Spectra7 Microsystems Inc. — Annual Report 2024

Apr 16, 2025

Consolidated Financial Statements of

SPECTRA7 MICROSYSTEMS INC.

Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

SPECTRA7 MICROSYSTEMS INC.

Years Ended December 31, 2024 and 2023

Table of Contents

	Page
Independent Auditor’s Report	2 – 4
Consolidated Statements of Loss and Comprehensive Loss	5
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)	6 – 7
Consolidated Statements of Financial Position	8
Consolidated Statements of Cash Flows	9
Notes to the Consolidated Financial Statements	10 – 36

Independent Auditor's Report

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To the Shareholders of Spectra7 Microsystems Inc.:

Opinion

We have audited the consolidated financial statements of Spectra7 Microsystems Inc. (the "Company"), which comprise the consolidated statements of financial position as at December 31, 2024 and December 31, 2023, and the consolidated statements of loss and comprehensive loss, changes in shareholders’ equity (deficiency) and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of material accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2024 and December 31, 2023, and its financial performance and its cash flows for the years then ended in accordance with IFRS® Accounting Standards.

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 audits 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 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 consolidated financial statements, which indicates that the Company incurred a net loss and negative cash flows from operating activities during the year ended December 31, 2024 and, as of that date, had an accumulated deficit and negative working capital. As stated in Note 1, these events or conditions, along with other matters as set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Key Audit Matters

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

In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.

Valuation of units issued to settle convertible debt

Key Audit Matter Description

We draw attention to Note 10 to the consolidated financial statements.

In the current year the Company completed the forced conversion of all outstanding convertible debentures resulting in the issuance of equity units consisting of common shares, prefunded warrants, and warrants of the Company. Assessing the valuation of these equity units is complex and requires judgment and estimation.

MNP LLP

1021 West Hastings St, Suite 2200, Vancouver BC, V6E 0C3

1.877.688.8408 T: 604.685.8408 F: 604.685.8594

Audit procedures performed to evaluate the reasonableness of the estimates and assumptions used required a high degree of auditor judgment and an increased extent of audit effort.

Audit Response

We responded to this matter by performing procedures in relation to assessing the valuation of units issued to settle convertible debt during the year. Our audit work in relation to this included, but was not restricted to, the following:

• Obtained and reviewed management's assessment and determination of the valuation of each component of the equity units issued.

• Performed inquiry with management and challenged key assumptions in their valuation approach.

• Using valuations specialists, assessed the reasonableness of the methodologies applied and developed an independent point estimate.

• Assessed whether key inputs, such as share price, volatility, risk-free rate, and expected life of warrants were reasonable.

• Considered and independently quantified management's assessment of the impact from a discount for lack of marketability.

• Recalculated the impact of acceleration barriers included in warrant agreements.

Other Information

Management is responsible for the other information. The other information comprises Management’s Discussion and Analysis.

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

In connection with our audits 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 audits 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 on this other information, 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® Accounting Standards, 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.

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1021 West Hastings St, Suite 2200, Vancouver, BC, V6E 0C3 1.877.688.8408 T: 604.685.8408 F: 604.685.8594 MNP.ca

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.

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

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.

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1021 West Hastings St, Suite 2200, Vancouver, BC, V6E 0C3 1.877.688.8408 T: 604.685.8408 F: 604.685.8594 MNP.ca

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

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

Vancouver, British Columbia April 15, 2025

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Chartered Professional Accountants

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1021 West Hastings St, Suite 2200, Vancouver, BC, V6E 0C3 1.877.688.8408 T: 604.685.8408 F: 604.685.8594 MNP.ca

SPECTRA7 MICROSYSTEMS INC.

Consolidated Statements of Loss and Comprehensive Loss Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

SPECTRA7 MICROSYSTEMS INC. Consolidated Statements of Loss and Comprehensive Loss Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)
	2024	2023
	$	$
Revenue	2,311,838	9,896,387
Cost of sales	2,492,612	4,247,102
Gross margin	(180,774)	5,649,285
Expenses (Income):
Research and development, net of investment tax credits and	4,471,498	4,751,837
including amortization of licenses
Sales and marketing	734,015	1,117,103
General and administrative	2,622,052	3,257,840
Provision for bad debt	3,276,176	1,226,000
Depreciation of right-of-use assets (Note 4)	229,002	240,350
Depreciation of property and equipment (Note 7)	109,277	65,226
Share-based compensation_(Note 11(b))_	591,753	1,648,173
Interest on lease obligation of right-of-use asset_(Note 5)_	10,831	11,634
Accretion and interest expense_(Note 10)_	771,215	1,662,563
Other (income) loss	17,667	(51,881)
Foreign exchange(gain)loss	(265,726)	18,938
Total Expenses	12,567,760	13,947,783
Gain on settlement of convertible debt_(Note 10_)	(2,073,556)	-
Income Tax Recovery (Note 14)	-	(119,467)
Net Loss	(10,674,978)	(8,179,031)
Other comprehensive loss:
Unrealizedforeigncurrency translation	(3,272)	(86,033)
Total comprehensive loss	(10,678,250)	(8,265,064)
Loss per share
Basic and diluted	**(0.10) **	(0.21)
Weighted average number of common
shares outstanding
Basic and diluted	105,116,983	38,677,900

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

Page | 5

SPECTRA7 MICROSYSTEMS INC.

Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

				Convertible
				debentures -			Accumulated
			Share-based	share			other
	Common	Common	payment	conversion			comprehensive	Total Equity
	shares	shares	reserve	option	Warrants	Deficit	Income (loss)	(Deficiency)
	#	$	$	$	$	$	$	$
Balance, December 31, 2022	33,689,934	168,991,070	5,718,126	1,514,142	3,902,307	(179,815,622)	268,885	578,908
Shares issued under Restricted Share Unit
plan	620,485	825,282	(825,282)	-	-	-	-	-
Private Placement March 2023 Equity, net of
issuance costs_(Note 11(a))_	5,990,000	2,116,257	-	-	1,760,950	-	-	3,877,207
Equity component of convertible debentures
(Note 10)	-	-	-	167,108	204,939	-	-	372,047
Share-based compensation expense_(Note_
11(b)(iii))	-	-	1,648,173	-	-	-	-	1,648,173
Total comprehensive loss	-	-	-	-	-	(8,179,031)	(86,033)	(8,265,064)
Balance, December 31, 2023	40,300,419	171,932,609	6,541,017	1,681,250	5,868,196	(187,994,653)	**182,852 **	(1,788,729)

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

Page | 6

SPECTRA7 MICROSYSTEMS INC.

Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

				Convertible
				debentures -			Accumulated
			Share-based	share			other
	Common	Common	payment	conversion			comprehensive	Total Equity
	shares	shares	reserve	option	Warrants	Deficit	Income (loss)	(Deficiency)
	#	$	$	$	$	$	$	$
Balance, December 31, 2023	40,300,419	171,932,609	6,541,017	1,681,250	5,868,196	(187,994,653)	182,852	(1,788,729)
Shares issued under Restricted Share Unit	151,715	163,919	(163,919)
plan		-
Shares issued in lieu of interest payment (Note	185,682	56,774	-	-	-	-	-	56,774
10)
Convertible Debenture Conversion net of fees	50,365,400	2,011,922	-	-	3,349,479	-	-	5,361,401
(Note 10)
Private Placement May 2024 net of fees (Note	51,577,707	1,868,075	-	-	6,522,905	-	-	8,390,980
11(a)(ii)
Shares issued upon conversion of 9%	15,384	7,029	-	-	-	-	-	7,029
Debentures (Note 11)
Share-based compensation expense (Note7	-	-	591,753	-	-	-	-	591,753
(b) (iii)
Total comprehensive loss	-	-	-	-	-	(10,674,978)	(3,272)	(10,678,250)
Balance, December 31, 2024	**142,596,307 **	176,040,328	**6,968,851 **	1,681,250	15,740,580	(198,669,631)	179,580	1,940,958

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

Page | 7

SPECTRA7 MICROSYSTEMS INC.

Consolidated Statements of Financial Position

December 31, 2024 and December 31, 2023

(Expressed in United States Dollars)

SPECTRA7 MICROSYSTEMS INC. Consolidated Statements of Financial Position December 31, 2024 and December 31, 2023 (Expressed in United States Dollars)
	December 31,	December 31,
	2024	2023
	$	$
Assets
Current assets:
Cash	1,291,212	658,580
Trade and other receivables_(Note 15)_	-	4,095,701
Investment tax credits	5,563	23,665
Inventories_(Note 6)_	368,624	2,304,588
Prepaid expenses and otherassets	642,538	330,454
	2,307,937	7,412,988
Non-current investment tax credits	-	5,563
Property and equipment_(Note 7)_	324,774	508,283
Right-of-use assets_(Note 4)_	74,425	80,150
Intangible assets_(Note 8)_	524,225	481,705
	3,231,361	8,488,689
Liabilities
Current liabilities:
Trade and other payables_(Note 9)_	1,158,805	2,096,380
Deferred revenue	55,000	146,152
Convertible debentures_(Note 10)_	-	5,110,641
Lease obligation on right-of-use assets_(Note 5)_	76,598	82,490
	1,290,403	7,435,663
Non-current convertible debentures_(Note 10)_	-	2,841,755
	1,290,403	10,277,418
Shareholders' (Deficiency)
Common shares_(Note 11(a))_	176,040,328	171,932,609
Share-based payment reserve (Note 11(b))	6,968,851	6,541,017
Convertible debentures - share conversion option_(Note 10)_	1,681,250	1,681,250
Warrants_(Note 11(c))_	15,740,580	5,868,196
Deficit	(198,669,631)	(187,994,653)
Accumulated othercomprehensiveincome	179,580	182,852
	1,940,958	(1,788,729)
	3,231,361	8,488,689

Nature of operations, going concern and continuation of the business (Note 1) Subsequent Events ( Note 19 )

Signed on behalf of the Board:

"Ron Pasek"

Director

"Omar Javaid"

Director

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

Page | 8

SPECTRA7 MICROSYSTEMS INC. Consolidated Statements of Cash Flows Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

SPECTRA7 MICROSYSTEMS INC. Consolidated Statements of Cash Flows Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)
	Year Ended	December 31,
	2024	2023
	$	$
Operating activities:
Net Loss	(10,674,978)	(8,179,031)
Items not involving cash:
Amortization of licenses_(Note 8)_	694,539	449,966
Depreciation of property and equipment_(Note 7)_	223,645	192,389
Depreciation of right-of-use assets_(Note 4)_	229,002	240,350
Share-based compensation_(Note 11)_	591,753	1,648,173
Gain on settlement of convertible debt (Note 10)	(2,073,556)	-
Accretionandinterest expense (Note 10)	771,215	1,662,563
	(10,238,380)	(3,985,590)
Net change in non‑cash working capital items
Trade and other receivables	4,095,701	(1,568,853)
Investment tax credits	23,665	(15,683)
Inventories	1,935,964	1,219,131
Prepaid expenses and other assets	(312,084)	589,572
Trade and other payables	(937,575)	157,430
Deferred revenue	(91,151)	77,401
	(5,523,860)	(3,526,592)
Interest paid_(Note 10)_	(889,959)	(892,064)
	(6,413,819)	(4,418,656)
Financing activities:
Proceeds from convertible debt, net of issuance costs	-	1,761,550
Proceeds from March 2023 private placement_(Note 11_)	-	3,877,208
Proceeds from May 2024 private placement, net of issuance costs	8,390,980	-
(Note 11)
Convertible debenture issuance costs	(60,412)	-
Repayment of lease obligation on right-of-use assets_(Note 5)_	(229,169)	(245,166)
	8,101,399	5,393,592
Investing activities:
Acquisition of property and equipment_(Note 7)_	(40,136)	(299,878)
Acquisitionof licenses (Note 8)	(737,059)	(854,824)
	(777,195)	(1,154,702)
Effect of foreignexchangerate changes oncash	(277,753)	66,091
Increase/(Decrease) in cash	632,632	(113,675)
Cash, beginning ofyear	658,580	772,255
Cash,end ofyear	1,291,212	658,580

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

Page | 9

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

1. Nature of operations, going concern and continuation of the business

Spectra7 Microsystems Inc. (the “Company” or “Spectra7”), is a publicly traded company listed on the TSX Venture Exchange (the “TSXV”). The Company delivers high performance analog semiconductors at unmatched bandwidth, speed and resolution to enable disruptive industrial design for leading electronics manufacturers in data centers, Virtual Reality (“VR”), Augmented Reality (“AR”), Mixed Reality (“MR”) and other connectivity markets.

The Company is domiciled in Canada and its registered office is located at 181 Bay Street, Suite 1800, Toronto, Canada M5J 2T9.

The Company’s consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize the carrying value of its assets and discharge its liabilities in the normal course of operations. The Company incurred a comprehensive loss of $10,678,250 for the year ended December 31, 2024 (December 31, 2023 - $8,265,064) and has an accumulated deficit of $198,669,631 (December 31, 2023 - $187,994,653). As at December 31, 2024, the Company had a working capital of $1,017,534, compared to a working capital deficiency of ($22,675) as at December 31, 2023.To date, the Company has funded operations through private and public equity offerings. Subsequent to the fiscal year, the Company entered into an agreement with Parade Technologies, Ltd. to sell substantially all of the Company’s assets. As a result of this pending sale, the Company has scaled down operations and only essential costs have continued to be incurred (Note 20 ). As at December 31, 2024, the Company was still exploring various options, including obtaining new financing or the sale of all common shares of the Company, and thus could not yet conclude that a sale of assets was highly probable to qualify for recognition as a completed sale within one year. As a result, assets were not reclassified as held for sale as at December 31, 2024.

Due to the fact that the Company intends to continue operations as a public shell company after having sold off all its assets, it has been concluded that the going concern presumption is still appropriate. However, these factors represent material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing and/or achieve profitable operations in the future. The consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate.

2. Basis of presentation

a) Statement of compliance

These consolidated financial statements have been prepared in accordance with IFRS® Accounting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements were approved for issuance by the Board of Directors on April 14, 2025.

b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value through profit or loss. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

These consolidated financial statements are presented in United States dollars. The Company's functional currency is Canadian dollars.

c) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its wholly owned subsidiaries and their corresponding functional currencies:

Spectra7 Microsystems Corp., a company incorporated under the laws of Ontario (USD); Spectra7 Microsystems Ltd., a company incorporated under the laws of Delaware (USD); Spectra7 Microsystems (Ireland) Limited, a company incorporated under the laws of Ireland (USD); and Si Bai Ke Te (Dongguan) Electronics Trading Co. Ltd., a China wholly foreign owned enterprise (CNY) .

Page | 10

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

All intercompany balances and transactions are eliminated in full on consolidation.

d) New Accounting Policies and Accounting Standards

The Company adopted the following amendments to accounting standards as at January 1, 2024:

IAS 1: Presentation of Financial Statements

In January 2020, the IASB issued amendments to IAS 1, Presentation of Financial Statements (“IAS 1”) to clarify the requirements for classifying liabilities as current or non-current. The amendments are effective for annual periods beginning on or after January 1, 2024.

IAS 7 Statement of Cash Flows and IFRS 7 Financial instruments

Amendments to IAS 7 and IFRS 7 issued in May 2023, introduces new disclosure requirements to enhance transparency and the usefulness of the information provided by entities about supplier finance arrangements on their liabilities, cash flows and exposure to liquidity risk.

The amendments did not have a material impact on the Company.

The following are future accounting standards issued as at January 1, 2023, but not yet effective:

IAS 1: Presentation of Financial Statements

Non-current Liabilities with Covenants - The IASB issued amendments to IAS 1, Presentation of Financial Statements (“IAS 1”) regarding liabilities with a right to defer settlement that is subject to future covenants to clarify that only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification as current or non-current. Additional disclosures are required for non-current liabilities arising from loan arrangements that are subject to covenants to be complied with within twelve months after the reporting period. The effective date is for annual periods beginning on or after January 1, 2024, with earlier application permitted.

IFRS 16: Lease Liability in a Sale and Leaseback

The IFRS issued amendments to IFRS 16 - Lease Liability in a Sale and Leaseback (“IFRS 16”) to require, in a sale and leaseback transaction, the seller-lessee to measure the lease liability without recognizing any gain or loss that relates to the right of use it retains. The effective date is for annual periods beginning on or after January 1, 2024, with earlier application permitted.

The amendments did not have a material impact on the Company.

3. Summary of material accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently throughout the Company.

Inventories

Inventories consist of microchip component parts. Raw material inventories, work in process and finished goods are recorded at the lower of cost and net realizable value. Cost is determined on a weighted average basis and includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present location and condition.

An assessment is made of the net realizable value of inventory at each reporting period. Net realizable value is the estimated selling price less the estimated cost of completion and the estimated costs necessary to make the sale. When circumstances that previously caused inventories to be written down no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of any write down previously recorded is reversed so that the new carrying amount is the lower of the cost and the revised net realizable value. Raw materials are not written down unless the goods in which they are incorporated are expected to be sold for less than cost, in which case, they are written down by reference to replacement cost of the raw materials, as this is the best indicator of net realizable value.

Page | 11

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Financial instruments

The Company adopted and implemented the following accounting policy on financial instruments:

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 (“FVTOCI”) or at amortized cost. The Company determines the classification of financial assets 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. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL or the Company has opted to measure them at FVTPL.

Financial Instrument	**Classification **
Financial Assets
Cash	Amortized cost
Trade and other receivables	Amortized cost
Financial Liabilities
Trade and other payables	Amortized cost
Lease obligation on right-of-use assets	Amortized cost
Convertible debentures	Amortized cost

Measurement

Financial assets and liabilities at amortized cost:

Financial assets and liabilities at amortized cost 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. 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 credit risk on 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 twelve month expected credit losses. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized.

Derecognition

Financial assets

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in the Consolidated Statements of Loss and Comprehensive Loss.

Page | 12

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Financial liabilities

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the Consolidated Statements of Loss and Comprehensive Loss.

Property and equipment

Property and equipment are carried at cost, less accumulated depreciation. The cost of an item of property and equipment consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use, and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Depreciation is recognized based on the cost of an item of property and equipment, less its estimated residual value, using the straight-line method, over its estimated useful life at the following rates: Computer software 1 year Computer hardware, laboratory and testing equipment 3 years Masks Estimated life of the product, not to exceed 5 years Office equipment 3 to 5 years Leasehold improvements Term of lease

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss in the Consolidated Statements of Loss and Comprehensive Loss. Expenditures incurred to replace a component of an item of property and equipment that is accounted for separately are capitalized and depreciated over their estimated useful life. Repair and maintenance costs are recognized in the Consolidated Statements of Loss and Comprehensive Loss as incurred.

The Company reviews the useful life, depreciation method and carrying value of its property and equipment annually with the effect of any changes in estimate accounted for on a prospective basis. Where the carrying value exceeds the estimated recoverable amount, an impairment is measured and recorded based on the higher of fair value less costs to sell or the asset’s value in use.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful life.

Intangible assets

Definite life intangible assets acquired in business combinations and pursuant to asset purchases are recorded at their fair values at the date of acquisition. Amortization is recognized on a straight-line basis over their estimated useful lives as follows:

Software and technology

Shorter of 2 - 3 years or license term

The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The Company has no indefinite life intangibles.

Licenses

Licenses to use electronic design automation tools are recorded at the aggregate cost of the payments in the contract less accumulated amortization and accumulated impairment losses. Amortization commences in the year the license is put into use in the development of the microchip and is amortized on a straight-line basis over its remaining license term. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Liabilities due on license agreements are classified as other financial liabilities and are recognized initially at fair value and subsequently at amortized cost.

Page | 13

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Impairment of tangible and intangible assets

The Company reviews at each reporting period the carrying amounts of its tangible and intangible assets which all have finite lives, to determine whether there are indicators that the carrying values are not recoverable. If such an indicator exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the asset belongs, the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The Company bases its impairment calculation on the most recent budgets and forecast calculations, which are prepared separately for each of the Company’s cash generating units to which the individual assets are allocated. A long-term growth rate is calculated and applied to project future cash flows. Impairment losses of continuing operations are recognized in the Consolidated Statements of Loss and Comprehensive Loss in expense categories consistent with the function of the impaired asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the asset or a cash generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Convertible debentures

The liability, equity and other (when applicable) components of convertible notes are presented separately on the statement of financial position, starting from initial recognition. The Company determines the carrying amount of the financial liability by discounting the stream of future payments at the prevailing market rate for a similar liability of comparable credit status and providing substantially the same cash flows. The liability component is then increased by accretion of the discounted amounts to reach the nominal value of the convertible notes at maturity which is recorded in the statement of loss and comprehensive loss as accretion expense.

The carrying amount of other components (when applicable), such as warrants, is determined using the barrier option pricing, Black-Scholes option pricing model or Monte-Carlo option pricing model. The carrying amount of the equity component is calculated by deducting the carrying amount of the financial liability and the carrying amounts of any other components (when applicable) from the amount of the convertible notes, and is presented in Equity as an equity component of convertible notes. The equity component is not remeasured subsequent to initial recognition, except on conversion or expiry.

The transaction costs are distributed between liability, equity and other (when applicable) components, on a pro-rata basis according to their carrying amounts.

Borrowing costs

Borrowing costs comprise interest payable on borrowings calculated using the effective interest rate method, and the ascribed value of warrants, and are expensed when they are incurred unless they are directly attributable to the acquisition, construction or production of a qualifying asset.

Activity relating to various compensation options issued as commissions and fees to agents in relation to equity and debt financing are reflected within the warrants reserve on the Consolidated Statements of Changes in Shareholders’ Equity (Deficiency).

Page | 14

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Income taxes

Tax expense comprises current and deferred tax. Tax is recognized in the statements of comprehensive income except to the extent it relates to items recognized in other comprehensive income or directly in equity.

Current Tax

Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that are enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred Tax

Deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of loss and comprehensive loss in the period in which the enactment or substantive enactment takes place. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable income will be available to utilize such amounts. Deferred tax assets are reviewed at each reporting date and are adjusted to the extent that it is no longer probable that the related tax benefits will be realized.

The Company is subject to income tax assessment in multiple jurisdictions. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken in the ordinary course of business for which the ultimate tax determination is uncertain.

The Company recognizes liabilities based on the Company’s current understanding of tax laws as applied to the Company’s circumstances. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

The Company computes an income tax provision in each of the jurisdictions in which it operates. However, actual amounts of income tax expense only become final upon filing and acceptance of the tax return by the relevant authorities, which occurs subsequent to the issuance of these financial statements. Additionally, estimating income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of the ability to use the underlying future tax deductions against future taxable income before such deductions expire. The assessment is based upon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final tax return, earnings would be affected in a subsequent period.

Foreign currencies

The consolidated financial statements are presented in United States dollars. The Company's functional currency is Canadian dollars. As such, an amount is recorded in other comprehensive loss for the translation to presentation currency. The functional currency of its subsidiaries is United States dollars given the majority of revenues and expenses are incurred in United States dollars, except the Company’s subsidiary in China where the functional currency is CNY. Transactions in currencies other than the functional currency are recorded at the rates of exchange at the date of the transaction. At each financial position reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the reporting date. Non-monetary items that are measured in terms of historical cost are translated using historical rates.

Exchange differences are recognized in profit or loss in the period in which they arise.

Page | 15

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Revenue recognition

The Company’s revenue is derived from one performance obligation which is to deliver the Company’s product to its customers, being each individual distributor of the Company’s product (the “Distributor”). Revenue is recognized when control of the Company’s product is transferred to the Distributor and when the Distributor obtains control of the Company’s product. The Company considers control to have passed at the point of shipment as all risk of loss or damage to the Company’s product passes to the Distributor at this point.

In each period, the Company recognizes revenue, net of any variable consideration, including the right of return. The estimate of expected returns reflects the amount that the Company expects to repay or credit its Distributors, using the expected value method. Revenue includes amounts subject to returns only if it is highly probable that there will be no significant reversal of cumulative revenue if the estimate of expected returns changes.

The Company records an adjustment to cost of sales and inventories representing the Company's right to receive goods back from the Distributor. The adjustment to inventories is initially measured at the carrying amount of the products at the time of sale, less any expected costs to recover the product and any expected reduction in value. In subsequent periods, the Company updates its expected level of returns, adjusting the measurement of the returns liability and inventories.

Contract liabilities

Customer deposits are recorded as deferred revenue on the Consolidated Statements of Financial Position and recognized to revenue when the product is shipped to the customer.

Leases

At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease liability at the lease commencement date.

Where a lease has two or more separate lease components the Company has accounted for each lease component within the contract as a lease separately from non-lease components of the contract. The non-lease components are accounted for by applying other applicable standards.

The right-of-use asset is initially measured at cost which comprises of the lease liability, lease payments made at or before the commencement date, initial indirect costs and asset retirement obligations, less any lease incentives. The right-of-use asset is subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option.

The lease liability is initially measured at the present value of the future lease payments discounted using the interest rate implicit in the lease or if that rate cannot be readily determined, the Company's incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Subsequently, the lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Company has elected to not apply IFRS 16 for short term leases that are 12 months or less and for leases of low value assets. The lease payments associated with these leases is recognized as an expense on a straight-line basis over the lease term. Lease modifications are accounted for as either a new lease with an effective date of the modification or as a change in the accounting for the existing lease.

Page | 16

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Share-based payments

Share-based payments and costs of equity-settled transactions to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Share-based payments to non-employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reasonably, in which case they are measured at the fair value of the equity instruments granted.

The Company maintains two share-based compensation plans for the benefit of its directors, officers, employees and consultants. These plans are a restricted share unit plan (the “RSU Plan”) and a stock option plan (the “Stock Option Plan”).

The RSU Plan is described in Note 11(b)(i). The fair-value of restricted share units (“RSUs”) issued without payment (or if payment is less than fair value) to directors, officers, employees and consultants is determined upon the date of grant and (the difference if less than fair value) recognized as compensation expense over the vesting period for directors, officers or employees and over the period of service for consultants with a corresponding increase in equity. RSUs issued at fair value are booked as equity.

The Stock Option Plan is described in Note 11(b)(ii). The fair-value of the stock options issued to directors, officers, employees and consultants is determined using the Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, expected volatility of the Company’s stock, and a weighted average expected life of options. For awards with graded vesting, each tranche in an award is considered a separate grant with a different fair value. The fair value of each tranche is recognized over its respective vesting period. For employees, officers and directors, the fair value of each tranche is estimated at the date of grant.

The estimated fair value of the options that are ultimately expected to vest are recorded over the option’s vesting period and charged to profit or loss with a corresponding increase in share-based payment reserve. When determining the number of options that are expected to vest the Company takes into account historical experience and trends in actual option forfeitures. For all stock options issued, if and when the stock options are exercised, the applicable amounts of share-based payment reserve are transferred together with the proceeds to common shares within share capital.

For cash-settled share-based payments, a liability is recognized for the goods or services acquired, measured initially at the fair value of the liability. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with changes in fair value recognized in profit or loss.

If stock options or RSUs are repurchased from directors, officers or employees and consultants, the excess of the consideration paid over the carrying amount of the stock options or RSUs repurchased is charged to share-based payment reserve and or deficit.

Loss per share

Basic loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method, which assumes any proceeds received by the Company upon exercise of the in-the-money instruments would be used to repurchase common shares at the average market price for 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.

Provisions

A provision is recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the obligation can be reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Share Capital

Ordinary common shares are classified as equity. Incremental costs directly attributable to issuance of new shares

Page | 17

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

or warrants are shown in equity as a deduction from the proceeds. Where common shares and warrants are issued as a unit, the Company allocates value on the basis of the relative standalone values of each component of the unit.

Measurement uncertainty and judgments

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses for the periods presented herein. Management bases its judgments and estimates on historical experiences and on other various factors it believes to be reasonable under the circumstances, the results of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and further periods if the review affects both current and future periods.

Significant assumptions about the future that management has made 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:

• the recoverability of trade and other receivables and investment tax credits that are included in the Consolidated Statements of Financial Position;

• the estimated variable considerations such as stock rotation, return provision and warranty reserve when determining the transaction price recognized as revenue that are included in the Consolidated Statements of Loss and Comprehensive Loss, and the Consolidated Statements of Financial Position;

• the net realizable value used to determine the carrying value of inventories and potential write-downs or reversals of write-downs to inventories;

• the inputs and assumptions used in the valuation and recording of the convertible debt;

• the incremental borrowing rate used in the valuation of right-to-use liabilities;

• the estimated useful lives and residual value of property and equipment, and licenses which are included in the Consolidated Statements of Financial Position and the related depreciation and amortization included in the Consolidated Statements of Loss and Comprehensive Loss;

• the amount of deferred tax assets only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits to be recovered;

• the inputs and assumptions used in the valuation of warrants, unit issuances and recording of share-based payments;

• the inputs and judgment used in the determination of functional currency;

• the judgment around assessment of classification of assets as held for sale; and

• the assessment of Company’s ability to continue as going concern

4. Right-of-use assets

The following table sets forth the right-of-use assets:

	$
Balance, January 1, 2023	80,048
Depreciation	(240,350)
Lease amendment	240,452
Balance, December 31, 2023	80,150
Depreciation	(229,002)
Lease amendment	223,277
Balance, December 31, 2024	74,425

Page | 18

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

In 2024, the Company entered into an amendment to extend the lease for its headquarters through April 2025. The lease amendment was accounted for as a change in the accounting of the existing lease. With the extended lease term, the Company recorded a right-of-use asset and a corresponding lease obligation of $223,277 using an incremental borrowing rate of 8.75%.

5. Lease obligations on right-of-use assets

The present value of the remaining minimum lease payments on the obligations for right-of-use assets as at December 31, 2024 and 2023 are as follows:

	$
Balance, January 1, 2023	87,204
Repayments	240,452
Repayments	(256,800)
Interest	11,634
Balance, December 31, 2023	82,490
Lease Amendment	223,277
Repayments	(240,000)
Interest	10,831
Balance, December 31, 2024	76,598
Current	76,598
Non-current	-

Set out below is a maturity analysis of lease liabilities as at December 31, 2024:

	$
Less than one year One to five years Total undiscounted lease obligation	76,598 -
	76,598

The following are the amounts recognized in the statement of loss and comprehensive loss:

Depreciation expense of right-of-use assets Interest on lease obligation of right-of-use liabilities Total amount recognized in profit or loss	2024 2023 $ $ 229,002 240,350 10,831 11,634 239,833 251,984

Page | 19

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

6. Inventories

	2024	2023
	$	$
Work-in-progress	918,418	1,912,117
Finished goods	**422,939 **	589,830
	1,341,357	2,501,947
Less:provision forobsolescence	(972,733)	(197,359)
	368,624	2,304,588

Inventories recognized as cost of sales for the year ended December 31, 2024 amounted to $1,095,552 ($4,019,555 for the year ended December 31, 2023). Inventories written-down for the year ended December 31, 2024 amounted to $ $775,374 .($64,505 for the year ended December 31, 2023),

7. Property and equipment

Computer hardware/ software	Laboratory Equipment Masks and Testing Equipment Office Equipment Leasehold Improvements	Total
$ Cost, balance	$ $ $ $	$
December 31, 2022 1,407,219 Additions 6,142 Disposals (1,351,436)	2,120,244 1,540,632 257,078 73,328 20,727 321,236 - - (1,949,154) (70,818) (116,747) -	5,398,501 348,105 (3,488,155)
December 31, 2023 61,925 Additions - Disposals - December 31, 2024 61,925	191,817 1,791,050 140,331 73,328 5,350 34,786 - - - - (5,548) - 197,167 1,825,836 134,783 73,328	2,258,451 40,136 (5,548) 2,293,039
Accumulated depreciation
December 31, 2022 1,396,747 Depreciation 6,339 Disposals (1,351,436)	2,089,381 11,81,771 256,478 73,328 18,154 167,296 600 - (1,948,161) (23,581) (116,747) -	4,997,705 192,389 (3,439,926)
December 31, 2023 51,650 Depreciation 6,851 Disposals - December 31, 2024 58,501	159,374 1,325,486 140,331 73,328 17,622 199,172 - - - - (5,548) - 176,996 1,524,658 134,783 73,328	1,750,168 223,645 (5,548) 1,968,265
Carrying amounts
December 31, 2023 10,275	32,443 465,565 - -	508,283
December 31, 2024 3,424	20,171 301,178 - -	324,774

Of the total depreciation recorded in the current year, $114,368 (2023 - $127,163) was recorded as part of cost of sales.

Page | 20

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

8. Intangible assets

	Licenses
	$
Cost
Balance, December 31, 2022	913,325
Additions	861,774
Balance, December 31, 2023	1,775,099
Additions	737,059
Disposals	(961,446)
Balance, December 31, 2024	1,550,712
Accumulated amortization
Balance, December 31, 2022	843,428
Amortization	449,966
Balance, December 31, 2023	1,293,394
Amortization	694,539
Disposals	(961,446)
Balance, December 31, 2024	1,026,487
Carrying Amounts
Balance, December 31, 2023	481,705
Balance, December 31, 2024	524,225

Amounts payable on license agreements were $nil as at December 31, 2024 and $6,950 as at December 31, 2023 which were due within one year and included in Trade and other payables.

9. Trade and Other Payables

Trade and other payables are comprised of the following:

	December 31,	December 31,
	2024	2023
	$	$
Trade payables	786,225	904,962
Otherpayables	372,580	1,191,418
Total	1,158,805	2,096,380

As at December 31, 2024, the amount of other payables is $372,574 (December 31, 2023 - $1,191,418), which includes $114,261 (December 31, 2023 - $147,769) related to customer return allowance and 92,089 (December 31, 2023 - $649,810) related to accrued payroll and bonus.

Page | 21

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

10. Convertible debentures

	$
Balance, January 1, 2023	5,640,272
Proceeds from issuance of convertible debt	2,089,649
Allocation to equity	(534,787)
Finder warrants, allocated to transaction costs	(33,536)
Transaction costs	(210,596)
Accretion and interest expense	1,662,563
Repayment of interest	(892,064)
Foreign exchange translation adjustment	230,896
Balance, December 31, 2023	7,952,396
Accretion and interest expense	771,215
Conversions	(7,029)
Repayment of interest	(889,959)
Repayment of interest in shares	(56,744)
Foreign exchange translation adjustment	(281,506)
Total	7,488,373
Derecognition of Convertible Debt	(5,414,817)
Gain on Derecognition of Convertible Debt	(2,073,556)
Balance, December 31, 2024	-

On July 26, 2022, the Company announced a non-brokered private placement (the “2022 Offering”) of the 14% convertible unsecured debentures (the “14% Debentures”) and completed the first tranche of the 2022 Offering through the issuance of $2,940,739 (CDN $3,809,000) principal amount of 14% Debentures for gross proceeds of $2,881,924 (CDN $3,732,820). On August 25, 2022, the Company entered into a first supplemental convertible debenture indenture to increase the size of the 2022 Offering and completed the second tranche of the 2022 Offering through the issuance of $3,927,162 (CDN $5,064,000) principal amount of the 14% Debentures for gross proceeds of $3,848,619 (CDN $4,962,720). In aggregate, the 2022 Offering consisted of the issuance of $6,867,901 (CDN $8,873,000) principal amount of 14% Debentures for gross proceeds of $6,730,543 (CDN $8,695,540) Proceeds from the 2022 Offering were primarily used to repay the older 7% unsecured convertible debentures.

Each CDN $1,000 principal amount of 14% Debentures was sold at a subscription price of CDN $980. The 14% Debentures were set to mature on December 31, 2024 and the principal amount was convertible into common shares at the option of the holder at any time prior to the close of business on the last business day immediately preceding maturity, at a conversion price of CDN $1.02 per common share, subject to adjustment upon certain customary events. Holders converting their 14% Debentures would receive accrued and unpaid interest thereon for the period from and including the date of the latest interest payment date to, and including, the date of conversion. In connection with the 2022 Offering, the Company paid $387,761 (CDN $500,968) in finder’s fees and issued an aggregate of 401,603 finder’s warrants, with each such warrant entitling the holder thereof to purchase one common share at a price of CDN $1.02 for a period of two years from the date of issuance.

On September 14, 2023, the Company completed a private placement (the “September 2023 Private Placement”) of 2,838 units (each, a “September 2023 Unit”) for gross proceeds of $2,089,649 (CDN $2,838,000). Each September 2023 Unit consisted of one 9% convertible unsecured debenture in the principal amount of CDN $1,000(each, a "9% Debenture" and, collectively, the "9% Debentures") and 1,538 common share purchase warrants of the Company (each, a "September 2023 Warrant" and, collectively, the "September 2023 Warrants").

Page | 22

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

The 9% Debentures were set to mature on September 14, 2025 and the principal amount was convertible into common shares at the option of the holder at any time prior to the close of business on the last business day immediately preceding maturity, at a conversion price of CDN $0.65 per common share, subject to adjustment upon certain customary events. Holders converting their 9% Debentures would receive accrued and unpaid interest thereon for the period from and including the date of the latest interest payment date to, and including, the date of conversion. Provided that the closing price of the common shares on the principal stock exchange on which the common shares trade was equal to or greater than 200% of the conversion price for any 10 consecutive trading days, then at any time within30 days after such tenth consecutive trading day, the Company would have had the right, but not the obligation, to force the conversion of the principal amount of the 9% Debentures into common shares at the conversion price in connection with a listing of the common shares on a recognized stock exchange in the United States or a change of control of the Company.

Each September 2023 Warrant entitles the holder to purchase one common share at a price of CDN $0.715 until September 14, 2025. The expiry date of the September 2023 Warrants can be accelerated by the Company if, at any time prior to the expiry date, the closing price of the common shares on the TSXV is greater than CDN $4.00 for any 10 non-consecutive trading days.

In connection with the September 2023 Private Placement, the Company paid $158,498 (CDN $194,885) in broker and finder’s fees and issued an aggregate of 184,173 broker warrants, with each broker warrant entitling the holder thereof to purchase one common share at a price of CDN $0.65 for a period of two years from the date of issuance.

The Company determines the carrying amount of the financial liability associated with the 9% Debentures using the present value of future cash flows with the principal amount of $2,089,649 and a discount rate of 25%. Debt component is being amortized using an effective interest rate of approximately 65.7% over its remaining term. The liability component is then increased by accretion of the discounted amounts to reach the nominal value of the convertible notes at maturity which is recorded in the statement of loss and comprehensive loss as accretion expense.

The carrying amount of other components (when applicable), such as the September 2023 Warrants and the broker warrants, is determined using the Black Scholes option pricing model based on the following assumptions: volatility of 98%, expected term of 2 years, risk free rate of 4.68% and zero dividend. The carrying amount of the equity component is calculated by deducting the carrying amount of the financial liability and the carrying amounts of any other components from the amount of the convertible notes, and is presented in Equity as an equity component of convertible notes.

The transaction costs are distributed between liability, equity and other (when applicable) components, on a pro rata basis according to their carrying amounts. Accordingly, the face value of the 9% Debentures, net of issuance costs, were allocated as follows:

	$
Liability component	210,596
Conversion feature	37,018
Warrant	35,415
Transaction costs	283,029

On May 10, 2024, the Company amended its 14% and 9% Debentures to provide that the holders may, at any time prior to maturity, convert such debentures, and that the Company has the right to convert such debentures, at any time prior to maturity, into: (a) in the case of the 14% Debentures, 7,538 units for each $1,000 principal amount of 14% Debentures (each, a "14% Unit"), with each 14% Unit consisting of one common share and one common share purchase warrant (each, a "14% Warrant") or, if the Share Ownership Threshold (defined below) would be exceeded by the warrantholder as a result of the conversion, one Pre-Funded Warrant (defined below) and one 14% Warrant and (b) in the case of the 9% Debentures, 7,538 units for each $1,000 principal amount of 9% Debentures (each, a "9% Unit"), with each unit consisting of one common share and 0.80 of a common share purchase warrant (each whole warrant, a "9% Warrant") or, if the Share Ownership Threshold would be exceeded by the warrantholder as a result of the conversion, one Pre-Funded Warrant and 0.80 of a 9% Warrant. Each 14% Warrant shall be exercisable into one common share or, if the Share Ownership Threshold would be exceeded by a holder as a result of the exercise of their warrants, one Pre-Funded Warrant, at an exercise price of $0.13 until July 26, 2027. Each 9% Warrant shall be exercisable into one common share or, if the Share Ownership Threshold would be

Page | 23

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

exceeded by a holder as a result of the exercise of their warrants, one Pre-Funded Warrant, at an exercise price of $0.13 until September 14, 2028.

On May 15, 2024, the Company completed the forced conversion of all outstanding 14% Debentures and 9% Debentures resulting in the issuance of 50,365,400 common shares, 37,836,738 Pre-Funded Warrants, 66,884,674 14% Warrants and 17,052,840 9% Warrants.

11. Shareholders' equity

• (a) Common shares

Authorized share capital consists of an unlimited number of common shares.

(i) March 2023 Private Placement

On March 15, 2023, the Company completed a brokered private placement (the “March 2023 Private Placement”) of 5,990,000 units (the "March 2023 Units") at a price of CDN $1.00 per March 2023 Unit for aggregate gross proceeds of $4,342,750 (CDN $5,990,000). Each March 2023 Unit consists of one common share and one common share purchase warrant (each, a "March 2023 Warrant") with each March 2023 Warrant being exercisable into one common share at an exercise price of CDN $1.18 until March 15, 2028, subject to adjustment upon certain customary events. The expiry date of the March 2023 Warrants can be accelerated by the Company to the date that is thirty (30) days following the delivery of an acceleration notice to the holders of the March 2023 Warrants if, at any time following the closing date of the March 2023 Private Placement, the closing price of the common shares is greater than CDN $4.00 for a period of 10 non-consecutive trading days on the TSXV.

In connection with the March 2023 Private Placement, the Company paid a commission of $291,183 (CDN $401,632) and issued 229,504 broker warrants, with each broker warrant being exercisable into one common share at a price of CDN $1.10 for the period commencing on the date that is six months after the closing date until the fifth anniversary of the closing date. Gross proceeds from the March 2023 Private Placement were allocated to the common shares and warrants based on their relative fair values, net of issuance costs. The fair value of the warrants was determined using the barrier option pricing model based on the following assumptions: volatility of 172%, expected term of 5 years, risk free rate of 3.59% and zero dividend. The equity portion allocated to warrant was $1,992,688

(ii) May 2024 Private Placement

On May 10, 2024, the Company completed a non-brokered private placement (the “May 2024 Private Placement”) of 107,683,090 units of the Company (each, a “May 2024 Unit”) at a price of CDN $0.10 per May 2024 Unit for aggregate gross proceeds of $6,910,100 (CDN $10,768,309). Each May 2024 Unit consisted of either (i) one common share and one common share purchase warrant (each, a “May 2024 Warrant”) or (ii) one pre-funded common share purchase warrant (each, a “Pre-Funded Warrant”) and one May 2024 Warrant. Each May 2024 Warrant is exercisable immediately and entitles the holder thereof to purchase either one common share or, if the Share Ownership Threshold would be exceeded, one Pre-Funded Warrant at an exercise price of CDN $0.11 until the date that is five years after the issuance date. The expiry date of the May 2024 Warrants can be accelerated by the Company at any time prior to the expiry date if the closing price of the common shares on the TSXV is greater than CDN $0.33 for any period of 10 consecutive trading days and certain volume thresholds are met during those 10 consecutive trading days. Each Pre-Funded Warrant entitles the holder to purchase one common share at a price of CDN $0.00001 subject to compliance with the Share Ownership Threshold. The Pre-Funded Warrants do not expire.

On June 13, 2024, the Company closed a second tranche of the May 2024 Private Placement consisting of the issuance of 18,311,453 May 2024 Units for aggregate gross proceeds of $1,332,595 (CDN $1,831,145).

Pursuant to the May 2024 Private Placement, the Company issued a total of 51,577,707 common shares, 74,416,836 Pre-Funded Warrants, and 125,994,543 May 2024 Warrants. In connection with the May 2024 Private Placement, the Company paid a cash commission of $461,727 and issued compensation warrants to purchase up to (a) 3,482,048 common shares at an exercise price of CDN$0.11 per common share until May 10, 2029 and (b) up to 683,462 common shares at an exercise price of CDN $0.11 per common share until June 13, 2029. The fair value of the compensation warrants was determined using the black-scholes option pricing model based on the following assumptions: volatility of 100%, expected term of 5 years, risk free rate of 3.88% and zero dividend.

Page | 24

SPECTRA7 MICROSYSTEMS INC.

Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

The total gross proceeds from the two tranches of the May 2024 Private Placement was approximately $8,242,695 (CDN$12.6 million).

The "Share Ownership Threshold" is (i) 9.99% of the number of Common Shares outstanding; or (ii) if the relevant holder has filed and the TSXV has cleared for acceptance a personal information form in the form prescribed by the TSXV, 19.99% of the number of Common Shares outstanding; provided, however, that the 19.99% threshold shall not apply if the requisite disinterested shareholder approval has been obtained in accordance with applicable TSXV policies.

Craig-Hallum Capital Group (the "Agent") acted as the sole placement agent for the May 2024 Private Placement for purchasers in the United States. The Agent received a cash commission of $461,727 and compensation warrants on substantially the same terms as the May 2024 Warrants, entitling the Agent to purchase up to 4,164,540 common shares at an exercise price of $0.11 per Common Share for a period of five years. The compensation warrants are not exercisable for Pre-Funded Warrants and are non-transferable. Richardson Wealth Ltd. also received a cash finder's fee equal to $8,400 with respect to certain Canadian purchasers.

The following table summarizes the changes to the issued and outstanding common shares during the year ended December 31, 2024:

	#	$
Balance, December 31, 2023	40,300,419	171,932,609
Shares issued under Restricted Share Unit Plan	151,715	163,919
Shares issued in lieu of interest payment	185,682	56,774
Convertible debt conversion	50,365,400	2,011,922
May 2024 Private Placement	51,577,707	1,868,075
Shares issued upon conversion of 9% Debentures	15,384	7,029
Balance, December 31, 2024	142,596,307	176,040,328

The following table summarizes the changes to the issued and outstanding common shares during the year ended December 31, 2023:

	#	$
Balance, December 31, 2022	33,689,934	168,991,070
Shares issued under Restricted Share Unit Plan	620,485	825,282
Convertible debt conversions	5,990,000	2,162,862
Balance, December 31, 2023	40,300,419	171,979,214
(b) Share-based compensation

The Company has established a stock option plan (the “Stock Option Plan”) and a restricted share unit plan (the “RSU Plan”) with the intention of attracting, retaining and motivating employees, officers and directors.

The Company’s Board of Directors determines, among other things, the eligibility of individuals to participate in the RSU Plan and the Stock Option Plan and the term, vesting periods, and the exercise price of options granted under the Stock Option Plan.

At the annual and special meeting of shareholders in June 2024, shareholders approved amendments to both the Stock Option Plan and the RSU Plan to provide that the combined maximum number of common shares reserved for issuance under both the Stock Option Plan and the RSU Plan, inclusive of existing stock options and RSUs, shall not exceed 20% of the then outstanding common shares or 27,564,478 common shares.

• (i) Restricted Share Units (RSU)

Vesting is determined by the Company’s Board of Directors at the time of grant. Vesting is contingent upon

Page | 25

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

continuous service/employment through the specific vesting date. The fair value as of the grant date is used to determine the value.

The following table summarizes information about the Company’s outstanding RSUs as at December 31, 2024 and 2023:

	December 31,	December 31,
	2024	2023
	#	#
Balance, opening January 1, 2024	5,045,727	4,328,217
Granted	17,337,500	1,465,708
Forfeited	(422,617)	(127,713)
Vested and Shares issued	(151,715)	(620,485)
Balance, ending	21,808,895	5,045,727

During the year ended December 31, 2024, 151,715 RSUs were delivered for $163,919, which was transferred to common shares from share-based payment reserve (December 31, 2023 – 620,485 RSUs were delivered for $825,282).

(ii) Stock options

Vesting is determined by the Company’s Board of Directors at the time of grant. Vesting is contingent upon continuous service/employment through the specific vesting date and have an exercise price as set forth in the option certificate issued in respect of such option and in any event shall not be less than market price of the common shares as of the award date.

The expiry date of an option is fixed by the Board of Directors at the time the particular option is awarded, provided that the expiry date shall be no later than the date that is 10 years following the award date of such option, subject to earlier termination upon the option holder ceasing to be a director, officer, employee or consultant of the Company.

The following table summarizes information about the Company’s outstanding stock options as at December 31, 2024 and 2023:

	December	31, 2024	December 31, 2023	December 31, 2023
		Weighted		Weighted
	Number of	Average	Number of	Average
	Options	Price	Options	Price
	#	CDN $	#	CDN $
Options outstanding, opening	213,300	1.45	259,768	1.88
January 1, 2024
Granted	-	-	-	-
Exercised	-	-	-	-
Expired	-	-	(4,468)	22.76
Forfeited	(26,300)	1.29	(42,000)	1.87
Options outstanding, ending	187,000	1.47	213,300	1.45

The following table is a summary of the Company’s stock options outstanding as at December 31, 2024:

Page | 26

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

		Options Outstanding	Options Outstanding	OptionsExercisable	OptionsExercisable
		Weighted
		average
		remaining	Weighted		Weighted
Exercise	Number	contractual	average	Number	average
pricerange	outstanding	life (years)	exercise price	exercisable	exercise price
CDN $	#	#	CDN $	#	CDN $
1.00 – 1.90	186,000	3,32	1.42	186,000	1.42
10.50 – 34.00	1,000	0.18	10.50	1,000	10.50
Balance,
December 31, 2024	187,000	3.30	1.47	187,000	1.47

The following table is a summary of the Company’s stock options outstanding as at December 31, 2023:

		Options Outstanding	Options Outstanding	Options Exercisable	Options Exercisable
		Weighted
		average
		remaining	Weighted		Weighted
Exercise	Number	contractual	average	Number	average
pricerange	outstanding	life (years)	exercise price	exercisable	exercise price
CDN $	#	#	CDN $	#	CDN $
1.00 – 1.90	212,000	4.22	1.38	212,000	1.38
9.50 – 34.00	1,300	1.11	11.83	1,300	11.83
Balance,
December 31, 2023	213,300	4.21	1.45	213,300	1.45

(iii) Share-based compensation expense

For its RSU Plan and Stock Option Plan, the Company recognized share-based compensation expense of $591,753 for the year ended December 31, 2024 ($1,648,173 for the year ended December 31, 2023 with a corresponding amount recognized as share-based payment reserve.

The fair value of the RSUs is determined based upon the Company’s stock price on the date of grant. There were no stock options granted during the year ended December 31, 2024 (no stock options granted for the year ended December 31,2023).

(c) Warrants

The following table summarizes information about the Company’s outstanding warrants as at December 31, 2024 and 2023:

Page | 27

SPECTRA7 MICROSYSTEMS INC.

Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Ended December 31, 2024 and 2023 ed in United States Dollars)
	December	31, 2024	December 31,2023
		Weighted		Weighted
	Number	Average	Number	Average
	of Warrants	Price	of Warrants	Price
	#	CDN $	#	CDN $
Balance, opening January 1, 2024	19,224,885	**1.74 **	9,756,307	3.09
Warrants component of 2023 Private	-	**- **	5,990,000	1.18
Placement (Note 7(a))
Broker Warrants component of March 2023	-	-	229,504	1.10
Private Placement (Note 7(a))
Warrants component of September 2023	-	-	4,548,961	0.71
Private Placement (Note 7 (a))
Warrants component of May 2024 Private Placement (Note 7 (b))	125,994,543	0.11	-	-
Broker warrants component of May 2024 Private Placement (Note 7 (b))	4,164,510	0.11	-	-
Warrants component of Convertible Debenture (Note 7 (b))	83,937,514	0.13	-	-
Warrants expired	(2,237,228)	3.30	(1,299,885)	2.43
Balance, ending	231,084,224	0.22	19,224,887	1.74

The following is a summary of the warrants outstanding by exercise price as at December 31, 2024:

Number of warrants outstanding	Exercise Price	Expiry Date
Warrants (1)
210,469	CDN $2.50	July 15, 2025
4,364,844	CDN $0.715	September 14, 2025
166,779	CDN $2.50	September 25, 2025
1,140,138	CDN $2.50	January 15, 2026
478,665	CDN $2.50	February 12, 2026
4,223,141	CDN $2.50	May 14, 2026
66,884,674	CDN $0.13	July 26, 2027
5,990,000	CDN $1.18	March 15, 2028
17,052,840	CDN $0.13	Sept 14, 2028
107,683,090	CDN $0.11	May 10, 2029
18,311,453	CDN $0.11	June 13, 2029
Broker Warrants (Compensation Options)
184,173	CDN $0.65	September 14, 2025
229,504	CDN $1.10	March 15, 2028
3,482,048	CDN $0.11	May 10, 2029
682,462	CDN $0.11	June 13, 2029

Page | 28

SPECTRA7 MICROSYSTEMS INC.

Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023

(Expressed in United States Dollars)

The following is a summary of the warrants outstanding by exercise price as at December 31, 2023:

Number of warrants outstanding	Exercise Price	Expiry Date
Warrants (1)
1,584,316	CDN $4.00	August 21, 2024
210,469	CDN $2.50	July 15, 2025
166,779	CDN $2.50	September 25, 2025
1,140,138	CDN $2.50	January 15, 2026
478,665	CDN $2.50	February 12, 2026
4,223,141	CDN $2.50	May 14, 2026
5,990,000	CDN $1.18	March 15, 2028
4,364,844	CDN $0.715	September 14, 2025
Broker Warrants (Compensation Options)
118,055	CDN $1.02	July 26, 2024
251,310	CDN $2.50	August 21, 2024
283,548	CDN $1.02	August 25, 2024
229,504	CDN $1.10	March 15, 2028
184,173	CDN $0.65	September 14, 2025

• (1) Subject to acceleration in certain circumstances.

• (d) Pre-Funded Warrants

The following table summarizes information about the Company’s outstanding pre-funded warrants as at December 31, 2024 and 2023:

	December 31, 2024 December 31,2023
	Number Number of Warrants of Warrants # # Balance, opening January 1, 2024 - - Pre-Funded Warrants component of May 2024 Private Placement (Note 7 (a)) 74,416,836 - Pre-Funded Warrants component of Convertible Debenture Conversion (Note 6) 37,836,738 -
	Balance, ending 112,253,574 -

12. Related party transactions and balances

The Company transacts with key individuals from management and with its directors who have authority and responsibility to plan, direct and control the activities of the Company. The nature of these dealings was in the form of payments for services rendered in their capacity as employees and as directors of the Company and are recorded at their fair value.

The Company's key management personnel are comprised of the Board of Directors and current and former members of the executive team of the Company.

Page | 29

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Key management personnel compensation is comprised of the following:

	Year Ended	December 31,
	2024	2023
	$	$
Salaries, fees and short-term benefits	495,333	1,101,373
Share-based compensation	338,361	1,190,355
	833,694	2,291,728

As at December 31, 2024, the amount owing to directors and officers was $600,654. ($359,850 for the year ended December 31, 2023).

On February 13, 2024, the Company borrowed $300,000 from certain directors of the Company (together, the “Director Lenders”). On February 27, 2024 and March 13, 2024, the Company borrowed an additional $210,000 and $30,000, respectively, from the Director Lenders. The Company repaid the full amount owed to the Director Lenders on May 15, 2024.

13. Economic dependence

During the year ended December 31, 2024, the Company derived approximately 100% of its revenue from three customers (December 31, 2023 – 100% from two customers).

14. Income taxes

A reconciliation between the Company’s statutory and effective tax rate is as follows:

	2024	2023
	$	$
Net loss before income tax	(10,674,978)	(8,298,498)
CombinedFederalandProvincial income tax rate	26.50%	26.50%
Recovery based on statutory tax rate	(2,828,869)	(2,199,102)
Increase (decrease) in tax expense
Permanent differences	897,360	861,169
Effect of different tax rates in foreign jurisdictions	(50,306)	(79,053)
Change in temporary differences not recognized	2,036,891	1,607,843
R&D credit	(67,946)	(92,535)
Adjustment related to prior periods	(344,407)	-
Foreign exchange translation and other	365,909	(197,717)
FDII	(8,630)	(20,072)
Income taxexpense (recovery)	-	(119,467)
Net Loss	(10,674,978)	(8,179,031)

Page | 30

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Non-capital losses

As at December 31, 2024, the Company has non-capital losses for carry forward to reduce future years’ income for tax purposes which, if unused, expire as follows:

ax purposes which, if unused, expire as follows:
Canada	USA
$ 2025 2,877,000 2026 3,757,000 2027 4,371,000 2028 4,371,000 2029 2,715,000 2030 5,514,000 2031 6,394,000 2032 1,549,000 2033 8,150,000 2034 6,720,000 2035 10,017,000 2036 9,982,000 2037 7,411,000 2038 12,113,000 2039 4,280,000 2040 1,727,000 2041 4,735,000 2042 3,131,000 2043 4,267,000 2044 11,261,000 Indefinitely -	$ - - - - - - - - - - - - - - - - - 1,031,251
115,339,000	1,031,251

The Company has Irish loss carry forwards of $ 46,385,500 which do not expire. These losses can be carried forward indefinitely for offset against future profits of the same trade.

Undeducted scientific research and experimental development expenses

As at December 31, 2024, the Company has unused scientific research and experimental development expenditures (“SR&ED”) available in Canada for carry forward to reduce future years’ income for tax purposes of $22,495,216 (December 31, 2023 - $22,495,216). These undeducted expenses have no expiry date.

Available scientific research and experimental development investment tax credits

The Company has non-refundable scientific research and experimental development investment tax credits in Ireland and Canada that can be applied against income taxes payable in each respective country. The Irish ITC of $2,727,762 (December 31, 2023 - $2,737,814) do not expire.

The unused Canadian ITC of $2,916,000 expire as follows:

	Canada
	$
2025	274,000
2026	764,000
2027	686,000
2028	346,000
2029	198,000
2030	504,000
2031	108,000
2032	36,000
	2,916,000

Page | 31

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

15. Financial instruments

The Company may be exposed to risks of varying degrees of significance that affect its ability to achieve its strategic objectives. The main objectives of the Company’s risk processes are to ensure that the risks are properly identified and that the capital base is adequate in relation to those risks. The principal risks to which the Company is exposed to are as follows:

Fair value

The fair value of cash, trade and other receivables, trade and other payables, lease obligation on right-of-use assets approximate their carrying values due to their short-term nature. The fair value of convertible debentures as at December 31, 2024 approximates the carrying value as the interest rate approximates current market rates.

December 31, 2024 December	31,2023
Carrying Value Fair Value Carrying Value	Fair Value
$ $ $ Financial assets Cash 1,291,212 1,291,212 658,580 Trade and other receivables - - 4,095,701 Financial liabilities Trade and other payables 1,158,800 1,158,800 2,096,380 Lease obligation on right-of-use assets 76,598 76,598 82,490 Convertible debentures - - 7,952,396	$ 658,580 4,095,701 2,096,380 82,490 7,952,396

Basis of fair values

Assets and liabilities recorded at fair value on the statement of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

Level 1 – quoted prices (unadjusted) observed in active markets for identical assets or liabilities. Level 2 – inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs)

If the inputs used to measure the fair value of an asset or liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. There have been no significant transfers between levels during the year.

Foreign currency risk

The Company may undertake sales and purchases transactions in foreign currencies, and therefore is exposed to gains or losses due to fluctuations in foreign currency exchange rates. Management believes the foreign exchange risk derived from currency conversions is currently low and therefore does not actively hedge its foreign currency risk. There has been no change to the Company’s policies and processes with respect to the way it manages foreign currency risk. The balance sheet includes the following amounts expressed in United States dollars with respect to

Page | 32

SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

financial assets and liabilities for which cash flows are denominated in the following foreign currencies:

	December 31,	December 31,
	2024	2023
	$	$
Cash
Canadian dollars	263,547	258,091
Euro	10,045	718
Chinese Yuan	2,524	3,372
Trade and other receivables
Canadian dollars	-	-
Euro	-	-
Investment tax credits receivable
Euro	5,563	23,665
Accounts payable and accrued charges
Canadian dollars	58,181	131,924
Euro	31,689	36,536
British pound	-	6,020
Chinese Yuan	28,967	28,663
Taiwan Dollar	-	-

Interest risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company does not use derivative financial instruments to reduce its exposure to interest rate risk.

Credit risk

Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its payment obligations. The Company’s credit risk is primarily attributable to trade and other receivables and money held in the Company’s bank accounts. The carrying value of these assets represents the maximum credit exposure. At December 31, 2024, Customer A had 82% and Customer B 16% of the Company’s trade and other receivables.

As of the approval date as it relates to December 31, 2024, $nil (2023 - $4,095,702) in trade receivables remains outstanding. The Company applies the simplified approach to providing for expected credit losses as prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. The loss allowance is based on the Company’s historical collection and loss experience and incorporates forward-looking factors, where appropriate. The provision matrix below shows the expected credit loss rate at each aging category of trade receivables.

Page | 33

SPECTRA7 MICROSYSTEMS INC.

Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

Trade receivables outstanding at December 31, 2024 Expected loss rate Loss allowance provision Trade receivables outstanding at December 31, 2023 Expected loss rate Loss allowance provision	Current 1-30 31-60 60- 90 >90 Total
	$- $250 $- $- $4,971,271 $4,971,520 0% 100% 0% 0% 100% 100%
	$- $250 $- $- $4,971,271 $4,971,520
	Current 1-30 31-60 60- 90 >90 Total $28,875 $- $3,227,104 $- $2,535,067 $5,791,046 0% 0% 29% 0% 30% 29% $- $- $938,132 $- $757,213 $1,695,345

Liquidity risk

The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash flows generated from operations to meet its requirements. There has been no change to the Company’s policies and processes with respect to the way it manages liquidity risk.

The following are the contractual maturities of the undiscounted financial liabilities as at December 31, 2024:

		Less than 1			After
	Total	year	1-3 years	4-5 years	5
					years
	$	$	$	$	$
Trade and other payables	1,158,800	1,158,800	-	-	-
Lease obligation on right-of-use assets	76,598	76,598	-	-	-
	1,235,398	1,235,398	-	-	-

The following are the contractual maturities of the undiscounted financial liabilities as at December 31, 2023:

		Less than 1			After
	Total	year	1-3 years	4-5 years	5 years
	$	$	$	$	$
Trade and other payables	2,096,380	1,731,771	99,969	464,579	-
Convertible debentures	7,952,396	5,110,641	2,841,755	-	-
Lease obligation on right-of-use assets	82,490	82,490	-	-	-
	10,131,266	7,051,581	2,942,724	464,579	-

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SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

16. Guarantees

In the normal course of business, the Company enters into agreements that meet the definition of a guarantee. The Company’s primary guarantees are as follows:

• (a) The Company has provided indemnities under its lease agreements for the use of its operating facilities. Under the terms of these agreements, the Company agrees to indemnify the counterparties for various items including, but not limited to, all liabilities, loss, suits, and damages arising during, on or after the term of the agreement. The maximum amount of any potential future payment cannot be reasonably estimated.

• (b) Indemnity has been provided to all directors and officers of the Company for various items including, but not limited to, all costs to settle suits or actions due to association with the Company, subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance to mitigate the cost of any potential future suits or actions. The term of the indemnification is not explicitly defined, but is limited to the period over which the indemnified party served as a director or officer of the Company. The maximum amount of any potential future payment cannot be reasonably estimated.

• (c) In the normal course of business, the Company has entered into agreements that include indemnities in favor of third parties, such as purchase and sale agreements, confidentiality agreements, engagement letters with advisors and consultants, outsourcing agreements, leasing contracts, information technology agreements and service agreements. These indemnities may require the Company to compensate counterparties for losses incurred by the counterparties as a result of breaches in representation and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnities are not explicitly defined and the maximum amount of any potential reimbursement cannot be reasonably estimated.

The nature of these indemnities prevents the Company from making a reasonable estimate of the maximum exposure due to the difficulties in assessing the amount of liability which stems from the unpredictability of future events and the unlimited coverage offered to counterparties. Historically, the Company has not made any payments under such or similar indemnities and therefore no amount has been accrued in the Consolidated Statements of Financial Position with respect to these indemnities.

17. Capital management

The Company’s objectives when managing capital are to: (i) ensure the Company continues to operate as a going concern to maximize the return on investment to shareholders; (ii) ensure sufficient liquidity to meet the Company’s financial obligations and to execute its operating and strategic plans; and (iii) minimize the after tax cost of capital while taking into consideration current and future industry, market and economic risks and conditions. The Company’s capital structure consists of its equity, loan facility and convertible debentures. Other than covenants disclosed in convertible debentures note (Note 10), there are no externally imposed restrictions on capital.

The Company intends to maintain a flexible capital structure in order to finance its ongoing growth and respond to changes in economic conditions.

18. Segment information

Operating segment

The Company operates in one operating segment, semiconductors. Management assesses performance and makes decisions about allocating resources based on this one business segment.

Geographic information

For the Years Ended December 31, 2024 and 2023, revenues were derived from customers in Asia.

At December 31, 2024, there were non-current assets, primarily property and equipment, located in the United States of America of $923,424 and at December 31, 2023, $1,075,701.

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SPECTRA7 MICROSYSTEMS INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2024 and 2023 (Expressed in United States Dollars)

19. Subsequent event

On March 7, 2025, the Company entered into a definitive agreement (the "Purchase Agreement") with Parade Technologies, Ltd. (“Parade”), pursuant to which Parade has agreed, subject to certain conditions, to acquire substantially all of the assets of the Company (the “Sale Transaction”) for a purchase price of $9,000,000 (the “Purchase Price”). On the closing date of the Sale Transaction, Parade shall pay an amount equal to the Purchase Price less $1,800,000 (the “Escrow Amount”) and the outstanding Bridge Loans (defined below) owing on the closing date (including interest thereon). The Escrow Amount shall be deposited into escrow with a third-party escrow agent to cover certain potential indemnity claims by Parade until the date that is one year after closing of the Sale Transaction.

Concurrently with the execution of the Purchase Agreement, Parade advanced a loan to the Company in the amount of $450,000 and, on March 21, 2025, advanced an additional loan in the amount of $300,000, in order for the Company to maintain its operations and carry on business until the closing of the Sale Transaction (collectively, the “Bridge Loans”). The Bridge Loans are governed by a loan agreement dated March 7, 2025 between the Company and the Purchaser and (i) bear interest at the prevailing prime rate; (ii) are secured against certain of the assets of the Company and its subsidiaries pursuant to a general security agreement; and (iii) will be credited (including interest) at closing against the Purchase Price. In the event that the Sale Transaction is not completed or the Purchase Agreement is terminated, the Bridge Loans shall be immediately repayable by the Company to Parade.

Closing of the Sale Transaction is subject to various conditions, including the approval of the TSXV and approval of at least 66 2/3% of the votes cast by shareholders of the Company at a shareholders meeting.

Concurrent with its announcement of the Sale Transaction, the Company announced its intention to distribute all of the net proceeds received from the Sale Transaction to its shareholders.

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