Financial Statements. December 31, 2018 and 2017 (Expressed in Canadian dollars)

Transcription

1 Financial Statements December 31, 2018 and 2017

2 INDEPENDENT AUDITOR'S REPORT To the Shareholders of Opinion We have audited the financial statements of, (the "Company"), which comprise the statements of financial position as at December 31, 2018 and December 31, 2017 and the statements of operations and comprehensive loss, changes in equity and cash flows for the years then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and December 31, 2017, and its financial performance and its cash flows for the years ended December 31, 2018 and December 31, 2017 in accordance with International Financial Reporting Standards. Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material Uncertainty Related to Going Concern We draw attention to Note 1 in the financial statements, which indicates that the Company's current liabilities exceeds its current assets by $88,763,079. As stated in Note 1, these events or conditions, along with such other matters as set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter. Other Information Management is responsible for the other information. The other information comprises Management's Discussion and Analysis. Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available 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 the Management Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed, we conclude that there is material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process.

3 Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor's report is Stephen McCourt. Chartered Professional Accountants Licensed Public Accountants April 1, 2019 Toronto, Ontario

4 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The management of (the Company or Harte Gold ) is responsible for the integrity and fair presentation of the accompanying financial statements. The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and reflect management s best estimates and judgements. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has developed and maintains a system of internal controls to obtain reasonable assurance that the Company s assets are safeguarded, transactions are authorized and financial information is reliable. Any system of internal control over financial reporting has inherent limitations, including the possibility of circumvention and overriding of controls, and therefore, can provide only reasonable assurance with respect to financial statement preparation and presentation. The Board of Directors oversees management s responsibility for financial reporting and internal control systems. The Board of Directors has reviewed and approved the financial statements. The financial statements have been audited by RSM Canada LLP. Their report outlines the scope of their examination and opinion on the financial statements. Stephen G. Roman Stephen G. Roman Chairman, President & CEO Rein A. Lehari Rein A. Lehari Chief Financial Officer April 1,

5 Statements of Financial Position as at December 31, December 31, January 1, Canadian dollars (as restated) (as restated) (Note 3) (Note 3) Assets Current Assets Cash and cash equivalents $ 7,293,216 $ 24,789,164 $ 27,232,409 Receivables (note 7) 2,351,478 1,500,286 2,777,498 Prepaids 3,074, ,880 25,448 12,719,380 26,581,330 30,035,355 Long Term Assets Restricted cash (note 6) 500,000 1,721,281 1,537,588 Plant and equipment (note 8) 100,939,764 27,365, ,940 Exploration and evaluation expenditures (note 9) 12,087, Liabilities Current Liabilities $ 126,246,958 $ 55,668,208 $ 31,675,883 Accounts payable and accrued liabilities (note 10) $ 23,614,991 $ 19,303,392 $ 10,384,552 Short-term debt (note 11) 28,216, Long-term debt classified as current (note 12) 42,499, Production payment liability (note 12) 5,250, Current portion of long-term debt (note 14) 198, ,333 - Flow-through share premium (note 15) 1,702,281 1,173,838 4,680, ,482,459 20,675,563 15,064,937 Long Term Liabilities Long-term debt (note 14) 418, ,667 2,203,254 Environmental rehabilitation provision (note 13) 4,783,587 1,718,836 1,370,807 Total Liabilities 106,684,380 23,011,066 18,638,998 Shareholders' Equity Capital stock and warrants (notes 16 & 18) 141,012, ,006,504 67,797,467 Other reserves 13,854,726 8,083,435 7,810,536 Deficit (135,305,097) (95,432,797) (62,571,118) 19,562,578 32,657,142 13,036,885 Going concern see note 1 Commitments see note 26 Subsequent events see note 27 $ 126,246,958 $ 55,668,208 $ 31,675,883 The accompanying notes are an integral part of these financial statements 2

6 Statements of Operations and Comprehensive Loss For the Years Ended December 31, Canadian dollars (as restated) (Note 3) Revenue $ - $ - Operating Expenses General and administrative expenses (note 19) 3,542,966 2,540,594 Exploration and evaluation expenses (note 20) 29,358,524 33,575,758 Share-based payments (note 17) 4,988, ,670 Depreciation 212,123 98,901 38,102,612 37,105,923 Other Expenses (Income) Flow-through share premium (note 15) (1,173,838) (4,680,385) Gain on loan modification (note 11) (507,272) - Loss on production payment liability (note 12) 74,434 - Interest expense 49, ,141 Foreign exchange loss 3,326,721-1,769,688 (4,244,244) Net loss before income taxes (39,872,300) (32,861,679) Income taxes (note 21) - - Net Loss and Comprehensive Loss $ (39,872,300) $ (32,861,679) Net loss per share - basic and fully diluted (note 22) $ (0.069) $ (0.070) Weighted average number of shares outstanding - Basic and diluted (note 22) 578,824, ,454,777 The accompanying notes are an integral part of these financial statements 3

7 Statements of Cash Flows For the Years Ended December 31, Canadian dollars (as restated) (note 3) Cash provided by (used in): Operations Net loss $ (39,872,300) $ (32,861,679) Adjustments to reconcile net loss to cash flow from operating activities: Depreciation 212,123 98,901 Share-based payments (note 17) 4,988, ,670 Flow-through share premium (note 15) (1,173,838) (4,680,385) Gain on loan modification (note 11) (507,272) - Loss on production payment 74,434 - Loan accretion (note 14) - 296,746 Unrealized foreign exchange loss 3,818,979 - Reclamation costs included in exploration and evaluation expenses - 348,029 Shares issued for property acquisitions 30,000 61,000 (32,428,875) (35,846,718) Net changes in non-cash working capital items: Prepaids (327,691) (266,432) Receivables (418,049) 1,277,212 Accounts payable and accrued liabilities (4,434,074) (2,045,435) (37,608,689) (36,881,373) Financing Short-term debt (note 11) 25,686,100 - Long-term debt (note 12 & 14) 43,584,010 (2,500,000) Interest paid (1,022,913) Cost of share issuances (184,126) (2,149,228) Issuance of units 15,960,930 49,790,168 Exercise of options 390, ,500 Exercise of warrants 3,106,751 4,111,663 87,520,752 50,204,103 Investing Restricted cash 1,221,282 (183,692) Additions to plant and equipment (note 8) (61,262,853) (15,582,283) Additions to exploration and evaluation expenditures (note 9) (8,528,691) - Revenue netted against exploration and evaluation expenditures 1,162,251 - (67,408,011) (15,765,975) Net increase (decrease) in cash and cash equivalents (17,495,948) (2,443,245) Cash and cash equivalents, beginning of year 24,789,164 27,232,409 Cash and cash equivalents, end of year $ 7,293,216 $ 24,789,164 Cash and cash equivalents includes the following: Cash $ 7,293,216 $ 24,784,134 Guaranteed investment certificates - 5,030 $ 7,293,216 $ 24,789,164 Supplemental cash flow information: Interest paid on Secured Note $ - $ 375,000 Shares issued for property acquisitions 30,000 61,000 The accompanying notes are an integral part of these financial statements 4

8 Statements of Changes in Shareholders Equity For the Years Ended Total Common Shares Warrants Other Shareholders' (Note 16) (Note 18) Subtotal Reserves Deficit Equity Canadian dollars # $ # $ $ $ $ $ January 1, 2017 (note 3) 430,763,904 65,126,537 46,256,584 2,670,930 67,797,467 7,810,536 (62,571,118) 13,036,885 Issued as a result of: Private placements (notes 15 and 16) 91,194,180 49,790, ,790, ,790,168 Flow-through premium (note 15) - (1,173,838) - - (1,173,838) - - (1,173,838) Property acquisitions (note 26) 100,000 61, , ,000 Share issuance costs - (2,149,228) - - (2,149,228) - - (2,149,228) Stock options exercised (note 17) 3,730,000 1,573, ,573,790 (622,290) - 951,500 Warrants exercised (note 18) 24,019,570 4,876,987 (24,019,570) (765,324) 4,111, ,111,663 Warrants expired (note 18) - - (172,161) (4,518) (4,518) 4, Stock options granted (note 17) , ,671 Net loss for the year (32,861,679) (32,861,679) December 31, ,807, ,105,416 22,064,853 1,901, ,006,504 8,083,435 (95,432,797) 32,657,142 Issued as a result of: Private placements (notes 15 and 16) 32,880,768 15,960, ,960, ,960,930 Flow-through premium (note 15) - (1,702,281) - - (1,702,281) - - (1,702,281) Property acquisitions (note 26) 100,000 30, , ,000 Share issuance costs - (192,290) 118,319 8,165 (184,125) - - (184,125) Warrants issued on debt (note 11 and 12) ,000,000 4,187,462 4,187, ,187,462 Stock options exercised (note 17) 4,100, , ,938 (193,938) - 390,000 Warrants exercised (note 18) 12,851,030 4,031,609 (12,851,030) (924,858) 3,106, ,106,751 Warrants expired (note 18) - (9,213,824) (976,230) (976,230) 976, Stock options granted (note 17) ,988,999-4,988,999 Net loss for the year (39,872,300) (39,872,300) December 31, ,739, ,817,322 16,118,318 4,195, ,012,949 13,854,726 (135,305,097) 19,562,578 The accompanying notes are an integral part of these financial statements 5

9 1. NATURE OF OPERATIONS AND GOING CONCERN (The Company or Harte Gold ) was incorporated in Ontario on January 22, 1982 and is a reporting issuer in the Provinces of Ontario, Alberta and British Columbia. The common shares of the Company trade on the Toronto Stock Exchange under the symbol HRT and on the Frankfurt Stock Exchange under the symbol H4O. The head office and principal address of the Company is 8 King Street East, Suite 1700, Toronto, Ontario, M5C 1B5. The Company is engaged in the acquisition and exploration of mineral resource properties with a focus on gold properties located in the Province of Ontario, Canada, and currently owns an interest in two properties: the Sugar Zone Property, 60 km east of the Hemlo area gold mines, located on the north shore of Lake Superior, and; the Stoughton-Abitibi Property (formerly Stoughton-Porcupine), 110 km east of Timmins and 50 km north east of Kirkland Lake. In 2017, Harte Gold completed a bulk sample program on its Sugar Zone Property to determine the recoverability and economics of its resource. In 2017, the Company also began economic studies on the resource and pursuing permits to enable commercial production. In May 2018, the Company filed a Preliminary Economic Assessment Report and in September 2018, the Company obtained permits required for commercial production. The Company was in the exploration and evaluation stage at December 31, 2018 and declared commercial production in On the basis of information to date, the Company has not yet identified a mineral resource on its Stoughton-Abitibi Property. These financial statements have been prepared using accounting principles applicable to a going concern, which assume that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the statements of financial position. At December 31, 2018, the Company has current liabilities of $101,482,459, of which, $23,614,991 relate to accounts payable and accrued liabilities generally payable within 30 to 90 days. The Company has current assets of $12,719,380 with which to discharge such liabilities. The Company had historically financed its activities by accessing equity markets from time to time. In May 2018, the Company entered into debt agreements with ANR Investments B.V. ( Appian ) and Sprott Private Resource Lending (Collector) LP ( Sprott ), (see notes 11 and 12). Appian is a major shareholder of the Company, holding 19.7% of the issued and outstanding common shares of the Company. Appian provided the Company a US $20,000,000 bridge loan facility (see note 11) which is due on May 9, 2019 and is included in current liabilities. The Company is presently in discussions with Appian about providing a shortterm liquidity solution. In May 2018, the Company also entered into a long-term debt agreement and related production payment liability with Sprott, (see note 12). The total availability under this facility was US $50,000,000, of which US $35,000,000 had been drawn at December 31, The Company was in default of certain covenants as at December 31, These covenants can be broadly categorized as financial, operating and completion. The Company received waivers of such covenants, but as some of the waivers were received after the reporting period, the accounting treatment is to categorize both the long-term debt and the production payment liability of the Sprott facility as current liabilities. The business of exploration, development and mining of minerals involves a high degree of risk and there can be no assurances that future exploration activities will result in the discovery of economically recoverable mineral deposits. The Company s ability to continue as a going concern is dependent on the successful operation of its one mining property, the Sugar Zone Mine. If revenues generated from future mining activities and the balance of funding available under its loan facilities are not sufficient to cover operating costs, capital costs and the payment of debt obligations, the Company will have to arrange additional debt or equity financing. There can be no assurance that the Company will be able to obtain any required financing inthe future or at favourable terms. The Company is however, well in discussions with existing lenders and potential financing sources regarding the refinancing of its current debt facilities with debt and/or equity. 6

10 1. NATURE OF OPERATIONS AND GOING CONCERN cont d However, due to uncertainties surrounding a number of factors such as, but not limited to, the ability to raise additional funds, exploration results, mine operating results, the price of underlying commodities and financial market conditions, it is not possible to predict the success of the Company s efforts in this regard. discussions l lead to a re-financing. These factors indicate the existence of material uncertainties that may cast significant doubt about the Company s ability to continue as a going concern. 2. BASIS OF PRESENTATION a) Statement of Compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the IFRS Interpretations Committee ( IFRIC ). These financial statements were approved by the Board of Directors on April 1, b) Basis of Measurement These financial statements have been prepared on a historic cost basis except for financial instruments classified as financial instruments at fair value through profit or loss, which are stated at their fair value. In addition, these financial statements have been prepared using the accrual basis of accounting and are presented in Canadian dollars, which is also the Company s functional currency. c) Segmented Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief executive officer of the Company. The Company has determined that it has one operating segment, being the acquisition, exploration and development of mineral resource properties, currently located in Canada. The Company s corporate head office expenditures are considered incidental to the activities of the Company and therefore do not meet the definition of an operating segment. 3. CHANGE IN ACCOUNTING POLICY Exploration and Evaluation Expenditures Under IFRS 6, Exploration and Evaluation of Mineral Resources ( IFRS 6 ), the Company historically capitalized its expenditures on exploration and evaluation ( E&E ) activities. Effective December 31, 2018, the Company adopted a voluntary change in accounting policy on E&E expenditures that is also generally accepted under IFRS 6. The Company s new policy on accounting for E&E expenditures is to expense these costs until the requisite permits to enter into commercial production have been obtained. All subsequent expenditures on the property are then capitalized until development stage has been reached or commercial production has been achieved. The Company received the permits required to enter into commercial production in September Accordingly, all E&E expenditures prior to this determination are expensed. The change in accounting policy is consistent with the conceptual framework for the recognition of assets and is an accepted accounting practice in the mining industry. Management has determined that such a voluntary change in accounting policy results in financial statements providing more reliable and more relevant information. The change in accounting policy has been applied to all of the Company s exploration activities. 7

11 3. CHANGE IN ACCOUNTING POLICY cont d In accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the change in accounting policy has been made retrospectively and the comparatives have been adjusted accordingly for all periods presented, as if the policy had been applied as of January 1, The following table summarizes the impact of the aforementioned voluntary change in accounting policy on affected line items within the Company s statements of financial position, operations and comprehensive loss, and cash flows, respectively. As at January 1, 2017 As Previously Effect of Change Reported in accounting policy Restated Statement of Financial Position Property and Equipment $ 102,940 $ - $ 102,940 Exploration and Evaluation Assets 44,170,665 (44,170,665) - Total Assets 75,846,548 (44,170,665) 31,675,883 Deferred Tax Liability 625,819 (625,819) - Total Liabilities 19,264,817 (625,819) 18,638,998 Accumulated Deficit (19,026,272) (43,544,846) (62,571,118) Total Equity 56,581,731 (43,544,846) 13,036,885 Total Equity and Liabilities 75,846,548 (44,170,665) 31,675,883 As at and for the twelve months ended December 31, 2017 As Previously Effect of Change Reported in accounting policy Restated Statement of Financial Position Property and Equipment $ 2,057,321 $ 25,308,276 $ 27,365,597 Exploration and Evaluation Assets 103,558,424 (103,558,424) - Total Assets 133,918,356 (78,250,148) 55,668,208 Deferred Tax Liability 3,891,851 (3,891,851) - Total liabilities 26,902,917 (3,891,851) 23,011,066 Accumulated Deficit (21,074,500) (74,358,297) (95,432,797) Total Equity 107,015,439 (74,358,297) 32,657,142 Total Equity and Liabilities 133,918,356 (78,250,148) 55,668,208 Statement of Operations and Comprehensive Loss Exploration and evaluation expenses - 33,575,758 33,575,758 Deferred income tax expense 3,266,032 (3,266,032) - Loss and comprehensive loss for year (2,048,228) (30,813,451) (32,861,679) Basic and diluted loss per share (0.004) (0.066) (0.070) Statement of Cash Flows Loss and comprehensive loss for the year (2,048,228) (30,813,451) (32,861,679) Share-based payment 483, , ,670 Amortization 2,425 96,476 98,901 Shares issued for property acquisitions - 61,000 61,000 Accounts payable and accrued liabilities 655,567 (2,701,002) (2,045,435) Reclamation costs - 348, ,029 Deferred income tax expense 3,266,032 (3,266,032) - Net cash used by operating activities (1,013,642) (35,867,731) (36,881,373) Additions to plant and equipment (1,238,282) (14,344,001) (15,582,283) Additions to capitalized exploration and evaluation expenditur (50,211,731) 50,211,731 - net of bulk sample cash receipts Net cash used by investing activities (51,633,706) 35,867,731 (15,765,975) 8

12 3. CHANGE IN ACCOUNTING POLICY cont d IFRS 9 Financial Instruments The Company adopted IFRS 9 Financial Instruments, which became effective January 1, 2018 and elected not to retroactively restate comparative periods. The adoption of this standard did not impact the opening accumulated deficit balance at January 1, 2018 and did not result in a change in the carrying values of the Company s financial assets or financial liabilities. The approach in IFRS 9 is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial asset. Most of the requirements of IAS 39 Financial Instruments: Recognition and Measurement for classification of financial liabilities were carried forward in IFRS 9. IFRS 9 introduced a single expected credit loss impairment model, which is based on changes in credit quality since initial application. The adoption of the expected credit loss impairment model had no impact on the Company s financial assets. The Company s financial instruments are accounted for as follows under IFRS 9 as compared to the Company s previous policy in accordance with IAS 39: Financial Assets: Classification Under IAS 39 Classification Under IFRS 9 Cash and cash equivalents Fair value through profit or loss Amortized cost Restricted cash Fair value through profit or loss Amortized cost Receivables (excluding HST receivable) Financial Liabilities: Accounts payable and accrued liabilities Short-term debt Long-term debt Production payment liability Loans and receivables at amortized cost Other financial liabilities at amortized cost Other financial liabilities at amortized cost Other financial liabilities at amortized cost Other financial liabilities at amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost As a result of the adoption of IFRS 9, the accounting policy for the financial instruments applied starting from January 1, 2018 as follows: At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: Financial assets Financial assets are classified as either financial assets at fair value through profit or loss, amortized cost, or fair value through other comprehensive income. The Company determines the classification of its financial assets at initial recognition. a) Fair value through profit or loss financial assets are classified as fair value through profit or loss if they do not meet the criteria of amortized cost or fair value through other comprehensive income. Changes in fair value are recognized in the statement of income (loss). b) Amortized cost financial assets are classified at amortized cost if both of the following criteria are met and the financial assets are not designated as at fair value through profit and loss: 1) the objective of the Company s business model for these financial assets is to collect their contractual cash flows; and 2) the asset s contractual cash flow represents solely payments of principal and interest. 9

13 3. CHANGE IN ACCOUNTING POLICY cont d Financial liabilities Financial liabilities are classified and measured at amortized cost unless they are designated as financial liabilities through profit or loss. Impairment From January 1, 2018, the Company assesses on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For receivables (excluding HST receivable), the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. Debt facility transaction cost Fees paid to establish debt facilities are recognized as transaction costs when it is likely that some or all of the debt facilities, to which the fees are related, will be drawn down. Transaction costs incurred on the establishment of debt facilities are recognized as deferred charges and transferred as a reduction in debt in proportion to the drawdown of the debt facility. Transaction costs classified as a reduction of debt are amortized over the life of the debt facility using the effective interest method. When it is determined that some or all of the debt facility will not be drawn down, the related transaction costs are amortized over the remaining debt facility period. Debt facilities and borrowing costs Debt facilities are recognized initially at fair value, net of transaction costs incurred. Debt facilities are subsequently carried at amortized cost using the effective interest rate method. The effective interest rate method is a method of calculating amortized cost of a financial liability and allocating the interest expense over the related period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of the asset until such time when the asset is substantially complete and ready for its intended use. Other borrowing costs are expensed as incurred. In accordance with IFRS 9, when a debt instrument is restructured or refinanced and the terms have been substantially modified, the transaction is accounted for as an extinguishment with a gain or loss recognized in profit or loss. When a modification is not substantial, the difference in present value arising as a result of such non-substantial modification is recognized in profit or loss. Fees and transaction costs related to such a modification are recognized as an adjustment to the carrying amount of the liability. Management takes into account both quantitative and qualitative factors in assessing whether terms have been substantially modified, and often judgement is required in conducting the assessment. Terms are considered to have been substantially modified when the net present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate differs by at least 10 percent from the present value of the remaining cash flows under the original terms. If the difference in the present value of the cash flows is less than 10 percent, then a qualitative assessment is performed to determine whether the terms of the two instruments are substantially different. The purpose of a qualitative assessment is to identify substantial differences in terms that by their nature are not captured by a quantitative assessment. In determining whether the terms of a debt arrangement have been substantially modified, management considers several factors, including, but not limited to, timing of cash flows, interest rate and fees, covenants, restrictions on use of proceeds, lender and borrower capacity for reworking debt, and other changes that are not otherwise considered in the quantitative analysis. 10

14 4. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used in the preparation of these financial statements are described below: a. Cash and Restricted Cash Cash and cash equivalents consist of cash on hand, balances with banks and short-term fixed income deposits, including money market instruments, which are readily convertible into cash with original maturity dates of less than ninety days. Restricted cash consists of cash deposited with a third party and held in trust or segregated cash (Note 6). b. Exploration and evaluation expenditures Exploration and evaluation expenditures incurred on the exploration and evaluation of potential mineral reserves and resources include costs such as: Acquisition of rights to explore. Exploratory drilling, trenching and sampling. Accumulating exploration data through topographical and geological studies. Determining the volume and grade of resources Test work on geology, metallurgy, mining, geotechnical and environmental matters. Conducting engineering, marketing and feasibility studies. Revenues generated as part of bulk sample are netted against E&E expenditures Exploration and evaluation expenditures are expensed as incurred, until such the requisite permits have been received (see note 3). In September 2018, the Company obtained the various permits required to enable it to begin commercial production. Accordingly, costs incurred subsequent to September 2018 to obtain access to resources and the mining of such resources prior to commercial production were capitalized as E&E costs. Revenues generated from sales during the period prior to commercial production are credited against such E&E costs when title is transferred and the amount is collectible. Upon commercial production, such capitalized E&E costs are transferred to mineral properties, plant and equipment, and inventories, as appropriate. Although the Company has taken steps to verify title to the properties on which it is conducting exploration and in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to unregistered prior agreements, unregistered claims, aboriginal claims and non-compliance with regulatory and environmental requirements. c. Construction-In-Process In Q2 2017, the Board of Directors of the Company approved start of construction of the processing facility and related infrastructure. Construction-in-process costs include the costs to construct the processing building, the costs of equipment and assembly, the costs of surface infrastructure required to support the operation of the processing facility, the present value of the estimated future costs of dismantling and removing the processing facility and restoring the site on which it is located, borrowing costs incurred for the construction of the processing facility, and indirect costs incurred to manage the construction process. Once operational commissioning is complete and commercial production is achieved, construction-in-process assets are reclassified within plant and equipment. 11

15 4. SIGNIFICANT ACCOUNTING POLICIES cont d d. Commercial Production Capitalized costs, including development and construction costs, are not depreciated until the time at which the related mining property has reached a pre-determined level of operating capacity intended by management. Various relevant criteria are considered to assess when the mine is substantially complete and ready for its intended use and moved into the production phase. Some of the criteria include, but are not limited to: Completion of operational commissioning of each major mine and processing facility component. The passage of a reasonable period of time for testing of all major mine and processing facility components. Demonstrated ability to mill consistently and without significant interruption at greater than 60% of permitted throughput over two months. Gold recoveries at or near expected production levels. Commercial production is declared on the first day of the calendar month following achievement of such milestones. Upon achieving commercial production, costs are transferred from E&E and construction-in-process into the appropriate asset classification such as inventory and mineral properties, plant and equipment, subject to impairment testing. Once in commercial production, gold sales are recognized as revenue and production costs as a component of cost of sales. Development expenditures incurred during the production phase to provide access to ore resources in future periods that provide future economic benefits continue to be capitalized. The Company declared commercial production in Subsequently, mineral properties, plant and equipment are amortized on a unit of production basis, which is measured by a portion of the mine s economically recoverable and probable ore reserves produced during the period. Impairment is tested in the same way as other non-financial assets. e. Plant and Equipment Plant and equipment are recorded at cost, less accumulated depreciation and accumulated impairment losses. The costs of mineral properties, plant and equipment consist of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use at an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Upon commercial production, the accumulated capitalized E&E and construction in process costs are transferred to mineral properties, plant and equipment and other assets. From this point forward, costs incurred are either capitalized to inventory or expensed as operating costs, except for capitalized costs related to assets that provide a future benefit. Costs related to the plant and mine will be amortized over the life of the mine using the units of production method. Certain costs associated with the development of the underground mine incurred during the production phase are considered to be underground capital development and are capitalized if they are expected to bear future economic benefits. Depreciation is recognized based on the cost of an item of plant and equipment, less its estimated residual value, over its expected useful life: Cost Component Furniture, vehicles and other equipment Buildings Useful Life Straight line over 2 5 years Straight line over 10 years 12

16 4. SIGNIFICANT ACCOUNTING POLICIES cont d Capitalized costs, including certain construction costs, are not depreciated until the time at which the related mineral property has reached a pre-determined level of operating capacity intended by management. Thereafter, such costs are amortized on a unit of production basis, which is measured by the portion of a mine s economically recoverable and proven and probable ore reserves produced during the period. f. Provision for Environmental Rehabilitation The Company recognizes liabilities for statutory, contractual, constructive or legal obligations associated with the retirement of exploration and evaluation assets and equipment, when those obligations result from the acquisition, construction, development or normal operation of the assets. The net present value of future rehabilitation cost estimates from decommissioning of plant and other site preparation work is capitalized to construction-in-process along with a corresponding increase in the rehabilitation provision in the period incurred. Discount rates using a pre-tax rate that reflects the time value of money are used to calculate the net present value. The rehabilitation asset is depreciated on the same basis as mining assets. The Company s estimates of reclamation costs could change as a result of regulatory requirements, discount rates and assumptions regarding the amount and timing of the future expenditures. These changes are recorded directly to mining assets with a corresponding entry to rehabilitation provision. The Company s estimates are reviewed annually for changes in regulatory requirements, discount rates, effects of inflation and changes in estimates. Changes in the net present value, excluding changes in the Company s estimates of reclamation costs, are charged to profit and loss for the period. g. Impairment of Non-Financial Assets The Company s non-financial assets, comprising E&E, plant and equipment, are reviewed for an indication of impairment at each statement of financial position reporting date. If an indication of impairment exists, the asset s recoverable amount is estimated. The recoverable amount is the greater of the (1) asset s fair value less costs to sell and (2) value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates, or is expected to generate, cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. An impairment loss is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. An impairment loss with respect to goodwill is never reversed. h. Flow-through Shares The Company will from time to time, issue flow-through common shares to finance a portion of its exploration program. Pursuant to the terms of the flow-through share subscription agreements, these shares transfer the tax deductibility of qualifying resource expenditures to investors, subject to a renouncement process. Renouncement may occur prospectively (the flow-through shares are issued, renouncement then occurs and eligible expenditures are incurred subsequently) or retrospectively (the flow-through are issued, eligible expenditures are then incurred and renouncement occurs subsequently). On issuance, the Company bifurcates the flow-through share into (1) a flow-through share premium, equal to the estimated premium, if any, that investors pay for the flow-through feature, which is recognized as 13

17 4. SIGNIFICANT ACCOUNTING POLICIES cont d a liability, and (2) share capital. If the renouncement is prospective, the obligation is fulfilled when eligible expenditures are incurred. The Company follows the retrospective approach, where the obligation to renounce is fulfilled when the paperwork to renounce is filed. Once the obligation is fulfilled, the liability is reduced and the balance is charged to the statement of operations and comprehensive income (loss). Proceeds received from the issuance of flow-through shares must be spent on Canadian resource property exploration expenditures prior to the calendar year following the year of issuance. The portion of the proceeds received but not yet expended is detailed in Note 15. The Company may also be subject to a Part XII.6 tax on flow-through proceeds renounced under the Look-back Rule, in accordance with Government of Canada flow-through regulations. When applicable, this tax is accrued as interest expense until paid. At the time of initial recognition, a taxable temporary difference exists and neither accounting profit nor taxable profit is affected, therefore the initial recognition exemption for deferred income taxes applies. i. Stock-based Compensation Transactions Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The Company grants stock options to acquire common shares of the Company to directors, officers, employees and consultants. The Company may also grant warrants to brokers, finders or lenders. The fair value of stock options is measured on the date of grant, using the Black-Scholes option pricing model, and is recognized over the vesting period. At each reporting date, the Company revises its estimates of the number of options that are expected to vest, based on the non-market vesting conditions. Consideration paid for the shares on the exercise of stock options is credited to share capital. In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the Company as consideration cannot be reliably measured, they are measured at the fair value of the share-based payment. Otherwise, the stock-based compensations are measured at the fair value of goods or services received. Warrants issued in obtaining debt facilities allow the Company the option to settle the warrants in cash. The Company has recorded these warrants in warrant reserve, as the intention is to not settle these warrants in cash. j. Warrants Proceeds from unit placements are allocated between shares and warrants issued according to their relative fair value. The allocated value of the share component is credited to common shares and the allocated value of the warrant component is credited to warrants in the statement of changes in shareholders equity. Upon exercise of warrants, consideration paid by the warrant holder, together with the amount previously recognized in warrants, is recorded as an increase to common shares. Upon expiration of warrants, the amount applicable to expired warrants is recorded as an increase to other reserves. k. Compound Financial Instruments The Company may issue compound financial instruments from time to time. An example of such a compound financial instrument is the issuance of a financial liability that is issued with options or warrants to acquire common shares. A compound financial instrument contains both a liability component and an equity component. The compound financial instrument is separated into its liability and equity components on the statement of financial position. The liability component is initially recognized at fair value, calculated as the net present value of the liability based upon debt issued by comparable issuers without incentive options or warrants, and accounted for at amortized cost using the effective interest rate method. The fair value of the liability component is accreted to the original face value of the debt over the respective term of the debt instrument and charged to operations as interest and accretion expense based on the effective interest method. The value of the equity component is accounted for as the difference between the face value of the 14

18 4. SIGNIFICANT ACCOUNTING POLICIES cont d liability component and the fair value of the liability component. Equity components are not re-measured subsequent to initial recognition. l. Income Taxes Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years. Deferred tax is recorded using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable loss; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. m. Related Party Transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. n. 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 attributed to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted income/loss per share is calculated using the treasury stock method and if converted method, if applicable. The treasury method assumes that outstanding share options and warrants with an average market price that exceeds the average exercise prices of the options or warrants for the period are exercised and the assumed proceeds are used to repurchase shares of the Company at the average market price of the common shares for the period. o. Share Capital Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects. p. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reasonable estimate can be made of the amount of the obligation. Provisions for legal claims, onerous leases and other onerous commitments are recognized at the best estimates of the expenditures required to settle the Company s liability. 15