Lithium South Development Corporation

LITHIUM SOUTH DEVELOPMENT CORPORATION (formerly NRG METALS INC.)

(an exploration stage company)

CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Canadian Dollars)

YEAR ENDED December 31, 2020

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Lithium South Development Corp.

Opinion

We have audited the accompanying consolidated financial statements of Lithium South Development Corp. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2020 and 2019, and the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2020 and 2019, 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 Auditor's Responsibilities for the Audit of the Consolidated 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 consolidated 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 of the consolidated financial statements, which indicates that the Company incurred a net loss of $2,986,280 during the year ended December 31, 2020 and, as of that date, the Company’s total deficit was $45,809,658. As stated in Note 1, these events and conditions 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.

Other Information

Management is responsible for the other information. The other information obtained at the date of this auditor's report includes Management’s Discussion and Analysis.

Our opinion on the consolidated 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 consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated 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 Consolidated Financial Statements

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

In preparing the consolidated 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 Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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.
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 consolidated 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 consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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 auditor’s report is Peter Maloff.

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Vancouver, Canada April 30, 2021

Chartered Professional Accountants

(formerly NRG METALS INC.)

(an exploration stage company)

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT

(Expressed in Canadian Dollars)

	December 31, 2020	December 31, 2019
ASSETS Current Cash Receivables (Note 4) Prepaid expenses Exploration and evaluation assets(Note 5)	$ 46,387 50,675 53 97,115 5,123,839 $ 5,220,954	$ 1,644 19,567 1,844 23,055 3,145,589 $ 3,168,644
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued liabilities (Note 6) Due to related parties (Note 11) Shareholders’ equity Share capital (Note 7) Reserves Deficit	$ 905,376 528,156 1,433,532 41,399,301 8,197,779 (45,809,658) 3,787,422 $ 5,220,954	$ 506,730 1,885,614 2,392,344 35,956,239 7,643,439 (42,823,378) 776,300 $ 3,168,644
Nature and continuance of operations (Note 1) Subsequent events (Note 5 and 16)

On behalf of the Board:

“Adrian F. C. Hobkirk” Director “Christopher P. Cherry” Director

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

LITHIUM SOUTH DEVELOPMENT CORPORATION

(formerly NRG METALS INC.)

(an exploration stage company)

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31,

(Expressed in Canadian Dollars)

EXPENSES Administration Consulting fees (Note 11) Directors’ fees (Note 11) Exploration costs (Note 5) Management fees (Note 11) Professional fees (Note 11) Marketing Share-based payments (Note 8) Transfer agent and filing fees Travel OTHER ITEM Loan bonus and interest (Note 11) Loss on settlement of debt (Note 7) Foreign exchange gain Loss and comprehensive loss for the year	$ 88,866 $ 294,517 159,298 265,000 81,298 79,697 5,044 373,972 285,423 472,969 150,250 131,430 180,000 - 505,698 - 106,141 61,758 12,552 25,448
	(1,574,570) (1,704,791)
	(368,468) - (1,097,502) - 54,260 12,812
	$ (2,986,280) $ (1,691,979)
Basic and diluted loss per common share	$ (0.14) $ (0.27)
Weighted average number of common shares outstanding	27,791,736 6,352,059

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

LITHIUM SOUTH DEVELOPMENT CORPORATION

(formerly NRG METALS INC.) (an exploration stage company)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Expressed in Canadian Dollar)

Balance, December 31, 2018 Comprehensive loss for the year Shares issued for cash and settlements of payables, net Shares issued for mineralproperty	5,736,275 $ 34,902,691 $ (41,131,399) $ 7,640,043 $ 1,411,335 - - (1,691,979) - (1,691,979) 1,231,875 877,298 - 3,396 880,694 166,667 176,250 - - 176,250
Balance, December 31, 2019	7,134,817 35,956,239 (42,823,378) 7,643,439 776,300
Comprehensive loss for the year Shares issued for exploration and evaluation assets Shares issued for cash and settlements of payables, net Share-basedpayments	- - (2,986,280) - (2,986,280) 2,250,000 528,750 - - 528,750 18,406,919 4,914,312 - 48,842 4,963,154 - - - 505,698 505,698
Balance, December 31, 2020	27,791,736 41,399,301 (45,809,658) 8,197,780 3,787,422

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

LITHIUM SOUTH DEVELOPMENT CORPORATION

(formerly NRG METALS INC.)

(an exploration stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (Expressed in Canadian Dollars)

	2020 2019
CASH FLOWS USED IN OPERATING ACTIVITIES Loss for the year Items not affecting cash: Share-based payments Loss on settlement of debts Changes in non-cash working capital items: Receivables Prepaid expenses Accounts payable and accrued liabilities Net cash used in operating activities CASH FLOWS USED IN INVESTING ACTIVITIES Evaluation and exploration acquisitions Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds on issuance of share capital, net Proceeds on loan from related parties Net cash provided by financing activities Change in cash during the year Cash, beginning of year Cash, end ofyear	$ (2,986,280) $ (1,691,979) 505,698 - 1,097,502 - (31,108) 93,085 1,791 19,614 1,179,940 816,411
	(232,457) (762,869)
	(1,449,500) (1,328,516)
	(1,449,500) (1,328,516)
	1,726,700 396,944 - 1,504,633
	1,726,700 1,901,577
	44,743 (189,808) 1,644 191,452
	$ 46,387$ 1,644

Supplement disclosure with respect to cash flows (Note 15)

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

LITHIUM SOUTH DEVELOPMENT CORPORATION (formerly NRG METALS INC.) (an exploration stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2020 (Expressed in Canadian Dollars)

1. NATURE AND CONTINUANCE OF OPERATIONS

The Company was incorporated in the Province of Ontario on June 20, 1995. Effective January 15, 2007, the Company was granted a Certificate of Continuation under the Business Corporation Act from the jurisdiction of Ontario into British Columbia. The Company is an exploration stage junior mining company engaged in the identification, acquisition and exploration of mineral properties in Argentina. The Company’s head office, principal address and registered records office is located at 804 – 750 West Pender Street, Vancouver, British Columbia, Canada. During the year ended December 31, 2019, the Company completed a 4 for 1 share consolidation. During the year ended December 31, 2020, the Company changed its name from NRG Metals Inc. to Lithium South Development Corporation and completed a 6 for 1 share consolidation. All references to number of shares and per share amounts have been retroactively restated to reflect the consolidation.

The Company’s consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

Several conditions cast doubt on the validity of this assumption. For the year ended December 31,2020 the Company incurred a net loss of $2,986,280 (December 31, 2019 - $1,691,979) and had an accumulated deficit of $45,809,658 (December 31, 2019 - $42,823,378). The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Such adjustments would be material.

The ability of the Company to continue as a going concern and meet its commitments as they become due, including the acquisition and exploration of exploration and evaluation assets, is dependent on the Company’s ability to obtain the necessary financing. Management is planning to raise additional capital to finance operations and acquire mineral properties. The outcome of these matters cannot be predicted at this time. The Company has incurred losses since inception and the ability of the Company to continue as a going concern depends upon its ability to develop profitable operations and to continue to raise adequate financing. These material uncertainties may cast significant doubt about the Company’s ability to continue as a going concern.

The Company is in the process of exploring its exploration and evaluation assets and has not yet determined whether these properties contain reserves that are economically recoverable. The recoverability of the amounts shown for exploration and evaluation assets and related deferred costs is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of its mineral properties and upon future profitable production.

2. BASIS OF PRESENTATION

Statement of Compliance

These consolidated financial statements, including comparatives, have been prepared using accounting policies consistent 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”). They have been prepared on a historical cost basis, except for financial instruments classified as financial instruments at fair value through profit and loss, which are stated at their fair value. In addition, these financial statements have been prepared using the accrual basis of accounting except for cash flow information. These financial statements are presented in Canadian dollars unless otherwise noted.

Approval of the financial statements

The consolidated financial statements of the Company for the year ended December 31, 2020 were reviewed by the Audit Committee and approved and authorized for issue by the Board of Directors on April 30, 2021.

2. BASIS OF PREPARATION (cont’d)

Basis of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: 1140177 BC Ltd., Canada and NRG Metals S.A Argentina, on June 14, 2016 from the date control was acquired. Control exists when the Company possesses power over an investee, has exposures to variable returns from the investee and has the ability to use its power over the investee to affect its returns. All intercompany balances and transactions have been eliminated.

Critical Accounting Estimates and Judgments

The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported expenses during the period. Actual results could differ from these estimates.

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:

i) The carrying value and the recoverability of exploration and evaluation assets, which are included in the statements of financial position. The cost model is utilized and the value of the exploration and evaluation assets is based on the expenditures incurred. At every reporting period, management assesses the potential impairment which involves assessing whether or not facts or circumstances exist that suggest the carrying amount exceeds the recoverable amount.
ii) The valuation of shares issued in non-cash transactions. Generally, the valuation of non-cash transactions is based on the value of the goods or services received. When this cannot be determined, it is based on the fair value of the non-cash consideration. When non-cash transactions are entered into with employees and those providing similar services, the non-cash transactions are measured at the fair value of the consideration given up using market prices.
iii) Share-based payments are subject to estimation of the value of the award at the date of grant using pricing models such as the Black-Scholes option valuation model. The option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because the subjective input assumptions can materially affect the calculated fair value, such value is subject to measurement uncertainty.
iv) The Company has evaluated the economic environment its entities operate in and determined that the functional currency of the Company, including its Argentinean subsidiaries, is the Canadian dollar. A change in this judgement would have significant impact on these consolidated financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

New Accounting Standards Adopted

Leases - On January 1, 2019, the Company adopted IFRS 16 – Leases (“IFRS 16”) which replaced IAS 17 – Leases and IFRIC 4 – Determining Whether an Arrangement Contains a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard is effective for annual periods beginning on or after January 1, 2019. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead, all leases are treated in a similar way to finance leases applied in IAS 17. IFRS 16 does not require a lessee to recognize assets and liabilities for short-term leases (i.e. leases of 12 months or less) and leases of low-value assets.

The Company applied IFRS 16 using the modified retrospective method. Under this method, financial information will not be restated and will continue to be reported under the accounting standards in effect for those periods. The lease liabilities will be measured at the present value of the remaining lease payments, discounted using the Company’s estimated incremental borrowing rate as at January 1, 2019, the date of initial application, resulting in no adjustment to the opening balance of deficit. The associated right-of-use assets will be measured at the lease liabilities amount, plus prepaid lease payments made by the Company. The Company has implemented the following accounting policies permitted under the new standard:

-leases of low dollar value will continue to be expensed as incurred; and
-the Company will not apply any grandfathering practical expedients.

As at December 31, 2020 and December 31, 2019, the Company did not recognize any right-of-use assets as it had no leases.

Financial instruments

Financial assets

The Company classified its financial assets in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (“FVTOCI”), or at amortized cost. The determination of the classification of financial assets is made at initial recognition. Equity instruments that are held for trading (including all equity derivative instruments) 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.

The Company’s accounting policy for each of the categories is as follows:

Financial assets at FVTPL : Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statement of (loss) income. Realized and unrealized gains and losses arising from changes in the fair value of financial assets held at FVTPL are included in the statement of (loss) income in the year.

Financial assets at FVTOCI : Financial assets carried at FVTOCI are recorded at fair value and transaction costs are expensed in the statement (loss) income. Realized and unrealized gains and losses arising from changes in fair value of the financial assets held at FVTOCI are included in other comprehensive (loss) income in the year.

Financial assets at FVTOCI : Investments in equity instruments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive (loss) income in they arise.

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial instruments (continued)

Financial assets at amortized cost : A financial asset is measured at amortized cost if the objective of the business model is to hold the financial asset for the collection of contractual cash flows, and the asset’s contractual cash flows are comprised solely of payments of principal and interest. They are classified as current assets or non-current assets based on their maturity date, and are initially recognized at fair value and subsequently carried at amortized cost less any impairment.

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.

The following table shows the classification of the Company’s financial assets under IFRS 9:

Financial asset	IFRS9Classification
Cash	FVTPL
Receivables	Amortized cost

Financial liabilities

The Company classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was incurred. The Company's accounting policy for each category is as follows:

Fair value through profit or loss – This category comprises derivatives or liabilities acquired or incurred principally for the purpose of selling or repurchasing in the near term. They are carried in the statement of financial position at fair value with changes in fair value recognized in the statement of operations and comprehensive loss.

Other financial liabilities - This category includes accounts payable and accrued liabilities and due to related parties, all of which are recognized at amortized cost using the effective interest method.

Transaction costs in respect of financial instruments at fair value through profit or loss are recognized in the statement of operations and comprehensive losses immediately, while transaction costs associated with all other financial instruments are included in the initial measurement of the financial instrument.

The following table shows the classification of the Company’s financial liabilities under IFRS 9:

Financial liability	IFRS 9 Classification
Accounts payable and accrued liabilities	Other financial liabilities
Due to related parties	Other financial liabilities

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currency translation

The functional currency is the currency of the primary economic environment in which the entity operations and has been determined for each entity within the Company. The functional currency for all entities within the Company is the Canadian dollar. The functional currency determinations were conducted through an analysis of the consideration factors identified in International Accounting Standards (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates .

Foreign currency transactions and balances are translated into Canadian dollars as follows:

(i) Monetary assets and liabilities, at the rate of exchange in effect at the statement of financial position date;
(ii) Non-monetary assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and
(iii) Revenue and expense items (excluding amortization, which is translated at the same rate as the related asset), at the rate of exchange prevailing at the transaction date.

Gains and losses arising from translation of foreign currency are included in the determination of net loss.

Exploration and evaluation assets

All costs related to the acquisition of exploration and evaluation assets are capitalized on a property by property basis, net of recoveries. Exploration costs incurred prior to the determination of the feasibility of mining operations and a decision to proceed with development are expensed to operations as incurred. If economically recoverable ore reserves are developed, capitalized costs of the related property are classified as mining assets and amortized using the unitof-production method. When a property is abandoned, all related costs are written off to operations.

The amounts shown for acquisition costs represent costs incurred to date and do not necessarily reflect present or future values. These costs are depleted over the useful lives of the properties upon commencement of commercial production or written off if the properties are abandoned or the claims allowed to lapse.

From time to time, the Company may acquire or dispose of an exploration and evaluation asset pursuant to the terms of an option agreement. As the options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as property costs or recoveries when the payments are made or received. Proceeds received on the sale of an option of the Company’s property are recorded as a reduction of the mineral property cost. The Company recognizes in income amounts received in excess of the carrying amount.

Although the Company has taken steps to verify the 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 title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects.

Evaluation and exploration assets are assessed for impairment by management when facts and circumstances suggest that the carrying amount exceeds the recoverable amount. When there is little prospect of further work on a property being carried out by the Company or its partners, when a property is abandoned, or when the capitalized costs are no longer considered recoverable, the related property costs are written down to management’s estimate of their net recoverable amount.

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

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Decommissioning liabilities

An obligation to incur decommissioning and site rehabilitation costs occurs when environmental disturbance is caused by exploration, evaluation, development or ongoing production.

Decommissioning and site rehabilitation costs arising from the installation of plant and other site preparation work, discounted to their net present value, are provided when the obligation to incur such costs arises and are capitalized into the cost of the related asset. These costs are charged against operations through depreciation of the asset and unwinding of the discount on the provision.

Depreciation is included in operating costs while the unwinding of the discount is included as a financing cost. Changes in the measurement of a liability relating to the decommissioning or site rehabilitation of plant and other site preparation work are added to, or deducted from, the cost of the related asset.

The costs for the restoration of site damage, which arises during production, are provided at their net present values and charged against operations as extraction progresses. Changes in the measurement of a liability, which arises during production, are charged against operating profit. The discount rate used to measure the net present value of the obligations is the pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the obligation.

Impairment of tangible assets

The Company’s tangible and intangible assets are reviewed for indications of impairment at each statement of financial position date. If indication of impairment exists, the asset’s recoverable amount is estimated.

An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in profit and loss for the period.

An impairment loss is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Loss per share

Basic loss per share is calculated using the weighted average number of common shares outstanding during the year. The dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to purchase common shares at the average market price during the period. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.

Shares held in escrow, other than where their release is subject to the passage of time, are not included in the calculation of the weighted average number of common shares outstanding.

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Share-based payments

The Company grants options to acquire common shares of the Company to directors, officers, employees and consultants. The fair value of share-based payments to employees is measured at grant date, using the Black-Scholes option pricing model, and is recognized over the vesting period for employees using the graded vesting method. Fair value of share-based payments for non-employees is recognized and measured at the date the goods or services are received based on the fair value of the goods or services received. If it is determined that the fair value of goods and services received cannot be reliably measured the share-based payment is measured at the fair value of the equity instruments issued using the Black-Scholes option pricing model.

For both employees and non-employees, the fair value of share-based payments is recognized as an expense with a corresponding increase in reserves. The amount recognized as expense is adjusted to reflect the number of share options expected to vest. Consideration received on the exercise of stock options is recorded in share capital and the related share-based payment in reserves is transferred to share capital.

Income taxes

Income tax expense consisting of current and deferred tax expense is recognized in the statement of loss and comprehensive loss. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end, adjusted for amendments to tax payable with regard to previous years.

Deferred tax assets and liabilities and the related deferred tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.

A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

4. RECEIVABLES

		December 31,		December 31,
		2020		2019
GST recoverable	$	18,075	$	15,817
Other receivables		32,600		3,750
	$	50,675	$	19,567

5. EXPLORATION AND EVALUATION ASSETS

Realization of assets

The investment in mineral properties comprise a significant portion of the Company’s assets. Realization of the Company’s investment in these assets is dependent upon the establishment of legal ownership, the attainment of successful production from the properties or from the proceeds of their disposal.

Resource exploration and development is highly speculative and involves inherent risks. While the rewards if an ore body is discovered can be substantial, few properties that are explored are ultimately developed into producing mines. There can be no assurance that current exploration programs will result in the discovery of economically viable quantities of ore. The amounts shown for acquisition costs represent costs incurred to date and do not necessarily reflect present or future values.

Environmental

The Company is subject to the laws and regulations relating to environmental matters in all jurisdictions in which it operates, including provisions relating to property reclamation, discharge of hazardous material and other matters. The Company may also be held liable should environmental problems be discovered that were caused by former owners and operators of its properties and properties in which it has previously had an interest. The Company conducts its mineral exploration activities in compliance with applicable environmental protection legislation.

The Company is not aware of any existing environmental problems related to any of its current or former properties that may result in material liability to the Company.

Environmental legislation is becoming increasingly stringent and costs and expenses of regulatory compliance are increasing. The impact of new and future environmental legislation on the Company’s operations may cause additional expenses and restrictions.

If the restrictions adversely affect the scope of exploration and development on the mineral properties, the potential for production on the properties may be diminished or negated.

Argentina Properties

Hombre Muerto North (“HMN”)

The project is being acquired through a purchase option agreement from a private borate producer from Salta, Argentina. At December 31, 2020, the Company had capitalized a total of $5,123,839 (December 31, 2019 - $3,145,589) related to the HMN acquisition. Terms of the acquisition are as follows:

US $50,000 (paid) on signing for a 90-day due diligence period and for the completion of a NI 43-101 Technical Report on the project.
Upon acceptance of the NI 43-101 report by the TSX, the Company will pay Mr. Moreno US $100,000 and issue 1,000,000 common shares of the Company common stock (issued at a fair value of $350,000 in fiscal 2017).
At March 17, 2018, US $250,000 (paid) and 41,667 common shares of the Company (issued at a fair value of $250,000).
At September 17, 2018, US $250,000 (paid) and 41,667 common shares of the Company (issued at a fair value of $200,000).
At March 17, 2019, US $1,000,000 subsequently amended to be US$500,000 (paid) due in March 2019 and US$500,000 due June 24, 2019 (paid) and 166,667 common shares of the Company. (issued)
At March 22, 2020, US $1,000,000 (paid) and 2,250,000 (issued at a fair value of $528,750) common shares of the Company.
At March 17, 2021, US $1,000,000 (subsequently paid) and 2,250,000 (subsequently issued) common shares of the Company.

5. EXPLORATION AND EVALUATION ASSETS (continued)

Argentina Properties (continued)

HMN continued

At March 17, 2022, US $2,000,000 and 2,250,000 common shares of the Company.
The project will be subject to a 3% Net Production Royalty, of which 50% may be purchased for US$3,000,000 within 36 months of Item 2.

The Company incurred exploration costs during the year ended December 31, as follows:

he Company incurred exploration costs during the year ended December 31,	as follows:
	2020	2019
Consultants and geologists Field supplies, camp costs, cannon payments and other Travel Total	$ - 1,044 - $1,044	$ 362,553 10,694 725 $373,972

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

		December 31,		December 31,
		2020		2019
Account payables	$	880,375	$	481,730
Accrued liabilities		25,000		25,000
	$	905,375	$	506,730

7. SHARE CAPITAL

Authorized: Unlimited common shares without par value

During the year ended December 31, 2019, the Company completed a 4 for 1 share consolidation and during the year ended December 31, 2020, the Company completed a 6 for 1 share consolidation. All references to number of common shares and per share amounts have been retroactively restated to reflect the consolidations.

Issued and outstanding:

Year ended December 31, 2020:

During the year ended December 31, 2020, the Company issued 2,250,000 common shares for a property payment valued at $528,750 (Note 5).

During the year ended December 31, 2020 the Company completed private placements and issued 8,222,380 units for cash proceeds of $1,726,700. The Company also issued 6,760,612 units valued at $3,236,255 in settlement of debts of $2,138,753, resulting in a loss on settlement of $1,097,502. Each unit consists of one common share and one transferable common share purchase warrant. Each warrant allows the holder to purchase one share of the Company at a price of $0.35 per share for a period of five years after the closing of the private placement. No finders’ fees were paid pursuant to the private placement.

7. SHARE CAPITAL (continued)

Year ended December 31, 2019:

The Company issued 25,000 common shares pursuant to the exercise of stock options for proceeds of $11,000 and issued 166,667 common shares for property payments valued at $170,000.

The Company closed a non-brokered private placement raising gross proceeds of $396,944 and settled $483,750 of debt by the issuance of 1,227,708 units at a price of $0.72 cents per unit. Each unit will comprise one common share and one transferable common share purchase warrant. Each warrant will allow the holder to purchase one share of the company at a price of $0.96 cents per share for a period of five years from the date of closing of the private placement. A finder’s fee of cash of $14,250 and 19,800 finders’ warrants (valued at $13,224) with the same terms as the unit were issued and paid on a portion of the private placement

During the year ended December 31, 2019, the Company issued 4,164 common shares on the exercise of warrants. The Company received $11,000 and adjusted $9,828 from reserves to share capital on exercise.

During the year ended December 31, 2019, the Company issued 1,000,000 common shares valued at $170,000 on acquisition of mineral property.

8. STOCK OPTIONS

The Company has a rolling stock option plan (the “plan”) that authorizes the board of directors to grant incentive stock options to directors, officers, consultants and employees, whereby a maximum of 10% of the issued common shares are reserved for issuance under the plan. Under the Plan, the exercise price of each option may not be less than the market price of the Company’s shares at the date of grant, subject to a minimum exercise price of $0.10 per share. Options granted under the Plan will have a term not to exceed five years and be subject to vesting provisions as determined by the board of directors of the Company

Stock option transactions are summarized as follows:

	Number ofOptions Weighted Average ExercisePrice
Outstanding, December 31, 2018 Cancelled Outstanding and exercisable, December 31, 2019 Granted Outstandingand exercisable,December 31,2020	520,833 $ 5.40 (520,833) 5.40
	- - 1,700,000 0.26
	1,700,000 $ 0.26

8. STOCK OPTIONS (continued)

During the year ended December 31, 2020, the Company granted 1,700,000 stock options to directors, officers and consultants of the Company. The fair value of the options granted during the period is $505,697 based on the BlackScholes option pricing model. The weighted average of the fair value per option was $0.297. The Company used the following assumptions for the Black-Scholes option pricing model:

	2020	2019
Risk-free interest rate	1.01%	-
Expected life of options	5.0 years	-
Annualized volatility	165%	-
Dividend rate	0.00%	-
Forfeiturerate	0.00%	-

9. WARRANTS

The following table summarizes the Company’s warrant activity the year ended December 31, 2020 and 2019:

	Number of Warrants Weighted Average Exercise Price
Outstanding, December 31, 2018 Issued Exercised Expired Outstanding, December 31, 2019 Issued Expired Outstanding, December 31, 2020	1,596,550 $ 5.11 1,247,508 0.96 (4,167) 2.64 (982,188) 4.25 1,837,903 2.78 18,406,919 0.35 (590,395) 0.96 19,654,427 $ 0.33

As at December 31, 2020, the following warrants were outstanding and exercisable:

ExpiryDate	Exercise Price	Number of Warrants
August 1, 2024	$0.96	1,247,508
April 2, 2025	$0.35	8,070,238
April 21, 2025	$0.35	5,372,380
June 28,2025	$0.35	4,964,301
		19,654,427

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company's financial instruments consist of cash, receivables and accounts payable and accrued liabilities. Cash has been designated as fair value through profit and loss, receivables as loans and receivables, and accounts payable and accrued liabilities and related party loans payable are designated as other financial liabilities. The fair value of these financial instruments approximates their carrying value due to the short-term nature of these instruments, except for cash which is valued at a level 1 fair value measurement. All the Company’s financial liabilities have contractual maturities less than 30 days and are subject to normal trade terms.

The Company is exposed to a variety of financial risks by virtue of its activities including currency, credit, interest rate, liquidity and other price risk. There has been no change in the way management managed these risks for the period.

a) Currency risk

While the Company’s parent is Canadian and its capital is raised in Canadian dollars, the Company was conducting business in Argentina, whose currency is the Peso. As such, it was subject to risk due to fluctuations in the exchange rates for the United States and Canadian dollars as well as the Argentina Peso. The Company does not manage currency risk through hedging or other currency management tools.

As at December 31, 2020, the Company has accounts payable denominated in US dollars of US$135,000 (December 31, 2019 – US$ 90,000) and cash of US$250 (December 31, 2019 - US$250). Based on a hypothetical change in the foreign exchange rate between the Canadian and the US dollars of 5% (2019 - 5%), the effect on net and comprehensive loss would be $6,700 (2019 - $4,500).

As at December 31, 2020, the Company has cash denominated in Argentine Peso of $275 (December 31, 2019 – $275). Based on a hypothetical change in the foreign exchange rate between the Canadian dollar and Argentine Peso (2019 - Argentine Peso) of 7.5% (December 31, 2019 – 7.5%), the effect on net comprehensive loss would be $20 (December 31, 2019 - $20).

b) Credit risk

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. The cash is held in a large Canadian financial institution, which has a strong credit rating from a primary credit rating institution. There is no risk associated with receivables as this is Goods and Services Tax (“GST”) due from the Canadian Government.

c) Interest rate risk

Interest rate risk consists of two components:

(a) To the extent that payments made or received on the Company’s monetary assets and liabilities are affected by changes in the prevailing market interest rates, the Company is exposed to interest rate cash flow risk.
(b) To the extent that changes in prevailing market rates differ from the interest rate in the Company’s monetary assets and liabilities, the Company is exposed to interest rate price risk.

Due to the short-term nature of the Company’s financial instruments fluctuations in market rates do not have a significant impact on estimated fair values as of December 31, 2020. Future cash flows from interest income on cash will be affected by interest rate fluctuations. The Company manages interest rate risk by maintaining an investment policy that focuses primarily on the preservation of capital and liquidity.

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

d) Liquidity risk

Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they come due. The Company’s ability to continue as a going concern is dependent on management’s ability to raise the required capital through future equity issuances. The Company manages its liquidity risk by forecasting cash flows required by operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning, and approval of significant expenditures and commitments. All the Company’s financial liabilities have contractual maturities less than 30 days and are subject to normal trade terms.

e) Price risk

The Company is exposed to price risk with respect to commodity and equity prices. Equity price risk is defined as the potential adverse impact on the Company’s earnings due to movements in individual equity prices or general movements in the level of the stock market. Commodity price risk is defined as the potential adverse impact on earnings and economic value due to commodity price movements and volatilities. The Company closely monitors commodity prices of gold and other precious and base metals, individual equity movements, and the stock market to determine the appropriate course of action to be taken by the Company. Fluctuations in pricing may be significant.

11. RELATED PARTY TRANSACTIONS

a) The Company incurred the following expenses charged by key management personnel and companies controlled by key management personnel, such personnel include the Company’s Directors, Chief Executive Officer, Chief Financial Officer and Corporate Secretary:

		2020		2019
Management, exploration and professional fees charged
by directors and corporations under their control	$	455,561	$	472,969
Directors’ fees	$	81,298	$	79,697
Share-basedpayments	$	264,651	$	-

Key management personnel were not paid any post-employment benefits, termination benefits, or other long-term benefits during the respective periods.

b) Included in accounts payable and accrued liabilities is $635,494 (December 31, 2019 - $372,981) due to directors, officers and corporations controlled by directors of the Company. The amount due to the related parties have no specific terms of repayment, are unsecured and non-interest-bearing.
c) The Company has outstanding amounts of $528,156 (December 31, 2019 - $1,885,614) due to related parties. The loans are unsecured, interest free and without specific terms of repayment. During the year ended December 31, 2020, the Company granted bonuses of $367,150 related to these outstanding loans.
d) During the year ended December 31, 2020, the Company issued 10,039,298 units valued at $3,182,517 in settlement of debts owing to entities and individuals related to directors of the Company of $2,108,253 resulting in a loss on settlement of $1,074,264.

12. INCOME TAXES

Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax rate of 27% (2019 - 27%) to income before income taxes. The reasons for the differences are as follows:

		2020		2019
Loss before income taxes	$	(2,986,280)	$	(1,691,979)
Statutoryincome tax rate		27%		27%
Expected income tax recovery	$	(806,000)	$	(457,000)
Changes in statutory, foreign tax, foreign exchange rates and
other		-		(32,000)
Permanent difference		433,000		-
Adjustments to prior years provision versus statutory tax		309,000		238,000
Unrecognized benefit of deferred tax assets		64,000		251,000
Total income tax expense	$	-	$	-

The Company recognizes tax benefits on losses or other deductible amounts generated in countries where the probable criteria for the recognition of deferred tax assets has been met. The Company’s unrecognized deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:

		2020		2019
Excess of unused exploration expenditures for Canadian tax
purposes over carrying value of mineral property interests	$	2,848,000	$	4,822,000
Excess of undepreciated capital cost over carrying value of fixed
assets		1,522,000		1,522,000
Share issuance costs		12,000		37,000
Non-capital losses carried forward		18,740,000		22,768,000
Net capital losses carried forward		705,000		705,000
Unrecognized deductible temporarydifferences	$	23,827,000	$	29,854,000

The Company has non-capital losses of approximately $18,740,000 that may be carried forward and applied against taxable income in future years. These losses, if not utilized, will expire through 2040. Exploration and evaluation assets, property and equipment and net capital losses have no expiry date.

Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize these benefits.

13. CAPITAL MANAGEMENT

The Company is an exploration stage company and this involves a high degree of risk. The Company’s primary source of funds comes from the issuance of share capital. The Company does not use other sources of financing that require fixed payments of interest and principal as the Company does not generate cash flow from current operations. Accordingly, the Company is not subject to any externally imposed capital requirements.

The Company defines its capital as shareholders’ equity. Capital requirements are driven by the Company’s exploration activities on its exploration and evaluation assets. To effectively manage the Company’s capital requirements, the Company has a planning and budgeting process in place to ensure that adequate funds are available to meet its strategic goals. The Company monitors actual expenses to budget all exploration projects and overhead to manage costs, commitments and exploration activities.

The Company has in the past invested its capital in liquid investments to obtain adequate returns. The investment decision is based on cash management to ensure working capital is available to meet the Company’s short-term obligations while maximizing liquidity and returns of unused capital.

Although the Company has been successful at raising funds in the past through the issuance of share capital, it is uncertain whether it will be able to continue this financing due to uncertain economic conditions. The Company believes that it will be able to raise sufficient funds from share issuances to fund its working capital for the coming year. There have been no changes to the Company’s approach to capital management during the period.

14. SEGMENTED INFORMATION

Company is focused on the exploration and evaluation assets in Argentina.

	December 31,	December 31,	December 31,	December 31,
		2020		2019
Exploration and evaluation assets
Argentina	$	5,123,839	$	3,145,589

15. SUPPLEMENT DISCLOSURES WITH RESPECT TO CASH FLOWS

The Company did not incur any interest or tax expenditures for the fiscal 2020 and 2019.

During fiscal 2020, the Company:

i) Issued 10,184,539 common shares valued at $3,236,255 to settle debt of $2,138,753 (Note 7) resulting in a loss on settlement of $1,097,502.
ii) Issued 2,250,000 common shares valued at $528,750 on the HMN property

During fiscal 2019, the Company:

i) Issued 166,667 common shares valued at $176,500 on acquisition of mineral property ii) Issued 671,875 common shares to settle debt of $483,750 (Note 7)

16. SUBSEQUENT EVENTS

Subsequent to December 31, 2020, the Company:

a) On January 18, 2021, the Company closed its non-brokered private placement, issuing an aggregate of 8,000,412 units at a price of $0.225 per unit, raising gross proceeds of $1,800,093. Each unit comprised one common share and one transferable common share purchase warrant. Each warrant allows the holder to purchase one additional share of the company at a price of $0.35 per share for a period of five years from the date of closing of the private placement.

The warrants are subject to an accelerated expiry provision whereby if the company's shares close at or above 40 cents per share during any 10 consecutive trading day period at any time subsequent to four months and one day after the closing date, the holder will have 30 days from the date the company provides notice of such accelerated expiry to exercise the warrant or it will expire.

The company paid finder's fees of $90,364 issued 401,615 finder's warrants. The finder's warrants are nontransferable and exercisable on the same terms as the private placement warrants;

b) On February 4, 2021, the Company granted incentive stock options to purchase a total of 2,400,000 common shares at an exercise price of $0.70 per common share for a period of 5 years to certain directors, officers and consultants, in accordance with the provisions of its stock option plan;
c) On February 17, 2021 the Company closed its non-brokered private placement, issued 10,000,000 units for total gross proceeds of $3,412,500. Each unit comprises one common share and one transferable common share purchase warrant. Each warrant will allow the holder to purchase one share of the company at a price of $0.455 cents per share for a period of five years from the date of closing of the private placement.

The company paid finder's fees of $162,235 and issued 575,472 finder's warrants. The finder's warrants are nontransferable and exercisable at $0.455 cents per finders' warrant for a period of five years;

d) On February 26, 2021, the Company closed its non-brokered private placement issuing an aggregate of 5,336,667 units at a price of $0.60 per unit raising gross proceeds of $3,202,000. Each unit consists of one common share and one transferable common share purchase warrant. Each warrant will allow the holder to purchase one share of the company at a price of $0.80 per share for a period of five years from the date of closing of the private placement.

The company paid finders' fees of $245,200 and issued 408,667 finders' warrants. The finders' warrants are nontransferable and exercisable at 80 cents per finder's warrant for a period of five years;

e) On March 24, 2021, the Company granted incentive stock options to purchase a total of 1,400,000 common shares at an exercise price of $0.80 per common share for a period of 5 years to certain directors, officers and consultants, in accordance with the provisions of its stock option plan; and
f) On March 25, 2021, the Company completed the second-to-last property payment for the acquisition of the HMN property and issued 2,250,000 common shares and completed a payment of US$1,000,000 to the property vendor.
g) Issued 4,643,399 common shares on the exercise of 3,963,399 warrants and 680,000 stock options for proceeds of $1,328,390

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Lithium South Development Corporation — Audit Report / Information 2020

44387_rns_2021-04-30_3da9bbc1-5ab6-40ca-a91e-c051f29a6253.pdf

INDEPENDENT AUDITOR’S REPORT

Opinion

Basis for Opinion

Material Uncertainty Related to Going Concern

Other Information

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

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

LITHIUM SOUTH DEVELOPMENT CORPORATION

(an exploration stage company)

On behalf of the Board:

LITHIUM SOUTH DEVELOPMENT CORPORATION

(an exploration stage company)

LITHIUM SOUTH DEVELOPMENT CORPORATION

(formerly NRG METALS INC.) (an exploration stage company)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

LITHIUM SOUTH DEVELOPMENT CORPORATION

(an exploration stage company)

1. NATURE AND CONTINUANCE OF OPERATIONS

2. BASIS OF PRESENTATION

Statement of Compliance

Approval of the financial statements

2. BASIS OF PREPARATION (cont’d)

Basis of Consolidation

Critical Accounting Estimates and Judgments

3. SIGNIFICANT ACCOUNTING POLICIES

New Accounting Standards Adopted

Financial instruments

Financial assets

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial instruments (continued)

Financial liabilities

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currency translation

Exploration and evaluation assets

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Decommissioning liabilities

Impairment of tangible assets

Loss per share

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Share-based payments

Income taxes

4. RECEIVABLES

5. EXPLORATION AND EVALUATION ASSETS

Realization of assets

Environmental

Argentina Properties

Hombre Muerto North (“HMN”)

5. EXPLORATION AND EVALUATION ASSETS (continued)

Argentina Properties (continued)

HMN continued

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

7. SHARE CAPITAL

7. SHARE CAPITAL (continued)

8. STOCK OPTIONS

8. STOCK OPTIONS (continued)

9. WARRANTS

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

a) Currency risk

b) Credit risk

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

e) Price risk

11. RELATED PARTY TRANSACTIONS

12. INCOME TAXES

13. CAPITAL MANAGEMENT

14. SEGMENTED INFORMATION

15. SUPPLEMENT DISCLOSURES WITH RESPECT TO CASH FLOWS

16. SUBSEQUENT EVENTS

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Lithium South Development Corporation Audit Report / Information 2020