Targeted Microwave Solutions Inc. — Audit Report / Information 2019

May 9, 2020

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Consolidated Financial Statements For the years ended December 31, 2019 and 2018

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INDEPENDENT AUDITOR'S REPORT

To the Shareholders of Targeted Microwave Solutions Inc.:

Opinion

We have audited the consolidated financial statements of Targeted Microwave Solutions Inc. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of comprehensive loss, cash flows and changes in equity for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Basis for Opinion

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

Material Uncertainty Related to Going Concern

We draw attention to Note 2 to the financial statements, which describes matters and conditions that indicate the existence of a material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Other Information

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

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

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

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

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

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

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

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could

reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

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

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

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

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

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

DALE MATHESON CARR-HILTON LABONTE LLP CHARTERED PROFESSIONAL ACCOUNTANTS

Vancouver, BC

May 8, 2020

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Targeted Microwave Solutions Inc. Consolidated statements of financial position As at December 31, 2019 and 2018 Expressed in U.S. Dollars

	December 31, 2019	December 31, 2018
ASSETS
Current
Cash	$ 43,471	$ 1,068
Sales tax receivable	5,236	19,499
Prepaid expenses	77	6,230
	48,784	26,797
Deposits	-	220
Total assets	$ 48,784	$27,017
LIABILITIES
Current
Accounts payable (note 9)	$ 116,440	$ 108,046
Accrued liabilities	36,664	46,647
Loans payable (note 6)	713,049	505,664
Total liabilities	866,153	660,357
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital (note 8)	11,301,764	11,301,764
Share-based payment reserve (note 8)	4,094,987	4,094,987
Accumulated deficit	(16,172,591)	(15,988,562)
Equity attributable to shareholders of the company	(775,840)	(591,811)
Non-controlling interest	(41,529)	(41,529)
	(817,369)	(633,340)
Total liabilities and shareholder’s equity (deficiency)	$ 48,784	$27,017

Going concern (note 2c) Commitments (note 13a) Subsequent events (note 13)

Approved on behalf of the Board:

“Gurminder Sangha” Director

“Lyle McLennan” Director

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

Targeted Microwave Solutions Inc. Consolidated statements of comprehensive loss For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

	For the year ended December 31	For the year ended December 31
	2019	2018
Expenses (income)
Consulting, management and director fees (note 9)	$ 97,808	$ 175,893
Foreign exchange gain	(2,087)	(4,090)
Office, rent and other	27,927	93,090
Investor relations, filing and compliance fees	23,129	45,374
Professional fees	20,047	20,658
Share-based compensation	-	2,671
Interest expense(note 6)	22,546	72,649
Loss before other items	189,370	406,245
Other expenses (income)
Gain on settlement of accounts payable	-	(13,672)
Other income	(5,341)	-
Fair value change in derivative liability (note 7)	-	(7,773)
Loss on disposal of assets(note 5)	-	20,000
	(5,341)	(1,445)
Net loss and comprehensive loss	$ 184,029	$ 404,800
Net loss and comprehensive loss attributable to:
Shareholders of the company	$ 184,029	$ 404,800
Net loss and comprehensive loss	$ 184,029	$ 404,800
Loss per share, basic and diluted	$ (0.00)	$ (0.00)
Weighted average number of shares outstanding
Basic and diluted	113,024,439	81,785,208

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

Targeted Microwave Solutions Inc. Consolidated statements of cash flows

For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars

	For the year ended December 31	For the year ended December 31
	2019	2018
Cash provided by (used in):
Operating Activities
Net loss	$ (184,029)	$ (404,800)
Items not affecting cash:
Share-based compensation	-	2,671
Gain on settlement of accounts payable	-	(13,672)
Loss on disposal of assets	-	20,000
Accrued interest and accretion (note 6)	21,759	72,649
Fair value change in derivative liability (note 7)	-	(7,773)
	(162,270)	(330,925)
Changes in non-cash working capital:
Sales tax and other receivables	14,263	(2,696)
Prepaid expenses	6,153	26,478
Accounts payable and accrued liabilities	(1,589)	(160,459)
Deposits	220	-
Net cash used in operating activities	(143,223)	(467,602)
Financing Activities
Loan proceeds (note 6)	-	481,000
Private placement share issuance commitment (note 6)	185,626	-
Share issuance costs	-	(13,775)
Cashgenerated by financing activities	185,626	467,225
Net increase (decrease) in cash	42,403	(377)
Cash, beginning	1,068	1,445
Cash, ending	$ 43,471	$ 1,068
SUPPLEMENTAL CASH DISCLOSURES
Non-cash items excluded from investing and financing activities:
Loan conversion to equity	$ -	$ 2,686,650
Share based payment reserve associated with loan payable	$ -	$ 47,985

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

Targeted Microwave Solutions Inc. Consolidated statements of changes in equity As at December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

			Share-based		Attributable	Non-
			payment		to company	controlling
	Shares	Amount	reserves	Deficit	shareholders	interest	Total
Balance, January 1, 2018	46,820,010	$ 8,628,889	$ 4,044,331	$ (15,583,762)	$ (2,910,542)	$ (41,529)	$ (2,952,071)
Loan conversion to equity (note 6)	66,204,429	2,686,650	-	-	2,686,650	-	2,686,650
Share issuance costs	-	(13,775)	-	-	(13,775)	-	(13,775)
Share-based compensation	-	-	2,671	-	2,671	-	2,671
Loans payable at below market interest	-	-	47,985	-	47,985	-	47,985
(note 6)
Loss and comprehensive loss for theyear	-	-	-	(404,800)	(404,800)	-	(404,800)
Balance, December 31, 2018	113,024,439	$11,301,764	$ 4,094,987	$(15,988,562)	$(591,811)	$(41,529)	$(633,340)
Balance, January 1, 2019	113,024,439	$11,301,764	$ 4,094,987	$ (15,988,562)	$ (591,811)	$ (41,529)	$ (633,340)
Loss and comprehensive loss for theyear	-	-	-	(184,029)	(184,029)	-	(184,029)
Balance, December 31, 2019	113,024,439	$11,301,764	$ 4,094,987	$(16,172,591)	$(775,840)	$(41,529)	$(817,369)

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

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

1. NATURE OF OPERATIONS

Targeted Microwave Solutions Inc. (the “Company” or “TMS”) was incorporated on April 10, 2015 under the British Columbia Business Corporation Act and is domiciled in Canada. The Company is a reporting issuer in the provinces of Alberta, British Columbia and Ontario. The Company's shares are listed for trading on the NEX board of the Toronto Stock Exchange, Venture (“TSX-V”) under the Tier 2 symbol "TMS.H". The Company's head office is located at 200 - 375 Water Street, Vancouver, BC, Canada, V6B 0M9. The registered and records office is located at Suite 1000, 925 West Georgia Street, Vancouver, BC, Canada, V6C 3L2.

The Company is an industrial clean technology company in the business of developing patented microwave-based application technologies to dry, decontaminate, physically upgrade and fully eliminate or reduce environment harming emissions. The technology has specific application to mass-scale use of industrial aggregates, energy producing biomass, low-rank coals and other materials for use by power utilities and industrial companies. The Company formerly completed the construction and commissioning of a commercial scale pilot plant facility (“King William Plant”) located in King William, Virginia where it previously tested advances in research and development of its microwave-based technology. The Company disposed of the King William Plant in June of 2018. The Company had a research and development office in Gaithersburg, Maryland, which was closed in July of 2017.

2. BASIS OF PREPARATION

(a) Statement of compliance

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

These consolidated financial statements were approved by the Board of Directors and authorized for issue on May 8, 2020.

(b) Basis of measurement

These consolidated financial statements have been prepared on a historical cost basis, except for those assets and liabilities that are measured at fair value at the end of each reporting period. Additionally, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information. These consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

(c) Going concern

These consolidated financial statements were prepared on a going concern basis. The Company’s ability to continue as a going concern is dependent upon its ability to continue to raise financing and to set a viable path forward since the Company has terminated all employees, closed its US offices and disposed of the King William Plant and related assets.

The Company has incurred operating losses, working capital deficits, negative operating cash flows and an accumulated deficit as outlined in the table below. Since inception, the Company had no source of operating revenues and expects to incur further losses as it identifies a viable path forward. These material uncertainties may cast significant doubt upon the Company’s ability to continue as a going concern. Realization values may be substantially different from the carrying values shown. These consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. The Company will have to raise funds to continue operations and, although it has been successful in doing so in the past, there is no assurance it will be able to do so in the future.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

As of December 31, 2019, and 2018, the Company reported the following:

	December 31, 2019	December 31, 2018
Net loss for the year	$ (184,029)	$ (404,800)
Working capital deficit	$ (817,369)	$ (633,560)
Accumulated deficit	$ (16,172,591)	$ (15,988,562)

(d) Functional currency and presentation currency

These consolidated financial statements are presented in United States dollars (“US dollars”), the Company’s presentation currency. The functional currency of the Company and all of its subsidiaries is the US dollar.

(e) Critical accounting judgements, estimates and assumptions

The Company’s management makes judgements in the process of applying the Company’s accounting policies in the preparation of its consolidated financial statements. In addition, the preparation of the consolidated financial statements requires that the Company's management makes assumptions and estimates of effects of uncertain future events on carrying amounts of the Company's assets and liabilities, as well as expenses at the end of the reporting period. Actual future outcomes could differ from present estimates and assumptions, potentially having material future effects on the Company's consolidated financial statements. Estimates are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company's assets and liabilities are accounted for prospectively. The Company is also required to make critical judgements in applying certain of the Company's accounting policies.

The significant assumptions about the future or other major sources of estimation uncertainty or application of judgement in applying the Company's accounting policies at the end of the reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts of the Company's assets and liabilities are as follows:

i. Functional currency

The functional currency of each of the Company's subsidiaries is the currency of the primary economic environment in which the entity operations. The Company has determined the functional currency of each entity is the US dollar. Determination of the functional currency may involve certain judgements to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and/or conditions.

ii. Share-based payments

The Company measures the cost of cash and equity settled transactions with employees and non-employees by reference to the fair value of the related instrument at the date in which they are granted and fair value of services, respectively. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant, which is dependent on the terms and conditions of the grant. In addition, the option pricing models used requires management to make various estimates and assumptions in relation to the expected life of the awards, volatility and forfeiture rates. Expected volatility is based on the trading history of the Company. Given the limited trading history of the Company, the historical volatility of similar companies with adequate trading history was also used in the determination.

iii. Loans payable

The Company is required to measure loans payable at fair value at inception. Estimating fair value for the loans requires the use of a discount rate and determining this rate is subject to judgement considering the Company does not have third party debt or an established credit rating. As the loans payable have been issued at below-market rates of interest, a difference results between the fair value of the loans payable and the proceeds received. The

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

determination of the fair value impacts the amount recorded as loan payable, the amount credited as a shareholder contribution to share-based payment reserve and also impacts the related non-cash interest expense.

iv. Going concern

Management has applied judgments in the assessment of the Company's ability to continue as a going concern when preparing its consolidated financial statements for the year ended December 31, 2019. Management prepares the consolidated financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. Management considered a wide range of factors relating to debt repayment schedules and potential sources of financing. As a result of the assessment, management concluded the going concern basis of accounting is appropriate based on cash flow forecasts and potential access to financing for the future twelve months.

3. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in the preparation of these consolidated financial statements are as follows:

(a) Basis of consolidation

These consolidated financial statements include the accounts of the Company and the following subsidiaries. Subsidiaries are entities controlled by the Company. Control exists when the Company has power over an investee, when the Company is exposed, or has rights, to variable returns from the investee and when the Company has the ability to affect those returns through its power over the investee.

Subsidiaries are included in the consolidated financial results of the Company from the effective date of acquisition up to the effective date of disposition or loss of control. All intercompany transactions and balances have been eliminated. The principal subsidiaries of the Company and geographic locations at December 31, 2019 were as follows:

		Country of	Ownership	Functional
		Incorporation	Interest	Currency
Targeted	Microwave Solutions USA Inc.	USA	100%	US Dollars
TMS-MD,	Inc.	USA	100%	US Dollars
Targeted	Microwave Solutions HongKongLimited	HongKong	51%	US Dollars

(b) Non-controlling interest

Non-controlling interest, presented as part of equity, represents the portion of a subsidiary's profit or loss and net assets that is not held by the Company. The Company attributes total comprehensive income or loss of subsidiaries between the shareholders of the parent and the non-controlling interests based on their respective ownership interests.

(c) Functional currency translation

The functional currency of the parent and its subsidiaries is the US dollar. The presentation currency of the consolidated financial statements is the US dollar. Accordingly, in preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (“Foreign Currencies”) are initially translated at the spot rate at the date of transaction. At the end of each reporting period, Foreign Currency balances are translated as follows: (i) monetary assets and liabilities denominated in Foreign Currencies are translated using the exchange rates prevailing at the balance sheet date; (ii) non-monetary assets denominated in Foreign Currencies that are measured at other than fair value are translating using the rates of exchange at the transaction dates; (iii) non-monetary assets denominated in Foreign Currencies that are measured at fair value are translated using the rates of exchange at the dates those fair values are determined; and (iv) income statement

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

items are translated using the average monthly exchange rates. Exchange gains and losses are recognized on a net basis in earnings or loss from operations for the period.

(d) Plant and equipment

Plant and equipment are recorded at cost less accumulated depreciation and impairment losses. The asset’s residual value, useful life and depreciation method are evaluated annually and changes to estimated useful lives, residual values or depreciation methods resulting from such review are accounted for prospectively.

(e) Income taxes

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

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

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

Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each reporting year, the Company reviews unrecognized deferred tax assets. The Company recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

(f) Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial assets of the Company consists of cash. Financial liabilities of the Company include accounts payable and loans payable.

Classification

The following table outlines the classification of the Company’s financial instruments:

Financial assets/liabilities
Cash	Amortized cost
Accounts payable	Amortized cost
Loans payable	Amortized cost
Measurement

Financial assets and liabilities at amortized cost

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

Financial assets and liabilities at FVTPL

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statements of loss and comprehensive loss. Realized and unrealized gains and losses arising from

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

changes in the fair value of the financial assets and liabilities held at FVTPL are included in the statements of loss and comprehensive loss in the period in which they arise.

Debt investments at FVOCI

These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.

Equity investments at FVOCI

These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to profit or loss.

Impairment of financial assets at amortized cost

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

Derecognition

Financial assets

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

Financial liabilities

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

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

(g) Share capital

The Company's common shares, share warrants, share options, restricted share units (“RSU”) and performance share units (“PSU”) are classified as equity instruments to the extent they do not meet the definition of a financial liability. Common shares issued in the Company's equity are recorded at the net proceeds received which is the fair value of the consideration received less costs incurred in connection with the issue.

(h) Share-based payments

The fair value of the estimated number of stock options and RSUs awarded to employees, officers and directors that will eventually vest, determined as of the date of grant, is recognized as share-based compensation expense over the vesting period of the stock options and RSUs, with a corresponding increase to equity. The fair value of the stock options is determined using the Black-Scholes option pricing model with market related inputs as of the date of grant. The fair value of RSUs is the market value of the underlying shares as of the date of grant. Stock

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

options with graded vesting schedules are accounted for as separate grants with different vesting periods and fair values. Changes to the estimated number of awards that will eventually vest are accounted for prospectively.

Finder’s warrants are considered to be equity and as such they are initially fair valued at the date of issuance and not re-measured at each reporting period. The original fair value assigned to the warrant is transferred to share capital on exercise.

Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued if it is determined that the fair value of the goods or services cannot be reliably measured and are recorded at the date the goods or services are received.

PSUs represent the right to receive the cash equivalent of a common share or, at the Company’s option, a common share purchased on the open market. All PSU’s currently issued are considered equity settled transactions as the Company’s intention is to settle transactions in shares should the non-market performance criteria be met. The fair value of the estimated number of PSUs awarded that are expected to eventually vest is determined as of the grant date and is recognized as share-based compensation expense over the period of performance on a rational systematic basis. Subsequently, these estimates are trued up for differences between the number of instruments expected to vest and the actual number of instruments vested.

(i) Basic and diluted earnings or loss per share

Basic earnings or loss per share represents the earnings or loss attributable to common shareholders for the year, divided by the weighted average number of common shares outstanding during the year. Diluted loss per share represents the earning or loss for the year, divided by the weighted average number of common shares outstanding during the year plus the weighted average number of dilutive shares resulting from the exercise of stock options, warrants and other similar instruments where the inclusion of these would not be anti-dilutive.

4. RECENT ACCOUNTING PRONOUNCEMENTS

Certain pronouncements were issued by the International Accounting Standards Board (“IASB”) or the IFRS Interpretations Committee (“IFRIC”) that are mandatory for accounting periods after December 31, 2018. Pronouncements that are not applicable to the Company are excluded from this note.

The following pronouncements have been adopted effective January 1, 2019:

IFRS 16, Leases

In January 2016, the IASB issued IFRS 16 to replace the previous lease’s Standard, IAS 17, Leases , and Related Interpretations. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to the current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to the current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted. IFRS 16 was adopted effective January 1, 2019 and resulted in no significant adjustments as the Company had no leases as of December 31, 2019 or 2018.

IFRIC 23, Uncertainty over Income Tax Treatments

In June 2017, the IASB released IFRIC 23, Uncertainty over income tax treatments. IFRIC 23 clarifies the application of recognition and measurement requirements in IAS 12, Income Taxes, when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers each tax treatment independently or collectively, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and how an

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

entity considers changes in facts and circumstances. IFRIC 23 was adopted effective January 1, 2019 and resulted in no significant adjustments.

5. PLANT AND EQUIPMENT

	Plant and	Plant and	Leasehold	Leasehold
Cost	Equipment		Improvements		Total
Balance at January 1, 2018	$ 4,993,243		$ 194,535		$ 4,993,243
Disposals for theyear	(4,993,243)		(194.535)		(4,993,243)
Balance at December 31,2018		-	-		-
Balance at January1, 2019		-		-	-
Balance at December 31,2019	$	-	$	-	$ -
Accumulated depreciation
Balance at January 1, 2018	$ 4,671,514		$	-	$ 4,671,514
Disposals for theyear	(4,671,514)			-	(4,671,514)
Balance at December 31,2018		-		-	-
Balance at January1, 2019		-		-	-
Balance at December 31, 2019	$	-	$	-	$ -
Net book value, December 31, 2018	$	-	$	-	$ -
Net book value, December 31, 2019	$	-	$	-	$ -

During the year ended December 31, 2018, the Company disposed the King William Plant and related assets to Broz & Robinson LLC (“BRC”) in exchange for a comprehensive release of any claims, demands and liabilities arising from the Company’s previous activities on the leased lands, including but not limited to claims relating to alleged environmental contamination. The release also included past claims by BRC against the Company for fees and expense reimbursements. The disposal of the King William Plant and related assets resulted in a loss on disposal of $20,000 recognized in the year ended December 31, 2018. The non-cash proceeds in relation to this disposal were $301,729, which represented the assumption of the Company’s liabilities by BRC that were related to the King William Plant. The net book value of the King William Plant and related assets at the disposal date was $321,729.

The Company did not acquire or dispose any plant and equipment assets during the year ended December 31, 2019.

6. LOAN AGREEMENTS

On March 8, 2016, the Company entered into two separate loan agreements with Dr. James Young, Chairman of the Board and Chief Executive Officer, and Satellite Overseas (Holdings) Limited (“SOHL”), a major shareholder, for an aggregate amount of $2,000,000. Each loan agreement provides for the issuance of a promissory note ("Notes") by the Company of $1,000,000. The Notes originally matured on March 31, 2018 and bore interest at 3% per annum with all principal and interest due on maturity of the Notes. The interest rate per the Notes are not considered to be on normal commercial terms, and as such, the Notes are considered to be issued at below-market interest rates.

At inception the proceeds of the Notes were allocated between: (a) the fair value of the Notes determined by discounting future cash payments at an estimated discount rate for similar instruments and; (b) the residual belowmarket element, which represents the benefit to shareholders’ of the Company of paying interest on an instrument at a below-market interest rates. As a result, the difference between the fair value of the loan at inception and the proceeds, which is considered the below-market element, was credited to share-based payment reserve on the consolidated statement of shareholders’ equity for the year ended December 31, 2018 and 2017.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

Year Ended December 31, 2018

On January 3, 2018, the Company secured a loan of $50,000 from SOHL to provide short-term working capital. The Company entered into a new loan agreement with SOHL for an aggregate amount of $50,000. The loan agreement provides for the issuance of a promissory note by the Company of $50,000. The loan matured on December 31, 2018 and accrues interest at 8% per annum with all principal and interest due on maturity of the loan. The interest rate per the loan is not considered to be on normal commercial terms, and as such, the loan is considered to be issued at below-market interest rates.

On February 13, 2018, the Company secured an additional loan of $75,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $125,000. The loan matured on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semiannually.

On March 19, 2018, the Company secured an additional loan of $75,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $200,000. The loan matured on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semi-annually.

On March 27, 2018, the loans payable balance held by SOHL, representing a total balance of $1,616,543 was converted into common shares at the lowest price permitted by the TSX-V. This resulted in the issuance of 39,834,828 common shares at a share price of C$0.05. The US dollar to Canadian dollar foreign exchange rate used for this transaction was 1.2321 (note 8).

On May 1, 2018, the Company secured an additional loan of $50,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $250,000. The loan matures on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semi-annually.

On June 26, 2018, the Company secured an additional loan of $175,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $425,000. The loan matured on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semi-annually.

On October 29, 2018, the Company secured an additional loan of $56,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $481,000. The loan matured on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semi-annually.

On November 1, 2018, the loans payable balance held by Dr. James Young, representing a total balance of $1,070,107 was converted into common shares at the lowest price permitted by the TSX-V. This resulted in the issuance of 26,369,601 common shares at a share price of C$0.05. The US dollar to Canadian dollar foreign exchange rate used for this transaction was 1.2321 (note 8).

On November 1, 2018, SOHL transferred and assigned the total balance of SOHL’s loans ($499,326 including accrued interest) by way of a private debt assignment transaction to Claredon Capital Corp. (formerly Lornex Financial Group Inc). The assigned loans to Claredon Capital Corp. (“Claredon”) do not have a stated maturity date, accrue interest at 8% per annum and are payable on demand.

Claredon is controlled by the CEO (note 9).

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

Year Ended December 31, 2019

On May 17, 2019, the Company closed a shares-for-debt transaction (“Debt Settlement”) to settle C$500,000 owed by the Company to Claredon in exchange for 10,000,000 common shares at a price of C$0.05 per common share in lieu of cash repayment. The Debt Settlement remains subject to approval from the TSX-V, and as such, the common shares have not yet been issued. As at December 31, 2019, the Debt Settlement is reported within loans payable at an amount of $371,250 and will be reclassified to equity once the shares have been issued.

On May 17, 2019, the Company closed a non-brokered private placement (“Private Placement”) to raise proceeds of C$250,000 in exchange for 5,000,000 common shares at a price of C$0.05 per common share. The Private Placement remains subject to approval from the TSX-V, and as such, the common shares have not yet been issued. The Company intends to use the proceeds from the Private Placement to repay indebtedness and for general working capital purposes. As at December 31, 2019, the Private Placement is reported within loans payable at an amount of $185,626 and will be reclassified to equity once the shares have been issued.

All securities issued under the Private Placement and in connection with the Debt Settlement are subject to a hold period in accordance with Canadian securities laws and TSX-V requirements. Both the Private Placement and the Debt Settlement were approved by the TSX-V on January 9, 2020 (note 13).

The following is a continuity of the Company’s loans as at December 31, 2019 and 2018:

		Total
Loans payable at January 1, 2018	$	2,686,650
Add: Gross proceeds		481,000
Less: Below-market interest rates element		(47,985)
Add: Accretion in the period		47,985
Add: Accrued interest in period		24,664
Less: Conversion of loans to equity		(2,686,650)
Loans payable at December 31, 2018	$	505,664
Loans payable at January 1, 2019	$	505,664
Add: Gross proceeds (Private Placement Share Issuance Commitment)		185,626
Add: Accrued interest in period		21,759
Loans payable at December 31, 2019		713,049

Interest expense in relation to the loans above, which includes accretion expense, was $21,759 and $72,649 for the years ended December 31, 2019 and 2018, respectively.

7. DERIVATIVE FINANCIAL LIABILITIES

The Company had warrants issued and outstanding at May 21, 2015. As the functional currency of the Company is the US Dollar, all Canadian dollar priced warrants met the criteria of a derivative liability instrument because they were exercisable in a currency other than the functional currency of the Company and thereby did not meet the “fixed-for-fixed” criteria for equity instrument classification. As a result, the Company accounted for these warrants as derivative liability instruments and recorded the instruments at fair value with mark-to-market adjustments at each reporting period recorded in the consolidated statements of comprehensive loss. The fair value of these warrants is determined using the Black-Scholes Option Pricing Model.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

The following table summarizes the changes in the derivative liability:

		Total
Balance, January 1, 2018	$	7,773
Fair value decrease in liability at end of year		(7,773)
Balance, December 31, 2018	$	-

All warrants expired on October 24, 2018. As such, the fair value of the warrants were $nil as at December 31, 2018.

8. SHARE CAPITAL AND SHARE-BASED PAYMENTS

(a) Authorized

The Company has unlimited common shares without par value authorized.

(b) Issued and outstanding

Year Ended December 31, 2018

On March 27, 2018, the loans payable balance held by SOHL, representing a total balance of $1,616,543 (C$1,991,774) was converted into common shares at the lowest price permitted by the TSX-V. This resulted in the issuance of 39,834,828 common shares at a share price of C$0.05 (note 6).

On November 1, 2018, the loans payable balance held by Dr. James Young, representing a total balance of $1,070,107 (C$1,318,480) was converted into common shares at the lowest price permitted by the TSX-V. This resulted in the issuance of 26,369,601 common shares at a share price of C$0.05 (note 6).

Year Ended December 31, 2019

There was no activity during the year ended December 31, 2019.

(c) Warrants

There were no warrants outstanding as at December 31, 2019 and 2018.

A summary of the status of the warrants outstanding and exercisable is as follows:

		Weighted Average Exercise
	Number	Price(C$)
Balance, January 1, 2018	604,400	$2.25
Expired	(604,400)	2.25
Balance, December 31, 2018	-	-

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

(d) Stock Options

Share option transactions and the number of share options outstanding during the years ended December 31, 2019 and 2018, are summarized as follows:

		Weighted Average Exercise
	Number of Options	Price(C$)
Balance, January 1, 2018	3,525,000	$ 0.55
Forfeited	(3,325,000)	(0.54)
At December 31, 2018 – Outstanding	200,000	$ 0.75
At December 31, 2018 – Exercisable	200,000	$ 0.75
Balance, January 1, 2019	200,000	$ 0.75
Forfeited	(200,000)	$ 0.75
At December 31, 2019 – Outstanding	-	$ -
At December 31,2019 – Exercisable	-	$-

At December 31, 2019, there were no stock options outstanding or exercisable. During the year, there were no stock options granted and no exercises of stock options. There were 200,000 of forfeitures of stock options during the year ended December 31, 2019.

For the year ended December 31, 2019, total share-based compensation expense related to stock options was $nil (year ended December 31, 2018 - $2,671), which was included in the consolidated statements of comprehensive loss.

(e) Restricted share units (“RSUs”)

There was no activity during year ended December 31, 2019. There were no RSU’s outstanding as at December 31, 2019 and 2018.

(f) Performance share units (“PSUs”)

There was no activity during the year ended December 31, 2019. There were no PSU’s outstanding as at December 31, 2019 and 2018.

Share-based Compensation Expense Summary

The components of share-based compensation expense as at December 31, 2019 and 2018 are as follows:

	2019	2018
Stock option expense	$ -	$ 2,671
Total Share-based Compensation Expense	$ -	$ 2,671

(g) Share-based payment reserve

The share-based payment reserve records items recognized as stock-based compensation expense and other share-based payments until such time that the stock options or warrants are exercised, at which time the corresponding amount will be transferred to share capital.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

9. RELATED PARTY TRANSACTIONS

(a) Related party transactions

The Company's related parties include its subsidiaries, key management personnel and entities owned by shareholders. At December 31, 2019, the Company owed a total of $42,120 (December 31, 2018 - $39,334) to an officer and a related company which was included in accounts payable. These amounts are unsecured, non-interest bearing and have no fixed terms of repayment.

In the prior year, the Company received loans from related parties and as at December 31, 2019, owed a total of $527,423 of principal and accrued interest (December 31, 2018 - $505,664) (note 6).

(b) Compensation of directors and other key management personnel

Compensation paid or payable to the Company's directors and key management for services provided during the year ended December 31, 2019 and 2018 is reported in the table below. Key management is defined by the Company as the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), Chief Operating Officer (“COO”), Chief Technology Officer (“CTO”) and their controlled companies.

On November 1, 2018, Gurminder Sangha was appointed as CEO and Director of the Company and was the only member of key management that was compensated during the year ended December 31, 2019. The 2018 officer compensation includes only those amounts from November 1, 2018 for the CEO, which was the date of his appointment.

	2019	2018
Consulting, management, directors and professional fees	$ 82,500	$ 45,000
Share-based compensation	-	2,671
	$ 82,500	$ 47,671

During the period ended December 31, 2019, the Company incurred $nil of director fees (December 31, 2018: $15,000).

10. INCOME TAXES

The reconciliation of income taxes, computed at the Canadian statutory rates, to income tax expense was as follows:

	2019	2018
Loss before taxes	$ (184,029)	$ (404,800)
Canadian statutorytax rate	27.00%	27.00%
Income tax recovery at statutory tax rate	(49,687)	(109,296)
Increase (decrease) resulting from:
Non-deductible items	-	11,555
Excluded income from intercompany debt cancellation	(882,277)	-
Jurisdiction tax rate differences	(135,103)	23
Share-based compensation expenses	-	735
Changes in estimates	60,063	(13,712)
Effect of substantively enacted income tax rate changes	-	(17,501)
Other items	1,605,538	63,685
Non-recognition of tax benefits related to tax losses and temporarydifferences	(598,534)	64,511
Income tax recovery	$-	$-

The effective Canadian Federal and British Columbia Provincial corporate tax rate is 15% and 12%, respectively.

Deferred Tax Assets and Liabilities

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

The significant components of the Company’s deferred income tax asset and liability were as follows:

	2019	2018
Non-capital loss carryforwards	$ 986,387	$ 3,117,166
Capital loss carryforwards	1,605,538	-
Cumulative eligible capital	44,989	58,034
Plant and equipment	-	-
Share issuance costs	14,242	23,307
Interest carryforwards	395,725	446,908
	3,046,881	3,645,415
Deferred tax assets not recognized	(3,046,881)	(3,645,415)
Net deferred tax assets	$-	$-

The deferred tax assets related to the temporary differences were not recognized, as its recoverability is not considered to be probable.

As at December 31, 2019, the Company had the following estimated tax operating losses available to reduce future taxable income.

Year of Expiry	Canada	USA	Total
2035	$ 533,254	$ -	$ 533,254
2036	741,463	618,846	1,360,309
2037	190,356	921,298	1,111,654
2038	389,426	3,996	393,422
2039	226,048	-	226,048
Total	$2,080,547	$1,544,140	$3,624,687

11. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash, accounts payable and loans payable.

(a) Financial assets and liabilities by category

Cash, accounts payable and loans payable are carried at amortized cost.

(b) Fair value of financial instruments

The carrying values of cash, accounts payable and loans payable approximate their fair values because of their current nature.

The categories of the fair value hierarchy that reflect the significance of inputs used in making fair value measurements are as follows:

Level 1 - Quoted prices in active markets for identical, unrestricted assets or liabilities;

Level 2 – Inputs other than quoted prices in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3 – Inputs for the asset or liability that are not based on observable market data (supported by little or no market activity).

The fair value of the derivative liabilities associated with the C$ denominated warrants are included in Level 3 as the valuation parameters on the warrants are not based on observable market data.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

Loans payable were also measured and recognized on a non-recurring basis (Level 3 measurement).

12. FINANCIAL INSTRUMENTS AND RELATED RISKS

The Company is exposed to a variety of financial risks as a result of operations, including market risk, credit risk and liquidity risk. The overall risk management strategy seeks to reduce potential adverse effects on the financial performance. Risk management is carried out under policies approved by the Board of Directors. The risks associated with the financial instruments and the policies on how these risks are mitigated are set out below.

(a) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due. The Company’s ability to continue as a going concern is dependent on management’s ability to raise the funds required through future equity financings, asset sales or sales from contracts, or a combination thereof. The Company has no regular cash flow from its operating activities. The Company manages its liquidity risk by preparing and reviewing forecasted expenditure and cash flow budgets. Management and the Board of Directors are actively involved in the review, planning and approval of annual budgets and significant expenditures and commitments. Failure to realize additional funding, as required, could result in the delay or indefinite postponement of further development of the Company’s projects.

The Company had a consolidated cash balance of $43,471 as at December 31, 2019 (December 31, 2018 - $1,068) with a working capital deficit of $817,369 (December 31, 2018 – working capital deficit of $633,560). As such, the Company is exposed to liquidity risk. In order to address this liquidity risk, the Company is actively seeking additional financing in the form of debt or equity (or both). Should the Company be unsuccessful in raising funds, it may not be able to satisfy its existing financial obligations or fund future growth. The Company’s current ongoing working capital requirements have been significantly reduced due to the implementation of the cost reduction strategy and the elimination of all remaining Company staff. Further, in 2018 and 2019, the Company converted certain of its loans payable balance to equity, which improved the working capital deficit.

In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities of the Company's financial obligations as at December 31, 2019:

					December	December
	Within 1year	2 to 5years		Over 5years	31, 2019	31, 2018
Accounts payable and accrued	$ 153,104	$ -		$ -	153,104	$ 154,693
liabilities
Loan repayments	713,049*		-	-	713,049	505,664
	$866,153	$	-	$-	$866,153	$660,357

(b) Capital management

The Company's objectives of capital management are to safeguard its ability to support the Company's normal operating requirements on an ongoing basis and support any potential go-forward strategies for the Company. The Company manages its capital structure and makes adjustments based on the funds available. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business.

The Company’s operations are currently not generating positive cash flow, and as such, the Company is dependent on external financing to fund its activities. In order to carry out research and development, which is currently suspended, and fund administrative costs, the Company will use its existing working capital, and raise additional amounts as needed.

Companies in this stage typically rely upon equity and debt financing or joint venture partnerships to fund its operations. There is no certainty with respect to the Company’s ability to raise capital.

Targeted Microwave Solutions Inc. Notes to the consolidated financial statements For the years ended December 31, 2019 and 2018 Expressed in U.S. dollars, except number of shares

Management reviews its capital management approach on an ongoing basis. At December 31, 2019, the Company expects that it will be able to meet its obligations based on the Company’s ability to obtain funding from investors. At December 31, 2019, there was no externally imposed capital requirements to which the Company is subject.

(c) Interest rate risk

Interest rate risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in market interest rates. Interest rate risk arises from the interest rate impact on cash because these are the only financial instruments that are impacted by interest, based on variable market interest rates. The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary assets and liabilities and amounts owing being non-interest bearing or bearing fixed rates of interest.

(d) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from holding cash with major financial institutions. Cash is held in highly-rated financial institutions and risk of loss is considered to be low. At December 31, 2019, the maximum exposure to credit risk is $43,471 (December 31, 2018 - $1,068).

(e) Currency risk

Currency risk is the risk that the fair values or future cash flows of financial instruments will fluctuate because of changes in foreign currency rates. Financial instruments are exposed to currency risk where those instruments are denominated in currencies that are not the same as the functional currency of the entity that holds them which results in exchange gains and losses which may impact net income or loss.

The Company is exposed to foreign currency risk on fluctuations related to cash, sales tax receivables, accounts payable and accrued liabilities that are denominated in Canadian dollars. The following are the most significant areas of exposure to currency risk, shown in U.S. dollars.

	2019	2018
Cash	$ 42,746	$ 66
Sales tax and other receivables	5,236	19,499
Accountspayable and accrued liabilities	(51,972)	(75,488)
	$ (3,990)	$ (55,923)

During the year ended December 31, 2019, the Company recognized a foreign exchange gain of $2,087 (year ended December 31, 2018 – gain of $4,090). Management does not hedge its exposure to foreign exchange risk. Management will continue to review its foreign denominated balances to determine the appropriate holdings to naturally hedge its Canadian dollar expenses.

Fluctuations in foreign currency exchange rates can impact marginally on the value of cash, sales tax receivables, accounts payable and accrued liabilities. A 10% variation in the US Dollar would result in a fluctuation of approximately $400 on net income/loss.

13. SUBSEQUENT EVENTS

On January 9, 2020, both the Private Placement and the Debt Settlement were approved by the TSX-V (note 6).

The Company has not maintained the requirements for a Tier 1 company in accordance with TSX Venture Exchange Policy 2.5. Therefore, effective January 13, 2020, the Company’s listing was transferred to the NEX board of the TSX-Venture Exchange. The trading symbol for the Company changed from TMS to TMS.H.