liability in a sale and leaseback (Amendments to IFRS 16).

4. Cash and cash equivalents

	December	31, 2023	December	31, 2022
Cash	$	17,131	$	13,894
Cash equivalents		35,460		14,232
	$	52,591	$	28,126

5.

Accounts receivable

	December 31, 2023	December	31, 2022
Trade accounts receivable	$ 110,938	$	75,147
Value added tax receivable	10,169		6,602
Other receivables	6,923		4,952
	$ 128,030	$	86,701

Trade accounts receivable is presented net of expected credit losses of $2,616,000 (December 31, 2022 – $2,806,000).

A continuity of the Group’s allowance for doubtful accounts is as follows:

	December	31, 2023	December	31, 2022
Opening balance	$	2,806	$	2,359
Additional allowances		611		837
Writeoffs		(31)		(37)
Adjustments		(770)		(353)
	$	2,616	$	2,806

62 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

6. Inventories

ventories
	December 31, 2023	December 31, 2022
Raw materials	$ 59,786	$	51,773
Work in progress	5,332		3,154
Finishedgoods	49,472		51,426
	$ 114,590	$	106,353

Raw materials and changes in finished goods, and work in progress recognized as cost of sales during the year amounted to $478,499,000 (2022 – $391,317,000). In addition, during the year, write-downs in the amount of $12,000 were recognized (2022 – reversal of write-downs of $78,000). Inventories carried at net realisable value as at December 31, 2023 were $578,000 (December 31, 2022 – $485,000).

7. Prepaid and other assets

repaid and other assets
	December 31, 2023	December	31, 2022
Prepaid expenses	$ 8,414	$	4,109
Currentportion of long-term lease and note receivable (note 8)	1,535		2,839
	$ 9,949	$	6,948

8. Lease receivable

Concurrent with the disposal of a product line in 2017, the Group entered into a lease agreement for one of its manufacturing facilities in Italy, under which the purchaser has the use of the plant, which includes both the land and the building, to October 2023. Consideration was in the form of a lease receivable, which the Company has determined meets the definition of a finance lease.

The lease receivable is calculated based on the present value of the future principal and interest cash flows, discounted at the market rate of interest at the lease inception date, determined to be 1.15%. Unless one of the Parties sends to the other a twelve month prior written notice of termination, at the end of each six year term, the agreement will be automatically renewed by an equal period.

Put and call option

The lease agreement included a put and call option related to the leased premises, exercisable within 60 days after September 30, 2023. The call option granted the purchaser an option to purchase the premises for consideration equal to 2,225,000 EUR (approximately $3,249,000). The put option granted HPS an option to sell the plant to the purchaser for consideration equal to the initial plant purchase price of 2,225,000 EUR. Under both the call and put option the plant purchase price was to be reduced by 50% of the monthly rent installments received, to a maximum of 375,000 EUR (approximately $548,000). If the purchaser failed to complete the acquisition of the leased premises upon the exercise of the put option by the Company and pay the required consideration, the purchaser would pay 500,000 EUR (approximately $730,000) in liquidated damages.

On November 22, 2023, given that the expiry date to exercise its put option was approaching and that the parties had not yet entered into any settlement agreement or a preliminary agreement for the sale and purchase

63

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

of the plant, the Group exercised its put option, specifying that the final plant purchase price, inclusive of any reduction agreed in the lease agreement, was equal to EUR 1,885,000. The date under which it will be settled has been extended into 2024.

Should the parties enter into a settlement agreement, the above-mentioned term of 30 business days to execute the necessary agreement to purchase the plant shall be deemed as interrupted as at November 22, 2023 and shall start elapsing (i) only if the plant and the solar panels installed on the roof thereof are not purchased by the purchaser, and (ii) from the first day after the date on which the sale and purchase has not been completed pursuant to the settlement agreement.

As a result of discussions with the purchaser in 2023, the Group and the purchaser are negotiating a settlement of various outstanding liabilities and necessary repairs to the building.

As at December 31 consideration receivable consists of:

As at December 31 consideration receivable consists of:
	December 31, 2023		December 31, 2022
Lease receivable of 1,050 EUR (2022 – 1,957 EUR), with monthly lease
payments of 13 EUR, bearing interest of 1.15% per annum.
Gross cash entitlement:	$ 1,535	$	2,867
Less: unearned finance income	–		(28)
Net lease receivable	1,535		2,839
Currentportion included withinprepaid expenses and other assets	$ 1,535	$	2,839

The aggregate amount of principal payments are expected to be received in the next year.

Refer to note 30 for subsequent event disclosure regrading this transaction.

9. Property, plant and equipment

Property, plant and equipment comprise owned and leased assets that do not meet the definition of investment property. Carrying amounts of owned and right of use assets are as follows:

	December 31, 2023	December 31, 2022	December 31, 2022
Property, plant and equipment owned	$ 50,357	$	34,789
Right-of-use asset	15,484		6,953
	$ 65,841	$	41,742

64 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

									Construction	Construction
				Leaseholds &		Machinery &		Office	in	Progress &
		Land	Buildings	Improvements		Equipment		Equipment		Deposits	Total
Cost
Balance at January 1, 2022	$	4,198	$ 18,518	$	1,865	$ 55,207	$	11,899	$	4,353	$ 96,040
Acquisition (note 11)		–	–		–	4,713		131		–	4,844
Additions (transfers)		–	1,180		335	7,405		1,237		(1,511)	8,646
Disposal		–	–		–	(54)		(16)		–	(70)
Effect of movements in
exchange rates		(16)	(47)		222	2,280		231		194	2,864
Balance at December 31, 2022	$	4,182	$ 19,651	$	2,422	$ 69,551	$	13,482	$	3,036	$ 112,324
Balance at January 1, 2023	$	4,182	$ 19,651	$	2,422	$ 69,551	$	13,482	$	3,036	$ 112,324
Additions		181	2,190		238	4,561		1,696		13,072	21,938
Disposal		–	–		–	(95)		–		–	(95)
Effect of movements in
exchange rates		(14)	(60)		146	(1,069)		77		(69)	(989)
Balance at December 31, 2023	$	4,349	$ 21,781	$	2,806	$ 72,948	$	15,255	$	16,039	$ 133,178
Accumulated Depreciation
Balance at January 1, 2022	$	–	$ 12,916	$	1,246	$ 45,963	$	10,763	$	–	$ 70,888
Depreciation for the year		–	826		128	2,908		703		–	4,565
Disposal		–	–		–	(52)		(15)		–	(67)
Effect of movements in
exchange rates		–	(17)		190	1,795		181		–	2,149
Balance at December 31, 2022	$	–	$ 13,725	$	1,564	$ 50,614	$	11,632	$	–	$ 77,535
Balance at January 1, 2023	$	–	$ 13,725	$	1,564	$ 50,614	$	11,632	$	–	$ 77,535
Depreciation for the year		–	1,156		211	3,676		848		–	5,891
Disposal		–	–		–	(70)		–		–	(70)
Effect of movements in
exchange rates		–	(24)		152	(703)		40		–	(535)
Balance at December 31, 2023	$	–	$ 14,857	$	1,927	$ 53,517	$	12,520	$	–	$ 82,821
Carrying amounts
At December 31, 2022	$	4,182	$ 5,926	$	858	$ 18,937	$	1,850	$	3,036	$ 34,789
At December 31, 2023	$	4,349	$ 6,924	$	879	$ 19,431	$	2,735	$	16,039	$ 50,357

Depreciation is recorded in the statement of earnings as follows: cost of sales $5,510,000 (2022 – $4,098,000), selling and distribution $nil (2022 – $nil) and general and administrative $381,000 (2022 – $467,000).

65

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Right of use assets

The Group leases many assets including buildings, vehicles and office equipment. Information about leases for which the Group is a lessee is presented below.

		Buildings		Vehicles		Office		Total
						Equipment
Balance at January 1, 2022	$	5,237	$	535	$	36	$	5,808
Additions		3,527		145		–		3,672
Disposal		(466)		(47)		–		(513)
Depreciation		(2,159)		(273)		(15)		(2,447)
Effect of movements in exchange rates		390		43		–		433
Carrying amount at December 31, 2022	$	6,529	$	403	$	21	$	6,953
Balance at January 1, 2023	$	6,529	$	403	$	21	$	6,953
Additions		11,852		685		–		12,537
Disposal		(438)		–		–		(438)
Depreciation		(2,964)		(329)		(13)		(3,306)
Effect of movements in exchange rates		(272)		10		–		(262)
Carrying amount at December 31, 2023	$	14,707	$	769	$	8	$	15,484

Certain building leases maintained by the Group contain renewal options. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The majority of the Group’s lease payments related to its production facilities located in Mexico.

• The first renewal option commenced in May 2020, with annual lease payments of $676,000, and is for a fiveyear term. The Group retains rights to renew this lease for 3 successive 5-year periods.

• There was additional space leased during 2023 as an extension of this plant which commenced on March 15, 2023 with annual lease payments of $445,000 and is for a five-year term.

• The Group’s lease on its second Mexican production facility was renewed on March 31, 2023 and carries annual lease payments of $690,500 and is for a four-year term.

• There was a third space leased at the end of 2023 with a lease commencement date of February 2024 with annual lease payments of $1,495,000 and is for a seven year term. The Group retains rights to renew this lease for 2 successive five-year terms. The Company had accessed this facility as of December 31, 2023 to begin installing equipment and completing leasehold improvements.

• The extension options held are exercisable only by the Group and not by the lessors. The Group assesses at lease commencement whether it is reasonably certain to exercise the options.

66 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

10. Investment in properties

Investment in properties
	December	31, 2023	December	31, 2022
Glen Ewing Property	$	1,044	$	1,044
Marnate Property (net of accumulated
depreciation of $1,624 (2021 - $1,415))		1,896		2,077
	$	2,940	$	3,121

Glen Ewing Property

The Group has a 50% ownership interest in a property in Georgetown, Ontario, (referred to as the Glen Ewing Property). It is a vacant plot of land currently under environmental remediation, and no revenue was derived from it in 2023 or 2022. The property is carried at cost. The estimated fair value of the property as at December 31, 2023 is $1,150,000 (2022 – $1,150,000). The fair value was determined based on independent available market evidence, with reference to comparable market transactions. The Group’s share of ongoing legal, consulting and remediation costs during the year was $78,000 (2022 – $148,000).

Marnate Property

The Group owns a property in Marnate, Italy, (referred to as the Marnate Property). As part of the sale transaction of certain of the assets and liabilities of the Italian company in 2019, the purchaser has leased the Marnate Property for a period of five years at an annual rental amount of 100,400 EUR (approximately $147,000). The operating expenses for this property were 160,000 EUR (approximately $234,000) in 2023 and 225,000 EUR (approximately $326,000) in 2022. Depreciation on the facility was recorded in the statement of earnings as general and administrative expenses in the amount of $124,000 (2022 - $184,000). The estimated fair value of the property as at December 31, 2023 is 2,130,000 EUR (approximately $3,111,000). The fair value was determined based on independent available market evidence, based on comparable property sales, by an independent valuator.

11. Corefficient

The Company and National Material L.P. (“National”) had operated the joint venture in Monterrey, Mexico under the name Corefficient S. de R.L. de C.V. Effective February 28, 2022, the Company and National had agreed to divide the operations, with HPS retaining certain equipment, employees, obligations, and other financial assets and liabilities, and National withdrawing certain assets and capital in exchange for redeeming their ownership interest. The Corefficient name was also retained by National. The operation continues to produce transformer cores to supply the Group’s facilities in Mexico.

Total consideration received by National in connection with this transaction was $10,809,000 comprised of inventory valued at $1,705,000, property, plant and equipment valued at $5,589,000 and a note payable in the amount of $3,515,000, repayable in six equal instalments, due monthly commencing March 2022.

67

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

As a result of this transaction, the Company now owns 100% of the equity and voting interests of the former Corefficient (referred to here as “Corefficient”) and continued the business within Hammond Power Solutions Latin America S. de R.L. de C.V. and continues to operate the entity as a wholly owned subsidiary of the Group. As the Company has acquired control of the former joint venture, the transaction constituted a business combination. The Company measured the fair value of its previously held interest in Corefficient immediately prior to obtaining control and determined it to be equivalent to its carrying value.

The allocation of the fair value of the acquired business is as follows:

Cash	$	3,393
Accounts receivable and other assets		16,513
Inventories		1,459
Property, plant and equipment		5,317
Deferred future tax asset		2,431
Assets	$	29,113
Current liabilities	$	(15,900)
Fair value of acquired business	$	13,213

The accounts receivable balance of $13,928,000, included in Accounts receivable and other assets above, was presented net of expected credit losses of $293,000. The contractual cash flows not expected to be collected is $nil.

Included in the Group’s consolidated results to February 28, 2022, the date of acquisition, the Group’s share of income of investment in joint venture of $4,000.

The agreement includes a contingent consideration element relating to unrecognized tax loss carryforwards generated by Coreffecient, under which if the Company is able to utilize the losses following the business combination, the Company must pay National 45% of the tax savings realized, to a maximum of $837,000. As at the acquisition date, the fair value of the consideration was determined to be $nil.

The acquisition costs incurred related to this transaction during 2022 were $177,000 which were included in general and administrative expense.

Included in the Group’s consolidated results for the twelve months ended December 31, 2022, was revenue of $5,191,000 and net earnings of $2,828,000 recognized by Corefficient from the date of acquisition to December 31, 2022. If the Company had acquired Corefficient effective January 1, 2022, the revenue would have been approximately $5,191,000 and there would have been net income of $2,834,000. The revenue of the consolidated group would have been approximately $558,464,000 and net income of the consolidated group would have been $44,834,000.

68 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

12. Intangible assets

Intangible assets
			Customer lists,			Externally
		Technology		relationships		acquired
Intangible assets		and Patents	and branding			software		Total
Cost
Balance at January 1, 2022	$	7,776	$	12,006	$	8,453	$	28,235
Additions		–		–		686		686
Effect of movements in exchange rates		33		(311)		(45)		(323)
Balance at December 31, 2022	$	7,809	$	11,695	$	9,094	$	28,598
Balance at January 1, 2023	$	7,809	$	11,695	$	9,094	$	28,598
Additions		–		–		384		384
Effect of movements in exchange rates		(120)		(119)		–		(239)
Balance at December 31, 2023	$	7,689	$	11,576	$	9,478	$	28,743
Accumulated Amortization
Balance at January 1, 2022	$	4,819	$	7,988	$	4,925	$	17,732
Amortization for the year		304		872		2,610		3,786
Effect of movements in exchange rates		(33)		(493)		(44)		(570)
Balance at December 31, 2022	$	5,090	$	8,367	$	7,491	$	20,948
Balance at January 1, 2023	$	5,090	$	8,367	$	7,491	$	20,948
Amortization for the year		309		328		663		1,300
Effect of movements in exchange rates		(55)		(42)		2		(95)
Balance at December 31, 2023	$	5,344	$	8,653	$	8,156	$	22,153
Balance at
At December 31, 2022	$	2,719	$	3,328	$	1,603	$	7,650
At December 31, 2023	$	2,345	$	2,923	$	1,322	$	6,590

Amortization of $560,000 (2022 – $2,704,000) has been recognized in cost of sales, $119,000 (2022 – $120,000)

has been recognized in selling and distribution and $621,000 (2022 – $961,000) has been recognized in general and administrative.

None of the intangible assets has been internally developed.

Research and development expenses of $566,000 (2022 –$425,000) have been recognized in cost of sales in the consolidated statements of earnings. No research and development costs have been capitalized (2022 – $nil).

Annual Report 2023 69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

13. Goodwill and impairment testing for cash-generating units

Goodwill	December 31, 2023	December 31, 2022	December 31, 2022
Opening balance	$ 12,024	$	12,216
Effect of movements of exchange rates	(288)		(192)
Endingbalance	$ 11,736	$	12,024

The Company conducts its annual impairment assessment of CGUs which contain goodwill, as well as any corresponding acquired long-lived assets including intangible assets and property, plant and equipment in the fourth quarter of each year, which corresponds with its annual planning cycle, and whenever events or changes in circumstances indicate that the carrying amount of an asset or CGU may not be recoverable. The Company did not identify any triggering events during the course of 2023 indicating that the carrying amount of its assets and CGUs may not be recoverable, which would require the performance of an impairment test for those CGUs which did not contain goodwill.

Impairment testing for cash-generating units containing goodwill

The Company has three subsidiaries identified as CGUs that contain goodwill. The CGUs and their respective goodwill balances are as follows: Delta Transformers Inc. (“Delta”) $2,180,000 (2022 – $2,180,000), Hammond Power Solutions Private Limited (“India”) $7,975,000 (2022 – $8,226,000) and Mesta Electronics LLC (“Mesta”) $1,581,000 (2022 – $1,618,000).

For its 2023 annual impairment assessment of CGUs containing goodwill, the Company used cash flow projections based primarily on its business plan for the following year, and projections for the ensuing four year period. The Company’s business plan is primarily based on financial projections submitted by its subsidiaries in the fourth quarter of each year, together with inputs from customer teams. This plan is subjected to reviews by various levels of management as part of the Company’s annual planning cycle, and is approved by the Board of Directors. The values used in the cash flow projections are based on historical sales, internal growth rate assumptions, and available market data.

India

Based on the Company’s projections, a five year cash flow forecast was completed and discounted to presentvalue using discount rate of 18.10% (2022 – 18.8%). Through the five year cash flow projections, the Company’s model also incorporated year 1 sales growth rates of 40.6% (2022 – 44.3%). The annual sales growth rates for year 2 to year 5 are in the range of 15.0% – 25.3% (2022 – year 2 to year 5 – 9.1% – 19.0%) based on the CGUs operating history and strategic sales growth initiatives. Cash flows beyond the five year period have been extrapolated using terminal growth rate of 8.0% (2022 – 8.0%).

70 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Delta

Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-value using discount rate of 17.1% (2022 –16.6%). Through the five year cash flow projections, the Company’s model also incorporated year 1 sales growth rates of 2.2% (2022 – 16.9%). The annual sales growth rates for year 2 to year 5 are 3.0% (2022 – year 2 to year 5 – 2.4% - 3.9%) based on the CGUs operating history and strategic sales growth initiatives. Cash flows beyond the five year period have been extrapolated using terminal growth rate of 3.0% (2022 – 3.0%).

Mesta

Based on the Company’s projections, a five year cash flow forecast was completed and discounted to present-value using discount rate of 26.7% (2022 – 27.4%). Through the five year cash flow projections, the Company’s model also incorporated annualized year 1 sales growth rate of 24.9% (2022 – 83.0%). The annual sales growth rates for year 2 to year 5 are 3% (2022 –3.0%) based on the CGUs operating history and strategic sales growth initiatives. Cash flows beyond the five year period have been extrapolated using terminal growth rate of 3.0% (2022 – 3.0%).

Management’s approach to determining projected revenue includes consideration of current bookings, consultation with its salesforce and historical results. The Company’s process for determining projected gross margin rates includes consideration of current pricing information from suppliers and historical gross margin rates realized by the Company. The Company determines the terminal growth rate with reference to published economic data pertaining to the applicable industry and country in which the cash generating unit operates. The discount rate is determined with reference to the cash generating unit’s weighted average cost of capital. While management believes that estimates of future cash flows and discount rates are reasonable, different assumptions regarding future cash flows or discount rates could materially affect the outcome of the impairment test. Management believes that certain reasonable possible changes in the key assumptions on which the recoverable amounts are based could cause the carrying amount to exceed the recoverable amount in the India CGU. As of December 31, 2023, a discount rate increase of 18.1% than the assumptions utilized would cause the estimated recoverable amount to be equal to the carrying amount for this CGU (December 31, 2022 – a discount rate increase of 7.6% or a 8.7% lower terminal growth rate).

For the Delta and Mesta CGUs, management believes that any reasonable possible change in the key assumptions on which the recoverable amounts are based would not cause the carrying amount to exceed the recoverable amount.

Upon completion of the annual impairment assessment it was determined that the recoverable amount of the CGUs exceeded their respective carrying values and no impairment existed as at December 31, 2023.

71

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

14. Bank operating lines of credit

The Group’s North American current banking agreement, which expires in June 2026, consists of a $50,000,000 U.S. revolving credit facility. The revolving credit facility can be drawn in U.S. Prime borrowings, Canadian Prime borrowings, Canadian Dollar Offered Rate (“CDOR”) borrowings or the London Inter-Bank Offered rate (“LIBOR”) benchmark replacement rate borrowings. The facilities are unsecured.

Interest on the revolving credit lines is dependent on certain financial ratios and ranges from Canadian bank prime rate plus 0.0% to Canadian bank prime rate plus 0.4% for the Canadian dollar denominated revolving credit lines or, if designated, the bank’s CDOR rate plus 1.40% to 1.90% and the Canadian overdraft loans at Canadian bank prime rate; and from U.S. base rate minus 1.00% to U.S. base rate minus 0.50% for the U.S. dollar denominated revolving credit lines or, USD overdraft loan at USD prime minus 1.00%.

The Group also has a 4,000,000 EUR unsecured Euro facility that matures June 2026 and may be renewed in writing each year to extend the maturity date for the facility for a further 365 days, subject to approval from the lender. The facility is comprised of a 3,750,000 Euro revolver and 250,000 Euro overdraft facility. The revolver facility bears interest at 2.25% plus the relevant Market Index, Euribor of 3.845% (2022 – plus margin of 2.25%, Euribor on December 31, 2022 – 1.895%, Euribor).

Hammond Power Solutions Private Limited maintains an additional demand credit facility for an unsecured working capital loan up to 515,000,000 Indian Rupee (INR”) (2022 – 515,000,000 INR) consisting of the subfacilities of a 40,000,000 INR (2022 – 40,000,000 INR) short-term working capital demand loan, a 475,000,000 INR (2022 – 475,000,000 INR) facility for bank guarantees. The demand loan bears interest at the relevant Market Index + 2.5% and the bank guarantees are at a rate of 1.0%. As at December 31, 2023, there was $nil Canadian dollar equivalent of Rupees drawn against the working capital demand loan (2022 – $nil). As at December 31, 2023 there was 351,156,000 INR, Canadian equivalent $5,583,000 (2022 – 265,106,000 INR, Canadian equivalent $4,347,000) drawings against the bank guarantees.

Based on exchange rates in effect at December 31, 2023, the combined Canadian dollar equivalent available across all facilities, prior to any utilization of the facilities was $80,353,000 (2022 – $82,122,000).

As at December 31, 2023, the Canadian dollar equivalent outstanding under the U.S. dollar revolving credit facility was $13,902,000, consisting of $5,902,000 Canadian dollars drawn and the Canadian equivalent of $8,000,000 U.S. dollars drawn (2022 – $1,531,000 – consisting of $1,531,000 Canadian dollars drawn and the Canadian equivalent of $nil U.S. dollars drawn). As well, $4,569,000 (2022 – $4,623,000) Canadian dollar equivalent of Euros was outstanding under the Euro facility, and $nil (2022 – $nil) Canadian dollar equivalent of Indian rupees under the Rupee facility. Amounts drawn on the facility have been recognized as current liabilities based on the Company’s anticipated repayment plans.

72 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

15. Lease and other long-term liabilities

Lease and other long-term liabilities
	December	31, 2023	December	31, 2022
Lease liabilities	$	16,421	$	8,593
Contingent consideration (note 27)		2,138		2,846
	$	18,559	$	11,439
Current	$	6,388	$	4,434
Non-Current	$	12,171	$	7,005

16.	Right of use liability maturity analysis – contractual undiscounted cash flows December 31, 2023 December 31, 2022
	Less than one year $ 5,500 $ 3,198 One to five years 11,838 5,905 More than fiveyears 2,877 –
	Total undiscounted lease liabilities $ 20,215 $ 9,103
	Less: effect of discountingand foreign exchange $ (3,794) $ (510)
	Lease liabilities included in the statement of financialposition $ 16,421 $ 8,593
	Current $ 4,250 $ 2,925 Non-current $ 12,171 $ 5,668
	Amounts recognized in statement of operations Year Ended December 31, 2023 Year Ended December 31, 2022
	Interest on lease liabilities $ 395 $ 232 Amounts recognized in statement of cash flows Year Ended December 31, 2023 Year Ended December 31, 2022
	Payment of lease liabilities $ 3,906 $ 3,004 Commitments December 31, 2023 December 31, 2022
	Capital expenditure commitments $ 12,252 $ 3,484

73

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

17. Income taxes

Income tax expense			2023		2022
Current tax expense
Currentperiod		$	23,961	$	15,234
Deferred tax recovery
Origination and reversal of temporary differences			(3,329)		(2,894)
Decrease in tax rate			(37)		1
			(3,366)		(2,893)
Total income tax expense		$	20,595	$	12,341
Reconciliation of effective tax rate	2023	2023	2022		2022
Net earnings		$ 63,399		$	44,828
Income tax expense		20,595			12,341
Earnings before income taxes		83,994			57,169
Income tax expense using the Company’s
domestic tax rate	39.50%	33,178	39.50%		22,582
Effect of tax rates in foreign jurisdictions	(11.04%)	(9,268)	(12.82%)		(7,328)
Decrease (increase) in tax rate	(0.04%)	(37)	0.00%		1
Non-deductible expenses/non-taxable
income	(1.25%)	(1,052)	(0.50%)		(284)
Reduced rate for active business and
manufacturing and processing	(2.94%)	(2,468)	(1.89%)		(1,081)
Losses for which no deferred tax asset was
recognized	0.30%	252	(4.05%)		(2,314)
Dividend withholding tax	0.00%	–	0.84%		478
Other	(0.01%)	(10)	0.50%		287
	24.52%	$ 20,595	21.58%	$	12,341

74 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Unrecognized temporary differences

At December 31, 2023, pre-tax temporary differences of $179,057,000 (2022 – $127,871,000) related to investments in subsidiaries were not recognized because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future. The tax liability in the event the Company were to sell these investments would be $22,382,000 (2022– $15,984,000) based on current tax rates.

Deferred tax assets have not been recognized in respect of the following items:

	December	31, 2023	December 31, 2022	December 31, 2022
Tax losses	$	9,848	$	9,561
Basis difference in subsidiary		31,643		30,688
Financial interests deductible in a future period		4,586		4,552
Provisions		883		1,201
Inventory		441		–
Property,plant and equipment		623		–
	$	48,024	$	46,002

The tax losses, financial interests deductible, provisions, inventory and property, plant and equipment deductions carry forward indefinitely and relate to HPS S.p.A and Continental Transformers s.r.l. The basis difference in subsidiary, when realized, will provide the Company a capital loss that carries forward indefinitely. The benefit of these items has not been reflected in the consolidated financial statements as it is uncertain as to whether the Company will be able to utilize the deductions.

75

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Recognized deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

	Assets	Assets	Liabilities	Liabilities
	2023	2022	2023		2022
Property, plant and equipment	$ 335	$ 1,166	$ (6,488)	$	(3,539)
Intangible assets	346	415	(378)		(468)
Scientific research and experimental
development	–	44	(41)		(17)
Inventories	712	653	–		–
Lease and notereceivable	–	–	(3,062)		(3,832)
Loans and borrowings	4,636	1,833	–		–
Employee benefits	5,445	1,445	(159)		(161)
Unrealized losses (gains) on
forward contracts and
foreign denominated loans
payable/receivable	164	184	(38)		(2)
Provisions and tax reserves	2,882	3,299	(4)		–
Tax loss carry-forwards	5,631	5,140	–		–
Basis difference in subsidiary	1,795	1,736	–		–
Tax assets (liabilities)	21,946	15,915	(10,170)		(8,019)
Set off of tax	(10,148)	(7,902)	10,148		7,902
Net tax assets (liabilities)	$ 11,798	$ 8,013	$ (22)	$	(117)

76 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Movement in temporary differences during the year ended December 31, 2023:

			Recognized
			in other
Balance	Recognized in	Recognized in	comprehensive		Balance
December 31, 2022	retained earnings	profit or loss	income	December 31, 2023
Property, plant and equipment $ 2,373	$ –	$ 3,780	$ –	$	6,153
Intangible assets 53	–	(21)	–		32
Scientific research and experimental development (27)	–	68	–		41
Inventories (653)	–	(59)	–		(712)
Long-term lease and note receivable 3,832	–	(770)	–		3,062
Loans and borrowings (1,833)	–	(2,803)	–		(4,636)
Employee benefits (1,284)	–	(4,002)	–		(5,286)
Unrealized gains on forward contracts and foreign-denominated loans payable/receivable (182)	–	56	–		(126)
Provisions and tax reserves (3,299)	–	421	–		(2,878)
Tax loss carry-forwards (5,140)	–	(491)	–		(5,631)
Basis difference in subsidiary (1,736)	–	(59)	–		(1,795)
$ (7,896) Foreign exchange	$ –	$ (3,880) $ 514	$ –	$	(11,776)
Income tax expense		$ (3,366)

77

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Movement in temporary differences during the year ended December 31, 2022:

				Recognized
				in other
	Balance	Recognized in	Recognized in	comprehensive		Balance
	December 31, 2021	retained earnings	profit or loss	income	December 31, 2022
Property, plant and equipment	$ 2,741	$ (392)	$ 24	$ –	$	2,373
Intangible assets	464	–	(411)	–		53
Scientific research and
experimental development	(8)	–	(19)	–		(27)
Inventories	(225)	–	(428)	–		(653)
Long-term lease and note
receiveable	3,402	–	430	–		3,832
Loans and borrowings	(1,950)	–	117	–		(1,833)
Employee benefits	(434)	–	(850)	–		(1,284)
Unrealized gains on
forward contracts and
foreign-denominated loans
payable/receivable	(197)	–	15	–		(182)
Provisions and tax reserves	(2,259)	(255)	(785)	–		(3,299)
Tax loss carry-forwards	(2,164)	(1,799)	(1,177)	–		(5,140)
Basis difference in subsidiary	(1,339)	–	(397)	–		(1,736)
Foreign exchange	$ (1,969)	$ (2,446)	$ (3,481) $ 588	$ –	$	(7,896)
Income tax expense			$ (2,893)

18. Share capital

a) Authorized:

Unlimited number of special shares, discretionary dividends, non-voting, redeemable and retractable.

Unlimited number of Class A subordinate voting shares, no par value.

Unlimited number of Class B common shares with four votes per share, convertible into Class A subordinate voting shares on a one-for-one basis. Annual dividends on the Class B common shares may not exceed the annual dividends on the Class A subordinate voting shares, no par value.

78 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

b) Issued:

Issued:
		December	31, 2023	December	31, 2022
9,126,624	Class A subordinate voting shares (2022 – 9,056,624)	$	15,754	$	15,233
2,778,300	Class B common shares (2022 – 2,778,300)		7		7
11,904,924	Total A and B shares (2022 – 11,834,924)	$	15,761	$	15,240

During the year ended December 31, 2023, 70,000 Class A shares were issued upon exercise of stock options, resulting in cash proceeds of $434,000 and a transfer of $87,000 from contributed surplus. During the year ended December 31, 2022, 45,000 Class A shares were issued upon exercise of stock options, resulting in cash proceeds of $298,000 and a transfer of $56,000 from contributed surplus.

The following dividends were declared and paid by the Company:

		December 31, 2023 December	31, 2022
55	cents per Class A subordinate voting shares (2022 – 38.5 cents)	$ 5,020 $	3,486
55	centsper Class B common shares (2022 – 38.5 cents)	1,528	1,070
		$ 6,548 $	4,556

c) Stock option plan

The Company uses a stock option plan to attract and retain key employees, officers and directors. Shareholders have approved a maximum of 1,200,000 Class A shares for issuance under the Stock Option Plan, with the maximum reserved for issuance to any one person at 5% of the Class A shares outstanding calculated immediately prior to the time of the grant. As per the Stock Option Plan, the Board of Directors may, at its sole discretion, determine the time during which the options shall vest and the method of vesting, or that no vesting restriction shall exist. The stock option exercise price is the price of the Company’s common shares on the Toronto Stock Exchange at closing for the day prior to the grant date on which the Class A shares traded. The period during which an option will be outstanding shall be 7 years, or such other time fixed by the Board of Directors, subject to earlier termination upon the option holder ceasing to be a director, officer or employee of the Company. Options issued under the plan are non-transferable unless specifically provided in the Stock Option Plan. Any option granted, which is cancelled or terminated for any reason prior to exercise, shall become available for future stock option grants. All options are to be settled by physical delivery of shares.

There were no options granted for the year ended December 31, 2023, or the year ended December 31, 2022. There were no options outstanding and exercisable as at December 31, 2023.

	December 31, 2023	December 31, 2023	December 31, 2023		December 31, 2022	December 31, 2022	December 31, 2022
			Weighted				Weighted
	Number of		average		Number of		average
	options		exercise price		options		exercise price
Outstanding, beginning of year	70,000	$	6.20		115,000	$	6.36
Exercised	(70,000)		6.20		(45,000)		6.62
Cancelled	–		–		–		–
Expired	–		–		–		–
Outstanding, end of year	–	$	–	$	70,000	$	6.20

79

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

d) Deferred Share Units

Under the Company’s DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value of the deferred compensation. The first DSUs were issued in March 2017. The number of DSUs was determined by dividing the amount of deferred compensation by the fair market value (“FMV”) of DSUs, defined in the DSU Plan as the weighted average closing price of HPS shares for the five business days immediately preceding the relevant date. Upon the occurrence of the redemption event, which could include ceasing to hold any position in the Company and/or any subsidiary or upon death of the participant, the affected participant will be entitled to receive a lump sum cash payment, net of applicable withholding taxes, equal to the product of number of DSUs held by that participant and the FMV on the date of the redemption event. The DSUs do not contain any vesting conditions or forfeiture provisions, as they are issued in exchange for deferred compensation, nor are they performance based. Under the DSU Plan, outstanding DSUs as at the record date are increased by the dividend rate whenever dividends are paid to shareholders.

The movement in DSUs for the years ended December 31, 2022 and 2023 is as follows:

	Number of	Closing	Share
	DSUs		Price
Balance at January 1, 2022	201,392	$	11.99
DSUs issued	44,152		12.49
DSUs redeemed	(31,569)		11.91
Balance at December 31, 2022	213,975	$	20.12
	Number of	Closing	Share
	DSUs		Price
Balance at January 1, 2023	213,975	$	20.12
DSUs issued	18,677		27.84
DSUs redeemed	(64,517)		8.36
Balance at December 31, 2023	168,135	$	81.70

An expense of $13,587,000 (2022 – $2,183,000) was recorded in general and administrative expenses. The liability of $13,737,000 (2022 - $4,153,000) related to these DSUs is included in accounts payable and accrued liabilities.

80 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

e) Long Term Incentive Plan

In February 2022, the Board of Directors approved a new Long Term Incentive plan (“LTIP”) for the Executive Officers of the Company. This plan replaces the Deferred Share Unit plan described above for executives. The LTIP consists of an annual grant made to the Chief Executive Officer and other Executive Officers of Performance Share Units (“PSU”) and Restricted Share Units (“RSU”). According to the plan, the PSUs constitute 60% of the total grant and will vest at the end of a three-year period at a ratio of 0% - 150%, depending on whether management met pre-determined EPS and RONA targets. The RSUs constitute the remaining 40% of the grant and will vest at the end of a three-year period at 100%. The increase or decrease in value of the vested PSUs and RSUs over the three-year period will be determined by the increase or decrease of the share price.

The annual grant is determined by the Compensation Committee, and are currently set at 35% of the executive’s salary and 50% of CEO’s salary. The grant vests after a three-year performance period and is dependent on continuous employment with the Company over that period, with exceptions for retirement and involuntary terminations. After vesting, the value of the PSUs and RSUs will be determined based on the PSU vesting factor and the share price. The value will be paid in cash to the participant, after which, the PSUs and RSUs will be extinguished.

The movement in PSUs and RSUs for the years ended December 31, 2022 and 2023 is as follows:

	Number of	Number of	Total Number	Closing	Share
	PSUs	RSUs	of Units		Price
Balance at January 1, 2022	–	–	-	$	–
Units issued	35,716	23,811	59,527		12.57
Balance at December 31, 2022	35,716	23,811	59,527	$	20.12

	Number of	Number of	Total Number of	Closing	Share
	PSUs	RSUs	Units		Price
Balance at January 1, 2023	35,716	23,811	59,527	$	20.12
Units issued	31,523	21,014	52,537		30.98
Balance at December 31, 2023	67,239	44,825	112,064	$	81.70

An expense of $6,367,000 (2022 – $1,602,000) was recorded in general and administrative expenses. The liability of $7,969,000 (2022 - $1,602,000) related to these PSUs and RSUs is included in accounts payable and accrued liabilities.

The market value of the granted PSUs and RSUs is $11,385,000 as of December 31, 2023. The difference between the market value and the accrual value is due to units granted but not yet vested.

81

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

19. Earnings per share

The computations for basic and diluted earnings per share from net earnings are as follows: (earnings in thousands of dollars)

	2023	2022
Basic earnings per share	$ 5.33 $	3.79
Calculated as:
Net earnings attributable to the equity holders of the Company	$ 63,399 $	44,828
Weighted average number of shares outstanding	11,904,924	11,833,674
Fully diluted earnings per share	$ 5.33 $	3.77
Calculated as:
Net earnings attributable to the equity holders of the Company	$ 63,399 $	44,828
Weighted average number of shares outstanding including effects of	11,904,924	11,876,359
dilutive potential ordinary shares
Reconciliation of weighted average number of shares outstanding:
Weighted average number of shares outstanding used to calculate
basic earnings per share	11,904,924	11,833,674
Adjustment for dilutive effect of stock option plan	–	42,685
Weighted average number of shares outstanding used to calculate
diluted earnings per share	11,904,924	11,876,359

As at December 31, 2023, nil options (2022 – nil) are excluded from the diluted average number of shares calculation as their effect would have been anti-dilutive.

20. Pension plans

Defined contribution plan

The Group has defined contribution pension plans that are available to virtually all of its Canadian employees with eligible employee contributions based on 2.0% – 7.0% (2022 – 2.0% - 6.75%)of annual earnings. The Group’s contributions of $1,964,000 (2022 – of $1,764,000) matches the employee contributions. The Group’s contributions related to its defined contribution pension plans are recorded as follows: $1,460,000 (2022 – $1,309,000) in cost of sales, $246,000 (2022 – $222,000) in selling and distribution, and $258,000 (2022 - $233,000) in general and administrative.

82 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

21. Provisions

Provisions
		Warranties		Site	Benefits and			Total
				restoration		incentives
Balance at January 1, 2022	$	1,718	$	216	$	258	$	2,192
Provisions made during the
period		188		130		779		1,097
Provisions used during the
period		(230)		(149)		(91)		(470)
Balance at December 31, 2022	$	1,676	$	197	$	946	$	2,819
Balance at January 1, 2023	$	1,676	$	197	$	946	$	2,819
Provisions made during the
period		1,904		130		679		2,713
Provisions used during the
period		(418)		(102)		(782)		(1,302)
Balance at December 31, 2022	$	3,162	$	225	$	843	$	4,230
Currentportion	$	3,162	$	80	$	681	$	3,923
Non-currentportion	$	–	$	145	$	162	$	307

Warranties

The provision for warranties relates mainly to transformers sold during the years ended December 31, 2023 and December 31, 2022. The provision is based on estimates made from historical warranty data associated with similar products and claims experience. The Group expects to incur most of the liability over the next year.

Site restoration

The Group has committed to undertaking a joint remediation plan for the Glen Ewing property with the owner of an adjoining industrial property and the co-owner of the property. The Group has recorded a liability for its estimated portion of the joint remediation.

Benefits and incentives

The benefit provision relates to statutory pension and leave benefits related to the India facility. Substantially all of this benefit is long-term. An incentive agreement dependent on revenue achievements was entered into in 2022 given Mesta’s strong performance, scheduled to be paid in February 2024.

83

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

22. Sales and deferred revenue

a) Sales

Sales have been captured based on the geography of where the product was sold, as follows:

	2023	2022
		(Adjusted*)
Canada	$ 175,619 $	151,058
United States and Mexico	489,579	383,137
India	44,866	24,269
	$ 710,064 $	558,464

• The 2022 sales values by geography have been adjusted from previously reported amounts due to a misclassification by geography. The previously disclosed comparative values in Canada was $33,437,000 less than the adjusted value, the previously disclosed values in United States and Mexico was $33,427,000 more than the adjusted value and India was $10,000 more than the adjusted value.

b) Deferred revenue

Movements in the Group’s contract liabilities (deferred revenue) was as follows:

	2023	2022
Opening balance	$ 10,607 $	5,027
Revenue recognized	(6,766)	(5,027)
Increase in contract liabilities	1,880	10,607
Endingbalance	$ 5,721 $	10,607

From time to time, the Company will require certain customers to advance payment prior to the satisfaction of performance obligations, which generally occurs at a point in time, upon the assumption of ownership of the transformer ordered by the customer.

23. Related party transactions

Related parties

William G. Hammond, Executive Chair and Chair of the Board, directly and indirectly, through Arathorn Investments Inc., beneficially owns 2,778,300 (2022 – 2,778,300) Class B common shares of the Company, representing 100% of the issued and outstanding Class B common shares of the Company and 923,802 (2022 – 924,802) Class A subordinate voting shares of the Company, representing approximately 10.1% (2022 – 10.2%) of the issued and outstanding Class A subordinate voting shares of the Company and as a result controls the Company. William G. Hammond owns all of the issued and outstanding shares of Arathorn Investments Inc. Total dividends paid during the year, directly and indirectly to William G. Hammond were $2,040,000 (2022 – $1,432,000).

84 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Key management personnel compensation

Key management personnel include the Company’s directors and members of the executive management team. Compensation awarded to key management is as follows:

team. Compensation awarded to key management is as follows:
	2023		2022
Salaries and benefits	$ 7,554	$	3,499
Share-based awards	9,028		2,183
	$ 16,582	$	5,682

24. Personnel expenses

	2023		2022
Wages and salaries	$ 105,808	$	69,624
Group portion of government pension and employment pension
and employment benefits	23,472		17,731
Contributions to defined contributionplans	1,962		1,763
	$ 131,241	$	89,118

25. Change in operating working capital

The table below depicts the receipt of (use of) cash for working capital purposes by the Group:

	2023		2022
Accounts receivable	$ (41,330)	$	1,552
Inventories	(8,237)		(42,427)
Prepaid expenses and other assets	(4,305)		(870)
Accounts payable and accrued liabilities	11,475		13,038
Deferred revenue	(4,886)		5,580
Provisions	(1,302)		(470)
Settlement of derivatives	(276)		89
Foreign exchange	(2,847)		3,969
	$ (51,708)	$	(19,539)

85

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

26. Segment disclosures

The Company operates in a single operating segment, being a manufacturer of transformers. The Company and its subsidiaries operate in Canada, the United States, Mexico and India.

Geographic Segments	2023	2022
		(Adjusted*)
Sales
Canada	$ 175,619 $	151,058
United States and Mexico	489,579	383,137
India	44,866	24,269
	$ 710,064 $	558,464
Property, plant and equipment and right-of-use
assets – net
Canada	$ 20,153 $	15,458
United States	16,945	8,992
Mexico	23,813	12,718
India	4,930	4,574
	$ 65,841 $	41,742
Investment in properties
Canada	$ 1,044 $	1,044
Italy	1,896	2,077
	$ 2,940 $	3,121
Intangibles, net
Canada	$ 1,271 $	1,588
United States	3,913	4,400
India	1,406	1,662
	$ 6,590 $	7,650
Goodwill
Canada	$ 2,180 $	2,180
United States	1,581	1,618
India	7,975	8,226
	$ 11,736 $	12,024

*Refer to note 22(a), sales & deferred revenue for explanation of adjustment.

86 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

27. Financial instruments

Fair value

The fair value of the Group’s financial instruments measured at fair value has been segregated into three levels. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Fair value of assets and liabilities included in Level 2 include valuations using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly. Fair value of assets and liabilities included in Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement.

The Group’s financial instruments measured at fair value consist of foreign exchange forward contracts and contingent consideration issued in conjunction with a business combination. The forward foreign exchange contracts have a fair value of a liability of $1,138,000 as at December 31, 2023 (2022 – $276,000) and are included in Level 2 in the fair value hierarchy. To determine the fair value of the forward foreign exchange contracts, Management used a valuation technique in which all significant inputs were based on observable market data. The gains and losses from these contracts are grouped with foreign exchange gain on the statement of operations. The contingent consideration liability is valued at $2,138,000 as at December 31, 2023 (2022 - $2,846,000) and is included in Level 3 of the fair value hierarchy. There have been no transfers between levels in 2023 or 2022.

The contingent consideration is comprised of three components:

		Employee		Revenue		Deferred		Total
		performance		achievement		tax losses
Current	$	672	$	–	$	837	$	1,509
Non-current		–		1,337		–		1,337
Balance at December 31, 2022	$	672	$	1,337	$	837	$	2,846
Current	$	–	$	1,320	$	818	$	2,138
Balance at December 31, 2023	$	–	$	1,320	$	818	$	2,138

• Employee performance

To determine the fair value of the contingent consideration, Management calculated the present vale of the expected future payments of four installments of approximately $325,000, discounted using a risk-adjusted discount rate of 3.5%. Two of the payments were made starting January 2022 in the amount of $651,000 and two payments were made during 2023 for a total of $672,000.

• Revenue achievement

To determine the fair value of the contingent consideration, Management calculated the fair value of the liability based on the present value of the expected payment and a probability weighted formula, discounted using a risk-adjusted discount rate of 2.5%. Management considers the risk of non-payment to be low. The estimated fair value would increase (decrease) if:

• ° the risk-adjusted discount rate were lower (higher)

• Deferred tax asset – unused tax losses

87

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

To determine the fair value of the contingent consideration, Management assessed the probability of realization of future tax losses based on the current year profitability of the entity and expected future forecasted earnings. It was determined that all available losses will be expected to be realized for which the benefit component for National’s 45% realization of certain tax losses. As of December 31, 2023 it was determined to be probable that sufficient future taxable profit will be available against which the unused tax losses can be recovered and utilized. The future tax asset value related to these losses was $1,861,000 and a corresponding liability to National of $837,000.

The carrying values of cash and cash equivalents, accounts receivable, bank operating lines of credit, and accounts payable and accrued liabilities and other liabilities approximate their fair value due to the relatively short period to maturity of the instruments. The lease receivable is valued at the present value of the future receipts which approximates the fair value.

In 2022, the employee performance and revenue achievement increases of $940,000 were recorded in general and administrative expenses and the deferred tax asset value of $837,000 was recorded in other expenses.

Derivative instruments

The Group has entered into forward foreign exchange contracts in order to reduce the Company’s exposure to changes in the exchange rate of the U.S. dollar, Euro, Mexican Peso and Indian Rupee as compared to the Canadian dollar. At December 31, 2023, the Company had outstanding forward foreign exchange contracts to buy and sell the following contracts, all with maturity dates in January 2024.

Buy/Sell	Buy Currency	Selling Currency	Amount of Buy Currency	Traded Rate
BUY	USD	CAD	45,000	1.4485
BUY	USD	INR	6,044	83.26 – 83.48
BUY	USD	MXN	6,614	16.97
Buy/Sell	Sell Currency	Buying Currency	Amount of Buy Currency	Traded Rate
SELL	USD	MXN	13,000	17.03 – 17.268
SELL	EUR	CAD	14,500	1.493
SELL	USD	INR	3,656	83.15

At December 31, 2022, the Company has outstanding forward foreign exchange contracts to buy and sell the following contracts, all with maturity dates in January 2023.

88 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Buy/Sell	Buy Currency	Selling Currency	Amount of Buy Currency	Traded Rate
BUY	EUR	CAD	12,050	1.4485
BUY	EUR	USD	5,300	1.0700
BUY	USD	CAD	72,000	1.3374 - 1.3543
BUY	USD	INR	7,405	81.6400 – 82.5900
BUY	USD	MXN	16,467	19.5400
Buy/Sell	Buy Currency	Selling Currency	Amount of Buy Currency	Traded Rate
SELL	EUR	CAD	24,100	1.3942 – 1.4502
SELL	EUR	USD	10,600	1.0434 – 1.0715
SELL	USD	CAD	36,000	1.3538
SELL	USD	INR	3,689	82.4000
SELL	USD	MXN	21,500	19.5010 – 19.6200

As at December 31, 2023 the Group has recognized a net unrealized expense of $1,138,000 representing the fair value of these forward foreign exchange contracts, comprised of a liability of $1,138,000 included within accounts payable and accrued liabilities. As at December 31, 2022 the Group recognized a net unrealized expense of $276,000, comprised of a liability of $276,000 included within accounts payable and accrued liabilities.

Financial risk management:

The Group is exposed to a variety of financial risks by virtue of its activities: market risk (including currency risk, interest rate risk and commodity price risk) credit risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance. There were no changes to types of risk arising from the Group’s financial instruments from the previous period.

Risk management is carried out by the finance department under the guidance of the Board of Directors. This department identifies and evaluates financial risks in close cooperation with management. The finance department is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated.

Annual Report 2023 89

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Currency risk:

The Group operates internationally and is exposed to foreign exchange risk from various currencies, primarily U.S. dollars, Mexican Pesos, the Euro and the Indian Rupee. Foreign exchange risk arises mainly from U.S. dollar denominated purchases in Canada and Canadian sales to the U.S. as well as recognized financial assets and liabilities denominated in foreign currencies. The Company manages its foreign exchange risk by having geographically diverse manufacturing facilities and purchasing U.S. dollar raw materials in Canada. The Company also monitors forecasted cash flows in foreign currencies and attempts to mitigate the risk by entering into forward foreign exchange contracts. Forward foreign exchange contracts are only entered into for the purposes of managing foreign exchange risk and not for speculative purposes.

The following table represents the Group’s balance sheet exposure to currency risk as at December 31, 2023:

	U.S.	Dollars	Mexican Pesos	Mexican Pesos	Euros	Euros	Indian	Rupees
	2023	2022	2023	2022	2023	2022	2023	2022
Cash	$ 29,113	$ 12,023	777	14,881	€ 895	€ 675	310,754	338,036
Accounts receivable	53,188	41,666	35,275	16,072	-	575	552,742	262,828
Long-term lease	–	–	–	–	1,050	1,957	–	–
receivable
Bank operating lines	–	–	–	–	(3,112)	(3,063)	–	–
of credit
Accounts payable	(18,139)	(18,003)	(26,513)	(16,464)	(331)	(160)	(473,545)	(346,452)
Lease obligation	(12,902)	(6,506)	–	–	–	–	–	(773)
Contingent
consideration	(1,614)	(2,100)	–	–	–	–	–	–
Net exposure	$ 49,646	$ 27,080	9,539	14,489	€ (1,498)	€ (16)	389,951	253,639

A one cent ($0.01) decline in the Canadian dollar against the U.S dollar as at December 31, 2023 would have decreased net earnings by $868,000 and increased equity by $670,000. This analysis assumes that all other variables, in particular interest rates, remained constant. Inversely, a one cent ($0.01) increase in the Canadian dollar against the U.S. dollar as at December 31, 2023 would have had an equal but opposite effect.

A one cent ($0.01) decline in the Canadian dollar against the Euro as at December 31, 2023 would have decreased net earnings by $24,000 and increased equity by $22,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Euro as at December 31, 2023 would have had an equal but opposite effect.

A one cent ($0.01) decline in the Canadian dollar against the Indian Rupee as at December 31, 2023 would have increased net earnings and equity by $64,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Indian Rupee as at December 31, 2023 would have had an equal but opposite effect.

A one cent ($0.01) decline in the Canadian dollar against the Peso as at December 31, 2023 would have decreased net earnings by $12,000 and increased equity by $7,000. Inversely, a one cent ($0.01) increase in the Canadian dollar against the Peso as at December 31, 2023 would have had an equal but opposite effect.

90 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Credit risk:

Credit risk arises from the possibility that the Group’s customers and counter parties may experience difficulty and be unable to fulfill their contractual obligations. The Group manages this risk by applying credit procedures whereby analyses are performed to control the granting of credit to its customer and counter parties based on their credit rating. As at December 31, 2023, the Group’s accounts receivable are not subject to significant concentrations of credit risk. The long-term lease receivable is subject to credit risk, which is mitigated by the security of the related plant. The Company’s maximum exposure to credit risk associated with the Group’s financial instruments is limited to their carrying amount.

The Group’s exposure to customer credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of its customer base, including the default risk associated with the industry and country in which customers operate.

Management has a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, if they are available, financial statements, credit agency information, industry information and in some cases bank references. Sale limits are established for each customer and reviewed quarterly. Any sales exceeding those limits require approval from Executive management.

The Group limits its exposure to credit risk from trade receivables by establishing a reasonable payment period. Many of the Group’s customers have been transacting with the Group for a number of years, and none of these customers’ balances have been written off or are credit-impaired at the reporting date.

In monitoring customer credit risk, customers are grouped according to their credit characteristics, including their geographic location, industry, trading history with the Group and existence of previous financial difficulties.

An allowance account for accounts receivable is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at which point the amounts are considered to be uncollectible and are written off against the specific accounts receivable amount attributable to a customer. The number of days outstanding of an individual receivable balance is the key indicator for determining whether an account is at risk of being impaired.

Expected credit losses are required to be measured through a loss allowance at an amount equal to the 12-month expected credit losses or full lifetime expected credit losses. The Group has used past due information to determine that there have been no significant increases in credit risk since initial recognition. There are balances in excess of 30 days past due but the Group does not presume that credit risk has increased given the characteristics of the Group’s customers, the industries in which they operate, the customer payment track records and the nature of the products the Group sells.

91

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

During the year, the expected credit losses for trade accounts receivables decreased $190,000 (2022 – increased $447,000), for which a recovery (2022 – expense) was recognized in general and administrative expenses. The aging of accounts receivable and the related allowance is as follows:

	December	31, 2023			December 31, 2022	December 31, 2022
	Gross Allowance			Gross		Allowance
Not past due	$ 95,888 $	–	$	63,877	$	–
Past due 0-30 days	25,809	–		20,035		–
Past due 31-120 days	5,819	–		3,505		716
Past due more than 120 days	3,114	2,616		2,090		2,090
	$ 130,630 $	2,616	$	89,507	$	2,806

Credit risk:

The carrying amount of financial assets representing the maximum exposure to credit risk at the reporting date was:

	Carrying	Amount
	December 31, 2023	December	31, 2022
Cash and cash equivalents	$ 52,591	$	28,126
Accounts receivable	128,030		86,701
Lease receivable	1,535		2,839
	$ 182,156	$	117,666

The maximum exposure to credit risk for accounts receivable at the reporting date by geographic region was:

Carrying	Amount
December 31, 2023	December	31, 2022
Canada $ 31,463	$	23,050
United States 70,052		55,390
Mexico 13,659		7,705
Italy 689		553
India 12,167		3
$ 128,030	$	86,701

92 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Interest rate risk:

Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and financial liabilities with variable interest rates expose the Group to cash flow interest rate risk. Changes in market interest rates also directly affect cash flows associated with the Group’s bank operating lines of credit that bear interest at floating interest rates.

The Group manages its interest rate risk by minimizing the bank operating lines of credit balances by applying excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis as well as actively monitoring interest rates. A 1% increase or decrease in interest rates as at December 31, 2023 would increase or decrease net earnings by approximately $340,000 (2022 – $62,000) respectively.

Commodity price risk:

A large component of the Group’s cost of sales is comprised of copper and steel, the costs of which can vary significantly with movements in demand for these resources and other macroeconomic factors. To manage its exposure to changes in commodity prices, the Group will enter into supply contracts with certain suppliers, and from time to time will enter into forward commodity purchase contracts. As at December 31, 2023, no forward commodity purchase contracts were outstanding (2022 – none).

93

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Liquidity risk:

Liquidity risk is the risk that the Group will not be able to meet its obligations as they become due.

The Group manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. Senior Management is also actively involved in the review and approval of planned expenditures.

The following are the carrying amounts and related anticipated contractual maturities of the Group’s financial liabilities:

		Carrying
December 31, 2023		amount		1year or less		1-2years		2-5years
Bank operating lines of credit	$	18,471	$	18,471	$	–	$	–
Accounts payable and
accrued liabilities		126,360		126,360		–		–
Contingent consideration		2,138		2,138		–		–
Derivative liabilities		1,138		1,138		–		–
	$	148,107	$	148,107	$	–	$	–

		Carrying
December 31, 2022		amount		1year or less		1-2years		2-5years
Bank operating lines of credit	$	6,154	$	6,154	$	–	$	–
Accounts payable and
accrued liabilities		92,025		92,025		–		–
Contingent consideration		2,846		1,509		1,337		–
Derivative liabilities		276		276		–		–
	$	101,301	$	99,964	$	1,337	$	–

94 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

Reconciliation of movements of liabilities to cash flows arising from financing activities:

The following is a reconciliation between the opening and closing balances for liabilities arising from financing activities:

activities:
			LIABILITIES							EQUITY
		Bank
		Operating		Lease		Contingent		Share		Retained
	Lines of Credit			Liabilities	Consideration			Capital		Earnings		Total
Balance January 1, 2023	$	6,154	$	8,593	$	2,846	$	15,240	$	146,847	$	179,680
Advances of bank operating
lines of credit, net		12,317		–		–		–		–		12,317
Payment of contingent
consideration		–		–		(675)		–		–		(675)
Interest payments		(1,320)		434		19		–		–		(867)
Exercise of stock options		–		–		–		434		–		434
Cash dividends paid		–		–		–		–		(6,548)		(6,548)
Repayment of lease liability		–		(3,906)		–		–		–		(3,906)
Total changes from
financing cash flows	$	10,997	$	(3,472)	$	(656)	$	434	$	(6,548)	$	755
Other changes
Liability-related
Interest expense		1,320		–		–		–		–		1,320
Foreign exchange		–		(800)		(52)		–		–		(852)
Non-cash disposals to lease
liabilities		–		(437)		–		–		–		(437)
Non-cash additions to lease
liabilities		–		12,537		–		–		–		12,537
Total liability-related other
changes	$	1,320	$	11,300	$	(52)	$	–	$	–	$	12,568
Equity-related
Exercise of stock options		–		–		–		87		–		87
Net income		–		–		–		–		63,399		63,399
Total equity-related other
changes	$	–	$	–	$	–	$	87	$	63,399	$	63,486
Balance December 31, 2023	$	18,471	$	16,421	$	2,138	$	15,761	$	203,698	$	256,489

95

Annual Report 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

			LIABILITIES	LIABILITIES						EQUITY
		Bank
		Operating		Lease		Contingent		Share		Retained
	Lines of Credit			Liabilities	Consideration			Capital		Earnings		Total
Balance January 1, 2022	$	19,267	$	7,980	$	1,509	$	14,886	$	106,575	$	150,217
Advances of bank operating
lines of credit, net		(13,113)		–		–		–		–		(13,113)
Payment of contingent
consideration		–		–		(651)		–		–		(651)
Interest payments		(1,596)		233		86		–		–		(1,277)
Exercise of stock options		–		–		–		298		–		298
Cash dividends paid		–		–		–		–		(4,556)		(4,556)
Repayment of lease liability		–		(3,004)		–		–		–		(3,004)
Total changes from
financing cash flows	$	(14,709)	$	(2,771)	$	(565)	$	298	$	(4,556)	$	(22,303)
Other changes
Liability-related
Interest expense		1,596		–		–		–		–		1,596
Foreign exchange		–		108		154		–		–		262
Non-cash additions to lease
liabilities		–		3,199		–		–		–		3,199
Non-cash disposal to lease
liabilities (note 11)		–		590		–		–		–		590
Non-cash disposal to lease
liabilities (note 11)		–		(513)		–		–		–		(513)
Non-cash additions to
contingent consideration
(note 27)		–		–		1,748		–		–		1,748
Total liability-related other
changes	$	1,596	$	3,384	$	1,902	$	–	$	–	$	6,882
Equity-related
Exercise of stock options		–		–		–		56		–		56
Net income		–		–		–		–		44,828		44,828
Total equity-related other
changes	$	–	$	–	$	–	$	56	$	44,828	$	44,884
Balance December 31, 2022	$	6,154	$	8,593	$	2,846	$	15,240	$	146,847	$	179,680

96 Hammond Power Solutions

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

28. Capital risk management

The Group’s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future business development. The Group includes cash, bank operating lines, longterm debt and equity, comprising of share capital, contributed surplus and retained earnings in the definition of capital. The Group is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the year ended December 31, 2023.

The following table sets out the Group’s capital quantitatively at the following reporting dates:

	December 31, 2023	December 31, 2022	December 31, 2022
Cash and cash equivalents	$ 52,591	$	28,126
Bank operating lines of credit	(18,471)		(6,154)
Lease liabilities	(16,936)		(8,593)
Contingent consideration	(2,138)		(2,846)
Share capital	15,761		15,240
Contributed surplus	2,289		2,376
Retained earnings	203,698		146,847
	$ 236,794	$	174,996

29. Determination of fair values:

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/ or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the Notes specific to that asset or liability.

a) Derivatives

The fair value of forward exchange contracts is based on valuations obtained from third parties, based on observable market inputs.

Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate.

b) Non-derivative financial assets

The fair value of the lease receivable is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

c) Share-based payment transactions

The fair value of DSUs is determined in accordance with the DSU Plan, which uses the average closing price for HPS shares for the five trading days immediately preceding the relevant date.

Annual Report 2023 97

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2023 and 2022 (tabular amounts in thousands of dollars, except share and per share amounts)

d) Investment properties

The fair values of the investment properties are based on available market evidence as determined by third party valuators using comparable property sale transactions and is considered to be valued at Level 3 of the fair value hierarchy.

30. Subsequent events

Dividends

On March 6, 2024, the Company declared a dividend of fifteen ($0.15) per Class A subordinate voting shares of HPS and a quarterly cash dividend of fifteen cents ($0.15) per Class B common shares of HPS payable on March 28, 2024 to shareholders of record at the close of business on March 21, 2024. The ex-dividend date is March 20, 2024.

On March 27, 2024, the Company declared a dividend of twenty-seven and a half cents ($0.275) per Class A subordinate voting shares of HPS and a quarterly cash dividend of twenty-seven and a half cents ($0.275) per Class B common shares of HPS payable on June 25, 2024 to shareholders of record at the close of business on June 18, 2024. The ex-dividend date is June 18, 2024.

Italy

On March 14, 2024 the Group and the purchaser signed a settlement agreement for the sale and purchase of the plant. As outlined in Note 8, the Group exercised its put option, specifying the final plant purchase price was equal to 1,850,000 EUR. The final negotiations resulted in a net settlement amount of 1,050,000 EUR ($1,535,000 CAD). This agreement will settle all outstanding disputed receivables and liabilities as well as the need for significant repairs to the roof of the building. The transfer of ownership and title will be executed no later than March 28, 2024. A deposit of 150,000 EUR was received on March 14, 2024.

SmartD

On March 22, 2024, HPS entered into a financing agreement with SmartD Technologies Inc. (“SmartD”). In the agreement, the Corporation will invest up to $3.9 million over three years in convertible debentures of SmartD. SmartD Technologies produces advanced motor control products, most notably it’s Clean Power Variable Frequency DriveTM. SmartD’s products combine motor drives with harmonic mitigating technology that help businesses save energy, lower costs, and minimize their carbon footprint.

98 Hammond Power Solutions