Theralase Technologies Inc. — Annual Report 2020

May 20, 2021

Theralase Technologies Inc. Audited Consolidated Financial Statements As at December 31, 2020 and 2019

The accompanying audited annual financial statements of Theralase Technologies Inc. are being refiled. The Company’s independent auditor did not include the 2019 financial period in its auditor’s report.

Management’s Responsibility for Financial Information

The accompanying consolidated financial statements and all information in this report were prepared by and are the responsibility of management. The consolidated financial statements were prepared in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and reflect management’s best estimates and judgments. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial information presented elsewhere in this report is consistent with that in the consolidated financial statements.

The Company maintains a system of internal controls, which provides management with reasonable assurance that financial information is relevant, reliable and accurate and that the Company’s assets are properly accounted for and adequately safeguarded.

The Board of Directors carries out its responsibility for the consolidated financial statements principally through its Audit Committee, consisting solely of outside directors. The Audit Committee reviews the Company’s annual consolidated financial statements and has recommended their approval to the Board of Directors. The shareholders’ auditors and Audit Committee meet with and without management being present.

The consolidated financial statements have been audited by the independent registered public accounting firm appointed by the shareholders, Richter LLP In that capacity they have issued a report on the consolidated financial statements for the year ended December 31, 2020 and 2019.

[ signed ] Shawn Shirazi Chief Executive Officer Theralase Technologies Inc.

[ signed ] Kristina Hachey Chief Financial Officer Theralase Technologies Inc.

Independent Auditor's Report

To the Shareholders of

Theralase Technologies Inc.

Opinion

We have audited the consolidated financial statements of Theralase Technologies Inc., (the Company), which comprise the consolidated statement of financial position as at December 31, 2020 and 2019, and the consolidated statement of comprehensive loss, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020 and 2019, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”).

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 Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

Without modifying our opinion, we draw attention to note 1 to the financial statements which explains that the Company has suffered consolidated losses from operations of $5,598,540 (2019 - $7,413,914) and has historically used net cash in operations. This raises doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Information Other than the Financial Statements and Auditor’s Report Thereon

Management is responsible for the other information. The other information comprises the information, other than the financial statements and our auditor’s report thereon, in Management’s Discussion and Analysis of Financial Condition and Operations.

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

MONTRÉAL TORONTO CHICAGO 1981 McGill College 181 Bay St., #3510 200 South Wacker Dr., #3100 Montréal QC H3A 0G6 Bay Wellington Tower Chicago, IL 60606 514.934.3400 Toronto ON M5J 2T3 312.828.0800 416.488.2345

RICHTER.CA

RICHTER

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

We obtained Management’s Discussion and Analysis of Financial Condition and Operations 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 in this auditor’s report. We have nothing to report in this regard.

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

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

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

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

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

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

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

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

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

RICHTER

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

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

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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

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

The engagement partner on the audit resulting in this independent auditor’s report is Marie-Claude Frigon.

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Montréal, Québec April 28, 2021

1CPA auditor, CA, public accountancy permit No. A112505

THERALASE® TECHNOLOGIES INC.

Consolidated Statements of Financial Position

As at December 31, 2020 and 2019

Stated in Canadian Dollars

As at December 31, 2020 and 2019 Stated in Canadian Dollars THERALASE® TECHNOLOGIES INC. Consolidated Statements of Financial Position	As at December 31, 2020 and 2019 Stated in Canadian Dollars THERALASE® TECHNOLOGIES INC. Consolidated Statements of Financial Position
Note 2020 2019
Assets Current assets Cash and cash equivalents 7,880,243 $ 12,548,550 $ Trade and other receivables 4 485,238 824,133 Inventories 5 452,238 722,558 Prepaid expenses and other assets 97,900 95,101
Total current assets 8,915,619 14,190,342
Non-current assets Trade receivables 4 55,325 101,626 Property and equipment 6 951,258 1,013,381 Right-of-use-assets 8 89,993 141,247 Intangible assets 7 - 6,512 Rent deposit 8,587 16,982
Total non-current assets 1,105,163 1,279,748
Total Assets 10,020,782 $ 15,470,090 $
Liabilities Current liabilities Payables and accruals 9 764,790 $ 1,470,025 $ Currentportion of lease liabilities 8 56,619 50,147
Total current liabilities 821,409 1,520,172
Non-current liabilities Lease liabilities 8 35,724 94,475
Total non-current liabilities 35,724 94,475
Total Liabilities 857,133 1,614,647
Equity attributable to shareholders Share capital 11, 14 42,120,421 42,120,213 Contributed surplus 11, 12 10,254,440 6,990,821 Common share purchase warrants 11, 12 5,295,255 7,396,563 Accumulated deficit (48,506,467) (42,652,154)
Total Equity 9,163,649 13,855,443
Total Shareholders' Equity and Liabilities 10,020,782 $ 15,470,090 $
Commitments (Note 23)
Approved on Behalf of the Board [Randy Bruder] Director [Guy Anderson] Director

Approved on Behalf of the Board
[Randy Bruder]	Director
[Guy Anderson]	Director

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

1

THERALASE® TECHNOLOGIES INC.

Consolidated Statements of Operations For the year ended December 31

Stated in Canadian Dollars

Consolidated Statements of Operations For the year ended December 31 Stated in Canadian Dollars
	Note		2020		2019
Sales		$	929,122	$	964,051
Cost of sales			659,442		903,296
Gross margin			269,680		60,755
Operating expenses
Selling expenses	16		447,882		716,343
Administrative expenses	17		2,070,261		2,604,808
Research and development expenses	18		3,448,243		4,159,724
(Gain) loss on foreign exchange			(4,160)		15,041
Interest accretion on lease liabilities	8		9,680		12,356
Interest income			(103,686)		(33,603)
			5,868,220		7,474,669
Net loss and comprehensive loss for theyear		$	(5,598,540)	$	(7,413,914)
Basic and diluted lossper common share	15		(0.027)		(0.051)
Weighted average number of common shares		204,275,875		144,681,053

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

2

THERALASE® TECHNOLOGIES INC.

Consolidated Statements of Cash Flows

For the year ended December 31

Stated in Canadian Dollars

THERALASE® TECHNOLOGIES INC. Consolidated Statements of Cash Flows For the year ended December 31 Stated in Canadian Dollars	THERALASE® TECHNOLOGIES INC. Consolidated Statements of Cash Flows For the year ended December 31 Stated in Canadian Dollars
2020 2019
Cash flows from operating activities Net loss for the year (5,598,540) $ (7,413,914) $ Items not involving cash: Amortization of property and equipment 214,513 192,517 Amortization of right-of-use assets 51,254 51,254 Amortization of intangibles 6,512 11,490 Stock-based compensation expense 912,032 394,566 (Gain) loss on foreign exchange (4,160) 15,041 Loss on disposal of assets 12,186 - Interest accretion from lease liabilities 9,680 12,356
(4,396,523) (6,736,690) Change in operating assets and liabilities other than cash: Current trade and other receivables 343,055 (48,719) Non-current trade receivables 46,301 10,331 Inventories 270,320 141,703 Prepaid expenses and other assets 5,596 (38,728) Payables and accruals (714,915) 105,641
(4,446,166) (6,566,462)
Cash flows from investing activity Purchase ofpropertyand equipment (164,576) (533,208)
(164,576) (533,208)
Cash flows from financing activities Payment of lease liabilities (52,279) (60,235) Proceeds from public offering - 17,481,910 Transaction cost on public offering - (1,596,694) Proceeds from the exercise of share warrants 175 2,789,540
	Warrant extension costs (5,461) -
(57,565) 18,614,521 (4,668,307) 11,514,851 Cash and cash equivalents,beginningofyear 12,548,550 1,033,699 Increase (decrease) in cash and cash equivalents during the year	(57,565) 18,614,521
Cash and cash equivalents,end ofyear 7,880,243 $ 12,548,550 $
Supplementary Information Interest Paid 9,682 $ 12,356 $ Interest Received 103,686 $ 33,603 $

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

3

THERALASE® TECHNOLOGIES INC.

Consolidated Statements of Changes in Equity For the year ended December 31

Stated in Canadian Dollars

For the year ended December 31 Stated in Canadian Dollars Consolidated Statements of Changes in Equity
Note	Number of Shares Share Capital Contributed Surplus Common Share Purchase Warrants Deficit Total Shareholders' Equity
	# $ $ $ $ $
Balance, December 31, 2018 Stock-based compensation expense 12 Exercised share purchase warrants 13 Issued pursuant to private placement 11 Transaction cost on private placement 11 Issued pursuant to public offering 11 Transaction cost on public offering 11 Broker compensation units 11 Loss for theyear	134,877,585 26,434,938 5,989,332 3,812,609 (35,238,240) 998,639 - - 394,566 - - 394,566 7,802,633 3,382,853 - (593,313) - 2,789,540 4,095,157 1,017,289 - 416,017 - 1,433,306 - (6,096) - (2,493) - (8,589) 57,500,000 12,937,500 - 4,312,500 - 17,250,000 - (1,191,079) - (397,026) - (1,588,105) - (455,192) 606,923 (151,731) - - - - - - (7,413,914) (7,413,914)
Balance,December 31,2019	204,275,375 42,120,213 6,990,821 7,396,563 (42,652,154) 13,855,443
Balance, December 31, 2019	204,275,375 42,120,213 6,990,821 7,396,563 (42,652,154) 13,855,443
Stock-based compensation expense 12 Expired warrants 13 Exercised share purchase warrants 13 Extension of warrants 13 Warrants extension costs 13 Loss for theyear	- - 912,032 - - 912,032 - - 2,351,587 (2,351,587) - - 500 208 - (33) - 175 - - - 255,773 (255,773) - - - - (5,461) - (5,461) - - - - (5,598,540) (5,598,540)
Balance, December 31, 2020	204,275,875 42,120,421 10,254,440 5,295,255 (48,506,467) 9,163,649

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

4

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

1. Nature of Operations

Theralase Technologies Inc. (the “ Company ” or “ Theralase ”) has two main divisions.

The Anti-Cancer Therapy (“ ACT ”) division develops patented and patent pending drugs, called Photo Dynamic Compounds (“ PDCs ”) and activates them with proprietary and patent pending laser technology to destroy specifically targeted cancers, bacteria and viruses. The Cool Laser Therapy (“ CLT ”) division designs, develops, manufactures and markets patented and proprietary super-pulsed laser technology indicated and cleared by Health Canada and the Food and Drug Administration (“ FDA ”) for the healing of chronic knee pain. The technology has been used off-label for healing numerous nerve, muscle and joint conditions.

The Company develops products both internally and using the assistance of specialist external resources. Successful financing enables the commercialization of the Company’s current and future product offerings, which is further supported through the Company’s established network of direct sales and indirect distribution networks.

Theralase was incorporated by articles of incorporation in the province of Ontario in September 2004. The Company’s common shares trade on the Toronto Stock Venture Exchange under the symbol TLT. The registered office is 41 Hollinger Road, Toronto, Ontario, Canada M4B 3G4.

Going Concern, Capital Disclosures and Statement of Compliance

The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards ( “IFRS” ) as issued by the International Accounting Standards Board ( “IASB” ) and including interpretations of the IFRS Interpretations Committee ( “IFRISIC” ) on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. For the year ended December 31, 2020, the Company had a net loss of $5,598,540 (2019 - $7,413,914), an accumulated deficit of $48,506,467 (2019 - $42,652,154) and has historically used net cash in operations. These conditions indicate the existence of material uncertainties that casts substantial doubt about the Company’s ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon achieving a profitable level of operations and obtaining additional financing, neither of which is assured. The Company has been able to raise capital to continue to market its products and continues to develop sales opportunities that could result in additional sales of its products in the future. These consolidated financial statements do not give effect to any adjustments which may be necessary should the Company be unable to continue as a going concern and be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements. These adjustments could be material.

The Company’s objective is to maintain a sufficient capital base to support future research, development and strategic business initiatives allowing the Company to invest in its future and maintain investor, creditor and market confidence.

Sales of the TLC-1000 and TLC-2000, the Company’s existing product lines have not met expectations and have not been sufficient in and of themselves to enable the Company to fund all its continuing development and commercialization efforts and, accordingly, management is pursuing alternate financing sources to fund the Company’s development and commercialization efforts. The Company has successfully raised capital through an equity offering in 2019 (note 11) however, there is no guarantee that the Company will be able to raise additional capital on terms and conditions agreeable to the Company.

5

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

1. Nature of Operations (continued)

The Company is not subject to any externally imposed capital requirements and the Company does not use financial ratios to manage capital. There were no changes in the Company’s approach to capital management during the years presented.

Approval of Financial Statements

The consolidated financial statements for the year ended December 31, 2020 (including comparatives) were approved and authorized for issue by the board of directors on April 28, 2021.

2. Summary of Significant Accounting Policies

Basis of presentation

The consolidated financial statements, which are presented in Canadian Dollars (unless otherwise stated), have been prepared under the historical cost convention, as modified by the measurement at fair value of certain financial assets and financial liabilities. Share options and share awards granted to employees, directors, officers and third parties are recognized at fair value at the date of grant.

Accounting estimates and judgments

The preparation of these consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the year.

Financial statement items subject to significant management judgment include:

• Valuation of deferred income tax assets – The valuation of deferred income tax assets requires judgment on their recoverability. Such judgments are made based on management’s estimate on the timing and amount of the Company’s future taxable earnings (see note 10).

• Warrants and share-based payments – The Company used the Black-Scholes option pricing model in determining the value of warrants and stock options, which requires a number of assumptions made, including the risk-free interest rate, expected life, forfeiture rate and expected share price volatility. Consequently, the actual share-based compensation expense may vary from the amount estimated (see notes 12 and 13).

• Lease term - The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the consolidated entity’s operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

disruption to replace the asset. The consolidated entity reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances.

Financial statement items subject to significant management estimates include:

• Allowance for credit losses - The valuation of allowances for uncollectible trade receivables requires assumptions including estimated credit losses based on customer, industry concentrations and the Company’s knowledge of the financial conditions of its customers. Uncertainty relates to the actual collectability of customer balances that can vary from management's estimates and judgment (see note 20).

• Allowance for inventory obsolescence – The Company estimates inventory obsolescence allowances for potential losses resulting from inventory that cannot be processed and/or sold to customers. Additional allowances may be required if the physical condition of inventory deteriorates or customer requirements change (see note 5).

• Measurement of impairment in assets – The active market or a binding sale agreement provides the best evidence for determination of fair value, but where neither exists, fair value is based on the best information available to reflect the amount the Company could receive for the assets or its value in use which is equal to the present value of future cash flows expected to be derived from the use and sale of the assets. Management exercises judgment to determine whether indicators of impairment exist, and if so, management must estimate the timing and amount of future cash flows from sales.

• Warranty reserves – The valuation for warranty reserves requires assumptions regarding estimated warranty claims against product sales. Uncertainty relates to the actual warranty claims against product sales that can vary from management's estimates.

• Incremental borrowing rate – Where the interest rate implicit in a lease cannot be readily determined, an incremental borrowing rate is estimated to discount future lease payments to measure the present value of the lease liability at the lease commencement date. Such rate is based on what the consolidated entity estimates it would have to pay a third party to borrow the funds necessary to obtain an asset of a similar value to the right-of-use asset, with similar terms, security and economic environment.

While management believes that the estimates and judgments are reasonable, actual results may differ materially from those estimates.

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; Theralase Inc. and Theralase Biotech Inc., over which the Company exercises control. Inter-company balances and transactions are eliminated in preparing the consolidated financial statements.

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

Foreign currency

The functional and presentation currency of the Company and its subsidiaries is the Canadian dollar. Transactions which are denominated in other currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction date. The carrying values of monetary assets and liabilities denominated in foreign currencies are adjusted at each balance sheet date to reflect exchange rates prevailing at that date, except for inventory which is recorded at historical cost and not adjusted. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year adjusted for effective interest and payments during the year, and the amortized cost in the foreign currency translated at the exchange rate at the end of the year. Foreign exchange gains and losses are recognized in the statement of operations and comprehensive loss.

Revenues and expenses are converted at transaction date rates prevailing during the year, except for amortization, which is converted at historical rates.

Cash and cash equivalents

Cash and cash equivalents includes cash held in a Canadian Schedule I bank and short-term and highly liquid investments with original maturities of three months or less.

Financial instruments

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

I. Classification

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

II. Measurement

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

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

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

III. Impairment of financial assets at amortized cost

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

IV. Derecognition

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

Inventories

Raw materials are valued at the lower of cost or net realizable value. Finished goods and work-in-process are valued at the lower of cost or net realizable value and consist of the following costs: raw materials, subcontracting, direct and indirect labour and the applicable share of manufacturing overhead. Net realizable value is estimated based on the amount at which inventories are expected to be sold, taking into account estimated costs necessary to make the sale. Finished goods are determined on a first-in, first-out basis. Raw materials are recorded on weighted average basis.

Property and equipment

Property and equipment are recorded at cost, net of accumulated depreciation and impairment charges. Depreciation of property and equipment, other than leasehold improvements and rental units, is calculated using the declining balance basis to depreciate the cost of the assets over their estimated useful lives using the following annual rates:

Tools and dies	25%
Computer equipment	30%
Furniture and fixtures	20%
Equipment	25%

9

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

Leasehold improvements are depreciated on a straight-line basis over the shorter of the useful life of the leasehold or the initial lease term.

Rental units are depreciated on a straight-line basis over five years based on the estimated useful life.

Intangible assets

Intangible assets are recorded at cost including professional fees incurred in connection with the filing of the patents and the registration of the trademarks for product marketing and manufacturing purposes net of accumulated amortization and impairment charges. Costs incurred to maintain patents and trademarks for intellectual property are expensed in the year incurred. Amortization of intangible assets is recorded on a straight-line basis over the estimated useful lives of the related assets as follows:

Patents 10 to 17 years Trademarks 17 years

Impairment of assets

Items of property and equipment and intangible assets with finite lives, subject to depreciation or amortization, respectively, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Management is required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such an indication exists, the asset’s recoverable amount is compared to its carrying value, and an impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value, less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or Cash-Generating Units (“ CGU ”). In determining value in use of a given asset or CGU, 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.

Items of property and equipment and amortizable identifiable intangible assets with finite lives that suffered impairment are reviewed for possible reversal of the impairment if there has been a change, since the date of the most recent impairment test, in the estimates used to determine the impaired asset’s recoverable amount. However, an asset’s carrying amount, increased due to the reversal of a prior impairment loss, must not exceed the carrying amount that would have been determined, net of depreciation or amortization, had the original impairment not occurred.

Leases

Right-of-use assets

The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

10

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

Lease liabilities

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

Research and development expenditures

Research expenditures are expensed in the year incurred. Product development expenditures are expensed in the year incurred unless the product candidate meets the following criteria for deferral and amortization:

• the technical feasibility of completing the intangible asset so it will be available for use or sale;

• its intention to complete and its ability to use or sell the asset;

• how the asset will generate future economic benefits;

• the availability of resources to complete the asset; and

• • the ability to measure reliably the expenditure during development.

The Company’s policy is to amortize deferred product development expenditures over the expected future life of the product once product revenues or royalties are recorded. No product development expenditures have been deferred during the year.

Investment tax credits and government assistance

The Company is entitled to refundable and non-refundable Canadian federal and provincial investment tax credits, which are earned as a percentage of eligible research and development expenditures incurred in each taxation year.

Investment tax credits are accounted for as a reduction of the related expenditure for items of a current nature and as a reduction of the related asset’s cost for items of a long-term nature in the year the expenses are incurred, when received or when the Company has reasonable assurance that investment tax credits will be realized.

Government assistance toward current expenses, including salaries, is recognized as a reduction of the corresponding expenses at the time they are incurred, provided there is a reasonable assurance that the Company has complied and will continue to comply with all the conditions of the government assistance.

11

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

Subsidies claimed under the Canada Emergency Wage Subsidy ('' CEWS '') amounted to approximately $165,923 and is recognized in the amount of $25,868 in cost of sales, $27,468 in selling expenses, $37,352 in administrative expenses and $75,235 in research and development expenses.

Revenue recognition

The Company designs, develops, manufactures and markets patented and proprietary super-pulsed laser technology. In accordance with IFRS 15, sales are recognized when control of the products has transferred to the Company’s customers, being when the products are shipped to the customer. Once products are shipped to the Company’s customers, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales order, the acceptance provisions have lapsed, or the Company has objective evidence that all criteria for acceptance have been satisfied. A portion of the Company’s sales take place on a trial basis, where the Company will deliver inventory to customer locations that has not yet been purchased. The revenue from these sales is recognized when the customer purchases the inventory. A portion of the Company’s sales are financed by the Company and the revenue from these sales is recognized when the products are shipped to the customer.

The Company’s obligation to provide a refund for faulty products under the standard warranty terms is recognized as a provision.

A receivable is recognized when the goods are shipped as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

Share-based payment

The share-based payment plan, described in note 12, allows Company employees and consultants to acquire shares of the Company. The fair value of share-based payment awards granted is recognized as an employee or consultant expense with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee.

The Company uses the fair value based method of accounting for employee stock options. Under the fair value based method, compensation costs are measured at fair value at the date of grant and are expensed using the graded vesting method over the stock options’ vesting periods. The fair value of granted stock options is determined using the Black-Scholes valuation model. Any consideration received by the Company in connection with the exercise of stock options is credited to share capital.

For equity-settled share-based payment transactions with non-employees, the Company measures the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which cases, the Company measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

12

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

2. Summary of Significant Accounting Policies (continued)

Share capital

The proceeds from the exercise of stock options and warrants are recorded as share capital in the amount for which the option and warrant enabled the holder to purchase a share in the Company. Commissions paid to underwriters, and other related share issue costs, such as legal and auditing, on the issue of the Company’s shares are charged directly to capital stock.

Valuation of equity units issued in public offerings

The Company has adopted a fair value method with respect to the measurement of shares and warrants issued as public offering units. The Company allocates the net proceeds based on the relative fair values to each component.

Loss per share

Loss per common share is calculated by dividing the net loss for the year by the weighted average number of common shares outstanding during the year. Diluted loss per share amounts do not differ from basic share amounts in these consolidated financial statements as the effect of outstanding options and warrants is anti-dilutive for all years presented.

Income taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (“ temporary differences ”) and loss carry forwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is generally recognized in income in the year that includes the date of enactment or substantive enactment. Deferred income tax assets are recognized at each reporting date only to the extent that it is probable that the related tax benefit will be realized.

3. Future accounting pronouncements

IAS 1 and IAS 8 - Definition of Material (Amendments to IAS 1 and IAS 8)

The amendments clarify the definition of material and how it should be applied by including in the definition guidance that until now has featured elsewhere in IFRS Standards. In addition, the explanations accompanying the definition have been improved. Finally, the amendments ensure that the definition of material is consistent across all IFRS Standards.

Old definition:

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements (IAS 1 Presentation of Financial Statements).

13

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

3. Future accounting pronouncements (continued)

New definition:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

The Company will not be impacted by these amendments.

4. Trade and Other Receivables

Trade and Other Receivables
Trade receivable (net amount) Government tax credits receivable	2020 2019
	$ 230,283 $ 380,229 310,280 545,530
Total Less: Non-current trade receivables	540,563 925,759 (55,325) (101,626)
Total	$ 485,238$ 824,133

Write offs of trade receivables for the year ended December 31, 2020 amounted to $30,025 which was previously provided for (2019 - $38,872). In addition, for the year ended December 31, 2019 a direct write-off of $5,662 was made. Refer to note 20 (i) for the continuity schedule of allowance for trade receivables.

Government tax credits receivable comprise of research and development investment tax credits and the Canada Emergency Wage Subsidy from the federal government which relate to qualifiable research and development expenditures under the applicable tax laws. Research and development tax credits receivable total $240,000 and has been allocated against research and development expenses. The Canada Emergency Wage Subsidy receivable totals $50,890 and is accounted for as a reduction of operating expenses and has been recognized as follows, $8,032 against selling expenses, $10,248 against administrative expenses, $9,188 against cost of goods sold and $23,422 against research and development expenses.

Non-current trade receivables represent receivables from customers to whom the Company sold products under payment plans with payment terms ranging from 24 to 72 months. Receivables under payment plans are recorded at time of origination or purchase at fair value of products sold and are subsequently reported at amortized cost, net of any allowance for credit losses.

The Company’s exposure to credit and currency risks related to trade and other receivables is presented in note 20.

5. Inventories

Inventories
Raw materials Work-in-process Finishedgoods	2020 2019
	229,063 $ 337,536 $ 1,135 10,120 222,040 374,902
Total	452,238 $ 722,558 $

During the year, inventories amounting to $232,038 (2019 - $322,726) were incurred as expense in cost of sales in the Statements of Operations. In 2020, there were inventories written-off amounting to $131,983 (2019 - $nil) and an inventory provision of $163,026 (2019 - $277,896).

14

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

6. Property and Equipment

Property and Equipment
Cost
	Tools and Dies		Computer Equipment		Furniture and Fixtures		Rental units1			Equipment	Leasehold Improvements			Total
Balance at January 1, 2019	$	207,499	$	347,953	$	147,941	$	139,820	$	420,542	$	212,554	$	1,476,309
Additions		1,150		59,505		1,090		-		441,811		29,652		533,208
Disposals		-		-		-		(5,891)		-		-		(5,891)
Balance at December 31,2019	$	208,649	$	407,458	$	149,031	$	133,929	$	862,353	$	242,206	$	2,003,626
Balance at January 1, 2020	$	208,649	$	407,458	$	149,031	$	133,929	$	862,353	$	242,206	$	2,003,626
Additions		5,144		-		12,745		-		138,285		8,402		164,576
Reclassification		-		-		-		3,313		(3,313)		-		-
Disposals		(39,653)	(129,313)			(90,552)		(2,900)		(54,258)		-		(316,676)
Balance at December 31, 2020	$	174,140	$	278,145	$	71,224	$	134,342	$	943,067	$	250,608	$	1,851,526

Depreciation
	Tools and Dies		Computer Equipment		Furniture and Fixtures		Rental units1			Equipment	Leasehold Improvements			Total
Balance at January 1, 2019	$	141,565	$	229,125	$	106,608	$	57,577	$	228,767	$	39,977	$	803,619
Depreciation for the year		16,500		38,049		8,681		26,786		52,501		50,000		192,517
Disposals		-		-		-		(5,891)		-		-		(5,891)
Balance at December 31,2019	$	158,065	$	267,174	$	115,289	$	78,472	$	281,268	$	89,977	$	990,245
Balance at January 1, 2020	$	158,065	$	267,174	$	115,289	$	78,472	$	281,268	$	89,977	$	990,245
Depreciation for the year		13,731		42,190		9,167		27,357		64,409		57,659		214,513
Reclassification		-		-		-		(826)		826		-		-
Disposals		(39,606)	(122,002)			(86,457)		(2,901)		(53,524)		-		(304,490)
Balance at December 31, 2020	$	132,190	$	187,362	$	37,999	$	102,102	$	292,979	$	147,636	$	900,268
Carrying Amounts
At December 31,2019	$	50,584	$	140,284	$	33,742	$	55,457	$	581,085	$	152,229	$	1,013,381
At December 31, 2020	$	41,950	$	90,783	$	33,225	$	32,240	$	650,088	$	102,972	$	951,258

(1) Rental units consist of TLC-1000 systems used in customer rentals, demonstrations and service loaners

In 2020, there was amortization included in cost of sales amounting to $34,076 (2019 - $9,492). As at December 31, 2020, research and development equipment included assets not available for use with a cost of $375,436 (2019 - $397,339).

15

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

7. Intangible Assets

Cost
		Patents	Trademarks		Development Costs		FDA Clinical Study Costs(1)			Total
Balance at December 31,2019	$	199,622	$	58,346	$	344,093	$	509,649	$	1,111,710
Balance at December 31, 2020	$	199,622	$	58,346	$	344,093	$	509,649	$	1,111,710
Amortization
Balance at January 1, 2019	$	181,863	$	58,103	$	344,093	$	509,649	$	1,093,708
Amortization for theyear		11,353		137		-		-		11,490
Balance at December 31,2019	$	193,216	$	58,240	$	344,093	$	509,649	$	1,105,198
Balance at January 1, 2020	$	193,216	$	58,240	$	344,093	$	509,649	$	1,105,198
Amortization for theyear		6,406		106		-		-		6,512
Balance at December 31, 2020	$	199,622	$	58,346	$	344,093	$	509,649	$	1,111,710
Carrying Amounts
At December 31,2019	$	6,406	$	106	$	-	$	-	$	6,512
At December 31, 2020	$	-	$	-	$	-	$	-	$	-

(1) FDA clinical study costs consist of expenses incurred in conducting the clinical trial Laser Therapy Applications for Chronic Joint Pain used to obtain the FDA clearance in July 2005, which allows for the marketing and sale of the TLC-1000 product line into the US market.

8. Lease Liabilities and Right-of-use-Assets

		Property	Office	Equipment		Total
Right-of-use Assets
Balance at January 1, 2019	$	185,479	$	7,022	$	192,501
Depreciation charge for theperiod		49,461		1,793		51,254
Balance at December 31, 2019	$	136,018	$	5,229	$	141,247
Balance at January 1, 2020	$	136,018	$	5,229	$	141,247
Depreciation charge for theperiod		49,461		1,793		51,254
Balance at December 31, 2020	$	86,557	$	3,436	$	89,993
Lease Liabilities
Balance at January 1, 2019	$	185,479	$	7,022	$	192,501
Interest charge for the period(1)		11,905		451		12,356
Leasepayments for theperiod(2)		(58,075)		(2,160)		(60,235)
Balance at December 31, 2019	$	139,309	$	5,313	$	144,622
Balance at January 1, 2020	$	139,309	$	5,313	$	144,622
Interest charge for the period(1)		9,321		360		9,681
Leasepayments for theperiod(2)		(59,800)		(2,160)		(61,960)
Balance at December 31, 2020	$	88,830	$	3,513	$	92,343

(1) Lease payments are discounted using an incremental borrowing rate of 8%.

(2) Lease payments do not include variable property lease payments of $39,997 (2019 - $51,250).

16

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

8. Lease Liabilities and Right-of-use-Assets (continued)

		As at	December 30,	December 30,	2020	2020		As at	December 31,	December 31,	2019	2019
				Office						Office
	Property		Equipment			Total	Property		Equipment			Total
Current portion of lease liabilities	$	54,669	$	1,950	$	56,619	$	48,421	$	1,726	$	50,147
Non-currentportion of lease liabilities		34,160		1,564		35,724		90,888		3,587		94,475
	$	88,829	$	3,514	$	92,343	$	139,309	$	5,313	$	144,622

Principal repayments of the Company’s leased premises and office equipment until maturity are as follows:

				Office
	Property		Equipment			Total
2021		54,669		1,950		56,619
2022		34,160		1,564		35,724
	$	88,829	$	3,514	$	92,343

9. Payables and Accruals

Payables and Accruals
	2020 2019
Trade payables	$ 408,211 $ 525,195
Salaries, employment taxes, and benefits	162,191 613,170
Accrued liabilities	194,388 331,660
Total	$ 764,790$ 1,470,025

10. Income Taxes

Income Taxes
	2020 2019
Current income taxes Loss before income taxes Combined Federal and Provincial tax rate Recovery of tax at statutory tax rate Permanent differences Federal and provincial investment tax credits Expiry of non-capital losses True-up adjustment Change in tax rate and other Change in unrecognized deferred tax asset	(5,598,540) $ (7,413,914) $ 26.50% 26.50%
	(1,483,613) $ (1,964,687) $ 224,694 110,017 (462,413) (480,391) - - 139,370 (165,017) - - 1,581,962 2,500,078
Deferred income tax recovery	- $ - $

17

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

10. Income Taxes (continued)

Income Taxes (continued)
		2020		2019
Deferred Income tax assets
Non-capital loss carry forwards	$	5,359,810	$	4,457,917
Property, plant and equipment		281,922		305,766
Share issuance costs		257,889		370,250
Patents and trademarks		43,235		41,510
Development costs		4,385,800		3,840,221
Federal and provincial investment tax credits		3,195,802		2,925,939
Reserves		(265)		(265)
Deferred Income tax assets	$	13,524,193	$	11,941,338
Net future deferred income tax assets		13,524,193		11,941,338
Less: unrecognized deferred tax asset		(13,524,193)		(11,941,338)
Deferred Income tax assets	$	-	$	-

Non-capital loss carry-forwards

The Company has non-capital losses available for carry forward of approximately $20,225,697 (2019 - $16,822,329). The income tax benefit of this income tax recovery has not been recorded. These non-capital losses will expire as follows:

2026	$	93,534
2027		145,746
2028		351,013
2029		1,309,103
2030		602,073
2031		779,012
2032		362,215
2033		438,309
2034		837,869
2035		1,868,853
2036		2,929,100
2037		3,338,197
2038		1,818,376
2039		3,900,142
2040		1,452,155
	$	20,225,697

18

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

11. Public Offering and Private Placement

On January 9, 2019, the Company completed a financing by way of a private placement, where 4,095,157 Units were issued at a price of $0.35 per unit for gross proceeds of $1,433,306, of which 542,857 units were purchased by certain insiders of the Company. Each unit consisted of one common share and one nontransferable common share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common share at a price of $0.50, expiring on January 9, 2021. In connection with the offering, the Company incurred financing costs of $8,589.

The purchase price of $0.35 per unit was allocated between the common shares ($0.25 per share) and common share purchase warrants ($0.10 per warrant), based on their relative fair values. Management determined that the allocation of the gross proceeds of $1,433,306 was $1,017,289 for the common shares issued and $416,017 for the common share purchase warrants issued.

On August 22, 2019, the Company closed a public offering of units. On closing, the Company issued an aggregate of 57,500,000 Units, of which 502,000 units were purchased by certain insiders of the Company, at a price of $0.30 per unit for aggregate gross proceeds of $17,250,000. Each unit consisted of one common share of the Company and one common share purchase warrant. Each Warrant entitles the holder to acquire an additional Common Share at a price of $0.35, expiring on August 22, 2024. In connection with this financing the Company incurred financing costs of $2,195,028 of which $1,588,105 was paid in cash and $606,923 was paid through the issuance of 2,023,077 broker compensation units. Each broker compensation unit entitles the holder thereof to acquire one common share and one common share purchase warrant on the same terms as the unit common shares and common share purchase warrants issued pursuant to the financing. The broker compensation units were valued based on the fair value of services rendered.

The purchase price of $0.30 per unit was allocated between the common shares ($0.23 per share) and common share purchase warrants ($0.07 per warrant), based on their relative fair values. Management determined that the allocation of the gross proceeds of $17,250,000 was $12,937,500 for the common shares issued and $4,312,500 for the common share purchase warrants issued.

The fair value of each common share purchase warrants granted, with the exception of the August 22, 2019 public offering, was estimated on the dates of the grant using the Black-Scholes option pricing model with the following assumptions:

following assumptions:
	January 9, 2019
Expected volatility (based on historical share prices)	96.04%
Risk-free interest rate	1.91%
Expected life	2 Years
Expected dividends	Nil
Strike Price	$0.50
Share Price	$0.33

The August 22, 2019 public offering common share purchase warrants were valued based on the market value at time of grant which was $0.07. As at December 31, 2020, 2,023,077 broker compensation units were outstanding.

19

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

12. Stock Options

The Company has a rolling stock option plan reserving for issue under this plan up to 10% (20,427,537 common shares) of the outstanding common shares at a purchase price not less than the fair market value of the Company’s stock at the grant date. Under the Company’s stock option plan, the board of directors may grant, at its discretion, stock options to purchase common shares to certain employees, officers, directors and consultants of the Company. Terms and conditions of the stock option and vesting provisions are at the discretion of the board of directors.

A summary of stock options issued under the stock option plan for years ended December 31, 2020 and 2019 is provided below.

A summary of stock options issued is provided below.	under the stock option plan for years ended Dece	mber 31, 2020 and 2019
	Common shares under	Weighted average
	option	exercisedprice$
Outstanding,December 31,2018	5,770,000	0.50
Expired during year (1)	(1,250,000)	0.50
Forfeited during year (2)	(880,000)	0.50
Granted during year(3)	12,370,000	0.30
Outstanding, December 31, 2019	16,010,000	0.35
Expired during year (4)	(1,300,000)	0.50
Forfeited during year(5)	(295,000)	0.50
Outstanding, December 31, 2020	14,415,000	0.33

• 1) On July 10 and November 1, 2019 certain stock options previously issued to employees and consultants expired totaling 1,250,000

• 2) During 2019, certain employees and consultants were terminated and/or resigned from the employment of the Company and forfeited all non-vested options totaling 880,000.

• 3) On September 11, 2019 options were granted to certain directors and officers, employees and consultants of the Company for 10,000,000 at $0.25 each and 2,370,000 at $0.50 each for a total of 12,370,000 options vesting in three tranches with tranches vesting in one, two and three years respectively and expiring five years from date of issue.

• 4) On May 26 and October 13, 2020 certain stock options previously issued to employees and consultants expired totaling 1,300,000

• 5) During 2020, certain employees and consultants were terminated and/or resigned from the employment of the Company and forfeited all non-vested options totaling 295,000.

The following table summarizes information on the stock options outstanding as at December 31, 2020:

Stock Options Outstanding	Stock Options Outstanding	Stock Options Outstanding		Stock Options Exercisable	Stock Options Exercisable
Stock Options Outstanding	Weighted Average Remaining Life (years)	Weighted Exercise	Average Price $	Stock Options Exercisable	Weighted Average Exercise Price$
10,000	0.3		0.50	10,000	0.50
3,020,000	1.3		0.50	3,020,000	0.50
11,385,000	3.7		0.28	3,795,000	0.28
14,415,000				6,825,000

20

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

12. Stock Options (continued)

Under the stock option plan, the stock options vest over a three year period, commencing one year after the grant. As at December 31, 2020, 6,825,000 of the stock options were vested. All outstanding stock options as at December 31, 2019 will be fully vested by September 11, 2022.

Options to employees are measured at the fair value of the equity instruments granted on the grant date were measured using the following weighted average assumptions:

	2019
Risk-free interest rate	1.43%
Expected volatility*	86.28%
Expected life	5 years
Expected dividends	Nil
Weighted average grant date fair value	$0.14
Weighted average exercise price	$0.30
Weighted average forfeiture rate	15%

For the year ended December 31, 2020, the Company recognized stock-based compensation expense of $912,032 (2019 - $394,566) for stock options issued to directors, officers, employees and consultants, of which $556,057 (2019 - $363,274) is included in administrative expenses, $1,328 (2019 - $2,813) in selling expenses and $354,647 (2019 - $28,479) is included in research and development expenses. The remaining stock based compensation amount to be expensed on non-vested options, net of forfeiture is $492,370 (2019 - $1,210,779).

*Based on historical volatility

13. Common Share Purchase Warrants

Common share purchase warrants consisted of the following:

Common share purchase warrants consisted	of the following:
	Number	Weighted average	Fair value at
	outstanding	exercisedprice$	date ofgrant$
Outstanding December 31, 2018	37,753,847		3,812,609
Issued with shares	4,095,157	0.50	413,524
Issued with shares	57,500,000	0.35	3,763,743
Exercised	(7,802,633)	0.36	(593,313)
Outstanding December 31, 2019	91,546,371		7,396,563
Expired	(19,071,940)	0.54	(2,351,587)
Exercised	(500)	0.35	(33)
Extended	-		255,773
Extension Costs	-		(5,461)
Outstanding December 31, 2020	72,473,931		5,295,255

• 1) During 2019, 7,802,633 warrants were exercised. The share price at the exercise date was $0.36

2) During 2020, 19,071,940 warrants expired.

• 3) During 2020, 500 warrants were exercised. The share price at the exercise date was $0.35

21

THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

13. Common Share Purchase Warrants (continued)

The following table summarizes information on the common share purchase warrants outstanding for the year ended as of December 31, 2020:

Exercise Price	Outstanding Beginning of the year	Expired During the period	Exercised During the period	Granted During the period	Outstanding End of Period	Weighted Average Remaining Contractual Life (years)	Weighted Average Remaining Contractual Life (years)
$0.540	19,071,940	19,071,940	-	-	-		-
$0.375	4,555,266	-	-	-	4,555,266		0.86
$0.300	3,159,000	-	-	-	3,159,000		1.36
$0.500	3,165,008	-	-	-	3,165,008		1.76
$0.500	4,095,157	-	-	-	4,095,157		0.02
$0.350	57,500,000	-	500	-	57,499,500		3.64
	91,546,371	19,071,940	500	-	72,473,931		-

On May 13, 2020, the Board of Directors of the Company extended the expiry date of 3,159,000 share purchase warrants issued on May 14, 2018 by two years to May 14, 2022. The estimated fair value of the warrant extension is $187,697 which has been recognized under common share purchase warrants and the deficit. The fair value was estimated using the Black-Scholes model calculated for the difference between the extended period and the remaining period when the decision was taken to extend the warrants. The assumptions used were as follows for the two periods respectively: no expected dividend yield, 85.91% and 70.82% expected volatility, 0.28% and 0.28% risk-free interest rate and 2 and 0.002 years warrant expected life. Warrant extension expenses totaling $3,721 were allocated to these common share purchase warrants.

On September 30, 2020, the Board of Directors of the Company extended the expiry date of 3,165,008 share purchase warrants issued on October 3, 2018 by two years to October 3, 2022. The estimated fair value of the warrant extension is $68,076 which has been recognized under common share purchase warrants and the deficit. The fair value was estimated using the Black-Scholes model calculated for the difference between the extended period and the remaining period when the decision was taken to extend the warrants. The assumptions used were as follows for the two periods respectively: no expected dividend yield, 82.71% and 84.06% expected volatility, 0.24% and 0.24% risk-free interest rate and 2 and 0.005 years warrant expected life. Warrant extension expenses totaling $1,740 were allocated to these common share purchase warrants.

14. Share Capital

The Company is authorized to issue an unlimited number of common shares.

15. Loss Per Common Share

Basic loss per common share has been calculated based on the weighted average number of common shares outstanding during each of the years presented in the consolidated financial statements.

Stock options to purchase 14,415,000 (2019 - 16,010,000) common shares and common share purchase warrants totaling 72,473,931 (2019 - 91,546,371) were not included in the computation of diluted loss and comprehensive loss per common share due to their anti-dilutive nature.

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

16. Selling Expenses

The following are expenses classified as selling expenses on the consolidated financial statements:

		2020	2019
Sales salaries	$	260,286 $ 404,608
Advertising		84,106	161,777
Commission		43,665	55,892
Travel		10,637	53,740
Stock based compensation		1,328	2,813
Amortization and depreciation allocation		47,860	37,513
Total selling expenses	$	447,882$ 716,343

17. Administrative Expenses

The following are expenses classified as administrative expenses on the consolidated financial statements:

		2020	2019
Insurance	$	43,087	$ 48,993
Professional fees		482,138	316,236
Rent		39,967	50,675
General and administrative expenses		269,762	447,025
Administrative salaries		476,608	1,176,607
Settlement		85,000	-
Director and advisory fees		69,887	127,247
Stock based compensation		556,057	363,274
Amortization and depreciation allocation		47,755	74,751
Total administrative expenses	$	2,070,261	$ 2,604,808

18. Research and Development Expenses

The following are expenses classified as research and development expenses on the consolidated financial statements:

statements:
	2020 2019
Research and development (net of investment tax credit) $ 2,951,008 $ 3,997,739
Stock based compensation	354,647 28,479
Amortization and depreciation allocation	142,588 133,506
Total research and development expenses	$ 3,448,243$ 4,159,724

19. Government Assistance

The Company is eligible to receive grants and investment tax credits from the federal government related to research and development activities. All such amounts are applied against related research and development expenses when received or collection is reasonably assured. In 2020, an amount of $240,000 (2019 - $255,000) of investment tax credits was recorded against research and development expense. The amount is included in the trade and other receivables accounts in the consolidated statement of financial position.

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

20. Financial Instruments – Fair Value and Risks

IFRS 7 - Financial Instruments: Disclosures establishes a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows:

• Level 1 quoted prices 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. from derived prices); and

• Level 3 inputs for the asset or liability that are not based upon observable market data

The carrying amounts of cash and cash equivalents, trade and other receivable and payables and accrued liabilities approximate fair value due to the short-term maturities of these instruments.

Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As at December 31, 2020 and 2019, the Company’s financial instruments are categorized as Level 1. There were no financial instruments categorized as Level 2 or 3.

i 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 and arises principally from the Company’s trade and other receivable. The amounts reported in the consolidated balance sheets are net of allowances for credit losses, estimated by the Company’s management based on prior experience and its assessment of the current economic environment. The Company reviews its trade receivable accounts regularly and reduces amounts to their expected realizable values by adjusting the allowance for credit losses when management determines that the account may not be fully collectible. The Company has adopted credit policies in an effort to minimize those risks. The carrying value of trade and other receivables represent the Company’s maximum exposure to credit risk.

The following table reflects the balance and age of trade receivables as at December 31:

Trade receivables (net amount) Percentage outstanding more than 30 days Percentage outstanding more than 120 days	2020 2019
	$ 230,283 $ 380,229 1% 21% 1% 21%

The following table reflects the changes in the allowance for trade receivables during the years ended December 31:

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

20. Financial Instruments – Fair Value and Risks (continued)

ncial Instruments – Fair Value and Risks (continued)
Allowance for trade receivables - beginning of year Allowance recorded against current year sales Adjustment based on collection experience Amounts written off	2020 2019
	70,436 $ 94,012 $ - 1,695 1,274 13,601 (30,025) (38,872)
Allowance for trade receivables - end ofyear	41,685 $ 70,436 $

ii Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by continuously monitoring forecasted and actual cash flows, as well as anticipated investing and financing activities. The Company does not have material long-term financial liabilities.

The table below reflects the contractual obligations of the Company’s undiscounted cash flows for its financial liabilities:

The table below reflects the contractual obligations of the Company’s undiscounted cash flows for its financial liabilities:	The table below reflects the contractual obligations of the Company’s undiscounted cash flows for its financial liabilities:
Contractual Obligations Total 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Payments Due by Period
Lease liabilities 92,343 $ 56,619 $ 35,724 $ - $ - $ - $ Payables and accruals 764,790 764,790 - - - - Commitments(note 20) 446,989 333,844 7,500 7,500 7,500 7,500	- $ - $ - $ - $ - $ - $ - - - - - - 7,500 7,500 7,500 7,500 7,500 7,500
Total contractual obligations 1,304,122 $ 1,155,253 $ 43,224 $ 7,500 $ 7,500 $ 7,500 $	7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $

The Company also has contractual obligations (note 24) in the form of research and development commitments.

iii Interest rate risk

Interest rate risk is the risk that changes in interest rates will affect the Company’s income or the value of the financial instruments held.

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company’s exposure to interest rate risk is as follows:

Cash and cash equivalents Short-term fixed and variable interest rate Short-term investments Short-term fixed interest rate Financed trade receivables Short-term and long-term fixed interest rate

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

20. Financial Instruments – Fair Value and Risks (continued)

Based on the carrying amount of the Company’s variable interest-bearing financial instruments as at December 31, 2020, an assumed 0.5% increase or 0.5% decrease in interest rates during such period would have resulted in an increase/decrease of $48,000 in income, with all other variables held constant.

Management believes that the risk that the Company will realize a loss as a result of the decline in the fair value of its cash equivalents and short-term investments is limited because these investments have shortterm maturities and are generally held to maturity.

The capacity of the Company to reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available in the market.

Interest income presented in the consolidated statement of loss represents interest income on financial assets.

iv Foreign currency exchange risk

The Company is exposed to foreign currency exchange risk. This risk arises from the Company’s holdings of US dollar denominated cash, trade and other receivables and payables and accrued liabilities. Changes arising from this risk could impact the Company’s reported foreign currency exchange gains or losses.

Accounts exposed to foreign currency exchange risk as at December 31 are as follows:

Cash Trade and other receivables Payables and accruals	Canadian U.S. Canadian U.S. 2020 2019
	40,822 $ 32,062 $ 31,223 $ 24,040 $ 56,110 44,070 108,826 86,677 (185,317) (145,552) (201,469) (166,829)
Total	(88,385) $ (69,420) $ (61,420) $ (56,112) $

v Foreign currency exchange risk sensitivity analysis

The following table details the Company’s sensitivity analysis to a 10% strengthening in the US dollar on foreign currency denominated monetary items and adjusts its translation at the consolidated balance sheet dates for a 10% change in foreign currency exchange rates. For a 10% weakening of the US dollar against the Canadian dollar, there would be an equal and opposite impact on loss and comprehensive loss for the year.

Cash Trade and other receivables Payables and accruals	2020 2019
	4,082 $ 3,122 $ 5,611 10,883 (18,532) (20,147)
Total	(8,839) $ (6,142) $

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

21. Related Party Disclosure

The compensation of the directors and other key management of the Company is included in the summary table below. Key management includes those persons having authority and responsibility for planning, directing and controlling the activities, directly or indirectly, of the Company.

	2020	2019
Short-term compensation	$1,210,000	$2,195,573
Stock-based compensation	841,349	232,890
Total	$2,051,349	$2,428,463

Key management personnel were not paid post-employment benefits, termination benefits or other long term benefits during the years ended December 31, 2020 and 2019. Fees paid to directors have been disclosed in note 17.

Stock-based compensation paid to key management personnel is the fair value of options that vested to key management personnel during the year. Stock based compensation paid to directors have been disclosed in note 18.

22. Segmented Information

For management purposes, the Company is organized into two separate reportable operating divisions; (1) Anti-Cancer Therapy (“ ACT ”) division and (2) Cool Laser Therapy (“ CLT ”) division. The ACT division is responsible for the research and development of Photo Dynamic Compounds (“ PDC ”) for the treatment of primarily cancer. The ACT division is responsible for all aspects of the Company’s therapeutic laser business, which manufactures products used by healthcare practitioners primarily for the healing of pain.

The following table displays revenue and direct expenses from the CLT and ACT division for the years ended December 31:

CLT ACT Total Sales 929,122 $ - $ 929,122 $ Cost of sales 659,442 - 659,442 Gross margin 269,680 - 269,680 Operating Expenses Selling expenses 447,882 - 447,882 Administrative expenses 955,673 1,114,588 2,070,261 Research and development expenses 230,936 3,217,307 3,448,243 (Gain) loss on foreign exchange (2,080) (2,079) (4,160) Interest expense 4,840 4,840 9,680 Interest income (51,843) (51,843) (103,686) 1,585,408 4,282,813 5,868,220 Loss for the period (1,315,728) $ (4,282,813) $ (5,598,540) $ Total Assets 2,837,811 $ 7,182,971 $ 10,020,782 $ Total Liabilities 419,166 437,967 857,133 2020	CLT ACT Total 2020	CLT ACT Total 2019
	929,122 $ - $ 929,122 $ 659,442 - 659,442	964,051 $ - $ 964,051 $ 903,296 - 903,296
	269,680 - 269,680	60,755 - 60,755
		716,343 - 716,343 1,742,759 862,049 2,604,808 455,617 3,704,107 4,159,724 7,520 7,521 15,041 6,178 6,178 12,356 (33,603) - (33,603)
	1,585,408 4,282,813 5,868,220	2,894,814 4,579,855 7,474,669
	(1,315,728) $ (4,282,813) $ (5,598,540) $	(2,834,059) $ (4,579,855) $ (7,413,914) $
	2,837,811 $ 7,182,971 $ 10,020,782 $ 419,166 437,967 857,133	4,527,182 $ 10,942,908 $ 15,470,090 $ 776,651 837,996 1,614,647

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

22. Segmented Information (continued)

The following table displays revenue and direct expenses from CLT division product sales by product line and geographic area for the years ended December 31:

Sales by Product Line TLC-1000 TLC-2000 Expenses Cost of Sales Selling Expenses	Canada USA International 411,391 $ 25,525 $ 7,347 $ 403,768 62,398 18,693 815,159 87,923 26,040 2020	Canada USA International 2019
		264,870 $ 54,345 $ 13,463 $ 570,532 42,230 18,611
		835,402 96,575 32,074
	578,556 62,404 18,482 376,408 49,873 21,601 954,964 112,277 40,083 (139,805) $ (24,354) $ (14,043) $	782,753 90,490 30,053 635,105 50,465 30,773
		1,417,858 140,955 60,826
		(582,456) $ (44,380) $ (28,752) $

As at December 31, 2020 and 2019, the Company’s long-lived assets used in operations are all located in Canada. Timing of revenue is recognized at a point in time.

23. Commitments

The Company’s commitments consist of the following:

Research Commitments (a) Research Agreement (b) Research Agreement (c) Research Agreement(d)	Total 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
	58,250 $ 58,250 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 24,969 24,969 - - - - - - - - - -
	303,225 228,225 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500
	22,400 22,400 - - - - - - - - - -
Total	408,844 333,844 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500

• a) Research Commitments under a research collaboration agreement with University Health Network for the Ontario Research Fund project. Under the terms of this agreement, the Company is required to pay $348,600 for the period from June 1, 2017 through to June 1, 2021. The Company has paid $290,080 relating to this commitment, of which $58,520 is the remaining commitment.

• b) Research Commitments under a research agreement with a Trial Management Organization for the TLC-3000 cancer therapy project. Under the terms of this agreement, the Company is required to pay $126,324 (U.S. $96,800) for the period from July 23, 2019 through to December 31, 2022. The Company has paid $101,355 (U.S. $76,400) relating to this commitment, of which $24,969 (U.S. $20,400) is the remaining commitment.

• c) Research Commitments under a research agreement with Alphora Research Inc. for the TLC-3000 cancer therapy project. Under the terms of this agreement, the Company is required to pay $939,000 for the period from September 27, 2019 through to April 30, 2031. The Company has paid $635,775 relating to this commitment, of which $303,225 is the remaining commitment.

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THERALASE[] TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2020 & 2019

Stated in Canadian Dollars

23. Commitments (continued)

• d) Research Commitments under a research collaboration agreement with University Health Network for the Sponsored Research Agreement. Under the terms of this agreement, the Company is required to pay $184,789 for the period from March 1, 2020 through to February 28, 2021. The Company has paid $162,389 relating to this commitment, of which $22,400 is the remaining commitment.

24. COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“ COVID-19 ”) as a global pandemic, which continues to spread throughout Canada and around the world. As of the report date, the Company is aware of significant changes in its business as a result of COVID-19, notably: unavailability of personnel, personnel working remotely or virtually, significant delays / cancellations in customer purchase decisions and delays in the Company’s Phase II Non-Muscle Invasive Bladder Cancer clinical study specifically; patient enrollment, patient treatment and the on-boarding of new clinical study sites. Management is uncertain of the full extent of theses impacts on its financial statements and believes that the business disruption caused by COVID-19 could be temporary; however, there is uncertainty around its duration and hence the potential impact on the business cannot be fully estimated as of the date of this report.

25. Subsequent Events

On January 8, 2021, the Company extended the expiry date of 4,095,157 share purchase warrants, all of which are exercisable at $0.50 per share. The share purchase warrants were issued on January 9, 2019 pursuant to a private placement involving the issuance of 4,095,157 units of the Company. The new expiry date of the warrants is January 9, 2023.

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