ATI Airtest Technologies Inc. — Audit Report / Information 2023

Dec 20, 2024

ATI AIRTEST TECHNOLOGIES INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2023 AND 2022
(Expressed in Canadian dollars)

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D M C L

dmcl.ca

DALE MATHESON CARR-HILTON LABONTE LLP

CHARTERED PROFESSIONAL ACCOUNTANTS

Independent Auditor's Report

To the Shareholders of ATI Airtest Technologies Inc.

Opinion

We have audited the consolidated financial statements of ATI Airtest Technologies Inc. (the "Company"), which comprise the consolidated statements of financial position as at December 31, 2023 and 2022, and the consolidated statements of comprehensive loss, changes in shareholders' deficiency and cash flows for the years then ended, and notes to the consolidated financial statements, including material accounting policy information (collectively referred to as the "financial statements").

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

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 1 to the financial statements, which indicates that the Company has incurred accumulated losses of $21,340,693 and has current liabilities in excess of current assets of $4,349,761 as of December 31, 2023. As stated in Note 1, these events or conditions, along with other matters as set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters, that in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Vancouver	Surrey	Tri-Cities	Victoria
1500 - 1140 West Pender St.
Vancouver, BC V6E 4G1
604.687.4747	200 - 1688 152 St.
Surrey, BC V4A 4N2
604.531.1154	700 - 2755 Lougheed Hwy
Port Coquitlam, BC V3B 5Y9
604.941.8266	320 - 730 View St.
Victoria, BC V8W 3Y7
250.800.4694

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Except for the matter described in the Material Uncertainty Related to Going Concern section, we have determined that there are no other key audit matters to communicate in our report.

Other Information

Management is responsible for the other information. The other information comprises the information included in Management's Discussion and Analysis.

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

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

We obtained Management's Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

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

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

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

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.

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• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

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

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

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

The engagement partner on the audit resulting in this independent auditor's report is David Goertz.

Dmcl.

DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC

December 11, 2024

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ATI AIRTEST TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Expressed in Canadian dollars)

	Note	December 31, 2023	December 31, 2022
ASSETS
Current
Cash		$ 10,928	$ 16,309
Accounts receivable	5, 8	213,753	418,512
Inventory	6	111,468	985,576
Prepaid expenses		16,312	94,833
Share subscription receivable	14	33,000	35,000
		385,461	1,550,230
Non-current
Equipment		4,001	5,494
Right of use asset	17	107,819	113,161
Total assets		$ 497,281	$ 1,668,885
LIABILITIES
Current
Accounts payable and accrued liabilities	7, 12	$ 2,082,635	$ 2,103,452
Factoring facility	8	-	377,869
Deferred revenue	16	98,317	-
Advances payable	9	74,014	74,014
Term loans	10	63,149	68,950
Derivative liabilities	21	145,560	154,988
Convertible notes	11, 12	250,000	250,000
Due to related parties	12	1,983,265	1,953,206
Lease liability	18	38,282	33,524
		4,735,222	5,016,003
Non-current
Loans	12, 13	1,012,932	986,191
Lease liability	18	91,154	97,739
Total liabilities		5,839,308	6,099,933
SHAREHOLDERS' DEFICIENCY
Share capital	14	14,397,707	14,086,110
Advance on offering	14	32,000	90,000
Reserves	14	2,354,274	2,350,821
Accumulated other comprehensive loss		(785,315)	(660,655)
Deficit		(21,340,693)	(20,297,324)
Total shareholders' deficiency		(5,342,027)	(4,431,048)
Total liabilities and shareholders' deficiency		$ 497,281	$ 1,668,885

Nature of operations and ability to continue as a going concern (Note 1)
Subsequent events (Notes 10, 14 and 23)

APPROVED ON BEHALF OF THE BOARD

/s/ “Kulwant Sandher”

/S/ “Ted Konyi”

The accompanying notes are an integral part of these consolidated financial statements

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ATI AIRTEST TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

(Expressed in Canadian dollars)

	2023	2022
PRODUCT SALES	15
$ 1,988,559	$ 2,390,947
COST OF GOODS SOLD	6
1,189,795	1,496,519
WRITE-DOWN OF INVENTORY	6
867,552	18,908
GROSS PROFIT	(68,788)	875,520
EXPENSES
General and administrative	16
933,604	905,349
Business development and marketing	16
425,026	702,650
Research and development	12,711	60,726
	(1,371,341)	(1,668,725)
OPERATING LOSS BEFORE OTHER ITEMS	(1,440,129)	(793,205)
Other items
Accretion	13
(269,993)	(215,244)
Interest and financing fees	8,10,18
(70,488)	(94,979)
Foreign exchange	133,805	(405,221)
Write-off of prepaid expense	(16,020)	-
Gain on debt extinguishment	-	28,544
Royalty expense and interest	12
(101,124)	(113,790)
Gain on debt modification	10, 13	233,252
Change in fair value of derivative liabilities	21
487,328	753,251
	396,760	377,417
NET LOSS FOR THE YEAR	(1,043,369)	(415,788)
OTHER COMPREHENSIVE LOSS
Items that may be reclassified to profit or loss
Exchange differences on translation	(124,660)	326,035
COMPREHENSIVE LOSS FOR THE YEAR	(1,168,029)	(89,753)
Loss per shares – basic and diluted (Note 23)	$ (0.02)	$ (0.02)
Weighted average number of common shares outstanding
– basic & diluted (Note 23)	43,354,078	24,171,101

The accompanying notes are an integral part of these consolidated financial statements

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ATI AIRTEST TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHARHOLDERS' DEFICIENCY

YEARS ENDED DECEMBER 31, 2023 AND 2022
(Expressed in Canadian dollars)

	Share capital			Reserves
	Number of shares	Amount $	Obligation to issue units $	Contributed surplus $	Foreign currency translation $	Deficit $	Total shareholders' deficiency $
Balance, December 31, 2021	109,032,582	12,414,010	275,000	2,350,821	(986,690)	(19,881,536)	(5,828,395)
Units issued for cash (Note 14)	33,540,000	1,672,100	(275,000)	-	-	-	1,397,100
Advance on offering (Note 14)	-	-	90,000	-	-	-	90,000
Foreign currency translation adjustment	-	-	-	-	326,035	-	326,035
Net loss for the year	-	-	-	-	-	(415,788)	(415,788)
Balance, December 31, 2022	142,572,582	14,086,110	90,000	2,350,821	(660,655)	(20,297,324)	(4,431,048)
Units issued for cash (Note 14)	80,100,000	801,000	(90,000)	-	-	-	711,000
Fair value of warrant derivative liabilities (Note 21)		(477,900)	-	-	-	-	(477,900)
Advance on offering (Note 14)	-	-	32,000	-	-	-	32,000
Share issuance costs (Note 14)	-	(11,503)	-	3,453	-	-	(8,050)
Foreign currency translation adjustment	-	-	-	-	(124,660)	-	(124,660)
Net loss for the year	-	-	-	-	-	(1,043,369)	(1,043,369)
Balance, December 31, 2023	222,672,582	14,397,707	32,000	2,354,275	(785,315)	(21,340,693)	(5,342,027)

The accompanying notes are an integral part of these consolidated financial statements

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ATI AIRTEST TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

(Expressed in Canadian dollars)

	2023	2022
CASH PROVIDED BY (USED IN):
Operating Activities:
Net loss for the year	$ (1,043,369)	$ (415,788)
Items not involving cash:
Accretion	269,993	215,244
Interest expense	23,752	13,838
Amortization	1,493	2,108
Depreciation	35,812	31,580
Unrealized foreign exchange	(124,660)	326,035
Royalty expense and interest	76,074	113,790
Write-down of inventory	867,552	18,908
Gain on debt extinguishment	-	(28,544)
Gain on debt modification	(233,252)	(424,856)
Warrant derivative liability	(487,328)	(753,251)
Changes in non-cash working capital items:
Accounts receivable	204,759	(272,520)
Inventory	64,670	(460,848)
Prepaid deposits	20,407	139,842
Factoring facility	(378,135)	174,725
Accounts payable and accrued liabilities	(96,625)	150,874
Deferred revenue	98,317	-
Net cash used in operating activities	(700,540)	(1,168,863)
Financing Activities:
Proceeds from loans advanced from related parties	30,059	-
Repayments of loans due to related parties	-	(262,611)
Proceeds from private placements	678,000	-
Proceeds from share subscription receivable	35,000	-
Loan proceeds	-	30,000
Loan repayment	(25,101)	(20,538)
Lease payments	(46,749)	(40,230)
Advance on offering	32,000	90,000
Issuance of units, net	-	1,397,100
Share issuance costs	(8,050)	-
Net cash provided by financing activities	695,159	1,193,721
Increase (decrease) in cash	(5,381)	24,858
Cash (deficiency), beginning of year	16,309	(8,549)
Cash, end of year	$ 10,928	$ 16,309

The accompanying notes are an integral part of these consolidated financial statements

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

1. Nature of operations and ability to continue as a going concern

ATI Airtest Technologies Inc. (the “Company”) was incorporated in British Columbia on March 13, 1996. The primary business activity is the manufacture and sale of air testing equipment and related services in Canada and the United States. The Company’s shares are traded on the TSX Venture Exchange (“TSX-V”) under the symbol AAT.

The Company’s head office and warehouse is located at Unit 9-1520 Cliveden Ave, Delta, BC.

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. They do not include adjustments, if any, that may be required for the realization of assets or the settlement of liabilities should the Company be unable to continue as a going concern. The Company has experienced significant operating losses since its inception and has current liabilities in excess of current assets at December 31, 2023 of $4,349,761 and has accumulated a deficit of $21,340,693 to date. The Company’s continuation as a going concern is dependent upon its ability to obtain additional financing, continued support of existing creditors and lenders, continued financial support from related parties, and ultimately attaining profitable operations. Management intends to finance operating costs over the next twelve months through equity financing, curtailed expenses leading to profitable operations. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.

1. Statement of compliance and basis of measurement

The consolidated financial statements of the Company comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

These consolidated financial statements have been prepared on a historical cost basis, modified where applicable. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting except for cash flow information.

Basis of consolidation

The consolidated financial statements of the Company and each of its wholly owned inactive subsidiaries: Airwave Environmental Technologies Inc. (Canada), Airtest Technologies Corp. (US), and Clairtec Inc. (US). Inter-company transactions and balances have been eliminated upon consolidation.

1. Material accounting policy information

Accounts receivables

Receivables are carried at the lower of amortized cost or the present value of estimated future cash flows, taking into account discounts given or agreed. The present value of estimated future cash flows is determined through the use of value adjustments for uncollectible amounts. As soon as individual trade accounts receivable can no longer be collected and are expected to result in a loss, they are designated as doubtful trade accounts receivable and valued at the expected collectible amounts. The allowance for the risk of non-collection of trade accounts receivable takes into account the length of time the balance of the receivable remains outstanding.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Receivables (continued)

In the event of sale of receivables and factoring, the Company derecognizes receivables when the Company has given up control or continuing involvement, which is deemed to have occurred when the Company has transferred its rights to receive cash flows from the receivables and the Company has transferred substantially all of the risks and rewards of the ownership of the receivables.

Prior to transferring the risks and rewards of ownership of the receivables, the Company’s receivables are recognized to the extent of the Company’s continuing involvement in the assets. In this case, the Company also recognizes an associated liability. The transferred receivable and associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

Inventory

Inventories include raw materials, work in process and finished goods, all of which are stated at the lower of weighted average cost and net realizable value. Cost includes the cost of direct material, direct labour and other overhead costs. Labour costs are allocated to items based on actual labour rates. Fixed and variable overhead are allocated to production activities in converting materials to finished goods. The Company reviews inventory for obsolete and slow-moving goods and any such inventory is written down to net realizable value.

Revenue recognition

Product sales revenue is recognized when evidence of a contractual arrangement exists, prices are determinable, and the risks of ownership or title pass to the customer. This is normally when products are shipped from the warehouse, provided collection is probable.

Warranty provision

The Company accrues for estimated warranty obligations under a warranty provision at the time sales are recognized and any changes in estimates are recognized prospectively through the provision. The Company provides its customers with a limited right of return for defective products. All warranty returns must be authorized by the Company prior to acceptance. Warranty provisions are estimated based on the Company’s experience and to date have been insignificant.

Loss per share

Basic loss per share amounts are calculated by dividing net loss by the weighted average number of common shares outstanding during the year.

Diluted loss per share amounts are computed similarly to basic loss per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of additional options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the year. For the years presented, the effect of outstanding options and warrants was either anti-dilutive or they were not “in-the-money”. Consequently, basic loss per share equals diluted loss per share.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Share-based payments

The Company operates a stock option plan. Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to the share-based payment reserve. The fair value of options is determined using the Black-Scholes Option Pricing Model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.

Income taxes

Income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where the Company operates and generates taxable income. Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred tax is recognized on temporary differences at the reporting date arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that future taxable income will be available to allow all or part of the temporary differences to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted and are expected to apply by the end of the reporting period. Deferred tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Financial instruments

The following is the Company's accounting policy for financial instruments under IFRS 9:

(i) Classification

The Company classifies its financial instruments in the following categories: at fair value through profit and loss ("FVTPL"), at fair value through other comprehensive income (loss) ("FVTOCI") or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company's business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or if the Company has opted to measure them at FVTPL.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Financial instruments (continued)

Financial assets/liabilities	Classification IFRS 9
Cash	FVTPL
Accounts receivable	Amortized cost
Accounts payable	Amortized cost
Factoring facility	Amortized cost
Advances payable	Amortized cost
Term loans	Amortized cost
Derivative liabilities	FVTPL
Convertible notes	Amortized cost
Due to related parties	Amortized cost
Lease liability	Amortized cost

(ii) Measurement

Financial assets and liabilities at amortized cost

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

Financial assets and liabilities at FVTPL

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the statements of comprehensive loss in the period in which they arise.

(iii) Impairment of financial assets at amortized cost

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company shall recognize in the statements of comprehensive loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Financial instruments (continued)

(iv) Derecognition

Financial assets

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity.

Financial liabilities

The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The Company also derecognizes a financial liability when the terms of the liability are modified such that the terms and / or cash flows of the modified instrument are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value.

Gains and losses on derecognition are generally recognized in profit or loss.

Impairment of non-financial assets

The carrying amount of the Company’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset, or the asset’s cash generating unit, exceeds its recoverable amount. Impairment losses are recognized in the statement of comprehensive loss.

The recoverable amount of an asset is measured at the greater of its fair value less cost to sell and its value in use. In assessing value in use, the estimated attributable future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset.

For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount, however, a reversal cannot exceed the carrying amount that would have been determined had no impairment loss been recognized in previous years.

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.

Foreign currency translation

The functional currency of each entity is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Canadian dollars. The Company’s functional currency is the United States dollar.

Transactions and balances:

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Foreign currency translation (continued)

Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the statement of comprehensive loss in the period in which they arise, except where deferred in equity as a qualifying cash flow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognized in other comprehensive income in to the extent that gains and losses arising on those non-monetary items are also recognized in other comprehensive income. Where the non-monetary gain or loss is recognized in profit or loss, the exchange component is also recognized in profit or loss.

Translation to presentation currency:

The financial results are translated from the functional currency to the Company’s presentation currency as follows:

• assets and liabilities are translated at period-end exchange rates prevailing at that reporting date; and
• income and expenses are translated at average exchange rates for the period.

Exchange differences arising on translation are recognized in other comprehensive income and recorded in the Company’s foreign currency translation reserve in equity.

Leases

A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Company assesses whether the contract meets three key evaluations which are whether:

i. the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Company;

ii. the Company has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; and

iii. the Company has the right to direct the use of the identified asset throughout the period of use. The Company assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.

Measurement and recognition of leases as a lessee

At lease commencement date, the Company recognizes a right-of-use asset and a lease liability. The Company depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Company also assesses the right-of-use asset for impairment when such indicators exist.

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

3. Material accounting policy information (continued)

Leases (continued)

At the commencement date, the Company measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available. If the interest rate implicit in the lease is not readily available, the Company discounts using the Company’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised.

Subsequent to initial measurement, the liability is reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

A lease modification is accounted for as a separate lease from the original lease if the modification increases the scope of the lease by adding the right to use one or more underlying assets; and the consideration for the lease increase by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. If the lease modification merely extends the Company’s right to use an existing leased asset to which it already has access, the modification is not accounted for as a separate lease. Instead, the Company recalculates the existing lease obligations on the effective date of the lease modification to include the lease payments until the end of the extended period and a corresponding adjustment is also made to the right-of-use asset. The additional right-of-use asset and lease obligations relating to the extended period are therefore recognized on the date of modification.

The Company has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognizing a right-of-use asset and lease liability, the payments in relation to these are recognized as an expense in profit or loss on a straight-line basis over the lease term. On the statement of financial position, right-of-use assets have been included under non-current assets and lease liabilities have been included under current and non-current liabilities.

4. Significant judgments, estimates and assumptions

The preparation of financial statements in accordance with IFRS requires the Company to make estimates and assumptions concerning the future. The Company’s management reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which the estimates are revised.

Estimates and assumptions where there is significant risk of material adjustments to assets and liabilities in future accounting periods include the recoverability of trade receivables, net realizable value of inventory, fair value measurements for financial instruments and other equity-based payments, warranty accruals, cost allocations, and measurement of deferred tax assets and liabilities.

The preparation of financial statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates, in applying accounting policies. The most significant judgments in applying the Company’s financial statements include the assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give rise to significant uncertainty.

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

5. Accounts receivable

	December 31, 2023	December 31, 2022
Trade receivables	$ 361,986	$ 167,309
Trade receivables factored (Note 8)	-	403,285
Allowance for doubtful amounts	(148,233)	(152,082)
	$ 213,753	$ 418,512

6. Inventory

Inventory consists of the following:

	December 31, 2023	December 31, 2022
Finished goods	$ 20,071	$ 223,094
Work in progress	916	475,857
Raw materials and component parts	90,481	286,625
	$ 111,468	$ 985,576

For the year ended December 31, 2023, the Company recognized inventory of $1,858,985 (2022 - $1,344,559) in cost of sales including write-down of inventory of $867,552 (2022 - $18,908). As of December 31, 2023, prepaid expenses of $nil (2022 - $63,682) comprises of prepaid inventory.

Cost of sales consists of the following:

	December 31, 2023	December 31, 2022
Inventory	$ 991,433	$ 1,344,559
Labor costs	198,362	152,960
	$ 1,189,795	$ 1,496,519

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

7. Accounts payable and accrued liabilities

	December 31,2023	December 31, 2022
Trade payables	$ 1,922,505	$ 1,883,793
Due to government agencies	83,185	146,391
Payroll accrual and vacation payable	-	4,400
Accrued liabilities	76,945	68,868
	$ 2,082,635	$ 2,103,452

8. Factoring facility

The Company had a factoring facility under which, as agreed on by the lender and the Company, certain accounts receivable may be assigned to the lender for a price consisting of the face value of the account less a discount of 1.5% provided the balance is paid within the first thirty days it was assigned to the lender, after which the discount is increased by 0.05% for each day the account remains outstanding. In accordance with the terms of the agreement, the lender withholds 15% of the price of the account until the account has been fully paid. The specified trade receivables were pledged as security for the arrangement with full recourse against the Company.

In addition, the Company might request loans or advances against purchase orders received from customers with terms and conditions similar to the factored accounts receivable arrangement. During the year ended December 31, 2023, the Company terminated the factoring facility arrangement.

The balances due under the factoring facility are summarized as follows:

	December 31, 2023		December 31, 2022
Funds advanced:
Factored accounts receivable	$	-	$	349,169
Purchase orders		-		28,700
	$	-	$	377,869

9. Advances payable

Advances payable are unsecured, due on demand and bear no terms of interest.

10. Term loans

The Company’s term loans are comprised as follows:

	December 31, 2023		December 31, 2022
	(1)	$ 23,149	$	19,995
	(2)	40,000		30,955
	(3)	-		18,000
	$	63,149	$	68,950

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

10. Term loans (continued)

(1) The Company issued a note payable for a loan received during the fiscal year ended December 31, 2011. The loan bears interest at the rate of 10% per annum, is unsecured and is currently in default.

(2) In April 2020, the Company received $40,000 in the form of a Canada Emergency Business Account (“CEBA”) loan. CEBA is part of the economic assistance program launched by the Government of Canada to ensure that businesses have access to capital during the COVID-19 pandemic and can only be used to pay non-deferrable operating expenses. During the period from receipt of the CEBA loan to December 31, 2022, further extended by the Government of Canada until December 31, 2023 then further to January 18, 2024, (the “Initial Term”), no interest is charged on the amount outstanding and should at least $30,000 be repaid on or before the end of the Initial Term, the remaining $10,000 of principal would be forgiven. If at the end of the Initial Term the loan is not repaid, the Company has the right to exercise the option to convert the CEBA loan into a three-year term loan bearing interest at 5% per annum. The Company did not repay $30,000 prior to the end of the Initial Term. As of December 31, 2023, the full principle balance of $40,000 (2022-$30,955) is due. During the year ended December 31, 2023, the Company recorded a loss on debt modification of $10,000 (2022 - $nil).

In January 2024, the Company exercised its option to convert the CEBA loan into a CIBC term loan with a 3-year term and an annual interest rate of 5%.

(3) The loan is interest bearing with fixed payments, is unsecured and due on demand.

11. Convertible notes

On April 17, 2015, the Company issued convertible promissory notes totaling $250,000 bearing interest at 10% per annum with the balance due on April 17, 2017. The loan principal could be converted into common shares of the Company at $0.10 per share at any time during the term of the loan.

The convertible promissory notes are summarized as follows:

Balance, December 31, 2023 and December 31, 2022	$	250,000

12. Related party transactions

Key management personnel compensation

The Company’s key management personnel have authority and responsibility for overseeing, planning, directing and controlling the activities of the Company and consist of the Company’s Board of Directors and the Company’s Executive Leadership Team. The Executive Leadership Team consists of the President, the CEO and Board Chairman, and Chief Financial Officer.

	December 31, 2023	December 31, 2022
Salaries and benefits (Note 16)	$ 370,994	$ 255,573
Professional and management fee (Note 16)	$ 327,301	$ 150,000

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

12. Related party transactions (continued)

Related party loans

On December 29, 2017, the Company signed a royalty agreement (“Royalty Agreement”) with Omni Marketing Global Ltd. (“OMG”), a company controlled by a director. Under this agreement, OMG eliminated loans and interest by ATI for an aggregate value of $1,013,299, which was included under convertible debt loan and related party payables, as at December 31, 2017. In addition, OMG advanced $1,000,000 to the Company and in return, the Company pays OMG a 5% royalty on monthly gross sales commencing January 1, 2018. All late monthly royalty payments are subject to 3% default interest rate.

If the Royalty Agreement is terminated due to a breach, of any obligation herein, OMG shall be entitled, in addition to the royalty payments, to a payment equal to $2,013,299 plus 25% per year that the Royalty Agreement has been in effect, less all royalty payments that have been made from the Company to OMG during the term of the Royalty Agreement.

As at December 31, 2023, the net owing to OMG, excluding the royalty payment and interest, is $2,013,299 (2022 - $2,013,299), of which $250,000 is accounted for in convertible debt notes (Note 11) and $66,667 as accrued interest in accounts payable and accrued liabilities (Note 7). During the year ended December 31, 2023, the Company recognized royalty expense and interest of $101,124 (2022 - $113,790). As at December 31, 2023, $76,074 (December 31, 2022 - $17,000) has been accrued as royalties and interest owing recorded in due to related parties and is recorded to accounts payable and accrued liabilities.

Accounts payable

At December 31, 2023, $286,633 (Dec, 2022 - $239,574) is payable to directors for accrued services and advances. These amounts due to related parties are non-interest bearing, unsecured, and without specified terms of repayment.

Non-current loans

As at December 31, 2023, $178,087 (Dec, 2022 - $168,517) is included in non-current loans payable owed to the CFO and past COO of the Company. See Note 13 for the terms of these loans.

13. Non-current loans

	December 31, 2023		December 31, 2022
Opening	$	986,191	$1,195,803
Accretion expense		269,993	215,244
Adjustment from reassessment of maturity date		(243,252)	(424,856)
	$	1,012,932	$986,191

On September 30, 2014, the Company entered into agreements with several debtors to modify the terms of debt owing. Under the agreements, the Company restructured $1,665,035 of debt which was due on demand and had interest terms between 0% to 18% per annum. The maturity date was amended to the later of August 31, 2016, or 60 days after the end of the third consecutive fiscal quarter in which the Company would achieve earnings before interest, taxes, depreciation, and amortization of $500,000 (the “Milestone Date”). No interest accrues on the loans until the maturity date.

The modification was accounted for as an extinguishment of the original debt and a reissuance of new debt (“New Debt”).

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

13. Non-current loans (continued)

The fair value of the New Debt at the time the agreements were entered into was estimated to be $1,070,283 determined using an expected maturity (repayment) date of June 1, 2017. The discount rate used to determine the fair value was 18% which is management’s estimate of market interest rates based on interest rates payable on unsecured debts the Company previously issued to third parties. Differences between the fair value initially recorded and the amount payable on maturity will be amortized using the effective interest rate method. At each reporting period, the Company re-evaluates the anticipated maturity date and adjust the carrying value accordingly, with any changes recorded in profit or loss. As of December 31, 2023, the Company estimated that the Milestone Date would be met at the end of the fourth quarter of 2026 and the New Debt would mature at December 31, 2026. During the year ended December 31, 2023, the Company recognized a gain on debt modification of $243,252 (2022 - $424,856).

14. Share capital

a) Authorized

Unlimited common shares without par value

b) Issued and outstanding

For the year ended December 31, 2023

In February 2023, the Company closed a private placement for gross proceeds of $801,000 by issuing 80,100,000 units. Each unit consists of one common share plus one warrant. Each warrant entitles the holder to purchase one additional common share for two years from the closing date at $0.05 per share. The Company incurred $8,050 as share issuance costs. The Company issued 805,000 broker warrants with a fair value of $3,453. The broker warrants are treated as share issuance costs and valued using the Black-Scholes Option Pricing Model with a risk-free rate of 3.91%, volatility of 144.21%, expected life of 2 years and an expected dividend yield of 0%. Each broker warrants entitles the holder to purchase one additional common share for two years from the issuance date at $0.05 per share. Of gross proceeds of $801,000, $90,000 were advance payments from the year ended December 31, 2022 and $33,000 were received subsequent to December 31, 2023.

For the year ended December 31, 2022

In April 2022, the Company closed a private placement for proceeds of $1,677,000 by issuing 33,540,000 shares at $0.05 per unit where a unit consists of one common share plus one warrant. Each warrant entitles the holder to purchase one additional common share for a period of two years from the closing date at an exercise price of $0.08. The Company incurred $4,900 for share issuance costs. Of the $1,677,000, $275,000 was received during year ended December 31, 2021 and $35,000 was received subsequent to December 31, 2022.

(c) Obligation to issue units

As of December 31, 2023, the Company received $33,000 (2022 - $90,000) in advance payments for a private placement subscription. The units were issued after the year-end. (Note 23).

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

14. Share capital (continued)

(d) Stock options

The Company’s Board of Directors may, from time to time, grant stock options, subject to regulatory terms and approval, to employees, officers, directors and consultants. The exercise price of each option can be set at no less than the closing market price of the common shares on the TSX-V on the date of grant. Options terminate 30 days following the termination of employment. Vesting and the option terms are set at the discretion of the Board of Directors at the time the options are granted.

During the year ended December 31, 2023, there was no activities occurred to stock options (2022 – nil).

As of December 31, 2023, the number of outstanding and exercisable stock options is nil (2022 – nil).

(d) Warrants

The following is a summary of the Company’s warrant activities:

	Number of Warrants	Weighted Average Exercise Price
Outstanding at December 31, 2021	31,527,001	$ 0.11
Issued	33,638,000	$ 0.08
Expired	(21,600,000)	$ 0.06
Outstanding at December 31, 2022	43,565,001	$ 0.11
Issued	80,905,000	$ 0.05
Expired	(9,927,001)	$ 0.20
Outstanding at December 31, 2023	114,543,000	$ 0.06
Weighted average remaining contractual life		0.85 years

Warrants outstanding at December 31, 2023 are as follows:

Expiration Date	Exercise Price	Number of Warrants Outstanding
April 14, 2024	$ 0.08	33,638,000
January 23, 2025	$ 0.05	40,705,000
February 2, 2025	$ 0.05	40,200,000
		114,543,000

Subsequent to December 31, 2023, 33,638,000 warrants expired without being exercised.

15. Segmented information

During the year ended December 31, 2023, $1,096,688 (2022 - $1,639,029) of the Company’s revenue was earned from customers domiciled in the United States.

For the year ended December 31, 2023, sales to one customer represented approximately 12% (2022 – 18%) of the Company’s revenue.

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

16. Supplementary information

Differed revenue continuity table

	December 31, 2023	December 31, 2022
Balance, beginning	$ -	$ -
Addition to deferred revenue	169,053	-
Revenue recognized	70,736	-
Balance, ending	$ 98,317	$ -

Presentation of the Company's operating expenses by nature versus function is as follows:

	December 31, 2023	December 31, 2022
OPERATING EXPENSES
General and administrative:
Amortization (Note 17)	$ 35,812	$ 2,108
Automotive	18,144	15,097
Bad debts	(3,849)	-
Depreciation	1,493	31,580
Freight	40,049	30,294
Office and general	69,481	37,800
Professional and management fees (Note 12)	327,301	310,864
Regulatory fees	38,723	47,897
Rent and property tax	35,456	32,758
Salaries and benefits (Note 12)	370,994	396,951
Total general and administrative	933,604	905,349
Business development and marketing:
Advertising	3,790	11,397
Auto	4,640	13,350
Business promotion	29,440	51,470
Meals and entertainment	5,907	3,738
Salaries and benefits	333,110	502,046
Sales and consulting	-	89,748
Telephone	4,803	7,280
Trade shows	22,636	8,889
Travel	20,700	14,732
Total business development and marketing	$ 425,026	$ 702,650

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

17. Right of use asset

The Company’s right-of-use asset relates to the lease of office space.

Cost:	$
Balance at December 31, 2021 and 2022	239,480
Addition (Note 18)	30,470
Balance as December 31, 2023	269,950
Accumulated amortization:
---	---
Balance at December 31, 2021	94,739
Depreciation for the year	31,580
Balance, December 31, 2022	126,319
Depreciation for the year	35,812
Balance, December 31, 2023	162,131
Net book value:
---	---
As of December 31, 2022	113,161
As of December 31, 2023	107,819

18. Lease liability

On August 1, 2018, the Company entered into a lease agreement for its head office for 6 years with a renewal term of 3 years. Upon initially recognizing the lease liability, the Company took the renewal period into account when measuring it. On August 1, 2023, the Company renewed the office lease with a term ended on July 31, 2026. The renewal was accounted for as a lease modification requiring modification of the lease liability to reflect the new payments at lease modification date using a revised discount rate, making a corresponding adjustment to the right-of-use asset. The lease was calculated using an incremental rate of 18%.

	$
Balance at December 31, 2021	162,855
Interest expense	8,638
Lease payments	(40,230)
Balance, December 31, 2022	131,263
Addition	30,470
Interest expenses	14,452
Lease payments	(46,749)
Balance, December 31, 2023	129,436
Which consist of:
Current lease liability	38,282
Non-current lease liability	91,154
Balance, December 31, 2023	129,436

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

18. Lease liability (continued)

The maturity analysis of the lease liabilities as at December 31, 2023 is as follows:

Maturity Analysis	$
Less than one year	58,669
One to five years	105,790
Total undiscounted lease liabilities	164,459
Amount representing implicit interest	(35,023)
Balance at December 31, 2023	129,436

19. Financial instruments and financial risk management

The Company's financial instruments are exposed to certain financial risks, including currency risk, credit risk, interest rate, liquidity and funding risk.

Foreign exchange risk

Foreign currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company is exposed to currency risk as it incurs expenditures that are denominated in Canadian dollars while its functional currency is the United States dollar.

Canadian dollar value of Canadian balances December 31, 2023

Cash	$ 1,680
Account receivables	186,471
Account payables	(597,469)
	$ (409,318)

Every 1% change in foreign exchange rate will have approximately $4,093 impact on the Company's financial position. The Company does not use hedges or derivative instruments to reduce its exposure to currency risk.

Liquidity and funding risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a planning and budgeting process in place to help determine the funds required to support the Company's normal operating requirements on an ongoing basis. At present, the Company does not have sufficient funds to pay its existing creditors or meet its short-term business requirements. Other than the non - current lease liability and loans, the other liabilities all due on demand or have term of 30 days or less.

Historically, the Company's main sources of funding have been the issuance of equity securities for cash, debt instruments and bridge financing. The Company's access to financing is always uncertain. There can be no assurance of continued access to significant equity funding. Liquidity risk is considered to be high.

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

19. Financial instruments (continued)

Liquidity and funding risk

The following is an analysis of the contractual maturities of the Company’s financial liabilities as of December 31, 2023

	1 Year	1-5 Years	Total
	$	$	$
Accounts payable and accrued liabilities	2,082,635	-	2,082,635
Advances payable	74,014	-	74,014
Term loans	63,149	-	63,139
Convertible notes	250,000	-	250,000
Due to related parties	1,983,265	-	1,983,265
Lease liability	58,669	105,790	164,459
Loans	-	1,665,035	1,665,035
	4,511,732	1,770,825	6,282,557

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As at December 31, 2023, the risk is considered minimal.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company is exposed to moderate credit risk due to concentration of the majority of its trade receivables with a small number of customers. Three customers represent approximately 60% of trade receivables. Management performs a periodic assessment of the credit worthiness of customers to reduce exposure to credit risk.

Fair value

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

• Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
• Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
• Level 3 – Inputs that are not based on observable market data.

The fair value of the Company’s financial assets and liabilities approximates their carrying amount. Assumptions used to determine the fair value on initial recognition of the non-current loans is disclosed in Note 13.

December 31, 2023	Level 1	Level 2	Level 3	Total
	$	$	$	$
Cash	10,928	-		10,928
Derivative liabilities	-	-	145,560	145,560
Total	10,928	-	145,560	156,488
December 31, 2022	Level 1	Level 2	Level 3	Total
---	---	---	---	---
	$	$	$	$
Cash	16,309	-		16,309
Derivative liabilities	-	-	154,988	154,988
Total	16,309	-	154,988	171,297

---

ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

20. Capital Management:

The Company’s principal sources of capital are cash from operations and from the issuance of debt and equity securities. The Company manages its cash, accounts receivable and loans in conjunction with budgeted or expected capital needs. The Company’s objective when managing capital is to maintain sufficient liquidity to continue to meet ongoing expenditure and operational needs.

The Company manages the capital structure and makes adjustments to capital management strategies based on economic conditions and as risk characteristics of its capital change. To maintain or adjust the capital structure, the Company may consider the issuance of shares, factoring additional receivables, debt issues or other management policies. Management plans additional funding in the remainder of 2024 to assist with current working capital needs. The funding may be debt or equity or a combination of both.

The Company is not subject to externally imposed capital requirements other than under factoring arrangements as described in Note 8. The Company’s overall strategy with respect to capital risk management remains unchanged from the year ended December 31, 2023.

21. Derivative liabilities

	December 31, 2023	December 31, 2022
Balance, Beginning	$ 154,988	$ 908,239
Fair value of warrants issued	477,900	-
Change in fair value	(487,328)	(753,251)
Balance, Ending	$ 145,560	$ 154,988

The derivative financial liability consists of the fair value of share purchase warrants that have exercise prices that differ from the functional currency of the Company and are within the scope of IAS 32 “Financial Instruments: Presentation”.

The fair values of these warrants were estimated using the Black-Scholes Option Pricing Model using the following assumptions:

• The stock price was based upon the unit price at the time of issuance;
• The risk-free interest rate assumption is based on the government of Canada marketable bonds for a period consistent with the expected term of the option in effect at the time of the grant;
• The Company does not pay dividends on common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Therefore, the expected dividend rate was 0%;
• The expected life of the warrants was estimated to be 100% of the remaining contractual term which is based on the historical exercise patterns of warrant holders; and
• The expected volatility was based off of the historical trading prices of the Company’s common stock price over a period equivalent to the expected life of the warrants.

The fair values of the liabilities were estimated using the Black-Scholes Option Pricing Model using the following inputs

	December 31, 2023	December 31, 2022
Expected volatility	145% - 322%	197% - 370%
Expected life	0.28 to 2.0 years	1.0 years
Dividends	0%	0%
Risk-free interest rate	3.84%	4.07%

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ATI AIRTEST TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

(Expressed in Canadian dollars)

22. Income taxes

Income tax recovery attributable to net loss before income tax recovery differs from the amounts computed by applying the combined Canadian federal and provincial income tax rate to income before income taxes as follows:

	December 31, 2023	December 31, 2022
Net loss	$ (1,043,370)	$ (415,788)
Statutory tax rate	27%	27%
Expected income tax recovery	(282,000)	(112,000)
Tax effect of:
Permanent differences	(196,000)	(193,000)
Share issue costs	(1,000)	(1,000)
Prior year adjustments	(91,000)	(56,000)
Other	(2,000)	-
Change in unrecognized deferred tax assets	572,000	362,000
Income tax recovery	$ -	$ -

The Company has the following deductible temporary differences for which no deferred tax asset has been recognized:

	December 31, 2023	December 31, 2022
Non-capital loss carry-forwards	$ 3,831,000	$ 3,261,000
Share issuance costs	2,000	1,000
Equipment	50,000	49,000
Unrecognized deferred tax assets	(3,883,000)	(3,311,000)
	$ -	$ -

As at December 31, 2023, the Company has approximately $14,189,000 of non-capital losses in Canada that may be used to offset future taxable income, expiring from 2026 to 2043.

Tax attributes are subject to review, and potential adjustment, by tax authorities.

23. Subsequent events

On January 2,2024, the Company completed a consolidation of its comment shares on the basis of one post-consolidation common share ("Post-Consolidated Share") for every five pre-consolidation common shares. Loss per share has been retrospectively presented to reflect the share consolidation.

In March 2024, the Company completed a private placement for gross proceeds of $399,552 by issuing 19,977,600 Post-Consolidated units at $0.02 per unit. Each unit consists of one Post-Consolidated Share and one warrant. Each warrant entitles the holder to purchase one Post-Consolidated Share for two years from the closing date at an exercise price of $0.05.