2016€¦ · SPARTON RESOURCES INC. For the year ended December 31, 2016 Management’s Discussion and Analysis dated April 28, 2017 . The following discussion and analysis of results

2016

SPARTON RESOURCES INC.


MANAGEMENT DISCUSSION AND ANALYSIS

CONSOLIDATED FINANCIAL STATEMENTS

2016-ANNUAL STATEMENTS

SPARTON RESOURCES INC. For the year ended December 31, 2016

Management’s Discussion and Analysis dated April 28, 2017

The following discussion and analysis of results of operations of Sparton Resources Inc. (“Sparton” or the “Company”) and its subsidiaries for the year ended December 31, 2016 should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 and the MD&A for the year 2016, all of which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All currency is shown in Canadian dollars unless otherwise stated. The Company’s active subsidiaries are comprised of (i) Sparton International Holdings Inc. (100% owned) (“SIH”) (ii) VanSpar Mining Inc. (89.8% owned by SIH) (“VanSpar”), both of which are registered in the British Virgin Islands, (iii) Jiujiang Sparton Vanadium Tech and Trade Company (“JJ Sparton”) (90% owned by VanSpar), registered in China as its operating subsidiary and (iv) Edcor Drilling Services Inc. (100% owned) (“EDCOR”), registered in Ontario, Canada. Forward-Looking Information This Management’s Discussion and Analysis (“MD&A”) contains certain forward-looking statements and information relating to the Company that are based on the beliefs of its management as well as assumptions made by and information currently available to the Company. When used in this document, the words "anticipate", "believe", "estimate", "expect" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Forward-looking statements include, among other things, regulatory compliance, the sufficiency of current working capital, the estimated cost and availability of funding for the continued exploration and development of the Company’s exploration properties. Such statements reflect the current views of its management with respect to future events and are subject to a variety of inherent risks, uncertainties and other facts which are beyond the Company’s control, and could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reasons, except as required by applicable Canadian securities law. Investors and others should carefully consider these and other factors and not place undue reliance on these forward-looking statements. General The Company continues to seek financing for its various vanadium related projects and evaluate other opportunities related to the mineral exploration and vertically integrated energy storage industry activities. It also is continuing its evaluation of other exploration projects. Battery Commissioning: On August 28, 2015, the Company’s subsidiary, JJ Sparton, executed an Agreement for Services (“AFS”) with a PRC-based private company, Prudent Energy (the “Client”), to fund the commissioning one of the world’s largest vanadium flow batteries. Pursuant to the Agreement, JJ Sparton was to provide funding to complete all work as planned under the Agreement. According to the Agreement, once the commissioning work was completed, the test protocol successfully carried out, certain reports submitted, and the owner of the battery, namely the State Grid North China Company Ltd. (“SG”), approved the completion of commissioning, a payment which was expected to be up to RMB16.44 million ($3,503,364) would become payable by SG to JJ Sparton’s Client. This would be followed by 3 annual payments of up to RMB5.48 million ($1,116,788) by SG to JJ Sparton’s Client, each paid on the anniversary of the completion date of the

commissioning under a maintenance protocol for the battery. These payments would be net of expenses incurred by the Client, and net of some liabilities of the Client before determining the amount of money left for paying JJ Sparton. The commissioning work was completed and SG accepted the battery on February 22, 2016, and paid RMB15.265 million ($3,022,000) in June 2016 to JJ Sparton’s Client. After certain payments were deducted pursuant to a court approval process for the Client’s liabilities, $545,573 (RMB2,734,700) was paid to JJ Sparton in 2016. The JDH Transaction

Under a Share Acquisition Agreement (the “SAA”) between private investment corporation, HPX TechCo Inc., and VanSpar, the Company’s 89.8% owned subsidiary, HPX TechCo Inc. agreed to directly fund the acquisition of the shares of JD Holdings Inc. (“JDH”) for US$ 3.3 million (the "Funding Transaction"), pursuant to an existing share purchase agreement between VanSpar and JDH and its security holders. In consideration for HPX TechCo Inc. funding the acquisition cost together with a further US$2,000,000 for working capital and US$605,000 paid to VanSpar, VanSpar caused 82% of the JDH shares to be transferred to HPX TechCo Inc., with the remaining 18% being retained by VanSpar (the “JDH Transaction”). The JDH Transaction was financed by HPX TechCo Inc., which provided the purchase price funding of US$ 3.3 million payable to the current security holders of JDH, with payment of at least US$1,650,000 on closing. The balance of the purchase price may be reduced by up to US$300,000 for financial obligations or liabilities of the JDH subsidiaries within six months after closing. The net balance of the purchase price will be paid to the current JDH security holders six months after closing. The JDH Transaction also required a minimum US$2.0 million investment within 20 business days after closing, to provide working capital to reactivate the JDH subsidiaries' operations. These funds were also be invested by HPX TechCo. The HPX TechCo Inc. assumed full managerial and administrative responsibility for JDH and its subsidiaries' battery manufacturing and marketing operations. VanSpar’s role going forward will be the exploration, assessment and possible development of any vanadium related resources identified as possible sources of raw material for the manufacturing of VRB battery systems by JDH. In addition, under the terms of the restructured transaction, in the event that JDH or its affiliates acquire certain vanadium assets in China within 5 years after closing, VanSpar will receive a finder’s fee equal to 5% of the value of the acquired assets up to a maximum of US$250,000.

The transaction obtained regulatory approval and was approved by the Company’s shareholders on November 3, 2016. The JDH Transaction and the Funding Transaction were closed by the end of December 31, 2016. US$1,650,000 has been paid to the former shareholders of JDH, and US$1,650,000 ($2,215,636) has been received and held by the Company to be paid to the former shareholders of JDH six months after closing. VanSpar received a US$605,000 transaction fee payment from HPX TechCo shortly after closing as per the terms of the Funding Transaction. Promissory Note Bridge Financing On October 6, 2016 VanSpar executed a Promissory Note with HPX TechCo Inc. in the amount of US $75,000 to provide ongoing working capital to Prudent Energy during the time up to and shortly after the closing of the JDH and Funding Transactions. Prudent was active at this time and HPX TechCo did

not have a protocol for advancing funds. VanSpar subsequently advanced the funds to Prudent through JJ Sparton partly by paying Prudent expenses and later by transferring the funds directly into Prudent’s operating bank account in China. The amount of the Promissory note was increased to US $150,000 with a second advance made to VanSpar of US $75,000 in December 2016. The Promissory Note carries an annual interest rate of 10% and funds used thereunder are solely for the operating expenses of Prudent Energy (now renamed as PuNeng Energy).

In addition, management is continuing to pursue other initiatives intended to address the current working capital deficiency and reduce operating overheads. Contract Drilling Business Revenue and expenses relating to one of the drill units owned by the Company’s EDCOR subsidiary is shared with Eva Lake Mining Ltd., an aboriginal Metis service company, based in Atikokan Ontario. For the year ended December 31, 2016, the Company reported $nil drilling revenue (2015 - $91,875 with a gross margin of $15,889). The Company is actively seeking new clients and new service contracts for EDCOR.

Diamond Exploration Claims, Quebec

In late 2015 and early 2016, the Company, jointly with an independent consultant (as to 50% ownership each), staked a number of mineral claims (29) totaling 1,388 hectares in the Wemindji diamond exploration area of Northern Quebec. Due to intense competition in the online staking of a number of these claims a random draw was held by the Quebec Ministry of Natural Resources to establish which competitor in the staking would be awarded the claims. The Company and consultant were awarded all of the disputed claims. On May 19, 2016, the Company executed an agreement with Honey Badger Exploration Inc. where under Sparton sold its 50 % interest in these claims for a total consideration of $5,000 cash and 1,000,000 common shares of Honey Badger (valued at $30,000). The Company and the consultant will each retain a 1% Net Smelter Return Royalty on any mineral production from these claims. These royalties can be purchased at any time for a total of $1,000,000, each. Final closing of the transaction is complete and the Honey Badger shares have been received. Mexico Mineral Property Royalties In 2011, the Company signed a sale and purchase agreement with American Consolidated Minerals Corporation (“AJC”) to sell Sparton’s full interest in the Sierra Rosario Mexico precious metal property in return for cash payments totalling $560,000 and the issuance of 500,000 AJC shares to the Company with half of the payment received in 2011 and the balance in 2012. In August 2014, AJC was acquired by Starcore International Mines Ltd., a base and precious metals producer in Mexico. Starcore now owns a 100% interest in Sierra Rosario. Sparton retains Net Smelter Return (“NSR”)) production royalties for base and precious metals as follows:

i) 3% NSR on a 50% share of Base Metal Production

ii) 2% NSR on a 50% share of Gold Production

iii) 1.5% NSR on a 50% share of Silver Production

VanSpar and Xiushui, Jiangxi Vanadium projects In 2011, VanSpar was mandated as the exclusive consolidator of vanadium projects in the Xiushui area by the local government. The evaluation of the several nearby vanadium opportunities in Jiangxi Province, China continued through 2012 by VanSpar and its local operating subsidiary, JJ Sparton. The vanadium opportunities evaluated included the Guojiaping, Rentian, Dong Du and Da Chun projects. All of the vanadium deposits in the area appear to be amenable to simple open pit mining with a very low strip ratio. Additional drilling can expand the “resources” of these defined deposits relatively easily and bring them to a higher level of reliability. In 2011, the Company prepaid $484,800 (RMB 3 million) for the acquisition of the Rentian Mining Company assets, including the Quankeng Mining Licence and its vanadium production plant infrastructure. In 2012, the Company took legal action against Rentian for falsifying due diligence information about its assets in order to recover the prepayment. A positive court judgment against Rentian in favour of the Company was received in the third quarter of 2012. See Note 9 to the December 31, 2015 audited consolidated financial statements. On the basis of the court judgment, the Company is now a secured creditor of Rentian and will seek to resolve the collection for the payment as the project moves forward. VanSpar also entered into a Preliminary Agreement for the purchase of an 89% interest in the Dong Du licence, subject to positive due diligence studies. VanSpar had not concluded final agreements for the acquisition of any of the vanadium properties as of December 31, 2016.

Vanadium prices have dropped somewhat from previous highs due to softer steel markets, but at current vanadium pentoxide (V2O5) prices, of about US$4.00 per pound, for standard grade material, management believes that the Dong Du project represents a significant opportunity with strong growth potential for the Company and strategic investors or partners. High purity V2O5 sells for substantially higher prices and is the quality of material which would be produced from the Xiushui deposits. Investigations are continuing for other vanadium acquisitions in the general Xiushui project area. Discussions are continuing with interested parties for senior VanSpar financing. As various international economies recover, vanadium prices and demand are expected to recover to pre-recession levels.

Very significant new vanadium demand in the vanadium flow battery industry continues to develop with several new large installations for renewable energy storage commissioned and operating successfully. VanSpar has developed relationships with battery manufacturers with the objective of securing off-take agreements for high purity vanadium products necessary for manufacturing these types of batteries, and believes that the unique properties of the Xiushui area deposits make them ideal for low cost and high quality vanadium product production. Company management has continued to seek investment partners to acquire and develop the Xiushui deposits. It has developing relationships with organizations in the vanadium related energy storage industry as battery manufacturers that could be end product users for its vanadium product production. The closing of the transaction for the financing of the acquisition of JDH, is the culmination of these efforts. See the section entitled “Events after the Reporting Period” below.

Vanadium Flow Battery Commissioning Program

The opportunity for VanSpar to enter into a contract to fund the commissioning one of the world’s largest vanadium redox flow batteries ("VRB”) arose through a past relationship with the battery manufacturer as a possible client for vanadium product sales from the Xiushui deposits. This battery is located in Hebei Province, China, approximately 180 km north of downtown Beijing, where the battery was installed for the PRC North State Grid Company (“SG” or “State Grid”) as part of the Zhangbei renewable energy and storage program. The Zhangbei Project is in proximity to the site of the Beijing 2022 Winter Olympics, near Zhangjiakou, in Hebei Province, China. It is the world’s largest renewable energy utilization platform,

integrating wind power, solar power, energy storage, and smart grid transmission technologies. Clean power generated by this project will be integrated into north China’s energy grid operated by State Grid.

As China’s largest wind and solar energy electricity generation and storage installation, it supports the storage and release of clean electricity into the power grid in an efficient and controlled manner. The project was jointly launched in May 2010 by the Ministry of Finance, the Ministry of Science and Technology, the National Energy

Bureau, and State Grid. It is a key component of China’s Golden Sun Photo Voltaic Solar Pilot Project. It currently includes 500 megawatts of wind power and 100 megawatts of solar power, with 110 megawatts of energy storage capacity, and covers a total land area of 200 square kilometers. Expansion plans for both electricity generation from wind and solar sources and additional energy storage capacity have been recently announced. With a total investment of 12 billion RMB (approximately US$1.8 billion), upon completion, it will be China’s largest grid integration photo voltaic solar power generation station and its largest land-based wind farm in unit capacity, as well as the world’s largest chemical energy storage station.

The project represents state of art installations for all its various components and will integrate the world’s largest number of different operational technologies in a single new energy project. JJ Sparton had the commissioning contract with the builder of the battery. On August 28, 2015, the Company’s subsidiary, JJ Sparton (owned 89.8% by VanSpar), executed an agreement for services with a PRC-based private company relating to the commissioning of the Zhangbei Project's 8 megawatt hour vanadium flow battery. Pursuant to the agreement, JJ Sparton was to provide funding to complete all of the work specified in the agreement. Funds raised by VanSpar had been advanced to JJ Sparton for the commissioning costs. Prior to December 31, 2015, JJ Sparton incurred $307,144 (RMB1,510,047) in commissioning costs. In 2016, $357,914 in additional costs were incurred. In 2015, the commissioning work was completed. The test protocol was then successfully carried out. Test reports were submitted in early 2016, and the owner of the battery, SG, accepted and acknowledged that the battery met design criteria. A payment, RMB15.265 million ($3,022,000), was paid in June 2016 by SG to JJ Sparton’s client Prudent Energy. After certain deductions relating to pre-existing client liabilities were approved under a court supervised process and paid, the balance of RMB 2,734,700 ($545,573) was paid by the client to JJ Sparton in the second quarter of 2016. The agreement for services also provides for 3 additional maintenance payments of up to RMB5.48 million ($1,116,788) each, on each anniversary after the completion of the battery commissioning. Chebucto Gas

Sparton holds an estimated 6.5% unitized working interest in the Chebucto natural gas field, in the Sable Island area of offshore Nova Scotia. This is part of the Scotia Offshore Energy Project (“SOEP”) These include SDL 2286, part of the Chebucto gas field, in which the Company owns a 12.5 % working interest. Chebucto is located near the existing North Triumph production facilities. The SOEP supplies natural gas into the northeast seaboard areas of the United States and Canada. Sparton has owned the Chebucto interest since 1997. There were no other new developments with Chebucto during the years 2016 and 2015. In 2013, the Company had re-assessed the value of the oil and gas properties and concluded an impairment of $553,914 and written down the value of the properties to $1 due to the continuing low price of natural gas.

Financial Highlights, Expenditures As at December 31, 2016, active projects were the VanSpar vanadium resource development program in Jiangxi China and the SGCC Battery maintenance subcontract. The Company evaluated several base and precious metal project opportunities during the year. On successful completion of the VanSpar funding and acquisition of a minority interest in JDH, the Company has substantially improved its working capital position to enable it to continue to pursue its mineral exploration activities. Subsequent to December 31, 2016, the Company will, subject to regulatory approvals, further reduced its liabilities by converting $960,081 of its debt into equity. Results of Operations

For the years ended December 31, 2016 and 2015 The company received $545,573 (RMB2,734,700) from the battery commissioning project in 2016, and closed the JHD transaction and received $1,604,650 (US$605,000 cash or $804,650 and 18% of JDH valued at $800,000), resulting in net income in2016. The net income for the year in 2016 was $1,081,578 compared to a loss of $707,981 for 2015. The Company’s contract drilling subsidiary, EDCOR, recorded revenue of $nil in 2016 (2015 - $91,875 and a cost of drilling of $75,986). Operating expenses net of expense recovery and other income totalled $1,104,370 in 2016 (2015 - $786,768). Main operating expenses include $60,885 (2015 - $96,347) for general and administrative expenses, $357,914 (2015 - $307,144) for battery commissioning costs, $422,627 (2015 - $276,475) for management and consulting fees, $159,599 (2015 - $34,718) for professional fees, $45,895 (2015 - $23,407) interest, financing costs, bank charges, and other expenses of $57,450 (2015 - $48,677). In the current year, the Company’s subsidiary, JJ Sparton, received $545,573 (RMB2,734,700) from the battery commissioning project, recorded as expenses recovery. The Company also recorded $35,000 (2015 - $nil) gain from disposal of mineral assets, $nil (2015 - $64,690) loan forgiven income and $725 gain (2015 - $1,792 loss) from investment. Cash flow from operating activities showed a net cash in-flow totalling $590,129 (2015 – out-flow of $116,548) in the year ended December 31, 2016. For the year ended December 31, 2016, the Company’s investing activities had a cash out-flow of $38,466 (2015 - $nil) for acquisition of equipment. During 2016, the Company reported a total cash out flow for financing activities of $123,780 (2015 – in flow of $137,325). Of those financing activities, $30,000 (2015 - $168,000) was raised from the issuance of convertible debentures by VanSpar, $57,900 (RMB300,000) (2015 - $nil) was subscriptions received for convertible debentures of VanSpar to be issued, $2,215,636 (2015 - $nil) was received to be used to complete the JDH transaction, $nil (2015 - $17,325) from gain on sales of shares received through legal settlement, and $10,000 (2015 - $nil) was a loan from a director of the Company. In 2016 $21,680 (2015 - $nil) was paid to related parties, and $200,000 (2015 - $48,000) was paid for the short-term loan (2015 - $48,000). For the three months ended December 31, 2016 and 2015 The net income for the three months ended December 31, 2016 was $1,238,937 compared to a loss of $429,604 in the comparable period in 2015. The net income reported in the period was mainly due to the $1,604,650 other income recorded in the last three months of 2016 from the acquisition of JDH (US$605,000 or $804,650 cash and 18% share interest in JDH valued at $800,000). Operating expenses net of gain on disposal of assets totalled $365,713 in the three-month period ended December 31, 2016 (2015 - $429,600). Quarterly Information

The following table sets out selected quarterly financial information of Sparton and is derived from quarterly financial statements prepared by management:

Dec. 31,

2016 Sept. 30,

2016

June 30, 2016

Mar. 31, 2016

Dec. 31, 2015

Sept. 30, 2015

Sept30, 2015

Mar. 31, 2015

Operating Revenue ($)

-

-

-

-

-

-

-

91,875

Total Net Loss (income)

(1,238,937) 268,942 (289,733) 178,150 364,914 68,720 163,983 110,364

Basic and Diluted Loss (gain) Per Share ($)

(0.01) 0.00 (0.00) 0.00 0.00 0.00 0.00 0.00

Liquidity and Financial Condition

As at December 31, 2016, Sparton had a liquidity concern. It had current assets of $2,736,486 (2015 - $48,871), and a working capital deficit of $1,129,824 (2015 - $1,388,058). Cash, restricted cash and marketable securities totalled $2,712,585 (2015 -$40,841). HST receivables were $23,901 (2015 - $8,030). Property, plant and equipment assets were $61,738 at December 31, 2016 (2015 - $51,605). Oil and gas properties were written down to $1. Long term investment in the 18% of JDH valued at $800,000. Exploration and evaluation assets were valued at $nil. Current liabilities totalled $3,866,310 at December 31, 2016 (2015 - $1,436,929). Included in the current liability were $395,387 (2015 - $374,709) in accounts payable and accrued liabilities, $2,731,808 (2015 - $520,000) of short-term debts, and $739,115 (2015 - $542,220) due to related parties. In the year ended December 31, 2016, the Company’s subsidiary, VanSpar, issued $30,000 in convertible debentures (2015 - $168,000) that have a term of 12 months, bear interest at an annual rate of 10% and are convertible into common shares of VanSpar at US$0.17 per share at the option of the debenture holders. The convertible feature does not qualify as an equity and, as such, would be classified as a liability; however, the fair value of the conversion feature has been valued at a nominal amount and has therefore not been separated from the debenture. The Black Scholes model was used to assess the value of the convertible feature using a range of inputs to assess the sensitivity; all outcomes were nominal. During the year 2016, JJ Sparton received $57,900 (RMB300,000) as a loan from an investor to support the SGCC1 battery commissioning program. This plus interest of $3,879 (RMB20,100) was repaid subsequent to the year end of 2016. Minority interests representing carrying value of the share interest held by minority shareholders in Sparton’s subsidiary companies was $93,837 as at December 31, 2016 (2015 – deficit of $87,016). Capital Management: The Company is not subject to any capital requirements by a lending institution or regulatory body, other than the TSX Venture Exchange (“TSX-V") which requires adequate working capital or financial resources of the greater of a) $50,000 and b) the amount required to maintain operations and cover general and administrative expenses for a period of 6 months. As of April 28, 2017, the Company was compliant with the policies of the TSX-V.

Outstanding Share Data

Sparton’s authorized capital consists of an unlimited number of common shares without par value. As at December 31, 2016 and the date of this MD&A, there were 111,375,460 common shares issued and outstanding. As of December 31, 2016, there are no share options outstanding for the Company or its subsidiaries. 2,775,000 options were issued after December 31, 2016 (see the Sequent Events After the Reporting Period for details) Related Party Transactions The Company’s related parties consist of the following:

(i) Mr. Barker the President of the Company made advances to the Company that bear no interest, are unsecured and due on demand. As at December 31, 2016 the balance was $5,932 (2015 - $6,837).

(ii) In September 2013, former directors Edward Thompson and current directors Wesley Roberts

and Richard Williams, each provided a $4,300 loan to the Company in the form of promissory notes for a total of $12,900, that bears an annual interest of 10%, is unsecured, and due on demand. During the year 2016 Richard Williams provided additional $10,000 loan to the Company at the same terms. A total of $4,657 in interest was accrued as at September 30, 2016 (December 31, 2015 - $3,214). $21,680 was repaid to two directors in 2016 and at December 31, 2016, the balance owed to a director was $5,877.

(iii) Senior management and directors have not been paid for the past 2 years, except as disclosed herein. During the year 2016, billings for management and consulting fees of $102,000 (2015 – $102,000) were received by the Company from a director who is also the President of the Company. $18,000 (2015 - $18,000) rent expenses was accrued for property owned by the President. Such management and consulting fees and rent were accrued but no cash was paid in the periods. $434,084 was payable to the President as at December 31, 2016 (2015 - $316,803). $45,000 (2015 – $60,000) in management and consultant fees were billed to the Company by Charles Qiming Ge. $94,957 was payable as at December 31, 2016 (2015 - $49,816) to Charles Ge. The Company was also billed $60,000 plus HST (2015 - $60,000) by a company controlled by the CFO of the Company for consulting fees which were recorded as management and consulting

Related parties Relationship

A. Lee Barker CEO and President; minority shareholder of VanSparQiming Ge Former director; minority shareholder of VanSparRichard D. Williams Director; minority shareholder of VanSparDavid Brian Long Director, minority shareholder of VanSparOriental Sources Inc. A company controlled by the Company's CFO

2016 2015Due to related parties $ $Advances from Lee Barker (i) 5,932 6,837 Promissory notes and interests payable to directors (ii) 5,877 16,114 Due to Qiming Ge (iii) 94,957 49,816 Consulting fees payable to Oriental Sources Inc. (iii) 198,265 152,650 Consulting fees and rent payable to Lee Barker (iii) 434,084 316,803 Total 739,115 542,220

fees on the consolidated income statement. $198,265 was payable as at December 31, 2016 (2015 - $152,650) to the company controlled by the CFO of the Company.

In addition, senior management and directors A. Lee Barker, Qiming Ge, Richard D. Williams and one key consultant related to VanSpar, were paid total bonuses of $155,250 for closing the transaction for the acquisition of JDH.

(iv) A director and president of the Company subscribed for $8,000 VanSpar convertible debentures in 2015 as described in Note 7(b) to the 2016 audited consolidated financial statements.

The compensation expense associated with key management and directors for employment services or similar during the years in 2016 and 2015 are as the follows:

New accounting policies:

There were no new accounting policies in 2016.

Standards issued but not yet effective:

Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRIC that are mandatory at certain dates or later. Management is still assessing the effects of the pronouncements on the Company. The standards impacted that may be applicable to the Company are the following:

Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRIC that are mandatory at certain dates or later. Management is still assessing the effects of the pronouncements on the Company. The standards impacted that may be applicable to the Company are the following: IFRS 15 Revenue from Contracts with Customers was issued by the IASB in May 2014. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. Earlier application is permitted. IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue—Barter Transactions Involving Advertising Services. The new standard is effective for annual periods beginning on or after January 1, 2018. IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used,

2016 2015Salaries, consultant fees and other benefits 362,760$ 222,000$ Directors' fees - -

362,760$ 222,000$

replacing the multiple impairment methods in IAS 39. A new hedge accounting model is introduced and represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements. The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions. The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted.

Critical Accounting Estimates and Judgements:

The preparation of financial statements requires management to make estimates and judgments about the future. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Accounting estimates will, by definition, seldom equal the actual results. The following discussion sets forth management’s:

• most critical estimates and assumptions in determining the value of assets and liabilities; and

• most critical judgments in applying accounting policies.

Please refer to Note 3 to the December 31, 2016 audited consolidated financial statements for the critical accounting estimates and judgements used by management for the financial statements.

Financial instruments and risk factors The Company’s current major projects are the Chebucto, offshore Nova Scotia, natural gas license, the nearby North Triumph license, and the VanSpar vanadium deposit development and battery commissioning projects in China. Unless the Company acquires or develops additional project, the Company will be mainly dependent upon these projects. The Company subsidiary VanSpar’s vanadium program in China may lead to acquisitions of vanadium related resource licenses there. If no additional major mineral related assets are acquired by the Company, any adverse development affecting these assets would have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s current focus on the vanadium project development and battery commissioning project indicates if there is adverse development on these projects it may adversely affect the future operation of the Company and its ability to meet its obligations and liabilities. Other risk factors and the impact on the Company's financial instruments are summarized in the Note 4 to the December 31, 2016 audited consolidated financial statements. There have been no changes in the risks, objectives, policies and procedures from the previous year. Please refer to the Note 4 to the December 31, 2016 audited consolidated financial statements of the Company for the discussions on the financial instruments the Company holds, and the risk factors and analysis.

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet arrangements.

Corporate Governance and Management’s Responsibility for Financial Statements

Management of the Company is responsible for the preparation and presentation of the annual and interim consolidated financial statements and notes thereto and the accompanying MD&A and other information contained therein. Additionally, it is management’s responsibility to ensure that the Company complies with

the laws and regulations applicable to its activities. The Company’s management is accountable to the Board of Directors (“Directors”), each member of which is elected annually by the shareholders of the Company. Responsibility for the reviewing and approving of the Company’s annual audited and quarterly unaudited consolidated financial statements and related MD&A is delegated by the Directors to the Audit Committee, which is comprised of three directors, two of whom are independent of management.

The audited consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. In addition, in preparing the financial information management must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.

All relevant information related to the Company is filed electronically at www.sedar.com and on the Company’s website at www.spartonres.ca.

Outlook

The opportunities by VanSpar to acquire and develop the large Xiushui County vanadium deposits in Jiangxi province, China, and the evaluation of the local refinery, fits directly into the Company’s business plan to develop mining operations and become a profitable specialty metal producer, thereby bringing new value to its shareholders through its direct operations and those of its subsidiaries. At the present time, however, this opportunity is difficult to move forward with the weakness in commodity markets and availability of risk capital for this sector. Connections with end product users of vanadium products in the flow battery manufacturing industry have, however, provided the opportunity to become involved in activities which are vertically integrated with the Company’s mining objectives - namely through the battery commissioning project with a vanadium redox battery manufacturer and subsequent acquisition of a minority interest in the manufacturer PuNeng, through JDH.

One of the challenges for clean electricity (wind and solar) is storage. The energy storage industry has become a significant growth business with installations of clean electricity generation systems around the world. China has been particularly aggressive in this program with its movement to reduce pollution from its fossil fuel power plants. The best solution for power storage and grid distribution on a large scale appears to be the vanadium redox battery. Through Sparton’s ongoing interest in vanadium, the Company’s subsidiaries have been provided with the opportunity to be a participant in this exciting nascent global market. Various initiatives in this sector are being studied by management. The opportunity to commission the large Vanadium flow battery owned by the State Grid North China (“SG”) at the Zhangbei project has been a significant development and has led to additional new transaction opportunities vertically integrated with the mining objectives of the Company and its subsidiaries.

These opportunities arose out of the Company’s activities in pursuing vanadium exploration and mining opportunities in China. Mineral exploration and mining objectives continue to be the focus of the Company’s long-term plans as well as the ongoing search for other resource opportunities.

New financing initiatives to support all of these activities are being pursued by Company management on an ongoing basis. In a depressed market for junior resource companies, Sparton has instituted significant cost cutting measures and is actively seeking new clients for its drilling subsidiary, Edcor, as a source of revenue. New project opportunities are becoming available as competitors struggle to raise financing and these are also being evaluated.

Events after the Reporting Period

Subsequent to December 31, 2016, $178,000 of the debentures plus interest of $17,187 described in Note 9(b) were converted into VanSpar shares at US$0.17 per share. This results in a total of 863,719 common shares of VanSpar to be issued, being 2.5% of total shares outstanding after the conversion.

Subsequent to December 31, 2016, the RMB300,000 plus interest of RMB20,100 in total of RMB320,100 ($61,779) short term debt as described in Note 9(c) was repaid.

Subsequent to December 31, 2016, the Company granted 2,775,000 options to directors and officers and consultants of the Company. Each option entitles the holder to purchase one common share at an exercise price of $0.10 per share, expires three years after the granting date of April 10, 2017.

On April 10, 2017 the Company applied to the TSX.V to settle outstanding fees and expenses totaling $764,894 payable to five consultants of the Company, recorded as $201,635 in the accounts payable and $576,676 in the due to related parties at December 31 2016, by the issuance of a total of 4,005,700 common shares of the Company at a deemed value of $0.10 per share. Approval from TSX.V is pending for this settlement.

On April 25, 2017 VanSpar subsidiary JJ Sparton invoiced Pu Neng Energy (formerly Prudent Energy) the battery manufacturing subsidiary of JDH, the sum of $936,400 (RMB 4,727,000) for the first year of maintenance of the SGCC1 battery in accordance with the contract between JJ Sparton and PuNeng under the Vanadium Flow Battery Commissioning Program (see above).



For the years ended December 31, 2016 and 2015

(Expressed in Canadian dollars)



For the years ended December 31, 2016 and 2015(Expressed in Canadian dollars)

INDEX PAGE

Independent Auditors’ Report 1-2

Consolidated Statements of Financial Position 3-4

Consolidated Statement of Income (Loss) 5

Consolidated Statements of Comprehensive Income (Loss) 6

Consolidated Statements of Changes in Equity 7

Consolidated Statements of Cash Flows 8

Notes to the Consolidated Financial Statements 9-33

INDEPENDENT AUDITOR'S REPORT

To the Shareholders of Sparton Resources Inc.

We have audited the accompanying financial statements of Sparton Resources Inc.and its subsidiaries, which comprise the Consolidated financial statements as at December 31,2016 and December 31, 2015 and the statements of loss and comprehensive loss, changes inequity and cash flows for the years then ended and a summary of significant accounting policiesand other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statementsin accordance with International Financial Reporting Standards, and for such internal control asmanagement determines is necessary to enable the preparation of financial statements that arefree from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with Canadian generally accepted auditing standards.Those standards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance about whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor’sjudgement, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity’s preparation and fair presentation of the financialstatements in order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Anaudit also includes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate toprovide a basis for our audit opinion.

1

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, thefinancial position of Sparton Resources Inc. and its subsidiaries as at December 31, 2016 and2015, and its financial performance and its cash flows for the years then ended in accordance withInternational Financial Reporting Standards.

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 1 in the consolidated financialstatements which indicates that Sparton Resources Inc. had a working capital deficiency. Thiscondition, along with other matters as set forth in Note 1, indicate the existence of a materialuncertainty that may cast significant doubt about the company's ability to continue as a goingconcern.

Chartered Professional AccountantsLicensed Public AccountantsToronto, OntarioMay 1, 2017

2

3

See accompanying notes to the consolidated financial statements.

SPARTON RESOURCES INC.Consolidated Statements of Financial PositionAs at December 31, 2016 and 2015(Expressed in Canadian dollars)

Notes 2016 2015

AssetsCurrent assets

Cash 464,066 36,183Restricted cash 9 &15 2,215,636 -HST receivable 23,901 8,030Marketable securities 32,883 4,658

Total current assets 2,736,486 48,871

Property, plant and equipment 6 61,738 51,605Oil and gas properties 1 1Investment 15 800,000 -Total assets 3,598,225 100,477

4

SPARTON RESOURCES INC.Consolidated Statements of Financial PositionAs at December 31, 2016 and 2015(Expressed in Canadian dollars)

Notes 2016 2015

LiabilitiesCurrent liabilities

Accounts payable and accrued liabilities 17 418,498 374,709Due to related parties 11&17 739,115 542,220Purchase price payable 9 & 15 2,215,636 -Short term debts 9 &15 713,673 520,000

Total liabilities 4,086,922 1,436,929

EquityCommon shares 10(a) 17,416,183 17,416,183Share-based payment reserve 10(b) - 102,000Accumulated other comprehensive income (loss) (9,231) 3,980Deficit (17,966,984) (18,771,599)Equity attributable to shareholders (560,032) (1,249,436)Non-controlling interests 71,335 (87,016)Total equity (488,697) (1,336,452)Total liabilities and equity 3,598,225 100,477

Going concern (Note 1)Commitments and contingencies (Note 12)Events after the reporting period (Note 17)

Signed: "Richard Williams", Director

Signed: "A. Lee Barker", Director


5

SPARTON RESOURCES INC.Consolidated Statement of Income (Loss)For the years ended December 31, 2016 and 2015(Expressed in Canadian dollars, except for per share amount)

Notes 2016 2015

$ $Drilling revenue - 91,875

Drilling costs - (75,986)

Battery commissioning revenue 5 545,573 -545,573 15,889

ExpensesGeneral and administrative expenses 11&9 247,747 96,347Investor relations 15,494 17,881Management and consultant fees 11 456,377 276,475Professional fees 159,599 34,718Occupancy costs 18,000 18,000Transfer agent, filing and listing fees 31,267 12,835Interest expense and financing costs 45,895 23,407Battery commission costs 5 357,914 307,144Foreign exchange loss (7,311) (39)

1,324,982 786,768

Loss before other income (779,409) (770,879)Gain on disposal of assets 8 35,000 -Debt forgiveness 8 - 64,690Marketable securities gain (loss) 725 (1,792)Other income 15 1,604,650 -Net income (loss) 860,966 (707,981)

Basic and diluted income (loss) per share 0.01 (0.01)

Weighted average number of shares outstandingBasic and diluted 111,375,460 111,375,460

Net income (Loss) attributed toNon-controlling interests 158,351 (30,798)Shareholders of the Company 702,615 (677,183)

860,966 (707,981)


6

SPARTON RESOURCES INC.Consolidated Statements of Comprehensive Income (Loss)For the years ended December 31, 2016 and 2015(Expressed in Canadian dollars)

Notes 2016 2015

$ $Net income (loss) for the year 860,966 (707,981)

Other comprehensive income (loss)

Items that will be reclassified subsequently to income

Gain (loss) on translation of foreign operations (13,211) (5,321)

847,755 (713,302)

Comprehensive income (loss) attributed toNon-controlling interests 158,351 (30,798)Shareholders of the Company 689,404 (682,504)

847,755 (713,302)


7

SPARTON RESOURCES INC.Consolidated Statements of Changes in Equity(Expressed in Canadian dollars, except shares)

Accumulatedother Subtotal

Common shares Share-based comprehensive shareholders' Non-controlling TotalShares Amount payment reserve Income (loss) Deficit equity interests equity

$ $ $ $ $ $ $

Balance at January 1, 2015 111,375,460 17,398,858 287,999 9,301 (18,280,415) (584,257) (56,218) (640,475)Net loss for the period - - - - (677,183) (677,183) (30,798) (707,981)Expiry of options - - (185,999) - 185,999 - - -Translation of foreign operations - - - (5,321) - (5,321) - (5,321)Legal settlement - 17,325 - 17,325 - 17,325Balance at December 31, 2015 111,375,460 17,416,183 102,000 3,980 (18,771,599) (1,249,436) (87,016) (1,336,452)Net loss for the period - - - - 702,615 702,615 158,351 860,966Expiry of options - - (102,000) - 102,000 - - -Translation of foreign operations - - - (13,211) - (13,211) - (13,211)Balance at December 31, 2016 111,375,460 17,416,183 - (9,231) (17,966,984) (560,032) 71,335 (488,697)


8

SPARTON RESOURCES INC.Consolidated Statements of Cash FlowsFor the years ended December 31, 2016 and 2015(Expressed in Canadian dollars)

Notes 2016 2015$ $

Operating activitiesNet income (loss) 860,966 (707,981)Items not involving cash

Amortization of property, plant and equipment 14,644 15,060Accrued interest expense 41,590 23,407Foreign exchange (gain) loss 7,311 39Shares issued for services - 7,500Debt forgiveness - (64,690)Gain on disposal of assets (30,000) -Other income (800,000) -(Gain) loss on investment (725) 1,792

93,786 (724,873)

Changes in non-cash working capital 298,842 608,325392,628 (116,548)

Investing activitiesPurchase of property, plant and equipment (38,466) -

(38,466) -

Financing activitiesProceeds from related party 11 10,000 -Payments to related parties (21,680) -Proceeds from short term loans 9 285,401 168,000Purchase price payable 9 2,215,636Restricted cash 9 (2,215,636) -Payment of short term loan (200,000) (48,000)Gain on sales of shares received through legal settlement - 17,325

73,721 137,325

Increase in cash 427,883 20,777Cash, beginning of year 36,183 15,406Cash, end of year 464,066 36,183


SPARTON RESOURCES INC.Notes to the Consolidated Financial StatementsFor the years ended December 31, 2016 and 2015(Unless otherwise stated, all amounts are in Canadian dollars)

9

1. NATURE OF OPERATIONS AND GOING CONCERN

Sparton Resources Inc. (the "Company" or “Sparton”) was incorporated in Ontario, Canada, pursuant to theBusiness Corporation Act (Ontario). Its common shares are listed on the TSX Venture Exchange (“TSX-V”). TheCompany’s registered head office address is 81A Front Street East, Unit 216, Toronto, Ontario, M5E 1Z7. It isan exploration and development stage company, and has interests in exploration and evaluation properties inCanada and China.

Between 2015 and 2016, the Company focused primarily on developing vanadium related opportunities. Themajority of the Company’s efforts were devoted to financing exploration for a number of resource projects,seeking new business for the drilling operation and fulfilling the obligations under the vanadium redox flow batterycommissioning agreement.

Currently the Company has limited activity on its exploration projects. The Company continues to evaluate andseek new domestic and international exploration opportunities.

These consolidated financial statements have been prepared on the basis of accounting principles applicable toa going concern. Accordingly, they do not give effect to adjustments that would be necessary should theCompany be unable to continue as a going concern and have to realize its assets and liquidate its liabilities andcommitments at amounts different from those in the accompanying consolidated financial statements. Theseadjustments could be material.

Management is pursuing initiatives intended to address the current working capital deficiency. As at December31, 2016, the Company had a working capital deficiency of $1,350,4364 (2015 - $1,388,058) and a deficit of$17,966,984 (2015 - $18,771,599). Due to the continuing operating losses, the Company’s ability to continue asa going concern is dependent upon its ability to obtain adequate financing and to reach profitable levels ofoperation. It is not possible to predict whether financing efforts will be successful or if the Company will attainprofitable levels of operations. Management believes it will be successful in obtaining the necessary funding tocontinue operations in the normal course of operations; however, there is no assurance that these funds will beavailable on terms acceptable to the Company. These conditions indicate the existence of material uncertaintiesthat may cast significant doubt on the company’s ability to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance:

These consolidated financial statements of the Company and its subsidiaries were prepared in accordance withInternational Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board(“IASB”), and the IFRS Interpretations Committee (formerly “IFRIC”). These accounting policies are based on theIFRS standards and IFRIC interpretations applicable at December 31, 2016. These consolidated financialstatements were approved by the board of directors of the Company on April 28, 2017.

These consolidated financial statements were prepared on a going concern basis, under the historical costconvention. The preparation of financial statements in accordance with IFRS requires the use of certain criticalaccounting estimates. It also requires management to exercise judgment in applying the Company’s accountingpolicies. The areas involving a higher degree of judgment or complexity, or areas where assumptions andestimates are significant to the financial statements are disclosed in note 3.


10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of Consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries and jointoperations, as noted below.

As at December 31, 2016 and 2015, the Company wholly owned EDCOR Drilling Services Inc. (“EDCOR”) andSparton International Holdings Inc. (“SIH”). SIH owned a 90.42% (2015 – 90.42%) interest in VanSpar Mining Inc.(“VanSpar”) as at December 31, 2016 and 2015; Jiujiang Sparton Vanadium Tech & Trade Co., Ltd. (“JJ Sparton”)is 90% owned by VanSpar and China VanSpar Limited registered in Hong Kong is wholly owned by VanSpar.

Subsidiaries are entities over which the Company has control, where control is determined based on whether theCompany is exposed, or has rights, to variable returns from its involvement with the investee and has the abilityto affect those returns through its power over the investee. The effects of potential voting rights that are currentlyexercisable are considered when assessing whether control exists. Subsidiaries are fully consolidated whencontrol is transferred to the Company, and become unconsolidated when control ceases.

Intercompany transactions and balances between subsidiaries are eliminated upon consolidation.

The Company has assessed the nature of its joint arrangement and determined it to be classified as a jointoperation. The Company’s subsidiary EDCOR has a joint operation with a joint operation partner.

IFRS 11 “Joint Arrangements” requires an entity to consider whether a joint arrangement is structured through aseparate vehicle, as well as the terms of the contractual arrangement and other relevant facts and circumstances,to assess whether the parties are entitled to the net assets of the joint arrangement (a “joint venture”) or to ashare of the assets and liabilities of the joint arrangement (a “joint operation”). Joint ventures are accounted forusing the equity method, whereas joint operations are accounted for by recognizing the parties’ right to the assets,obligations for the liabilities, and expenses, including the parties’ share of any expense incurred jointly.

Revenue Recognition:

Revenue is measured at the fair value of the consideration received or receivable.

Revenue from drilling services is recognized when the services are provided, the amount of revenue can bemeasured reliably, the receipt of economic benefits is probable and costs incurred and expected to be incurredcan be measured reliably.

Revenue from battery contracts is recognized on the percentage-of-completion method, measured by referenceto the value of work carried out during the periods. When it is probable that total contract costs will exceedcontract revenue, the expected loss is recognized as an expense immediately.

Commission income from financial services provided for in the acquisition of JDH (Note 9) was recognized whenthe services were provided, the transaction had closed and the commission received or reliably receivable.

Entity Incorporation Ownership Ownership2016 2015

EDCOR Drilling Services Inc. Canada 100.00% 100.00%Sparton International Holdings Inc. BVI 100.00% 100.00%VanSpar Mining Inc. BVI 89.80% 89.80%Jiujiang Sparton Vanadium Tech &Trading Co., Ltd. PRC 80.82% 80.92%China VanSpar Limited Hong Kong 89.80% 89.80%


11


Property, Plant and Equipment and Amortization:

Property, plant and equipment include automobiles, drilling equipment and office equipment. Property, plant andequipment are carried at cost, less accumulated amortization and accumulated impairment losses. Costscomprise the fair value of consideration given to acquire or construct an asset. These costs include the directcharges associated with bringing the asset to the location and condition necessary for it to be capable of operatingalong with the future cost of dismantling and removing the asset.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for asseparate items (major components) of property, plant and equipment. Amortization of these assets commenceswhen the assets are ready for their intended use. Amortization of property, plant and equipment is the costs ofthe assets less their residual values over their estimated useful lives using the straight-line method. The estimateduseful lives, residual values and amortization method are reviewed at each year end, with the effect of anychanges in estimate accounted for on a prospective basis. Depreciation is recorded as follows:

Mining plant equipment Straight line over 5 yearsOffice equipment Straight line over 10 yearsAutomobile Straight line over 5 years

Oil and Gas Properties:

The costs to acquire non-producing oil and gas properties or licenses to explore, exploratory well expendituresand the costs to evaluate the commercial potential of underlying resources, including related borrowing costs,are initially capitalized as oil and gas properties.

Oil and gas assets are subject to technical, commercial and management review to confirm the continued intentto develop and extract the underlying resources. If an area or exploration well is no longer consideredcommercially viable, the related capitalized costs are charged to net income.

When management determines with reasonable certainty that an oil and gas property will be developed, asevidenced by the classification of proved or probable reserves and the appropriate internal and externalapprovals, the asset is transferred to Property, Plant and Equipment.

Impairment of Non-financial Assets:

Non-financial assets with finite lives are tested for impairment when events or changes in circumstances indicatethat their carrying amounts may not be recoverable. In addition, non-current assets that are not amortized aresubject to an annual impairment assessment. Any impairment loss is recognized, for the amount by which theasset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fairvalue less cost of disposal and its value in use. For the purposes of assessing impairment, assets are groupedat the lowest levels for which there are separately identifiable cash flows (“cash-generating units” or “CGUs”).The Company evaluates impairment losses for potential reversals, other than goodwill impairment, when eventsor changes in circumstances warrant such consideration. There was no impairment reversal during the year 2015and 2016.


12


Marketable Securities:

Publicly-traded investments:Securities including shares, options and warrants which are traded in an active market, such as on a recognizedsecurities exchange where no sales restrictions apply, are presented at fair value based on quoted closing tradeprices at the consolidated statement of financial position date or the closing trade price on the last day the securitytraded if there were no trades on the consolidated statement of financial position date. These are included inLevel 1 in Note 4.

Share-based Payments:

The Company operates a number of equity-settled share-based payment plans where the Company receivesservices from employees and non-employees as consideration for equity instruments of the Company, or payingobligations for property acquisitions with the equity instruments of the Company.

Share-based payments to employees are measured at the fair value of the instruments issued at the grant dateand amortized over their vesting periods. Share-based payments to non-employees are recorded at the date thegoods or services are received and are measured at the fair value of the goods or services received or the fairvalue of the equity instrument issued, if it is determined that the fair value of the goods or services received cannotbe reliably measured.

Non-market vesting conditions are considered in making assumptions about the number of awards that areexpected to vest. The expense is recognized over the vesting period, which is the period over which all of thespecified vesting conditions are satisfied. For awards with graded vesting, the fair value of each tranche isrecognized over its respective vesting year. The offset to the recorded cost is to common shares, warrants, orshare-based payment reserve. Considerations received on the exercise of warrants and stock options arerecorded as common shares and the related value of warrants or share-based payment reserve is transferred tocommon shares.

At each statement of financial position date, the Company reassesses its estimates of the number of awards thatare expected to vest and recognizes the impact of any revision in the income statement with a correspondingadjustment to equity or liabilities as appropriate.

Other Provisions:

Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions arerecognized when the Company has a present legal or constructive obligation as a result of past events, it isprobable that an outflow of resources will be required to settle the obligation and the amount can be reliablyestimated. Provisions are measured at the present value of the expenditures expected to be required to settlethe obligation using a discount rate that reflects current market assessments of the time value of money and therisks specific to the obligation. Provisions are re-measured at each statement of financial position date using thecurrent discount rate. The increase in the provision due to passage of time is recognized as a finance cost.

Loss Per Share:

Basic loss per share is calculated by dividing the net loss by the weighted average number of common sharesoutstanding during the year. In order to determine diluted loss per share, the proceeds from the exercise ofdilutive stock options and warrants would be used to repurchase common shares at the average market priceduring the year, with the incremental number of shares being included in the denominator of the diluted loss pershare calculation. The diluted loss per share calculation excludes any potential conversion of options andwarrants that would decrease the loss per share.


13


Short-term Debt:

Short-term debt is recognized initially at fair value, net of transaction costs incurred. Debt is classified as a currentliability unless the Company has an unconditional right to defer settlement for at least 12 months after thestatement of financial position date. Subsequent to the initial measurement, debt will be accreted up to its facevalue over the duration of the debt.

Financial Instruments:

Financial assets and liabilities classified as fair value through profit and loss ("FVTPL") are measured at fairvalue, with any resultant gain or loss recognized in the Consolidated Statement of Income (Loss) andComprehensive Income (Loss). FVTPL assets consists of marketable securities.

Financial instruments classified as being available-for sale are measured at fair value, with any resultant gain orloss being recognized directly under other comprehensive income (loss), except for impairment losses and, inthe case of monetary items such as securities denominated in foreign currency, which are recorded in foreignexchange gains or losses. When these investments are derecognized, the cumulative gain or loss previouslyrecognized in equity is recognized in the consolidated statement of operations and comprehensive income (loss).The Company has decided that its subsidiary VanSpar’s 18% interest in JDH is an available for sale investment(See Note 15).

Financial assets classified as loans and receivables are measured at amortized cost using the effective interestmethod. Loans and receivables assets consist of cash, restricted cash and trade and other receivables. Availablefor sale financial assets are measured at fair value with changes in fair value recorded in other comprehensiveincome (loss), except for equity instruments without a quoted market price in an active market and whose fairvalue cannot be reliably measured, which are measured at cost.

Financial liabilities classified as other financial liabilities are measured at amortized cost using the effectiveinterest rate method. Other financial liabilities consist of accounts payable and accrued liabilities, short term debtand due to related parties.

Transaction costs associated with FVTPL and available for sale financial assets and liabilities are expensed asincurred, while transaction costs associated with all other financial assets and liabilities are included in the initialcarrying amount of the asset and liability.

Financial assets are derecognized when the rights to receive cash flows from the financial assets have expiredor were transferred and the Company has transferred substantially all risks and rewards of ownership.

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.

Compound Financial Instruments:

Compound financial instruments are comprised of instruments that can be converted into shares at the option ofthe holder. The loans issued during the year are denominated in Canadian dollars and the conversion feature isdenominated in American dollars which results in an embedded derivative thus the conversion feature no longermeets the criteria to be classified as equity and is to be recognized as a financial liability. The embeddedderivative is recorded at fair value and re-measured each period with the movement being recorded as a gain orloss in Consolidated Statement of Income (Loss). The loans are classified as liability, less the portion relating tothe embedded derivate feature.

Interest related to a financial liability is recognized in the Consolidated Statements of Comprehensive Income(Loss). On conversion, the financial liability is reclassified to equity and no gain or loss is recognized.


14


Impairment of Financial Assets:

The Company assesses at each period end date whether there are indications that a financial asset is impaired.

If there is objective evidence that an impairment loss on financial assets carried at amortized cost has occurredthe amount of the loss is measured as the difference between the asset’s carrying amount and the present valueof estimated future cash flows discounted at the financial asset’s original effective interest rate. The carryingamount of the financial asset is then reduced by the amount of the impairment. The amount of the loss isrecognized in the Statement of Income (Loss).

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognized the previously recognized impairment lossis reversed to the extent that the carrying value of the financial asset does not exceed what the amortized costwould have been had the impairment not been recognized. Any subsequent reversal of an impairment loss isrecognized in the Consolidated Statement of Income (Loss).

Translation of Foreign Currencies:

The consolidated financial statements are presented in Canadian dollars, which is the Company's presentationcurrency and functional currency.

The financial statements of each of the Company's subsidiaries are measured using the currency of the primaryeconomic environment in which the subsidiary operates (the "functional currency"). The functional currency forall the Company’s Chinese subsidiaries is the Chinese Renminbi (“RMB”). Foreign currency transactions aretranslated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreignexchange gains and losses resulting from the settlement of such transactions as well as from the translation ofmonetary assets and liabilities not denominated in the functional currency of the subsidiary are recognized in theincome statement.

Assets and liabilities of entities (“foreign operations”) with functional currencies other than Canadian dollars aretranslated to Canadian dollars at the year-end rates of exchange, and the results of their operations are translatedat average rates of exchange for the year. The resulting translation adjustments are included in accumulatedother comprehensive income in shareholders' equity.

Additionally, foreign exchange gains and losses related to certain intercompany loans that are part of a netinvestment in foreign operations are included in accumulated other comprehensive income.

References to “USD” are to U.S. dollars, references to “$” are to Canadian dollars, and references to “RMB” areto Chinese Renminbi. Since the Chinese Renminbi (“RMB”) is not a fully convertible currency, all foreignexchange translations involving RMB must take place either through the People’s Bank of China or otherinstitutions authorized to deal with foreign exchange.

Income Taxes:

Current income taxCurrent income tax assets and liabilities are measured at the amount expected to be recovered from or paid tothe taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted orsubstantively enacted, at the reporting date, in the countries where the Company operates and generates taxableincome.

Current income tax relating to items recognized directly in other comprehensive income or equity is recognizedin other comprehensive income or equity and not in income or loss. Management periodically evaluates positionstaken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretationand establishes provisions where appropriate.


15


Income Taxes (continued):

Deferred income taxDeferred income tax is provided using the balance sheet method on temporary differences at the reporting datebetween the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except: Where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or

liability in a transaction that is not a business combination and, at the time of the transaction, affectsneither the accounting profit nor taxable profit; and

In respect of taxable temporary differences associated with investments in subsidiaries, associates andinterests in joint ventures, where the timing of the reversal of the temporary differences can be controlledby the Company and it is probable that the temporary differences will not reverse in the foreseeablefuture.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused taxcredits and unused tax losses, to the extent that it is probable that taxable profit will be available against whichthe deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can beutilised, except:

Where the deferred income tax asset relating to the deductible temporary difference arises from the initialrecognition of an asset or liability in a transaction that is not a business combination and, at the time ofthe transaction, affects neither the accounting profit nor taxable profit or loss; and

In respect of deductible temporary differences associated with investments in subsidiaries, associatesand interests in joint ventures, deferred income tax assets are recognized only to the extent that it isprobable that the temporary differences will reverse in the foreseeable future and taxable profit will beavailable against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reducedto the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilised. Unrecognized deferred income tax assets are reassessed at the end ofeach reporting year and are recognized to the extent that it has become probable that future taxable profit will beavailable to allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the yearwhen the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the end of the reporting year.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists toset off current tax assets against current income tax liabilities and the deferred income taxes relate to the sametaxable entity and the same taxation authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition atthat date, would be recognized subsequently if new information about facts and circumstances arose. Theadjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it occurredduring the measurement year or in profit or loss.


16


Borrowing Costs:

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

Standards Issued But Not Yet Effective:

Certain new standards, interpretations, amendments and improvements to existing standards were issued by theIASB or IFRIC that are mandatory at certain dates or later. Management is still assessing the effects of thepronouncements on the Company. The standards impacted that may be applicable to the Company are thefollowing:

IFRS 15 Revenue from Contracts with Customers was issued by the IASB in May 2014. The core principle ofthe new standard is for companies to recognize revenue to depict the transfer of goods or services to customersin amounts that reflect the consideration (that is, payment) to which the company expects to be entitled inexchange for those goods or services. The new standard will also result in enhanced disclosures about revenue,provide guidance for transactions that were not previously addressed comprehensively (for example, servicerevenue and contract modifications) and improve guidance for multiple-element arrangements. Earlier applicationis permitted. IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18 Revenue,IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18Transfers of Assets from Customers, and SIC-31 Revenue—Barter Transactions Involving Advertising Services.The new standard is effective for annual periods beginning on or after January 1, 2018.

IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments:Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset ismeasured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is basedon how an entity manages its financial instruments in the context of its business model and the contractual cashflow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurementof financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a singleimpairment method to be used, replacing the multiple impairment methods in IAS 39.. A new hedge accountingmodel is introduced and represents a substantial overhaul of hedge accounting which will allow entities to betterreflect their risk management activities in the financial statements. The most significant improvements apply tothose that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions. The new standard is effective for annual periods beginning on or after January 1, 2018.Earlier application is permitted.


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3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements requires management to make estimates and judgments about the future.Estimates and judgments are continually evaluated and are based on historical experience and other factors,including expectations of future events that are believed to be reasonable under the circumstances. Accountingestimates will, by definition, seldom equal the actual results. The following discussion sets forth management’s:

• most critical estimates and assumptions in determining the value of assets and liabilities; and• most critical judgments in applying accounting policies.

Income Taxes

The Company computes an income tax provision in each of the jurisdictions in which it operates. However, actualamounts of income tax expense only become final upon filing and acceptance of the tax return by the relevantauthorities, which occur subsequent to the issuance of the financial statements. Additionally, estimation of incometaxes includes evaluating the recoverability of deferred tax assets based on an assessment of the ability to usethe underlying future tax deductions before they expire against future taxable income. The assessment is basedupon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final taxreturn, earnings would be affected in a subsequent period. The Company’s 2016 applicable tax rate is 26% (2015– 26%) of earnings and its subsidiaries in China are subject to a tax rate of 25%. A 1% increase in the effectivetax rate would have no material impact on the income statement.

Contingent Liability

The Company recorded and disclosed the contingencies based on management’s best estimates using theinformation available to management as at the date of the financial statements. Management cannot be certainwhether future developments or new information may require an adjustment to the contingencies or makeadditional disclosures necessary.

Investment

The Company exercises a substantial amount of estimation in the valuation of privately owned investments.Judgement is also required to assess whether there are any indicators of impairment and classification of theinvestment by taking into consideration all of the pertinent facts surrounding these circumstances.

Changes in any of the assumptions or situations noted above could have a material impact on the classificationand valuation of the Company’s investment. Refer to Note 15 for additional details.


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3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)

Fair Value

Where the fair value of financial assets and financial liabilities and the fair value of share based paymentsrecorded in the statement of financial position cannot be derived from active markets, their fair value isdetermined using valuation techniques including the discounted cash flow model and the Black-Scholes optionpricing model for the valuation of stock options and warrants. The inputs to these models are taken fromobservable markets where possible, but where this is not feasible, a degree of judgment is required in establishingfair values. The judgments on the discounted cash flow model include considerations of inputs such as liquidityrisk, credit risk and volatility. The judgments on the measurement of stock options and warrants include theexpected dividends, life of the instruments, volatility and vesting of options. Changes in assumptions about thesefactors could affect the reported fair value of financial instruments and the equity instruments.

Revenue Recognition

Revenue from the battery commissioning contract is recognized on the percentage-of-completion method,measured by reference to the value of work carried out during the periods. When it is probable that total contractcosts will exceed contract revenue, the expected loss is recognized as an expense immediately. Due to the levelof uncertainty that exists around the contract, the contract costs have all been expensed (refer to Note 5 foradditional details).

Commission income from financial services provided for in the acquisition of JDH (Note 9) was recognized whenthe services were provided, the transaction had closed and the commission received or reliably receivable.

4. FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT

Financial Instruments

Financial instruments measured at fair value on the statement of financial position requireclassification into one of the following levels of the fair value hierarchy:

Level 1–Unadjusted quoted prices inactive markets that are accessible at the measurement date for identical,unrestricted assets or liabilities.

Level 2–Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly,for substantially the full term of the asset or liability.

Level 3–Prices or valuation techniques that require inputs that are both significant to the fair valuemeasurement and unobservable (supported by little or no market activity).


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4. FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT (Continued)

The carrying amounts of financial assets and liabilities as of December 31, 2016 and 2015 were as follows:

There was no reclassification between levels of financial assets in 2016 or 2015.

The carrying value of cash, restricted cash, HST receivables, accounts payable and accrued liabilities, and dueto related parties approximate their fair value because of the short term maturity of these instruments. The fairvalue of the marketable securities is based on the market-quoted fair value of the instruments.

The short term debts and the due to related parties are interest-bearing loans and borrowings valued at amortizedcost using the effective interest rates of the loans. Due to the short-term nature of these loans, fair value isapproximately the amortized cost.

Risk factors and the impact on the Company's financial instruments are summarized below. There have been nochanges in the risks, objectives, policies and procedures from the previous year.

December 31, 2016Loans andreceivables

Assets(liabilities)at fair valuethroughearnings

Assetsavailable forsale

Otherfinancialliabilities Total

$ $ $ $ $Cash 464,066 - - - 464,066Restricted cash 2,215,636 - - - 2,215,636Marketable securities (level 1) - 32,883 - - 32,883Investments - - 800,000 - 800,000Accounts payable and accruedliabilities - - - (418,498) (418,498)Short term debts - - - (2,929,309) (2,929,309)Due to related parties - - - (739,115) (739,115)

2,679,702 32,883 800,000 (4,086,922) (574,337)

December 31, 2015Loans andreceivables

Assets(liabilities)at fair valuethrough

Assetsavailable forsale

Otherfinancialliabilities Total

$ $ $ $ $Cash 36,183 - - - 36,183Restricted cash - - - - -Marketable securities (level 1) - 4,658 - - 4,658Accounts payable and accruedliabilities - - - (374,709) (374,709)Short term debts - - - (520,000) (520,000)Due to related parties - - - (555,817) (555,817)

36,183 4,658 - (1,450,526) (1,409,685)


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Credit Risk

Credit risk is the risk of loss associated with the counterparty’s inability to fulfill its payment obligations. TheCompany's credit risk is primarily attributable to cash, restricted cash, marketable securities, HST receivables.and investment available for sale. Cash and marketable securities are held with reputable Canadian charteredbanks and Chinese banks which are closely monitored by management. Other receivables consist of HSTrefundable. Management believes that the credit risk concentration with respect to financial instruments includedin cash, marketable securities, trade and other receivables is minimal.

Liquidity Risk

The Company has a liquidity concern. As at December 31, 2016, the Company had a cash balance of $464,066and restricted cash of $2,215,636 to settle current liabilities of $4,086,922. The Company’s accounts payableand accrued liabilities have contractual maturities of less than 30 days and are subject to normal trade terms.Included in the short-term debts are a short term loan plus interest of $237,207 due on demand, $2,215,636purchase price payable within a year, convertible debentures plus interest in total of $217,187 due within a year,US$150,000 ($197,501) loan payable, and $61,778 subscription received. The Company will continue its effortsto obtain adequate financing and reach profitable levels of operations.

Market Risk

Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreignexchange rates, and commodity prices. The impact of currency risk is noted below.

Interest Rate Risk

The Company carries short-term debt on which interest is payable at a fixed rate. The Company currently doesnot carry interest bearing debt at floating rates.

Foreign Currency Risk

The Company is exposed to foreign exchange rate risk, as a portion of the Company's business is carried out inUS dollars (“USD”) and Chinese Renminbi (“RMB”) and the Company and its subsidiaries maintain USD andRMB denominated bank accounts. Unfavorable changes in the applicable exchange rate between USD, RMBand the Canadian dollar may result in a material change in foreign exchange gain or loss. The Company and itssubsidiaries do not use derivative instruments to reduce the exposure to foreign currency risk.

RMB is not a freely convertible currency. Future exchange rates of RMB could vary significantly from the currentor historical exchange rates as a result of controls that could be imposed by the People’s Republic of China(“PRC”) government. The exchange rates may also be affected by economic developments and political changesdomestically and internationally and supply and demand of RMB. The appreciation or devaluation of RMB againstthe Canadian dollar may have positive or negative impact on the results of operations of the Company.

The Company's activities that result in exposure to fluctuations in foreign currency exchange rates consist of thepurchase of properties and the purchase of services, materials and equipment from suppliers invoiced in foreigncurrencies. Much of this exposure is pursuant to the discussion in note 5. As at December 31, 2016, approximately73% of its assets were carried in foreign currencies, approximately 60% of its liabilities were in foreign currencies,and for the year ended December 31, 2016 approximately 42% of expenses were incurred in foreign currencies.


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The Company is exposed to currency risk through the following assets and liabilities denominated in currenciesother than the Canadian dollar:

Balances as at December 31, 2016 US$ RMB

Cash 240,612 161,326Restricted cash 1,610,135 -Property, plant and equipment - 315,585Accounts payable and accrued liabilities - (320,098)Short term loan (1,800,135) -Net exposure 50,612 156,813

Securities Price Risk

The Company carries investments in certain public securities for which price fluctuations can affect theCompany’s earnings. The Company has classified these investments as financial assets at fair value throughprofit or loss where price volatility is reflected in operations.

Sensitivity Analysis

Based on management's knowledge and experience of the financial markets, the Company believes the followingmovements are "reasonably possible" in the year:

(i) Interest rate risk is remote as the interest rate on the Company's short-term debt is fixed.

(ii) As at December 31, 2016, a 10% fluctuation in the exchange rate from US$ to CDN$ will have an impactof about $12,100 on its comprehensive loss, a 10% fluctuation in the exchange rate from RMB to CDN$will have approximately $3,000 impact on the comprehensive loss.

(iii) Commodity price risk could adversely affect the Company. In particular, the Company’s future profitabilityand viability of development depends upon the world market price of vanadium. Commodity prices havefluctuated widely in recent periods. There is no assurance that commercial quantities of commodities maybe produced in the future, or that a profitable market will exist for them. A decline in the market price of thecommodities may affect the completion of future equity transactions and may also affect the Company’sliquidity and its ability to meet its ongoing obligations.


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5. FLOW BATTERY COMMISSION EXPENDITURES RECOVERY

On August 28, 2015 the Company’s subsidiary JJ Sparton signed and executed an agreement for services(“AFS”) with a PRC based private company (the Client) relating to the commissioning of a vanadium redox flowbattery. Pursuant to the Agreement, JJ Sparton was to provide funding to complete all work specified in theagreement. The commissioning work was completed and the owner of the battery, the State Grid North ChinaCompany Ltd. (“SG”) accepted the battery on February 22, 2016, and paid in June 2016 RMB15.265 million($3,022,000) to the Client. After certain payments were deducted by a court for the Client’s liabilities, $545,573(RMB2,734,700) was paid to JJ Sparton in 2016.

JJ Sparton had incurred $307,144 (RMB1,510,047) before December 31, 2015 in commissioning costs, and$357,914 (RMB2,357,579) in 2016.

In 2015 as the exact amount of the client’s liability deductions were unknown, and the amounts payable at eachstep of the process were undetermined, and therefore the recoverability of the expenditures was uncertain, allthe incurred costs were written off, similarly in 2016, the cost have been expensed due to the uncertainty of thecollectability of these amounts. To be consistent, expenses incurred in 2016 was initially recorded as commissioncosts and the amount $545,573 (RMB2,734,700) received by JJ Sparton in June 2016 was presented asexpenses recovery.

The AFS also provides for continued maintenance of the battery for three years and three additional payments ofup to RMB5.48 million ($1,117,000) each, on every anniversary after the completion of the commissioning. Thefirst anniversary payment of RMB5.48 million was received by the Client PuNeng Energy (formerly PrudentEnergy) on April 21, 2017. Given the uncertainty of amount that could be received by JJ Sparton, the amount willbe recognized as a revenue when received by JJ Sparton in 2017.


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6. PROPERTY, PLANT AND EQUIPMENT

During the year ended December 31, 2016, the Company expensed $14,644 (2015 - $15,060) in amortization tothe consolidated income statement. There was no reversal of impairment in the period.

7. OIL AND GAS PROPERTIES

In 2013 the Company has reassessed the value of the oil and gas properties and recorded its carrying value to$1 resulting into an impairment of $554,751. This impairment was triggered by the continuing low price of naturalgas and lack of development activity by the majority owner.

Mining plant Office Automobile TotalCosts Equipment equipment

$ $ $ $January 1, 2015 82,500 65,971 30,231 178,702

Additions - 1,066 - 1,066Effect of foreign exchange translation - 6,779 4,238 11,017December 31, 2015 82,500 73,816 34,469 190,785

Disposal - - (34,469) (34,469)Additions - 831 37,635 38,466Effect of foreign exchange translation - (7,292) - (7,292)December 31, 2016 82,500 67,355 37,635 187,490

Mining plant Office Automobile TotalAccumulated amortization and depletion Equipment equipment

$ $ $ $January 1, 2015 75,087 27,805 17,365 120,257Additions 7,413 1,047 6,600 15,060Effect of foreign exchange translation - 1,429 2,434 3,863December 31, 2015 82,500 30,281 26,399 139,180Additions - 12,893 1,751 14,644Disposal - - (26,399) (26,399)Effect of foreign exchange translation - (1,673) - (1,673)December 31, 2016 82,500 41,501 1,751 125,752

Net book valuesDecember 31, 2015 - 43,535 8,070 51,605December 31, 2016 - 25,854 35,884 61,738


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8. CONTINGENT ASSETS

Jiangxi, China

During the period ended June 30, 2011, VanSpar executed an exclusive option agreement for acquisitionof 80% interest in Jiangxi Rentian Mining Co., Ltd. (“Rentian”) for $4.67 million (RMB28.67 million). In 2011,VanSpar paid RMB 3,000,000 as an advance payment towards the acquisition that was recorded as$484,800 in 2011, as prepayments for the acquisition of assets. As at December 31, 2016 and 2015, theacquisition of the above mentioned Rentian vanadium project was not completed. In 2012, the Companytook action against Rentian to recover the prepayments and has provided a provision and written down thebalance to $nil in 2013. The action resulted in VanSpar being awarded a court ordered judgment of RMB3million ($594,000).

Mineral Claims, Canada

In late 2015 and early 2016 the Company, jointly with an independent consultant (as to 50% ownershipeach) staked a number of mineral claims (29) totalling 1388 hectares in the Wemindji diamond explorationarea of Northern Quebec. Due to intense competition in the online staking of a number of these claims arandom draw was held by the Quebec Ministry of Natural Resources to establish which competitor in thestaking would be awarded the claims. The Company and consultant were awarded all of the disputed claims.On May 19, 2016 the Company executed an agreement with Honey Badger Exploration Inc. where it soldits 50 % interest in these claims for a total consideration of $5,000 cash and 1,000,000 common shares ofHoney Badger (with a market value of $30,000), resulted into a gain on disposal of assets of $35,000. TheCompany and the Consultant will each retain a 1% Net Smelter Return Royalty on any mineral productionfrom these claims. These royalties can be purchased at any time for a total of $1,000,000 each. HoneyBadger has received all necessary regulatory, and other required approvals and final closing of thetransaction has taken place. The Honey Badger shares have been received by the Company.

See Note 5 for possible additional commission fee.


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9. SHORT-TERM DEBTS AND PURCHASE PRICE PAYABLE

(a) As at December 31, 2016 there was a short term loan of $152,000 (2015 - $352,000) bearing an annualinterest of 6% payable on a quarterly basis in arrears, unsecured, and due on demand. In 2016 $200,000principal was repaid for this loan. As at December 31, 2016 there was $85,207 (2015 - $64,185) interestpayable accrued for this loan.

(b) In 2015 the Company’s subsidiary VanSpar issued convertible debentures totalling $168,000 to 8 investors.During the year 2016 VanSpar issued a total of $30,000 additional convertible debentures to 3 investors. Thedebentures have a term of 12 months from date of issuance, bear an annual interest of 10%, are unsecured,and the unpaid principal and interest may be converted into common shares of VanSpar at a price of US$0.17per share. The convertible feature does not qualify for classification as equity and as such would be classifiedas a liability, however the fair value of the conversion feature has been valued at a nominal amount and hastherefore not been separated from the debenture. The Black Scholes model was used to assess the value ofthe convertible feature using a range of inputs to assess the sensitivity, all outcomes were nominal.

A director and president of the Company subscribed for $8,000 of the convertible debentures in 2015.

At December 31, 2016, the balance of the $198,000 (2015 - $168,000) principal plus interest of $19,187 (2015- $3,493) totalled $217,187 (2015 - $171,493). Subsequent to December 31, 2016, $178,000 of thedebentures plus interest of $17,187 were converted into VanSpar shares at US$0.17 per share. (Note 17)

(c) In 2016 an investor advanced to the Company $57,900 (RMB300,000) for possible subscription of thedebentures of VanSpar that has not closed. The advance bears an annual interest of 8%, unsecured, and dueon demand. At December 31, 2016 the principal plus annual interest of 8% was $61,779, unsecured and dueon demand. The principal and interest was repaid after December 31, 2016. (Note 17)

(d) In 2016 in relation to the JDH Transaction (Note 15) the Company received US$1,650,000 ($2,215,636) thatwas recorded as restricted cash and purchase price payable, that was non-secured, non-interest bearing andwill be repaid within 6 months after December 31, 2016.

(e) In connection with the JDH transaction as disclosed in the Note 15, the Company received US$150,000($197,501) from the private investment corporation before the closing to fund the temporary working capitalneed of JDH and PuNeng Energy, that was recorded as a short term debt, that was non-secured, interestbearing at 10 % per annum, and with no fixed repayment term.


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10. CAPITAL STOCK

(a) Common Shares

Authorized:Unlimited common shares

Issued:111,375,460 common shares

(b) Share-based payment reserve

The Company, under its shareholder approved stock-option plan, has granted options for the purchase ofcommon shares to employees, directors, officers and other service providers. The aggregate number ofcommon shares reserved for issuance under this plan is limited to 10% of the aggregate number of commonshares outstanding. The plan provides that the exercise price of an option granted under the plan shall notbe less than the market price at the time of granting the option. Options have a maximum term of 5 years,vest immediately upon issue, unless otherwise stated, and terminate on the 90th day after the optioneeceases to be any of an employee, director or consultant of the Company.

A summary of the stock option activity for the periods are as follows:

Weighted AverageNumber of Options Exercise Price ($)

Outstanding, January 1, 2015 5,205,000 0.10Expired (5,205,000) 0.10Outstanding, December 31, 2015

and December 31, 2016 - -

As at December 31, 2016, the Company had no stock options outstanding

*As at December 31, 2015 the Company’s subsidiary VanSpar had 550,000 options outstanding, with anexercise price of US$0.25 and were also recorded in the share-based payment reserve as $102,000. Theseoptions expired unexercised March 22, 2016.

Total share-based payment reserve as at December 31, 2016 was $nil (2015 - $102,000).


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11. RELATED PARTY TRANSACTIONS

The Company’s related parties consist of the following:

(i) Mr. Barker the President of the Company made advances to the Company that bear no interest, areunsecured and due on demand. As at December 31, 2016 the balance was $5,932 (2015 - $6,837).

(ii) In September 2013 former director Edward Thompson and current directors Wesley Roberts and RichardWilliams each provided a $4,300 loan to the Company in the form of promissory notes for a total of $12,900,that bears an annual interest of 10%, is unsecured, and due on demand. During the year 2016 RichardWilliams provided additional $10,000 loan to the Company at the same terms. A total of $4,657 in interestwas accrued as at September 30, 2016 (December 31, 2015 - $3,214). $21,680 was repaid to two directorsin 2016 and at December 31, 2016 the balance owing to a director was $5,877.

(iii) Senior management and directors have not been paid for the past 2 years, except as disclosed herein.During the year 2016, billings for management and consulting fees of $102,000 (2015 – $102,000) werereceived by the Company from a director who is also the President of the Company. $18,000 (2015 - $18,000)rent expenses was accrued for property owned by the President. Such management and consulting feesand rent were accrued but no cash was paid in the periods. $434,084 was payable to the President as atDecember 31, 2016 (2015 - $316,803). $45,000 (2015 – $60,000) in management and consultant fees werebilled to the Company by Charles Qiming Ge. $94,957 was payable as at December 31, 2016 (2015 -$49,816) to Charles Ge. The Company was also billed $60,000 plus HST (2015 - $60,000) by a companycontrolled by the CFO of the Company for consulting fees which were recorded as management andconsulting fees on the consolidated income statement. $198,265 was payable as at December 31, 2016(2015 - $152,650) to the company controlled by the CFO of the Company.

In addition, senior management and directors Lee Barker, Qiming Ge, Richard Williams and two keyconsultants to VanSpar were paid a total bonus of $189,000 (US$140,000) for closing the transaction ofJDH.

2016 2015Due to related parties $ $Advances from Lee Barker (i) 5,932 6,837Promissory notes and interests payable to directors (ii) 5,877 16,114Due to Qiming Ge (iii) 94,957 49,816Consulting fees payable to Oriental Sources Inc. (iii) 198,265 152,650Consulting fees and rent payable to Lee Barker (iii) 434,084 316,803Total 739,115 542,220


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11. RELATED PARTY TRANSACTIONS (Continued)

(iv) A director and president of the Company subscribed for $8,000 VanSpar convertible debentures in 2015 asdescribed in Note 7(b).

The compensation expense associated with key management and directors during the period in 2016 and 2015are as the follows:

2016 2015Salaries, consultant fees andother benefits $ 396,510 $ 222,000Directors' fees - -

$ 396,510 $ 222,000

12. COMMITMENTS AND CONTINGENCIES

(a) See Note 8 for the Company’s potential recovery on the incomplete acquisition of Rentian vanadium project.

(b) The Company’s exploration activities are subject to various federal, provincial and international laws andregulations governing the protection of the environment. These laws and regulations are continually changingand generally becoming more restrictive. The Company believes its operations are materially in compliancewith all applicable laws and regulations. The Company has made, and expects to make in the future,expenditures to comply with such laws and regulations.

(c) See Note 5 the Company’s commitment on the battery commissioning project and the contingent revenue tobe recognized when received in the future.

13. SEGMENTED INFORMATION2016 2015

PROPERTY, PLANT AND EQUIPMENTAND OIL AND GAS PROPERTIESCanada $ 1 $ 1China 61,738 51,605

$ $ 61,739 $ 51,606

REVENUES2016 2015

Canada, drilling service income $ - $ 91,875China, battery commissioning cost recovery 545,573 -BVI, other income 1,604,650 -

All drilling revenues during the year 2015 were from one client in Canada.


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14. CAPITAL MANAGEMENT

The Company considers its capital structure to consist of common shares and share-based payment reserve.The Company manages its capital based on the acquisition and investment opportunities in the course of itsbusiness to support the on-going operations of the business. The Board of Directors does not establishquantitative return on capital criteria for management, but rather relies on the expertise of the Company'smanagement to sustain future development of the business.

The Company's primary sources of capital were funds generated from issuance of common shares, debenturesand debts, and the exercise of stock options, and revenues provided by the drilling business.

There were no changes in the Company's approach to capital management during the periods presented. TheCompany and its subsidiaries are not subject to externally imposed capital requirements.

Management reviews its capital management approach on an ongoing basis and believes that this approach isreasonable given the relative size of the Company.

15. THE JDH TRANSACTION

On August 8, 2016, the Company’s 89.8% owned subsidiary, VanSpar Mining Inc.("VanSpar"), signed a SharePurchase Agreement (the "SPA") dated as of May 18, 2016 and effective as of August 8, 2016, to acquire all ofthe shares of JD Holding Inc. ("JDH"), a Cayman Islands corporation, for US$ 3.3 million. JDH is the parentcompany for a group of currently inactive companies engaged in the manufacturing of Vanadium Redox Battery(“VRB”) systems.

VanSpar and Sparton's 100% owned subsidiary, Sparton International Holdings Inc.("SIH"), have also signed onAugust 8, 2016, a Share Acquisition and Subscription Agreement (the "Financing Agreement") with a privateinvestment corporation for the financing of the JDH acquisition, which would result in the private investmentcorporation coming to own 82% of VanSpar.

On September 27, 2016, the Company announced that the above announced transaction to acquire JDH hadbeen restructured.

Under the terms of a new Share Acquisition Agreement (the “SAA”) between a private investment corporationand VanSpar, the private investment corporation would directly fund the acquisition of the shares of JDH for US$3.3 million (the "Funding Transaction"), pursuant to an existing share purchase agreement between VanSpar andJDH and its security holders.

In consideration for the private investment corporation funding the acquisition cost together with a furtherUS$2,000,000 for working capital and US$605,000 to be paid to VanSpar, VanSpar would cause 82% of the JDHshares to be transferred to the private investment corporation, with the remaining 18% being retained by VanSpar(the “JDH Transaction”). The Share Acquisition and Subscription Agreement announced on August 16, 2016 hadbeen terminated.

The JDH Transaction would be fully financed by the private investment corporation, which would provide thepurchase price funding of US$ 3.3 million payable to the current security holders of JDH, with payment of at leastUS$1,650,000 on closing. The balance of the purchase price may be reduced by up to US$300,000 for financialobligations or liabilities of the JDH subsidiaries within six months after closing. The net balance of the purchaseprice will be paid to the current JDH security holders six months after closing.

The JDH Transaction also required a minimum US$2.0 million investment within 20 business days after closing,to provide working capital to reactivate the JDH subsidiaries' operations. These funds would also be provided bythe private investment corporation.


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15. THE JDH TRANSACTION (Continued)

The private investment corporation will also assume full managerial and administrative responsibility for JDH andits subsidiaries' battery manufacturing and marketing operations.

VanSpar’s role going forward will be the exploration, assessment and possible development of any vanadiumrelated resources identified as possible sources of raw material for the manufacturing of VRB battery systems byJDH.

In addition, under the terms of the restructured transaction, in the event that JDH or its affiliates acquire certainvanadium assets in China within 5 years after closing, VanSpar will receive a finder’s fee equal to 5% of the valueof the acquired assets up to a maximum of US$250,000.

The transaction had obtained necessary regulatory approval and was approved by the Company’s shareholderson November 3, 2016. The JDH Transaction and the Funding Transaction were closed before the end ofDecember 31, 2016. US$1,650,000 has been paid to the former shareholders of JDH, and US$1,650,000($2,215,636) has been received and held by the Company to be paid to the former shareholders of JDH sixmonths after closing.

Before the closing, HPX TechCO Inc. provided US$150,000 to VanSpar as a short term loan to fund the workingcapital of Prudent Energy under the terms of a Promissory Note.

Although the Company’s CEO is a director of JDH, given that the Company owns less than 20% ownership, theprivate investment corporation owns over 80% of JDH and has the right to nominate the remaining three of fourdirectors, the Company determined that they do not have significant influence. As management has no immediateplans to sell its interest but may do so in the future, management has classified their investment in JDH as afinancial asset that is held for sale.

Since the acquisition of JDH and transfer of JDH shares to the investor happened at the same time and VanSparnever had control of JDH, the transaction taken as a whole was a brokerage transaction, and not a disposal ofcontrolled entities. As the cost for the Company in the transaction was nominal, the US$605,000 ($804,651)received was recorded as other income in the consolidated income statement. The 18% interest in JDH wasrecorded as other income of $800,000, representing part of the brokerage income at fair value at the date of thetransaction based on the acquisition price paid by the acquirer which is also the cost of the investment as atDecember 31, 2016. Both of these amounts have been recorded as Other Income on the Consolidated Statementof Income (Loss).

The US$1,650,000 ($2,215,636) that was received as a part of this transaction was recorded as restricted cashand purchase price payable on the Consolidated Statements of Financial Position as at December 31, 2016.

There were no material changes in the fair value of the investment available for sale during the year ended,December 31, 2016 due to the short period of time from the closing to the year end.


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16. INCOME TAXES

(a) Provision for income taxes

Major items causing the Company's income tax rate to differ from the Canadian federal statutory rate ofapproximately 26% (2013 - 26%) are as follows:

(b) Deferred income tax balances

2016 2015Income (loss) before taxes 860,966 (707,981)

Combined federal and provincial statutory income tax rate 26.5% 26.5%

Expected recovery at statutory rates 228,000 (187,615)

Add (deduct)

Loss expired (31,000) -Effect of lower tax rates in foreign jurisdictions (377,000) 6,000Others (15,300) 24,615Change in deferred tax assets unrecognized 195,300 157,000

Income tax (recovery) expense - -

2016 2015Deferred Income Tax AssetsNon-capital loss carry forward 2,329,300 2,214,000Marketable securities 23,500 30,000Net capital loss 871,600 872,000Mineral properties and equipment 790,900 704,000

4,015,300 3,820,000Allowance (4,015,300) (3,820,000)Net deferred income tax asset - -


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16. INCOME TAXES (Continued)

(c) Tax loss carry-forwards

The Company has approximately $2,942,866 of resource expenditures which, may be utilized under certaincircumstances to reduce Canadian taxable income of future years.

As at December 31, 2016, the Company has approximately $7,546,000 of non-capital losses in Canada and$1,446,000 (RMB 6,832,000) of non-capital losses in China, which can be used to reduce taxable incomeof future years. These losses expire as follows:

Year of expiry Canada China2017 - 1,008,0002018 - 163,0002019 - 43,0002020 - 136,0002021 - 96,0002026 400,000 -2027 458,000 -2028 317,000 -2029 1,490,000 -2030 1,150,000 -2031 464,000 -2032 1,440,000 -2033 548,000 -2034 320,000 -2035 378,000 -2036 579,000 -

$ 7,546,000 $ 1,446,000

17. EVENTS AFTER THE REPORTING PERIOD

Subsequent to December 31, 2016, $178,000 of the debentures plus interest of $17,187 described in Note9(b) were converted into VanSpar shares at US$0.17 per share. A total of 863,719 common shares of VanSparwere issued, being 2.5% of total shares outstanding after the conversion.

Subsequent to December 31, 2016, the RMB300,000 plus interest of RMB20,100 for a total of RMB320,100($61,779) short term debt as described in Note 9(c) was repaid.

The first anniversary battery maintenance payment of RMB5.48 million as disclosed in Note 5 was receivedby the client PuNeng Energy on April 21, 2017.

On April 25, 2017 VanSpar subsidiary JJ Sparton invoiced PuNeng Energy the battery manufacturingsubsidiary of JDH, the sum of $936,400 (RMB 4,727,000) for the first year of maintenance of the SGCC1battery in accordance with the contract between JJ Sparton and PuNeng Energy under the Vanadium FlowBattery Commissioning Program

Given the uncertainty of amount that could be received by JJ Sparton, the amount will be recognized asrevenue when received by JJ Sparton in 2017.

Subsequent to December 31, 2016, the Company granted 2,775,000 options to directors and officers andconsultants of the Company. Each option entitles the holder to purchase one common share at an exerciseprice of $0.10 per share, expires three years after the granting date of April 10, 2017.


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17. EVENTS AFTER THE REPORTING PERIOD (Continued)

On April 10, 2017 the Company applied to the TSXV to settle outstanding fees and expenses totaling $764,894payable to five consultants of the Corporation, recorded as $201,635 in the accounts payable and $576,676in the due to related parties at December 31 2016, by the issuance of a total of 4,005,700 common shares ofthe Company at a deemed value of $0.10 per share. Approval is pending.

Documents

2016€¦ · SPARTON RESOURCES INC. For the year ended December 31, 2016 Management’s Discussion and Analysis dated April 28, 2017 . The following discussion and analysis of results