Klondike Silver Corp. — Annual Report 2021

Sep 30, 2021

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Our Vision: Silver/Zinc/Lead Production

TSX-V: KS FSE: K1SN

Financial Statements

For the Years Ended May 31, 2021 and 2020

(Expressed in Canadian Dollars)

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INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS OF KLONDIKE SILVER CORP.

Opinion

We have audited the financial statements of Klondike Silver Corp. (the "Company"), which comprise:

•  the statements of financial position as at May 31, 2021 and 2020;

•  the statements of operations and comprehensive loss for the years then ended;

• the statements of changes in equity for the years then ended;

•  the statements of cash flows for the years then ended; and

•  the notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at May 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”).

Basis for Opinion

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditors' 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 audits 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 in our audits is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 1 in the financial statements, which indicates that the Company incurred a net loss of $2,426,666 during the year ended May 31, 2021 and had a deficit of $29,948,836 as at May 31, 2021. 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.

Emphasis of Matter – Restated Financial Statements

We draw attention to Note 4 to the financial statements, which describes that the May 31, 2020 financial statements that we originally reported on July 24, 2020 have been restated and describes the matter that gave rise to the restatement of the financial statements. Our opinion is not modified in respect of this matter.

Other Information

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

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audits 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 audits, and remain alert for indications that the other information appears to be materially misstated.

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

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

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, 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.

Auditors' 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 auditors' 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.

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

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•  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 auditors' 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 auditors' 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.

The engagement partner on the audit resulting in this independent auditors' report is Kevin Kwan.

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Chartered Professional Accountants

Vancouver, British Columbia September 28, 2021

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KLONDIKE SILVER CORP.

STATEMENTS OF FINANCIAL POSITION

(Expressed in Canadian Dollars)

		May 31, 2021 May 31, 2020
ASSETS Current Cash Receivables Prepaid expenses Total Current Assets Prepaid Expenses – Long Term Reclamation Bonds(Note 5) Mill and Equipment(Notes 6 and 14) Exploration and Evaluation Assets(Note 7) Total Assets	$	(Restated – Note 4) 1,800,959 $ 2,016 50,927 7,368 12,531 2,696
		1,864,417 12,080 83,279 - 270,500 195,500 438,576 271,542 14,899,153 13,301,794
	$	17,555,925 $ 13,780,916
LIABILITIES Current Accounts payable Accrued liabilities (Note 8) Due to related parties (Note 10) Loans (Note 12) Mortgage payable (Note 14) Total Current Liabilities Convertible Debenture(Notes 10 and 11) CEBA Loan(Note 13) Restoration Provision(Note 9) Total Liabilities EQUITY Share Capital(Note 15) Reserves Equity portion of convertible debenture(Note 11) Deficit Total Equity Total Liabilities and Equity	$	149,222 $ 222,854 596,792 201,375 1,190 20,531 - 127,693 145,000 145,000
		892,204 717,453 1,081,231 1,306,855 60,000 40,000 369,338 351,750
		2,402,773 2,416,058
		39,743,554 34,435,335 5,063,373 3,883,853 295,061 567,840 (29,948,836) (27,522,170)
		15,153,152 11,364,858
	$	17,555,925 $ 13,780,916

Nature of Operations and Going Concern (Note 1)

These financial statements were approved for issue by the Board of Directors on September 28, 2021.

They are signed on the Company’s behalf by:

“Thomas Kennedy” Director	“Glen Harder”
	Director

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

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KLONDIKE SILVER CORP.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in Canadian Dollars)

	Years ended
	May 31,May 31, 20212020
Expenses Accretion Amortization Compensation and consulting (Note 10) Interest and bank charges (Note 10) Investor relations and promotion Office, rent and miscellaneous (Note 10) Professional fees (Note 10) Regulatory and stock transfer fees Share based compensation (Note 10) Utilities and communication Net Loss and Comprehensive Loss for the Year	(Restated – Note 4) $ 326,757 $ 50,379 1,843 2,904 361,477 301,443 182,895 184,648 20,754 29,445 132,815 113,028 48,380 95,239 63,929 32,209 1,244,100 21,025 43,716 37,385
	$ (2,426,666) $ (867,705)
Loss Per Share –Basic and diluted	$ (0.01) $ (0.01)

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

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KLONDIKE SILVER CORP.

STATEMENTS OF CHANGES IN EQUITY

(Expressed in Canadian Dollars)

Balance, May 31, 2019 Issue of shares for cash, private placements Non flow-through shares Bonus shares issued on loans Share based compensation Issuance of convertible debenture Comprehensive loss for the year Balance, May 31, 2020 Issue of shares for cash, private placements Non flow-through shares Share issue costs - cash Issue of shares for warrant exercise Issue of shares for option exercise Issue of shares on convertible debenture Share based compensation Comprehensive loss for the year Balance, May 31, 2021	SHARE CAPITAL NUMBER AMOUNT RESERVES EQUITY PORTION OF CONVERTIBLE DEBENTURE DEFICIT TOTAL	SHARE CAPITAL NUMBER AMOUNT RESERVES EQUITY PORTION OF CONVERTIBLE DEBENTURE DEFICIT TOTAL	SHARE CAPITAL NUMBER AMOUNT RESERVES EQUITY PORTION OF CONVERTIBLE DEBENTURE DEFICIT TOTAL
	(Restated – Note 4) (Restated – Note 4) 156,916,893 $ 34,375,335 $ 3,847,828 $ - $ (26,654,465) $ 11,568,698 1,000,000 35,000 15,000 - - 50,000 817,142 25,000 - - - 25,000 - - 21,025 - - 21,025 - - - 567,840 - 567,840 - - - - (867,705) (867,705)
	158,734,035 34,435,335 3,883,853 567,840 (27,522,170) 11,364,858 37,300,000 2,554,600 - - - 2,554,600
	- (246,090) - 30,560,000 1,580,825 (5,825) 4,570,000 446,105 (206,655) 14,000,000 972,779 - - - 1,392,000 - - -		- - (246,090) - - 1,575,000 - - 239,450 (272,779) - 700,000 - - 1,392,000 - (2,426,666) (2,426,666)
	245,164,035 $ 39,743,554	$ 5,063,373	$ 295,061 $ (29,948,836) $ 15,153,152

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

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KLONDIKE SILVER CORP.

STATEMENTS OF CASH FLOWS

(Expressed in Canadian Dollars)

Operating Activities Net loss for the year Non-cash items: Accretion and amortization Bonus shares on loans Accrued interest Share based compensation Changes in non-cash operating assets and liabilities: Receivables Prepaid expenses Accounts payable and accrued liabilities Cash Used in Operating Activities Investing Activities Equipment Exploration and evaluation assets, net of BCMETC Reclamation bonds Prepaid exploration and evaluation costs Cash Used in Investing Activities Financing Activities Proceeds from share issuances, net of finders fees Convertible debenture Repayments to related parties Loans Cash Provided by Financing Activities Increase (Decrease) In Cash During the Year Cash – Beginning of Year Cash– End of Year Supplementary Cash Flow Information: Cash Paid During the Year For: Interest Non-cash Financing and Investing Activities: Exploration and evaluation costs included in accounts payable Amortization capitalized to exploration and evaluation assets Share based compensation capitalized to exploration and evaluation assets Change in restoration provision Issue of shares on convertible debenture		Years Ended May 31,May 31, 20212020
	Operating Activities Net loss for the year Non-cash items: Accretion and amortization Bonus shares on loans Accrued interest Share based compensation Changes in non-cash operating assets and liabilities: Receivables Prepaid expenses Accounts payable and accrued liabilities Cash Used in Operating Activities Investing Activities Equipment Exploration and evaluation assets, net of BCMETC Reclamation bonds Prepaid exploration and evaluation costs Cash Used in Investing Activities Financing Activities Proceeds from share issuances, net of finders fees Convertible debenture Repayments to related parties Loans Cash Provided by Financing Activities Increase (Decrease) In Cash During the Year Cash – Beginning of Year Cash– End of Year	(Restated – Note 4) $ (2,426,666) $ (867,705) 328,642 53,282 - 25,000 165,207 - 1,244,100 21,025 (43,559) 4,760 (9,835) 17,524 105,864 92,557 (636,247) (653,557) (206,981) - (1,195,476) (772,506) (75,000) - (83,279) - (1,560,736) (772,506) 4,122,960 50,000 - 1,841,067 (19,341) (665,450) (107,693) 167,693 3,995,926 1,393,310 1,798,943 (32,753) 2,016 34,769 $ 1,800,959 $ 2,016 $ 14,427 $ 14,427 $ 608,079 $ 75,925 $ 38,062 $ 24,184 $ 147,900 $ - $ - $ 228,685 $ 700,000 $ -

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

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN

Klondike Silver Corp. (the “Company”) was incorporated on March 2, 2005 under the laws of the Province of British Columbia, Canada. The Company is a public company listed on the TSX Venture Exchange (the “TSX.V”), trading under the “KS” symbol. The address of the Company’s corporate records office and principal place of business is Suite 804 – 750 West Pender Street, Vancouver, British Columbia V6C 2T7. The principal business of the Company is the exploration of mineral properties in Canada and it is considered to be an exploration company.

The Company incurred a net loss and comprehensive loss of $2,426,666 for the year ended May 31, 2021 (2020 - $867,705) and had a working capital (deficiency) at May 31, 2021 of $972,213 (2020 - $(705,373)) and a deficit of $29,948,836 (2020 - $27,522,170). These statements have been prepared on a going concern basis, which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company’s ability to continue as a going concern is dependent upon achieving profitable operations and upon obtaining additional financing. While the Company is expending its best efforts in this regard, the outcome of these matters cannot be predicted at this time.

The Company is in the process of acquiring, exploring and developing its exploration and evaluation assets and has not yet determined whether the properties contain ore reserves that are economically recoverable. The recoverability of the amounts shown for exploration and evaluation assets and related deferred exploration costs are dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of those reserves and upon future profitable production. The operations of the Company have primarily been funded by the issuance of common shares and ancillary income. Continued operation of the Company is dependent on the Company's ability to complete equity financing or generate profitable operations in the future. Management's plan in this regard is to secure additional funds through future equity financings, which may not be available or may not be available on reasonable terms. These factors may cast significant doubt on the Company’s ability to continue as a going concern. Accordingly, the financial statements do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and liquidate its liabilities, contingent obligations and commitments other than in the normal course of business and at amounts different from those in the financial statements.

Since December 31, 2019, the outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in a widespread health crisis that has affected economies and financial markets around the world resulting in an economic downturn. This outbreak may also cause staff shortages, reduced customer demand, increased government regulations or interventions, all of which may negatively impact the business, financial condition or results of operations of the Company. The duration and impact of the COVID-19 outbreak is unknown at this time and it is not possible to reliably estimate the length and severity of these developments on the operations of the business.

2. BASIS OF PRESENTATION

a) Statement of Compliance

These financial statements have been prepared in accordance 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”).

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

2. BASIS OF PRESENTATION (Continued)

b) Basis of Measurement and Presentation

These financial statements have been prepared on a historical cost basis except for financial instruments that have been measured at fair value. In addition, these financial statements have been prepared using the accrual basis of accounting, except for cash flow information. In the opinion of management, all adjustments (including normal recurring accruals), considered necessary for a fair presentation have been included.

c) Foreign Currencies

The presentation currency of the Company and the functional currency of the Company is the Canadian dollar.

Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each financial position reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the date of the statement of financial position. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

d) Critical Accounting Judgments and Estimates

The preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these judgments and estimates. The financial statements include judgments and estimates, which, by their nature, are uncertain. The impacts of such judgments and estimates are pervasive throughout the financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate occurs and may affect both current and future periods.

Significant assumptions about the future and other sources of judgments and estimates that management has made at the statement of financial position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, relate to, but are not limited to, the following:

• i) Determination of cash generating units

In performing impairment assessments of corporate assets, assets that cannot be assessed individually are grouped together into the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Management is required to exercise judgment in identifying these cash generating units (“CGUs”).

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

2. BASIS OF PRESENTATION (Continued)

d) Critical Accounting Judgments and Estimates (Continued)

• ii) Recoverability of asset carrying values

Management is required to assess impairment in respect of exploration and evaluation assets. Note 7 discloses the carrying value of these assets. The triggering events for the impairment of exploration and evaluation assets are defined in IFRS 6 Exploration and Evaluation of Mineral Resources.

Impairment of exploration and evaluation assets is assessed at the CGU level. The Company has used each of its mineral properties to establish its CGUs. In making the assessment, management is required to make judgments on the status of each project and the future plans towards finding commercial reserves. The nature of exploration and evaluation activity is such that only a proportion of projects are ultimately successful and some assets are likely to become impaired in future periods.

The Company assesses its mill and equipment for possible impairment if there are events or changes in circumstances that indicate that carrying values of the assets may not be recoverable, or at least annually.

The assessment of any impairment of mill and equipment is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions affecting prices, timing of cash flows, future development costs, and the useful lives of assets and their related salvage values.

iii) Decommissioning liabilities

Provisions for decommissioning liabilities associated with the Company’s operations are based on current legal and constructive requirements, technology, price levels and expected plans for remediation. Amounts recorded for decommissioning liabilities require the use of management’s best estimates of future decommissioning expenditures, expected timing of expenditures and future inflation rates. The estimates are based on internal and third-party information and actual costs and cash outflows can differ from estimates due to changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, and changes in clean up technology.

iv) Accrued liabilities

The Company has applied judgment in recognizing accrued liabilities, including judgment as to whether the Company has a present obligation (legal or constructive) as a result of a past event; whether it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and whether a reliable estimate can be made of the amount of the obligation.

v) Share based compensation

The Company uses the Black-Scholes Option Pricing Model for valuation of share-based compensation and other equity-based payments. Option pricing models require the input of subjective assumptions including expected price volatility, interest rate, and forfeiture rate. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings and equity reserves.

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

2. BASIS OF PRESENTATION (Continued)

• d) Critical Accounting Judgments and Estimates (Continued)

• vi) Deferred income tax assets

The Company has applied judgment in the inputs used in assessing the recoverability of deferred income tax assets to the extent that the deductible temporary differences will reverse in the foreseeable future and that the Company will have future taxable income.

vii) Convertible debenture

The convertible debentures are separated into their liability and equity components on the statements of financial position. The liability component is initially recognized at fair value, calculated at the present value of the liability based upon non-convertible debt issued by comparable issuers and accounted for at amortized cost using the effective interest rate method. The effective interest rate used is the estimated rate for non-convertible debt with similar terms at the time of issue.

viii) Going concern

The assessment of the Company’s ability to continue as a going concern and to raise sufficient funds to pay its ongoing operating expenditures and meet its liabilities for the ensuing year involves significant judgment based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these financial statements.

• a) Financial Instruments and Risk Management

i) Classification

The Company classifies its financial instruments in the following categories: at fair value through profit or 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 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 or if the Company has opted to measure them at FVTPL.

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

• a) Financial Instruments and Risk Management (Continued)

• i) Classification (Continued)

The following table shows the classification under IFRS 9:

Financial assets/liabilities	Classification IFRS 9
Cash	FVTPL
Reclamation bonds	FVTPL
Receivables	Amortized cost
Accounts payable and accrued liabilities	Amortized cost
Due to related parties	Amortized cost
Loans	Amortized cost
Mortgage payable	Amortized cost
Convertible debenture	Amortized cost
CEBA loan	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 statements of operations. 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 operations 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 operations, 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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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

• a) Financial Instruments and Risk Management (Continued)

iv) Derecognition of 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. Gains and losses on derecognition are generally recognized in the statements of operations.

Financial instruments are exposed to credit, liquidity and market risks. Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Market risk is that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of price risk: currency risk, interest rate risk and other price risk.

Liquidity risk is significant to the Company’s statement of financial position. The Company manages these risks by actively pursuing additional share capital issuances to settle its obligations in the normal course of its operating, investing and financing activities. The Company’s ability to raise share capital is indirectly related to changing metal prices and the price of gold, silver, zinc and lead in particular. To mitigate this market risk, management of the Company actively pursues a diversification strategy with property holdings focusing on base metals as well as precious metals.

v) Derecognition of financial liabilities

The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expired. 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 the statements of operations.

b) Cash and Cash Equivalents

Cash and cash equivalents consist of balances with banks, guaranteed investment certificates which are redeemable without penalty and investments in financial instruments with maturities within three months held for the purpose of meeting short-term cash commitments rather than for investing or other purposes. The Company places its cash and cash equivalents with institutions of high-credit worthiness. As at May 31, 2021 and 2020, the Company only held cash.

c) Mill and Equipment

The mill comprises a used ore processing plant, used buildings and related equipment stated at cost less accumulated amortization. Amortization on the mill and equipment is provided on the straight line method over their estimated useful lives ranging from three to twenty years.

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

d) Exploration and Evaluation Assets

Exploration and evaluation expenditures include the costs of acquiring licenses, costs associated with exploration and evaluation activities and the fair value (at acquisition date) of exploration and evaluation assets acquired in a business combination. Exploration and evaluation expenditures are capitalized as incurred. Costs incurred before the Company has obtained the legal rights to explore an area are recognized in profit or loss. Ancillary income received while the properties are in the exploration stage is credited to the carrying value of the mineral properties. Cost recoveries are credited against specific property costs, as received.

Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount.

Facts and circumstances relating to impairment as defined in IFRS 6 exploration and evaluation

assets are as follows:

• the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future and is not expected to be renewed;

• substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

• exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area;

• sufficient data exist to indicate that although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

In making the assessment, management is required to make judgments on the status of each project and the future plans towards finding commercial reserves. The nature of exploration and evaluation activity is such that only a proportion of projects are ultimately successful and some assets are likely to become impaired in future periods.

Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, which management has determined to be indicated by a feasibility study, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified to mining property and development assets.

Recoverability of the carrying amount of any exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest.

It is management’s judgment that none of the Company’s exploration and evaluation assets have reached the development stage and as a result are all considered to be exploration and evaluation assets.

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

d) Exploration and Evaluation Assets (Continued)

Although the Company has taken steps to verify title to exploration and evaluation assets in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property may be subject to unregistered prior agreements and non-compliance with regulatory requirements.

e) Impairment of Non-financial Assets

Impairment tests on intangible assets with indefinite useful economic lives are undertaken annually at the financial year-end. Other non-financials assets, including the mill, equipment and exploration and evaluation assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly.

Where it is possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset’s cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets. The Company has one cash-generating unit for which impairment testing is performed.

An impairment loss is recognized in the statement of operations, except to the extent they reverse gains previously recognized in other comprehensive income or loss.

• f) Decommissioning Liabilities

The Company is subject to various government laws and regulations relating to environmental disturbances caused by exploration and evaluation activities. The Company records the present value of the estimated costs of legal and constructive obligations required to restore the exploration sites in the period in which the obligation is incurred. The nature of the rehabilitation activities includes restoration, reclamation and re-vegetation of the affected exploration sites.

The rehabilitation provision generally arises when the environmental disturbance is subject to government laws and regulations. When the liability is recognized, the present value of the estimated costs is capitalized by increasing the carrying amount of the related mining assets. Over time, the discounted liability is increased for the changes in present value based on current market discount rates and liability specific risks.

Additional environmental disturbances or changes in rehabilitation costs will be recognized as additions to the corresponding assets and rehabilitation liability in the period in which they occur.

g) Provisions

Provisions are recognized where a legal or constructive obligation has been incurred as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. If material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation. The increase in any provision due to the passage of time is recognized as accretion expense.

16

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

h) Share Capital

i) Non-monetary consideration

Agent’s warrants issued as purchase consideration in non-monetary transactions are recorded at fair value determined by management using the Black-Scholes option pricing model. The fair value of the shares issued as consideration for exploration and evaluation assets is based on the trading price of those shares on the TSX.V on the date of the agreement to issue shares as determined by the Board of Directors. Proceeds from unit placements are allocated between shares and warrants issued using the residual method. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.

The fair value of common shares issued in private placements was determined to be the more easily measurable component and are valued at their fair value, as determined by the closing quoted bid price on the announcement date. The balance, if any, is allocated to attached warrants. Any fair value attributed to warrants is recorded to reserves.

ii) Flow-through shares

The Company will from time to time, issue flow-through common shares to finance a significant portion of its exploration program. Pursuant to the terms of the flow-through share agreements, these shares transfer the tax deductibility of qualifying resource expenditures to investors. On issuance, the Company bifurcates the flow-through share into: i) a flow-through share premium, equal to the estimated premium, if any, investors pay for the flow-through feature, which is recognized as a liability and ii) share capital. Upon expenses being incurred, the Company derecognizes the liability and recognizes a deferred tax liability for the amount of tax reduction renounced to the shareholders. The premium is recognized as other income and the related deferred tax is recognized as a tax provision.

The Company may also be subject to a Part XII.6 tax on flow-through proceeds, renounced under the Look-Back Rule, in accordance with Government of Canada flow-through regulations. When applicable, this tax is accrued as a financial expense until paid.

iii) Share-based payments

The share option plan allows Company employees and consultants to acquire shares of the Company. The fair value of options granted is recognized as an employee or consultant expense with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee.

The fair value is measured at grant date and each tranche is recognized over the period during which the options vest. The fair value of the options granted is measured using the BlackScholes option pricing model taking into account the terms and conditions upon which the options were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest.

17

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

• h) Share Capital (Continued)

iii) Share-based payments (Continued)

In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at the fair value of the share-based payment. Otherwise, share-based payments are measured at the fair value of goods or services received.

• iv) Share issuance costs

Costs directly identifiable with the raising of share capital financing are charged against share capital. Share issuance costs incurred in advance of share subscriptions are recorded as noncurrent deferred assets. Share issuance costs related to uncompleted share subscriptions are charged to operations.

i) Loss Per Share

Basic loss per share is calculated by dividing the loss for the period by the weighted average number of common shares issued and outstanding during the period. Diluted loss per share is calculated using the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding used for the calculation of diluted loss per share assumes that the proceeds to be received on the exercise of dilutive stock options and warrants are used to repurchase common shares at the average market price during the period. Basic and diluted loss per share is equal as outstanding stock options and warrants were all anti-dilutive.

j) Income Taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that they relate to a business combination or items recognized directly in equity or in other comprehensive income or loss.

Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current fiscal year and any adjustment to income taxes payable in respect of previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss.

Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each fiscal year the Company reassesses unrecognized deferred tax assets. Deferred income tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority.

18

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

• k) Convertible Debenture

The Company classifies convertible debentures into debt and equity components based on the residual method. The liability component is calculated at the present value of the principal and interest, discounted at the estimated interest rate applicable to the non-convertible debenture at the time the debenture was issued. This portion of the convertible debenture is accreted over its term to the full principle value using the effective interest rate method. The equity element of the convertible debenture comprises the value of the conversion option, being the difference between the face value of the convertible debt and the liability component. Upon maturity, the equity component is reclassified to reserves.

l) Exploration Tax Credits

The Company recognizes mineral exploration tax credits against the exploration and evaluation assets when the amount to be received can be reasonably estimated and collection is reasonably assured.

4. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

During 2021, the Company became aware of an error in recording the change in restoration provision on the financial statements for the year ended May 31, 2020. The Company incorrectly expensed $228,685 of change in restoration provision on the statement of operations and comprehensive loss. The amount should have been capitalized to exploration and evaluation assets on the statement of financial position.

The effect of the adjustments on the statement of financial position as at May 31, 2020, and the statements of operations and comprehensive loss, changes in equity and cash flows for the year then ended are as follows:

Statement of Financial Position

Assets Exploration and evaluation assets Equity Deficit	AS PREVIOUSLY REPORTED ADJUSTMENT AS RESTATED
	$ 13,073,109 $ 228,685 $ 13,301,794 $ (27,750,855) $ 228,685 $ (27,522,170)

19

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

4. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS (Continued)

Statement of Operations and Comprehensive Loss

		AS
		PREVIOUSLY	ADJUSTMENT		AS RESTATED
		REPORTED
Other expenses
Change in restoration provision	$	(228,685)	$	228,685	$	-
Net loss and comprehensive loss for the year	$	(1,096,390)	$	228,685	$	(867,705)
Loss per share – Basic and diluted	$	(0.01)	$	-	$	(0.01)
Statement of Changes in Equity
		AS
		PREVIOUSLY	ADJUSTMENT		AS RESTATED
		REPORTED
Comprehensive loss for the year	$	(1,096,390)	$	228,685	$	(867,705)
Deficit	$	(27,750,855)	$	228,685	$	(27,522,170)
Statement of Cash Flows
		AS
		PREVIOUSLY	ADJUSTMENT		AS RESTATED
		REPORTED
Cash used in operating activities
Net loss for the year	$	(1,096,390)	$	228,685	$	(867,705)
Total	$	(882,242)	$	228,685	$	(653,551)
Cash used in investing activities
Restoration provision	$	228,685	$	(228,685)	$	-
Total	$	(543,821)	$	(228,685)	$	(772,506)
Non-cash financing and investing activities
Change in restoration provision	$	-	$	228,685	$	228,685

5. RECLAMATION BONDS

The reclamation bonds at May 31, 2021 of $270,500 (2020 - $195,500) are recorded at fair value and consist of deposits made by the Company for indemnification of site restoration costs for the Silvana Mine, Sandon Mill and exploration sites located in BC. Reclamation bonds in the amount of $100,000 are held in trust for the Company by a company controlled by a former common director.

In connection with the Company’s M-65 permit, the Company increased its reclamation by $75,000 in September 2020.

20

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

6. MILL AND EQUIPMENT

Balance May 31, 2019 Additions, net of disposals Balance May 31, 2020 Additions, net of disposals Balance May 31, 2021 Balance May 31, 2019 Additions, net of disposals Balance May 31, 2020 Additions, net of disposals Balance May 31, 2021 Balance May 31, 2019 Balance May 31, 2020 Balance May 31, 2021		Costs	Costs
	Mill	Equipment	Land Total
	$ 314,800 $ -	1,387,767 -	$ 62,773 $ 1,765,340 - -
	314,800 -	1,387,767 206,939	62,773 1,765,340 - 206,939
	$ 314,800 $	1,594,706	$ 62,773 $ 1,972,279
		Accumulated Amortization
	Mill	Equipment	Land Total
	$ 314,800 $ -	1,151,910 27,088	$ - $ 1,466,710 - 27,088
	314,800 -	1,178,998 39,905	- 1,493,798 - 39,905
	$ 314,800 $	1,218,903	$ - $ 1,533,703
		Net Carrying Amount
	Mill	Equipment Land Total
	$ - $	235,857 $ 62,773 $ 298,630
	$ - $	208,769 $ 62,773 $ 271,542
	$ - $	375,803 $ 62,773 $ 438,576

The Company’s Rosebery building and land, which had net book values as at May 31, 2021 of $67,161 and $62,773 (2020 - $77,494 and $62,773) respectively, are encumbered by a first mortgage. (Note 14)

**The Company capitalizes its mill and related equipment amortization to Exploration and Evaluation Assets. (Note 7)

21

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

7. EXPLORATION AND EVALUATION ASSETS

For the year ended May 31, 2021:

Acquisition Costs Exploration Costs Opening balance-exploration Amortization Fuel Geology and labour Ground maintenance Mapping and sampling Share based compensation Site administration Supplies and maintenance BCMETC recovery Balance, May 31, 2021	Slocan and Sandon BC Horwood ON Total
	$ 691,278 $ 1,000 $ 692,278
	12,609,516 - 12,609,516 38,062 - 38,062 86,580 - 86,580 897,928 - 897,928 602,433 - 602,433 13,638 - 13,638 147,900 - 147,900 17,502 - 17,502 267,741 - 267,741
	14,681,300 - 14,681,300
	(474,425) - (474,425)
	$14,898,153 $ 1,000 $14,899,153

For the year ended May 31, 2020:

Acquisition Costs Exploration Costs Opening balance-exploration Amortization Drifting and drilling Fuel Ground maintenance Mapping and sampling Site administration Supplies and maintenance Balance, May 31, 2020	Slocan and Sandon BC Horwood ON Total
	$ 691,278 $ 1,000 $ 692,278
	11,526,072 - 11,526,072 24,184 - 24,184 510,534 - 510,534 70,339 - 70,339 228,685 - 228,685 29,022 - 29,022 141,900 - 141,900 78,780 - 78,780
	12,609,516 - 12,609,516
	$13,300,794 $ 1,000 $13,301,794

British Columbia Properties

The Slocan and Sandon Group covers an area of approximately 116 square kilometres. The claims include legacy claims, crown-granted claims and acquired or converted mineral claims. All claims are contiguous. Current claim expiry date is: July 31, 2029.

Ontario Property

The Company holds mineral claims in the Horwood Township of the Porcupine mining division, Ontario. The claims are subject to a pre-existing 3% NSR. Current claim expiry dates are: November 25, 2021 and September 20, 2022.

22

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

7. EXPLORATION AND EVALUATION ASSETS (Continued)

Yukon Property

The Company holds 9 mineral claims in the Watson Lake mining district of the Yukon Territory. Current claim expiry dates are: August 18, 2023 and February 4, 2028. The claims were written down in prior years to reflect management focus on the British Columbia properties.

8. ACCRUED LIABILITIES

Accrued liabilities are summarized as follows:

Professional fees Claim consulting Constructive obligation Tailings Management	May 31 May 31 2021 2020
	$ 12,000 $ 12,000 - 83,375 106,000 106,000 478,792 -
	$ 596,792 $ 201,375

9. RESTORATION PROVISION

The Company has calculated the fair value of the restoration provision as at May 31, 2021 using a discount rate of 0.54% (2020 – 0.54%). The estimated total future undiscounted cash flows to settle the restoration provision at May 31, 2021 is $400,000 (2020 - $400,000).

Balance, beginning of year Addition Accretion Balance, end of year	May 31 May 31 2021 2020
	$ 351,750 $ 106,314 - 228,686 17,588 16,750
	$ 369,338 $ 351,750

The components of this obligation are the removal of equipment currently used at the property as well as costs associated with the reclamation of the camp and work sites on the property. It is the Company’s intention to continue exploration work on the property until at least the current mineral claim expiry, for which the key ground is currently July 31, 2029 without extension. The estimate of future asset retirement obligations is subject to change based on amendments to applicable laws, management’s intentions and mineral claim renewals.

The Company may be contingently liable for other decommissioning liabilities. However, such obligations are not recognized since the fair value cannot be reasonably estimated due to the uncertainty of the extent of reclamation and remediation work and the settlement dates.

23

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

10. RELATED PARTY BALANCES AND TRANSACTIONS

Due to related party balances consist of the following*:

Due to Directors and Officers Due to Company controlled by a Director Convertible Debenture due to a major shareholder** Convertible debenture cash value Equity adjustment Convertible debenture statement value	May 31 May 31 2021 2020
	$ 1,190 $ 13,878 - 6,653
	$ 1,190 $ 20,531
	$ 1,306,273 $ 1,841,067 (225,042) (534,212)
	$ 1,081,231 $ 1,306,855

• Unsecured, non-interest bearing, with no fixed terms of repayment.

• ** See note 11.

The Company entered into the following transactions with related parties (also see Note 11). All related party transactions were calculated at the amount of consideration established and agreed to by the related parties.

• a) The Company was charged $120,000 (2020 - $120,000) by an officer for services to the Company.

• b) The Company was charged $1,000 (2020 - $nil) by Directors for services to the Company.

• c) The Company was charged $6,000 (2020 - $nil) by a former Director for services to the Company.

• d) The Company was charged $36,000 (2020 - $36,000) by an officer for rent.

• e) The Company was charged $6,235 in professional fees (2020 - $5,321) by a company controlled by a director.

• f) The Company accrued $165,207 in interest on the convertible debenture (2020 - $83,886) to a company controlled by a major shareholder.

• g) The Company recorded $717,750 in stock option compensation (2020 - $nil) for stock options granted to Directors and Officers.

24

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

11. CONVERTIBLE DEBENTURE

The Company has a Convertible Debenture agreement with a major shareholder with the provision that the major shareholder may make multiple advances to the Company up to a total amount of $2,500,000. The debenture bears interest at the rate of 10% per annum, compounded monthly and matures on December 31, 2024. The first advance in the amount of $1,457,181 may be converted, in whole or in part, into units (“Units”) of the Company at a conversion price of $0.10 per Unit before maturity (conversion price of $0.05 per Unit to January 15, 2021 is now expired). Each Unit is comprised of one common share and one common share purchase warrant of the Company. Each warrant may be converted into one share of the Company, with each Warrant being exercisable into one common share of the Company at a price of $0.05 per share for a period of 60 months from the issue date of the Convertible Debenture. Future advances under the Convertible Debenture agreement may be converted before maturity, in whole or in part, into Units at a conversion price equal to the then prevailing market price of the Company’s common shares and the exercise price of future warrants will be equal to the then prevailing market price of the Company’s common shares.

During the year, the major shareholder exercised his right to convert $700,000 of the Convertible Debenture at a conversion price of $0.05 per Unit. As a result, 14,000,000 common shares and 14,000,000 warrants, exercisable at $0.05 to December 31, 2024, were issued.

Changes in convertible debenture during the periods:

	May 31,	May 31,
	2021	2020
	$	$
Beginning balance	1,306,855	-
Net value at issuance	-	889,341
Accretion	309,169	33,628
Additional advances	-	300,000
Conversion	(700,000)	-
Interest accrual	165,207	83,886
Endingbalance	1,081,231	1,306,855

12. LOANS

During the year ended May 31, 2020, the Company received $125,000 in loans from various parties. The loans bear interest at 1.5% per month, are unsecured and $80,000 was repayable on April 14, 2021 and $45,000 was repayable on May 19, 2021. The Company issued 817,142 bonus shares to these parties in connection with the loans. These loans were repaid in June 2020.

13. CEBA LOAN

In April 2020 the Company received a loan of $40,000 and an additional $20,000 in March 2021, through the Canadian Emergency Business Account Program (“CEBA Loan”), which provides financial relief for Canadian small businesses during the COVID-19 pandemic. The CEBA Loans have an initial term date of December 31, 2022 (the “Initial Term Date”) and may be extended to December 31, 2025. The CEBA Loans are non-revolving, with an interest rate being 0% per annum prior to the Initial Term Date and 5% per annum thereafter during any extended term, which is calculated daily and paid monthly. The CEBA Loans can be repaid at any time without penalty and, if at least 75% of the first CEBA Loan and/or 50% of the second CEBA Loan is paid prior to the Initial Term Date, the remaining balance of the respective CEBA Loan will be forgiven.

25

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

14. MORTGAGE PAYABLE

The Company has a first mortgage on the Rosebery property located in Rosebery, British Columbia, Canada, in the amount of $145,000. Interest payments of $1,202 calculated at 9.95% per annum are due monthly. The mortgage balance is due on December 1, 2021.

15. SHARE CAPITAL

• a) Authorized: Unlimited common shares without par value.

• b) Issued during the year ended May 31, 2021:

In July 2020, the Company issued 1,000,000 common shares at a price of $0.05 for the exercise of warrants.

In August 2020, the Company issued 2,430,000 common shares at a price of $0.05 for the exercise of warrants.

On September 14, 2020, the Company closed a private placement for total proceeds of $516,000. The terms were: 10,320,000 units at a price of $0.05 per unit. All units consist of one common share and one-half share purchase warrant. Each full warrant entitles the holder to purchase one additional common share for 30 months at a price of $0.10 per share. Commissions paid total $3,250. A director participated for 180,000 units.

On September 25, 2020, the Company closed a private placement for total proceeds of $415,000. The terms were: 8,300,000 units at a price of $0.05 per unit. All units consist of one common share and one-half share purchase warrant. Each full warrant entitles the holder to purchase one additional common share for 30 months at a price of $0.10 per share. Commissions paid total $41,750. A 10% holder participated for 800,000 units.

In September 2020, the Company issued 13,180,000 common shares at a price of $0.05 for the exercise of warrants. 150,000 common shares at a price of $0.055 were issued for the exercise of options.

On October 14, 2020, the Company closed a private placement for total proceeds of $503,000. The terms were: 10,060,000 units at a price of $0.05 per unit. All units consist of one common share and one-half share purchase warrant. Each full warrant entitles the holder to purchase one additional common share for 30 months at a price of $0.10 per share. Commissions paid total $33,000.

In October 2020, the Company issued 7,510,000 common shares at a price of $0.05 for the exercise of warrants. 50,000 common shares at a price of $0.05 were issued for the exercise of options.

In November 2020, the Company issued 100,000 common shares at a price of $0.05 for the exercise of warrants. 100,000 common shares at a price of $0.06 were issued for the exercise of options.

In December 2020, the Company issued 2,950,000 common shares at a price of $0.05 for the exercise of warrants. 1,300,000 common shares at a price of $0.05 and 700,000 common shares at a price of $0.06 were issued for the exercise of options.

26

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

15. SHARE CAPITAL (Continued)

In January 2021, the Company issued 2,040,000 common shares at a price of $0.05, 400,000 common shares at a price of $0.055 and 100,000 shares at a price of $0.10 for the exercise of warrants. 1,600,000 common shares at a price of $0.05 and 170,000 common shares at a price of $0.06 were issued for the exercise of options. 14,000,000 common shares at a price of $0.05 were issued for the partial conversion of the convertible debenture (note 11).

In February 2021, the Company issued 50,000 common shares at a price of $0.05, 100,000 common shares at a price of $0.055 and 800,000 common shares at a price of $0.10 for the exercise of warrants. 100,000 common shares at a price of $0.055 were issued for the exercise of options.

On March 1, 2021, the Company closed a private placement for total proceeds of $1,120,600. The terms were: 8,620,000 shares at a price of $0.13 per common share. Commissions paid total $168,090.

In May 2021, the Company issued 400,000 common shares at a price of $0.05 for the exercise of options.

Issued during the year ended May 31, 2020:

In March 2020, the Company issued 80,000 common shares at a deemed price of $0.05 as bonus

shares on a $20,000 loan (Note 12).

In April 2020, the Company closed a private placement for total proceeds of $50,000. The terms were: 1,000,000 units at a price of $0.05 per unit. All units consist of one common share and one share purchase warrant entitling the holder to purchase one additional common share for five years at a price of $0.05 per share.

In April 2020, the Company issued 480,000 common shares at a deemed price of $0.025 as bonus

shares on loans totalling $60,000 (Note 12).

In May 2020, the Company issued 257,142 common shares at a deemed price of $0.035 as bonus shares on a $45,000 loan (Note 12).

c) Warrants

On January 7, 2021, the Company issued 7,000,000 warrants exercisable for a period of 60 months at a price of $0.05 for the partial conversion of the convertible debenture. The fair value of these warrants issued was estimated on the date of issuance in the amount of $65,800 using the BlackScholes valuation model with the following assumptions: i) exercise price per share of $0.05; ii) expected share price volatility of 104%; iii) risk free interest rate of 0.41%; iv) no dividend yield; v) expected life of 5 years; and vi) fully vested on grant.

On January 15, 2021, the Company issued 7,000,000 warrants exercisable for a period of 60 months at a price of $0.05 for the partial conversion of the convertible debenture. The fair value of these warrants issued was estimated on the date of issuance in the amount of $44,100 using the Black-Scholes valuation model with the following assumptions: i) exercise price per share of $0.05; ii) expected share price volatility of 104%; iii) risk free interest rate of 0.41%; iv) no dividend yield; v) expected life of 5 years; and vi) fully vested on grant.

27

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020

(Expressed in Canadian Dollars)

15. SHARE CAPITAL (Continued)

• c) Warrants (Continued)

In estimating the fair value of warrants issued using the Black-Scholes option pricing model, the Company is required to make assumptions. The expected volatility assumption is based on the Company’s historical volatility. The risk-free interest rate assumption is based on yield curves on Canadian government zero-coupon bonds with a remaining term equal to the warrants’ expected life. The Company uses historical data to estimate warrant exercise, and forfeiture within the valuation model. The Company has historically not paid dividends on its common stock.

A summary of the changes in warrants is as follows:

Balance, May 31, 2019 Issued Expired Balance, May 31, 2020 Issued Expired Exercised Balance, May 31, 2021	NUMBER OF WARRANTS OUTSTANDING WEIGHTED AVERAGE EXERCISE PRICE
	107,212,500 $ 0.05 1,000,000 0.05 (19,077,500) 0.07
	89,135,000 0.05 28,340,000 0.08 (18,400,000) 0.05 (30,560,000) 0.05
	68,515,000 $ 0.06

As at May 31, 2021, the following share purchase warrants were outstanding:

TOTAL NUMBER	EXERCISE	EXERCISE	EXPIRY
OF WARRANTS		PRICES	DATES
10,200,000	$	0.05	January 31, 2022
5,600,000	$	0.055	January 31, 2022
10,000,000	$	0.05	December 1, 2022
4,450,000	$	0.05	January 24, 2023
4,760,000	$	0.10	March 15, 2023
4,150,000	$	0.10	March 26, 2023
4,530,000	$	0.10	April 15, 2023
4,965,000	$	0.05	September 6, 2023
2,975,000	$	0.05	December 10,2023
1,885,000	$	0.05	April 25, 2024
14,000,000	$	0.05	December 31,2024
1,000,000	$	0.05	April 15, 2025
68,515,000

As at May 31, 2021 the weighted average remaining contractual life of the share purchase warrants was 1.98 years (2020 – 2.03 years) and the weighted average exercise price was $0.06 (2020 - $0.05).

28

KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

15. SHARE CAPITAL (Continued)

d) Stock Options

The Company has a stock option plan that provides for the issuance of options to its directors, officers, employees and consultants. The maximum number of outstanding options must be no more than 10% of the issued and outstanding shares at any point in time.

On January 29, 2021 the Company granted 16,000,000 incentive stock options exercisable for a period of 30 months at a price of $0.15. The fair value of these stock based compensation options granted was estimated on the date of grant in the amount of $1,392,000 (of which $147,900 were capitalized to exploration and evaluation assets) using the Black-Scholes valuation model with the following assumptions: i) exercise price per share of $0.15; ii) expected share price volatility of 102%; iii) risk free interest rate of 0.14%; iv) no dividend yield; v) expected life of 2.5 years; and vi) fully vested on grant. The Company cancelled 8,250,000 of these options on March 30, 2021.

On November 29, 2019 the Company granted 725,000 incentive stock options exercisable for a period of five years at a price of $0.05. The fair value of these stock based compensation options granted was estimated on the date of grant in the amount of $21,025 using the Black-Scholes valuation model with the following assumptions: i) exercise price per share of $0.05; ii) expected share price volatility of 133%; iii) risk free interest rate of 1.49%; iv) no dividend yield; v) expected life of 5 years; and vi) fully vested on grant.

In estimating the fair value of options granted using the Black-Scholes option pricing model, the Company is required to make assumptions. The expected volatility assumption is based on the Company’s historical volatility. The risk-free interest rate assumption is based on yield curves on Canadian government zero-coupon bonds with a remaining term equal to the stock options’ expected life. The Company uses historical data to estimate option exercise, forfeiture and employee termination within the valuation model. The Company has historically not paid dividends on its common stock.

The following is a summary of the changes in stock options:

	NUMBER OF	WEIGHTED AVERAGE
	OPTIONS	EXERCISE PRICE
Outstanding and exercisable at May 31, 2019	10,545,000	$ 0.06
Options granted	725,000	0.05
Options cancelled/expired	(550,000)	0.09
Outstanding and exercisable at May 31, 2020	10,720,000	0.06
Options granted	16,000,000	0.15
Options cancelled/expired	(8,600,000)	0.15
Options exercised	(4,570,000)	0.05
Outstanding and exercisable at May 31, 2021	13,550,000	$ 0.11

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

15. SHARE CAPITAL (Continued)

• d) Stock Options (Continued)

As at May 31, 2021 the following stock options were outstanding and exercisable:

NUMBER OF
OPTIONS	EXERCISE		EXPIRY
OUTSTANDING		PRICES	DATES
6,000,000	$	0.06	January 13, 2023
7,550,000	$	0.15	July 28, 2023 *
13,550,000

• On March 30, 2021 8,450,000 of 16,000,000 options were cancelled leaving 7,550,000 options with an expiry date of July 28, 2023 outstanding.

As at May 31, 2021 the weighted average remaining contractual life of the stock options was 1.92 years (2020 – 2.33 years) and the weighted average exercise price was $0.11 (2020 – $0.06).

e) Nature and Purpose of Reserves

The reserves recorded in equity on the Company’s statement of financial position from time to time will include “Contributed Surplus”, “Warrant Reserve” and “Share-based Payment Reserve”.

• “Contributed Surplus” recognizes amounts contributed to the Company shareholders either by way of direct contribution of cash or assets to the Company or delivery of assets to the Company having a fair value in excess of consideration paid by the Company.

• “Warrant Reserve” is used to recognize the fair value of share warrants prior to exercise or expiry.

• “Share-based Payment Reserve” is used to recognize the fair value of stock option grants prior to exercise, expiry or cancellation and the fair value of other share-based consideration paid at the date of payment.

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

16. MANAGEMENT OF CAPITAL

The Company manages its cash, common shares, stock options and warrants as capital. The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its exploration and evaluation assets and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. The Board of Directors does not establish a quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management team to sustain the future development of the business.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue debt, acquire or dispose of assets or adjust the amount of cash and cash equivalents.

In order to facilitate the management of its capital requirements, the Company prepares expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. In order to maximize exploration efforts, the Company does not pay out dividends. The Company’s investment policy is to keep its cash treasury on deposit in an interest bearing Canadian chartered bank account.

There were no changes in the Company’s approach to capital management during the years ended May 31, 2021 and 2020. The Company is not subject to externally imposed capital requirements.

17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the notes to these financial statements describe how the categories of financial instruments are measured and how income and expenses, including fair value gains and losses, are recognized.

As at May 31, 2021, the classification of the financial instruments, as well as their carrying values and fair values, are shown in the table below:

LEVEL FVTPL	AMORTIZED COST TOTAL CARRYING VALUE FAIR VALUE
Financial assets Cash 1 $ 1,800,959 Reclamation bonds 2 270,500 Receivables (a) 2 -	$ - $ 1,800,959 $ 1,800,959 - 270,500 270,500 50,927 50,927 50,927
$2,071,459	$50,927 $2,122,386 $2,122,386
Financial liabilities Accounts payable and accrued liabilities (a) 2 $ - Due to related parties (a) 2 - Mortgage payable (a) 2 - Convertible debenture (b) 2 - *CEBA loan 2 -	$ (745,014) $ (745,014) $ (745,014) (1,190) (1,190) (1,190) (145,000) (145,000) (145,000) (1,081,231) (1,081,231) (1,081,231) (60,000) (60,000) (60,000)
$-	$ (2,033,435) $ (2,033,435) $ (2,033,435)

(a) Fair value approximates the carrying amounts due to the short-term nature

(b) Face value of $1,306,273 and accrued interest of $249,092

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)

The carrying values of the Company’s financial liabilities were a reasonable approximation of fair value.

The Company is exposed to potential loss from various risks including commodity price risk, interest rate risk, currency risk, credit risk and liquidity risk. Based on the Company’s operations the liquidity risk and commodity price risk are considered the most significant.

a) Commodity Price Risk

The Company’s ability to raise capital to fund exploration or development activities is subject to risk associated with fluctuations in the market prices of base and precious metals including gold, silver, zinc and lead and the outlook for these metals. The Company does not have any hedging or other derivative contracts respecting its operations.

Market prices for metals historically have fluctuated widely and are affected by numerous factors outside of the Company’s control, including, but not limited to, levels of worldwide production, shortterm changes in supply and demand, industrial and retail demand, central bank lending and forward sales by producers and speculators. The Company has elected not to actively manage its commodity price risk, as the nature of Company’s business is in exploration.

b) Liquidity Risk

The liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk through careful management of its financial obligations in relation to its cash position. Using budgeting processes, the Company manages its liquidity requirements based on expected cash flow to ensure there are adequate funds to meet the short term obligations during the period.

In the past the Company has been able to maintain its liquidity position through private placements. However, the variable market conditions make it uncertain whether the Company can continue to raise adequate funds to meet its financial obligations. All of the liabilities presented as accounts payable and accrued liabilities are due within 90 days of May 31, 2021.

c) Credit Risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company’s cash is held in a Canadian financial institution. The Company has minimal credit risk.

d) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk through its mortgage and convertible debt

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KLONDIKE SILVER CORP.

NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 2021 AND 2020 (Expressed in Canadian Dollars)

18. INCOME TAXES

a) Provision for Income Taxes

The Company’s provision for income taxes for the years ended May 31, 2021 and 2020 differs from the amounts computed by applying the statutory income tax rates to the loss before income taxes as a result of the following:

Statutory Canadian corporate tax rate Expected current income tax recovery Non-deductible permanent differences Other Change in tax assets not recognized Deferred income tax recovery	2021 2020
	27% 27%
	$ (655,000) $ (296,000) 424,000 81,000 80,000 (22,000) 151,000 237,000
	$ - $ -

b) Deferred Income Tax Assets/Liabilities

The estimated tax effect of the significant components within the Company’s deferred tax asset/liability was as follows:

Mineral properties Convertible debenture Asset retirement obligation Non-capital losses carried forward Capital assets Share issue costs Valuation allowance Net deferred income tax assets/liabilities	2021 2020 $ (758,000) $ (586,000) (61,000) - 100,000 - 3,421,000 3,179,000 339,000 384,000 61,000 31,000 (3,102,000) (3,008,000) $ - $ -

The Company’s non-capital losses in the amount of approximately $12,669,000 begin to expire in 2026.

19. SUBSEQUENT EVENTS

In July 2021, the Company issued 200,000 common shares at a price of $0.06 for the exercise of options by a Director.

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