ZTEST Electronics Inc. — Interim / Quarterly Report 2021

Mar 1, 2021

ZTEST Electronics Inc.

Unaudited Condensed Interim Consolidated Financial Statements

December 31, 2020

(Stated in Canadian Dollars)

Notice To Reader

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the unaudited condensed interim consolidated financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

These unaudited condensed interim consolidated financial statements were approved by the Board of Directors on February 25, 2021. They have not been reviewed by the Company ’ s auditors.

The accompanying unaudited condensed interim consolidated financial statements have been prepared by, and are the responsibility of, management. These condensed interim consolidated financial statements are presented on the accrual basis of accounting and accordingly, a precise determination of many assets and liabilities is dependent upon future events. Where necessary, management has made informed judgments and estimates in accounting for these assets and liabilities and for transactions which were not complete at the end of the reporting period. Recognizing that the Company is responsible for both the integrity and objectivity of the financial statements, management is satisfied that these unaudited condensed interim consolidated financial statements have been fairly presented.

ZTEST Electronics Inc.

Unaudited Condensed Interim Consolidated Statements of Financial Position

(Stated in Canadian Dollars) December 31, 2020

Dec. 31 2020 Assets Current assets Cash $ 403,780 Accounts receivable 459,986 Inventories_(note 3) 673,688 Prepaid expenses 4,880 1,542,334 Equipment(note 4) 189,597 Right-of-use asset(note 5) 60,699 Investments(note 6) 2 $ 1,792,632 Liabilities Current liabilities Accounts payable and accrued liabilities(note 11) $ 824,053 Customer deposits 25,000 Current portion of lease liability(note 8) 26,809 875,862 Long-term debt(note 9) 60,000 935,862 Shareholders’ equity Share capital(note 10) 23,658,086 Warrants(note 10) 150,668 Contributed surplus(note 10)_ 1,593,525 Deficit (24,545,509) 856,770 $ 1,792,632	June 30 2020
	$ 220,403 512,068 732,961 18,781 1,484,213 210,918 112,099 1
	$ 1,807,231
	$ 898,237 25,000 79,296
	1,002,533 40,000
	1,042,533
	23,613,546 217,665 1,538,667 (24,605,180)
	764,698
	$ 1,807,231

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

Approved by the Board:

Signed: “Steve Smith”

Signed: “K. Michael Guerreiro”

Director

Director

ZTEST Electronics Inc.

Unaudited Condensed Interim Consolidated Statements of Changes in Equity (Stated in Canadian Dollars) December 31, 2020

Share Contributed Capital Warrants Surplus Deficit Balance, June 30, 2019 $ 23,394,174 $ 182,956 $ 1,533,373 $ (23,786,443) Net loss for the period - - - (282,745) Balance, December 31, 2019 23,394,174 182,956 1,533,373 (24,069,188) Shares for debt 153,450 - - - Private placement 65,922 40,003 - - Warrants expired - (5,294) 5,294 - Net loss for the period - - - (535,992) Balance, June 30, 2020 23,613,546 217,665 1,538,667 (24,605,180) Preferred shares issued 1 - - - Warrants exercised 44,539 (12,139) - - Warrants expired - (54,858) 54,858 - Net income for the period - - - 59,671 Balance, December 31, 2020 $ 23,658,086 $ 150,668 $ 1,593,525 $ (24,545,509)	Total
	$ 1,324,060 (282,745)
	1,041,315 153,450 105,925 - (535,992) 764,698 1 32,400 - 59,671
	$ 856,770

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

ZTEST Electronics Inc.

Unaudited Condensed Interim Consolidated Statements of Comprehensive Income (Loss) (Stated in Canadian Dollars) December 31, 2020

Three months ended 2020 2019 Product sales $ 873,206 $ 828,703 Cost ofproduct sales (note 3) 594,600 622,683 278,606 206,020 Expenses Selling, general and administrative_(note 12) 302,346 344,295 Interest expense - long term - - Interest expense - lease liability(note 8) 506 1,967 Interest expense - other 162 1,953 Finance fees(note 11) - 3,652 Depreciation of equipment 1,089 1,121 Foreign exchange(gain)loss (3,282) 1,286 300,821 354,274 Income (loss) before other income and provisions, and income taxes (22,215) (148,254) Other income and provisions Miscellaneous income - 2 Equityin loss of Conversance Inc. (note 6) - (13,851) - (13,849) Income (loss) before income taxes (22,215) (162,103) Provision for income taxes(note 13)_ - - Comprehensive income(loss) for theperiod $ (22,215) $ (162,103) Comprehensive income (loss) per share Basic $ (0.00) $ (0.01) Fullydiluted $ (0.00) $ (0.01) Weighted average shares outstanding Basic 23,006,479 21,103,696 Fullydiluted 23,006,479 21,103,696	Six months ended 2020 2019 $ 1,926,707 $ 1,709,406 1,291,173 1,236,516 635,534 472,890
	576,120 699,189 - 5 1,384 4,286 324 3,381 - 7,121 2,178 2,242 (4,143) 3,149
	575,863 719,373
	59,671 (246,483) - 4 - (36,266)
	- (36,262)
	59,671 (282,745) - -
	$ 59,671 $ (282,745)
	$ 0.00 $ (0.01) $ 0.00 $ (0.01)
	22,941,587 21,103,696 25,477,692 21,103,696

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

ZTEST Electronics Inc.

Unaudited Condensed Interim Consolidated Statements of Cash Flows

(Stated in Canadian Dollars) December 31, 2020

		Three	months ended	months ended		Six	months ended	months ended
		2020		2019		2020		2019
Cash flow from operating activities
Net income (loss) for the period	$	(22,215)	$	(162,103)	$	59,671	$	(282,745)
Items not involving cash
Depreciation of equipment		10,661		13,013		21,321		25,969
Depreciation of right of use assets		25,700		25,699		51,400		51,399
Imputed interest on lease liability		506		1,967		1,384		4,286
Equity in loss of Conversance Inc.		-		13,851		-		36,266
Changes in non-cash working capital items:
Accounts receivable		(18,033)		15,344		52,082		256,943
Inventories		1,490		86,360		59,273		(4,409)
Prepaid expenses		222		(10,724)		13,901		(9,299)
Accounts payable and accrued liabilities		(52,493)		(47,844)		(74,184)		(63,981)
Customer deposits		-		(24,126)		-		15,444
		(54,162)		(88,563)		184,848		29,873
Cash flow from investing activities
Purchase of equipment		-		-		-		(2,770)
Cash flow from financing activities
Proceeds of bank operating loan, net		-		65,000		-		(10,000)
Proceeds of long-term debt		20,000		-		20,000		-
Repayment of long-term debt		-		-		-		(3,291)
Repayment of lease liability		(26,936)		(26,935)		(53,871)		(53,871)
Issuance of common shares		32,400		-		32,400		-
		25,464		38,065		(1,471)		(67,162)
(Decrease) increase in cash		(28,698)		(50,498)		183,377		(40,059)
Cash, beginning ofperiod		432,478		77,067		220,403		66,628
Cash, end ofperiod	$	403,780	$	26,569	$	403,780	$	26,569
Supplemental Disclosure of Cash Flow Information:
During the period the Company had cash flows	arising from interest			and income taxes		paid as follows:
Cash paid for interest	$	162	$	1,953	$	324	$	3,397
Cashpaid for income taxes	$	-	$	-	$	-	$	-

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

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

1. Business of the Company

ZTEST Electronics Inc. ( “ the Company ” ) amalgamated under the laws of Ontario and carries on business at 523 McNicoll Avenue, Toronto, Ontario designing, developing, and assembling printed circuit boards and other electronic equipment. The Company's shares trade on the Canadian Securities Exchange ( “ CSE ” ) under the symbol "ZTE".

2. Significant Accounting Policies

Statement of compliance

The Company has prepared these unaudited condensed interim financial statements in accordance with IAS 34, Interim Financial Reporting , employing all of the same accounting policies and methods of computation as disclosed in the annual financial statements as at June 30, 2020.

The notes to these unaudited condensed interim consolidated financial statements are intended to provide a description of events and transactions that are significant to an understanding of the changes in the Company ’ s financial position and performance since June 30, 2020. Certain disclosures that appear in the annual financial statements have not been reproduced in these unaudited condensed interim consolidated financial statements and, in this regard only, these unaudited condensed interim financial statements do not conform in all respects to the requirements of IFRS for annual consolidated financial statements. Accordingly, these unaudited condensed interim consolidated financial statements should only be read in conjunction with the annual financial statements as at June 30, 2020.

These unaudited condensed interim consolidated financial statements were authorized for issuance by the Board of Directors of the Company on February 25, 2021.

Basis of presentation and going concern considerations

These unaudited condensed interim consolidated financial statements have been prepared on a historical cost basis using the accrual basis of accounting, except for cash flow information, and in accordance with IFRS applicable to a “ going concern ” . Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. If the going concern assumption were not appropriate for these unaudited condensed interim consolidated financial statements then adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the statement of financial position classifications used.

Basis of consolidation

Basis of consolidation	Basis of consolidation	Basis of consolidation
These unaudited condensed interim consolidated financial statements include the accounts of the Company as
well as the following subsidiaries' assets and liabilities and the revenues and		expenses arising, subsequent to the
date of acquisition:
Permatech Electronics Corporation (“PEC”)	- 100%	owned
Twenty49 Ltd	- 100%	owned (inactive)
Northern Cross Minerals Inc.	- 66.7%	owned (inactive)

Significant accounting judgments and estimates

The preparation of these unaudited condensed interim consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates. These unaudited condensed interim consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the unaudited condensed interim consolidated financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and also in future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Significant estimates and judgments include, but are not limited to, the assessment of the Company as a going concern, recoverability of inventory, the inputs used in applying the Black-Scholes valuation model, and the recognition and valuation of deferred tax amounts.

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

2. Significant Accounting Policies - continued

Financial instruments

The Company ’ s financial instruments are comprised of the following:

Financial assets: Cash Accounts receivable Financial liabilities: Bank operating loan Accounts payable and accrued liabilities Customer deposits Lease liability Long-term debt	Classification Amortized cost Amortized cost Classification Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost

Amortized cost – The amount at which a financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit losses.

The effective interest method - The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest and any transaction costs over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or liability to the net carrying amount on initial recognition.

Impairment of non-financial assets

At the end of each reporting period, the Company reviews the carrying amounts of its non-financial assets with finite lives to determine whether there is any indication that those assets have suffered an impairment loss. The Company has assessed the assets of all its operating entities and has determined that there is no impairment of its non-financial assets.

Income (loss) per share

The Company presents basic and diluted income (loss) per share data for its common shares, calculated by dividing the income (loss) attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the financial reporting period. Diluted income (loss) per share is determined by adjusting the income (loss) attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares.

Stock options and warrants outstanding are excluded from the computation of diluted income (loss) per share if their inclusion would increase the income per share, or decrease the loss per share, or if their exercise price exceeds the average market price of the Company ’ s shares for the financial reporting period.

Segment disclosure

The Company has a single location and operating segment. Accordingly, all revenues are generated in Canada and all assets are located in Canada.

3. Inventories

The carrying value of inventory is comprised of:

Dec. 31 2020 Raw materials and supplies(1) $ 616,625 Work in process 32,491 Finished goods 24,572 $ 673,688	June 30 2020
	$ 684,648 29,511 18,802
	$ 732,961

(1) The raw materials and supplies inventory is presented net of provisions for obsolete and/or slow moving items in the amount of $25,693 (June 2020 - $28,527).

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

3. Inventories - continued

Inventory utilization during the period was as follows:

Dec. 31 2020 Raw materials and supplies used $ 934,046 Labour costs_(note 16)_ 294,930 Depreciation 19,142 Other costs 51,805 Net change in finishedgoods and work inprocess (8,750) Cost ofproduct sales $ 1,291,173	Dec. 31 2019
	$ 810,906 373,384 23,727 58,617 (30,118)
	$ 1,236,516

4. Equipment

Equipment
Computer Office Manufacturing Leasehold Equipment Equipment Equipment Improvements Cost: Balance, June 30, 2019 $ 185,048 $ 71,277 $ 2,594,244 $ 84,143 Additions - - 2,770 - Balance, Dec. 31, 2019 185,048 71,277 2,597,014 84,143 Additions 1,370 - - - Balance, June 30, 2020 186,418 71,277 2,597,014 84,143 Additions - - - - Balance,Dec. 31,2020 $ 186,418$ 71,277$ 2,597,014$ 84,143 Accumulated Depreciation: Balance, June 30, 2019 $ (178,902) $ (70,242) $ (2,357,490) $ (69,102) Depreciation (923) (103) (23,786) (1,157) Balance, Dec. 31, 2019 (179,825) (70,345) (2,381,276) (70,259) Depreciation (1,127) (104) (23,841) (1,157) Balance, June 30, 2020 (180,952) (70,449) (2,405,117) (71,416) Depreciation (820) (83) (19,261) (1,157) Balance,Dec. 31,2020 $ (181,772) $ (70,532) $ (2,424,378) $ (72,573) Carrying Amounts: June 30, 2019 $ 6,146 $ 1,035 $ 236,754 $ 15,041 December 31, 2019 $ 5,223 $ 932 $ 215,738 $ 13,884 June 30, 2020 $ 5,466 $ 828 $ 191,897 $ 12,727 December 31,2020 $ 4,646$ 745$ 172,636$ 11,570	Total
	2,934,712 2,770 2,937,482 - 2,938,852 - $ 2,938,852
	$ (2,675,736) (25,969)
	(2,701,705) (26,229)
	(2,727,934) (21,321)
	$ (2,749,255)
	$ 258,976 $ 235,777 $ 210,918 $ 189,597

5. Right of use asset

The Company occupies its operating facility under a lease that expires March 2021. The right-of-use asset associated with this lease was initially recorded at cost equal to the present value of the remaining lease payments, plus a refundable deposit paid at the inception of the lease. Subsequent to initial recording, the rightof-use asset is measured using the cost model where cost is reduced by any accumulated depreciation and any accumulated impairment losses and is adjusted for any remeasurement of the lease liability. Depreciation is calculated on a straight-line basis over the remaining term of the lease and charged to net income as an element of occupancy costs (note 12) . There have been no impairment losses and no remeasurement of the lease liability.

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

5. Right of use asset - continued

Right of use asset - continued
Cost recognized upon adoption of IFRS 16	$	214,897
Depreciation recorded as an element of occupancy costs		(51,399)
Balance at December 31, 2019		163,498
Depreciation recorded as an element of occupancy costs		(51,399)
Balance at June 30, 2020		112,099
Depreciation recorded as an element of occupancy costs		(51,400)
Balance at December 31, 2020	$	60,699

6. Investments

The Company holds a non-controlling interest in Conversance Inc., a private Canadian technology company. The shares of Conversance Inc. are subject to a hold period and, unless permitted under securities legislation, the shares may not be traded before the date that is four months and a day after the issuer becomes a reporting issuer in any province or territory.

Conversance Inc. is engaged in the development of its proprietary technology and has not yet produced any revenues. The timing of such revenues, if any, is not currently determinable. The absence of cash flows, or the ability to predict when any may arise, made it infeasible for the Company to ascertain the value of Conversance Inc. as a going concern as at June 30, 2020. Accordingly, a provision for impairment was recognized to reduce the carrying value of the investment to $1. Should future circumstances warrant doing so, this provision may be reversed, but only to the extent that the carrying value of the investment at the time of reversal does not exceed the carrying value that would have resulted had the provision not been recorded.

Dec. 31 2020 296,250 Class A common shares, representing a 25.29% interest $ 1,129,762 25,000 Class A common shares(1) 1 Equity in post-acquisition loss (152,109) Impairmentprovision (977,652) Aggregate investment $ 2	June 30 2020
	$ 1,129,762 - (152,109) (977,652)
	$ 1

(1) In September 2020, ZTEST entered into an agreement with the founder and majority shareholder of Conversance Inc. whereby ZTEST issued 1,250,000 Convertible First Preferred Shares Series 1 to that majority shareholder in exchange for 25,000 Class A common shares of Conversance Inc. The ZTEST Series 1 shares will be automatically converted to common shares of ZTEST if, and only if, Conversance completes an arm ’ s length financing through which it issues at least 130,139 Class A common shares from treasury, at a price of at least $10.00 per Class A common share, by June 30, 2021. If such a financing is not completed then the ZTEST Series 1 shares will be redeemed for an aggregate price of $1 and the 25,000 Class A common shares of Conversance Inc. will be returned to the majority shareholder. If such a financing does proceed then ZTEST retains its right to maintain its 25.29% interests by subscribing for the requisite number of Class A common shares of Conversance, at the same price and payment terms applicable to the financing. As an additional element of this transaction, ZTEST was granted an option by Conversance Inc., to acquire 75,000 Class A common shares from treasury, in exchange for a cash payment of $1,000,000, until December 31, 2022.

7. Bank operating loan

The Company has a line of credit, which was not drawn upon as at December 31, 2020 or June 30, 2020. It may be drawn to a maximum of $250,000, bears interest at the TD Bank prime lending rate plus 2.5%, is due upon demand, and is secured by a general security agreement covering the assets of PEC.

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

8. Lease liability

The Company occupies its operating facility under a lease that expires March 2021. A refundable deposit of $35,000 was paid at the inception of the lease. The lease liability was initially recorded at the present value of the remaining lease payments, discounted using the Company ’ s incremental borrowing rate, which was determined to be 5.7%. The lease liability has been subsequently reduced by the lease payments paid and interest, imputed at the discount rate, was added to the obligation as follows:

Present value of lease payments remaining upon adoption of IFRS 16 Lease payments paid during period Interest imputed at 5.7% Balance at December 31, 2019 Lease payments paid during period Interest imputed at 5.7% Balance at June 30, 2020 Lease payments paid during period Interest imputed at 5.7% Balance at December 31, 2020 Less current portion	$ 179,897 (53,871) 4,286
	130,312 (53,871) 2,855 79,296 (53,871) 1,384 $ 26,809 (26,809) $ -

The Company has negotiated a new extension to this lease which establishes the monthly lease payments required from April 2021 to March 2026.

9. Long-Term Debt

Long-Term Debt
Dec. 31 2020 Canadian Emergency Business Account (CEBA), non-interest bearing with no payments required until December 31, 2022, then 5% per annum, payable monthly until maturity December 31, 2025. The principal amount may be pre-paid in whole or in part at any time without penalty. Provided the loan balance is no more than $20,000 as at December 31, 2022 the remaining balance of the loan will be forgiven. $ 60,000 Less: current portion - $ 60,000	June 30 2020
	$ 40,000 -
	$ 40,000

10. Share Capital

Authorized

Unlimited Common shares

Unlimited Preferred shares in one or more series.

1,250,000 Convertible Preferred Shares Series 1, redeemable, non-voting, with no dividend rights. These shares are subject to a triggering event, and a determination date not to exceed June 30, 2021. If the triggering event occurs, on or before June 30, 2021, then these shares will be automatically converted into 1,250,000 common shares, otherwise they will be redeemed for the aggregate redemption price of $1. The triggering event (note 6) is the completion, by Conversance Inc., of an arm ’ s length financing whereby it issues at least 130,139 Class A shares from treasury, representing at least 10% of the outstanding capital of Conversance after giving effect to the financing, at a price of at least $10 per share.

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

10. Share Capital - continued

Issued

Dec. 31 2020 Common shares $ 23,658,085 Convertible Preferred Shares Series 1 1 Share capital $ 23,658,086 Common shares Number of Shares (1) Balance June 30, 2019 and December 31, 2019 21,103,696 Shares issued in settlement of debt(2) 1,023,000 Private placement(3) 750,000 Balance June 30, 2020 22,876,696 Warrants exercised 540,000 Balance December 31, 2020 23,416,696 Convertible Preferred Shares Series 1 Number of Shares Balance June 30, 2019, December 31, 2019, and June 30, 2020 - Shares issued to acquire investment in Conversance Inc.(note 6) 1,250,000 Balance December 31, 2020 1,250,000	June 30 2020
	$ 23,613,546 -
	$ 23,613,546
	Amount
	$ 23,394,174 153,450 65,922
	23,613,546 44,539
	$ 23,658,085
	Amount
	$ - 1
	$ 1

• (1) Following the 2013 conversion of Class A Special Shares to common shares, 8,246 common shares remain reserved to be issued if and when the remaining Class A shareholders identify themselves to the Company.

• (2) In accordance with agreements between the Company and its Chief Executive Officer and a former Director, the Company issued 1,023,000 common shares, valued at $0.15 per share, in settlement of amounts aggregating $153,450 that were due them as at December 31, 2019 .

• (3) The Company completed a private placement whereby an aggregate of 750,000 working capital units were issued for gross proceeds of $112,500. Each unit consisted of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to acquire one additional common share of the Company at a price of $0.25 until twelve months following the closing date. The Company paid finders ’ fees of $1,575, incurred other costs of $5,000, attributed a value of $38,756 to the common share purchase warrants, and issued 10,500 broker warrants valued at $1,247. Each broker warrant entitles the holder to acquire one common share of the Company for $0.15 until February 28, 2021.

Details of warrants outstanding:

Details of warrants outstanding:
Number of Warrants Balance June 30, 2019 and December 31, 2019 3,641,700 Warrants issued via private placement 750,000 Broker warrants issued via private placement 10,500 Warrants expired (23,800) Balance June 30, 2020 4,378,400 Warrants exercised (540,000) Warrants expired (405,400) Balance December 31, 2020 3,433,000	Amount
	$ 182,956 38,756 1,247 (5,294)
	217,665 (12,139) (54,858) $ 150,668

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

10. Share Capital - continued

Details of warrants outstanding - continued:

	Number of		Exercise
	Warrants		Price	ExpiryDate
Issued Dec. 15, 2016	2,360,000	$	0.06	Dec. 15, 2021
Issued Jan. 30, 2018(1)	312,500	$	0.40	Jan. 31, 2021
Issued Feb. 28, 2020(2)	750,000	$	0.25	Feb. 28, 2021
Issued Feb. 28,2020(3)	10,500	$	0.15	Feb. 28,2021

(1) These warrants expired subsequent to the financial reporting date.

(2) 600,000 of these warrants were exercised subsequent to the financial reporting date.

• (3) These warrants were exercised subsequent to the financial reporting date.

	Number of	Weighted Average	Weighted Average	Weighted Average
	Warrants	Priceper Warrant		ExpiryDate
Beginning of period	4,378,400	$	0.15	Aug. 30, 2021
Warrants exercised during the period	(540,000)	$	0.06	Dec. 15, 2021
Warrants expired duringtheperiod	(405,400)	$	0.40	Dec. 22,2020
End ofperiod	3,433,000	$	0.13	Sep. 12,2021

The following weighted average assumptions were used to calculate the fair value of the warrants issued during the period:

Dec. 31 2020 Dividend yield None issued Risk free interest rate (%) None issued Expected stock volatility (%) None issued Expected life (years) None issued Details of options outstanding: Common Shares Number of Exercise Under Option Options Vested Price	June 30 2020
	Nil 1.27 119.88 1.0
	ExpiryDate
Granted Mar. 3, 2016 400,000(1, 2) 400,000 $ 0.05 Granted January12,2018 350,000(1) 550,000 $ 0.95	Mar. 3, 2021 Jan. 12,2023

(1) Directors and/or Officers of the Company hold these options.

• (2) 200,000 options were exercised subsequent to the financial reporting date.

	Common Shares	Weighted Average	Weighted Average
	Under Option	Priceper Option	ExpiryDate
Balance, beginning of the period	1,000,000	$ 0.55	Sep. 2, 2021
Expired duringtheperiod	(250,000)	$ 0.79	Jul. 26,2020
Balance,end of theperiod	750,000	$ 0.47	Jan. 14,2022

No stock options were granted during the period ended December 31, 2020 or during the year ended June 30, 2020.

Share based payment transactions and contributed surplus

The Company has a stock option plan. The aggregate number of common shares reserved for issuance under this plan cannot exceed 20% of the aggregate number of common shares of the Company that are issued and outstanding. The Company has granted options for the purchase of common shares to employees, directors, officers and other service providers. The fair values of stock options granted have been determined using the Black-Scholes model and are added to contributed surplus as follows:

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

10. Share Capital - continued

Share based payment transactions and contributed surplus - continued:

. Share Capital - continued Share based payment transactions and contributed surplus - continued:
Dec. 31 2020 Contributed surplus, beginning of period $ 1,538,667 Warrants expired - Contributed surplus, end of period $ 1,542,349	June 30 2020
	$ 1,533,373 5,294
	$ 1,538,667

11. Related Party Transactions and Balances

The Company had transactions during the periods presented with key management personnel and with 1114377 Ontario Inc., a company controlled by the spouse of a former director of PEC. The service agreement with 1114377 Ontario Inc. was terminated July 31, 2020.

All expenses and period end balances with related parties are at exchange amounts established and agreed to by the related parties. All transactions with related parties are in the normal course of operations and have been carried out on the same terms as those accorded to unrelated parties.

Dec. 31 2020 Employee and consultant compensation_(note 12) $ 160,189 Professional fees(note 12)_ 33,374 Finance fees - $ 193,563 Stock-based compensation $ -	Dec. 31 2019 $ 230,557 21,485 7,116 $ 259,158
	$ -

As at December 31, 2020 $452,052 (June 30, 2020 - $359,210) was payable to key management personnel and included in accounts payable and accrued liabilities.

12. Selling, general and administrative expenses

Selling, general and administrative expenses are comprised of the following amounts:

Dec. 31 2020 Employee and consultant compensation_(notes 11 and 16) $ 344,759 Occupancy costs(notes 5 and 16) 126,079 Professional fees(note 11)_ 48,999 Shareholder services 15,517 Insurance 17,053 Other 23,713 $ 576,120	Dec. 31 2019
	$ 481,076 138,518 34,595 6,749 16,144 22,110
	$ 699,189

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

13. Income Taxes

Deferred Tax

The following table summarizes the components of deferred tax:

Dec. 31 2020 Deferred tax assets: Non-capital losses carried forward $ 719 Deferred tax liabilities: Temporary timing differences (719) Net deferred tax liabilities $ -	Dec. 31 2019
	$ 5,864 (5,864) $ -

Unrecognized Deferred Tax Assets

Deferred taxes are provided as a result of temporary differences that arise due to the differences between the income tax values and the carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the following deductible temporary differences:

Dec. 31 2020 Inventory $ 25,693 Share issuance costs 41,876 Property, plant and equipment 39,548 Resource related expenditures 349,050 Scientific research and experimental development 1,050,618 Non-capital loss carry-forwards 2,189,106 Net capital loss carry-forwards 15,592,989	June 30 2020
	$ 28,527 41,876 39,429 349,050 1,050,618 1,921,405 15,592,989

Share issue costs expire from 2021-2023 and non-capital loss carry-forwards expire from 2027-2040. The remaining deductible temporary differences may be carried forward indefinitely but net capital loss carryforwards can only be used to reduce capital gains. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the group can utilize the benefits therefrom.

14. Capital disclosures

The Company ’ s objective when managing capital is to ensure its ability to meet operating commitments as they become due and to provide return for shareholders. This is achieved by continuously monitoring actual and projected cash flows and making adjustments to capital as necessary. Except for the repayment terms associated with long-term debt instruments, there are no externally imposed capital requirements.

Dec. 31 2020 Long-term debt $ 60,000 Share Capital 23,658,086 Warrants 150,668 Contributed surplus 1,593,525 Deficit (24,545,509) Net capital under management $ 916,770	June 30 2020
	$ 40,000 23,613,546 217,665 1,538,667 (24,605,180) $ 804,698

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

15. Financial risk factors

The Company is exposed in varying degrees to the following financial instrument related risks:

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company ’ s primary exposure to credit risk is in its accounts receivable. In an effort to mitigate this risk, management actively manages and monitors its receivables and obtains prepayments where warranted. It has been determined that no allowance is required, as all amounts outstanding are considered collectible. The Company incurred no bad debts during the periods ended December 31, 2020 or December 31, 2019 .

Concentration of credit risk

Concentration of credit risk arises when one or more customers individually account for 10% or more of the Company ’ s revenues during a reporting period. The Company had 2 customers during the current period, representing 22% and 15% of revenues (Dec. 31, 2019 - 3 customers, 16%, 15% and 13% of revenues). Amounts due from these customers represented 35% of accounts receivable at December 31, 2020 (Dec. 31, 2019 - 50%). The loss of, or significant curtailment of purchases by, such a customer, could have a material adverse effect on the Company's results of operations and financial condition. The Company monitors the relationship with all customers closely and ensures that every customer is subject to the same risk management criteria.

Liquidity risk

Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. At December 31, 2020 the Company had current financial assets of $863,766 (June 30, 2020 - $732,471) available to settle current financial liabilities of $875,862 (June 30, 2020 - $1,002,533). The Company manages its liquidity risk through the management of its capital (note 14) which incorporates the continuous monitoring of actual and projected cash flows to ensure that it has sufficient liquidity to meet its operating commitments without incurring unacceptable losses or risking damage to the Company ’ s reputation.

Market risks

The Company is exposed to interest rate risk due a bank operating loan that has a floating interest rate as well as currency risk related to accounts receivable, accounts payable, customer deposits, and nominal amounts of cash, prepaid expenses, and customer deposits denominated in US dollars. Market risks give rise to the potential for future cash flows to fluctuate because of changes in interest rates or foreign exchange rates. Market risks are closely monitored and attempts are made to match foreign cash inflows and outflows. During the current period – the Company reported a foreign exchange gain in the amount of $4,143 (Dec. 2019 loss of $3,149).

Sensitivity to market risks

At December 31, 2020, the Company had:

• A bank operating loan that had not been drawn upon (June 30, 2020 - $Nil), which bears interest predicated upon the TD Bank prime lending rate. Based upon the current amount due on the operating loan, a 1% increase in the TD Bank prime lending rate, as at the financial reporting date, would result in no additional interest expense over the next 12 month period.

• US$45,515 (June 30, 2020 – US$61,399) included in accounts receivable. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $2,275 in future cash inflow.

• US$86,242 (June 30, 2020 – US$114,337) included in accounts payable. A 5% decrease in the value of the Canadian dollar relative to the US dollar would result in an increase of $4,312 in future cash outflow.

Based upon observations of recent market trends management believes that each of these outcomes is possible.

ZTEST Electronics Inc.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Stated in Canadian Dollars) December 31, 2020

16. COVID-19

On January 30, 2020 the World Health Organization (WHO) declared COVID-19 a global health emergency and on March 11, 2020 they declared it a pandemic. These WHO declarations were soon followed by announcements of numerous restrictions by domestic and international governments affecting the way people could interact and how business was conducted. Many of these restrictions remain in place as of the financial reporting date.

As a contract manufacturer, the Company met the Ontario definition of an essential business thus allowing it to continue operations. The Company encouraged certain personnel to work from home and took steps to facilitate physical distancing and other safety measures for those for whom working from home was not feasible. To the date of the approval of these unaudited condensed consolidated financial statements, the Company, including its subsidiaries and investee company, have operated free of positive tests positive for COVID-19.

The health and safety of our personnel is our top priority however continuing to operate free of COVID-19 infections does not ensure that there will be no related implications to the business. The present and future economic effects of COVID-19 cannot be accurately predicted at this time. This includes the potential impact the pandemic may have on the Company ’ s suppliers and customers as well as the market risks described in note 15. Although these potential effects cannot be quantified, the Company anticipates that COVID-19 could have an adverse impact on its future business, results of operations, financial position and cash flows.

To help mitigate the uncertainty created by COVID-19, the Company has availed itself of subsidies made available to it by the Canadian Federal government. During the period, the Company obtained CEBA benefits of $20,000 (note 9), CERS benefits of $6,077 which have been applied to reduce occupancy costs (note 12) , and CEWS benefit in the amount of $129,875 which has been applied to reduce labour costs (note 3) and Employee and consultant compensation (note 12) . The Company will continue to monitor all government subsidies and will make application wherever it satisfies the eligibility criteria.