Desert Lion Energy Corp.

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS

2 To the Shareholders off INDEPENDENT AUDITOR S REPORT We have audited the accompanying consolidated financial statements of and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in equity and consolidated statements of cash flows for the year ended December 31, 2017 and for the period from incorporation (June 17, 2016) to December 31, 2016, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Desert Lion Energy Corp. and its subsidiaries as at December 31, 2017 and 2016, and their financial performance and their cash flows for the year ended December 31, 2017 and for the period from incorporation (June 17, 2016) to December 31, 2016 in accordance with International Financial Reporting Standards. UHY McGovern Hurley LLP Toronto, Canada March 27, 2018 Chartered Professional Accountants Licensed Public Accountants

3 Consolidated Statements of Financial Position As at: December 31, 2017 December 31, 2016 ASSETS Current Cash and cash equivalents $ 6,553,667 $ 167,890 Restricted cash (Notes 12 and 20) 9,830,197 - Amounts receivable (Note 6) 782,817 31,973 Inventory 29,262 - Deposits 189,793 - Prepaid expenses 574,013 14,125 Total current assets 17,959, ,988 Non-current Prepaid expenses - 301,568 Funds in escrow - 2,148,320 Property, plant and equipment (Note 8) 2,558,850 - Exploration and evaluation assets (Note 7) 5,196,323 - Total assets $ 25,714,922 $ 2,663,876 LIABILITIES Current Trade payables and accrued liabilities (Note 9) $ 2,966,231 $ 311,926 Subscription receipts (Notes 12 and 20) 9,830,197 - Offtake prepayment liability (Note 10) 5,021,513 - Option liability (Note 10) 1,769,000 - Loans payable (Note 11) - 88,609 Total current liabilities 19,586, ,535 EQUITY Share capital (Note 12(b)) 13,165,700 2,743,530 Warrants (Note 13) 2,746, ,070 Options (Note 14) 781, ,900 Deficit (10,560,606) (931,159) Accumulated other comprehensive loss (54,835) - Equity attributable to owners of the parent 6,078,036 2,263,341 Non-controlling interest (Note 7) 49,945 - Total shareholders' equity 6,127,981 2,263,341 Total liabilities and equity $ 25,714,922 $ 2,663,876 Nature of operations and going concern (Note 1) Commitments and contingencies (Notes 7, 10 and 19) Subsequent events (Note 20) Approved by the Board of Directors on March 27, 2018: PETER MCCAGUE, Director TIM JOHNSTON, Director See accompanying notes to the consolidated financial statements Page 2

4 Consolidated Statements of Loss and Comprehensive Loss For the period from incorporation Year ended (June 17, 2016) to ($ Canadian) December 31, 2017 December 31, 2016 Expenses Consulting and management fees (Note 18) $ 2,145,395 $ 122,474 Professional fees 435,389 95,889 General office expenses 163,098 26,300 Travel expenses 281,632 71,745 Shareholder communications and filing fees 33,820 - Marketing and promotion 394,847 15,535 Share based compensation (Notes 14 and 18) 518, ,900 Exploration and evaluation expenditures (Note 7) 5,670, ,311 Amortization expense 26,044 - Foreign exchange (gain) (632,886) (12,839) Loss before other items 9,035, ,315 Interest and financing expense 126,304 1,844 Change in fair value of option liability (Note 10) 971,000 - Withholding tax expense 14,523 - Net loss for the period $ 10,147,600 $ 931,159 Other comprehensive loss Foreign currency translation 54,835 - Comprehensive loss for the period 10,202, ,159 Comprehensive loss for the period attributable to: Owners of the parent 9,684,282 - Non-controlling interest 518,153 - $ 10,202,435 $ - Basic and diluted loss per share (Note 15) $ 0.31 $ 0.03 Weighted average number of common shares outstanding - basic and diluted 32,820,735 29,415,229 See accompanying notes to the consolidated financial statements Page 3

5 Consolidated Statements of Changes in Equity Common Shares Warrants Contributed Surplus Accumulated Deficit Non- Controlling interest Accumulated Other Comprehensive Loss # $ $ $ $ $ $ $ Balance, December 31, ,000,000 2,743, , ,900 (931,159) - - 2,263,341 Private placements, net of issue costs (Note 12(b)) 13,171,083 10,343,715 2,010, ,354,466 Broker warrants (Note 13) , ,236 Share-based compensation (Note 14) , ,171 Options exercise (Note 14) 86,207 78,455 - (35,351) ,104 Issuance of non-controlling interest (Note 7) , ,098 Loss for the year (9,629,447) (518,153) - (10,147,600) Other comprehensive loss for the year (54,835) (54,835) Balance, December 31, ,257,290 13,165,700 2,746, ,720 (10,560,606) 49,945 (54,835) 6,127,981 Equity Balance, June 17, Private placements, net of issue costs (Note 12(b)) 25,225,000 2,704, ,704,780 Broker shares (Note (12(b)) 775,000 38, ,750 Broker warrants (Note 13) , ,070 Share-based compensation (Note 14) , ,900 Loss for the period (931,159) - - (931,159) Balance, December 31, ,000,000 2,743, , ,900 (931,159) - - 2,263,341 See accompanying notes to the consolidated financial statements Page 4

6 Consolidated Statements of Cash Flows Year ended December 31, 2017 For the period from incorporation (June 17, 2016) to December 31, 2016 CASH (USED IN) PROVIDED BY: OPERATING ACTIVITIES Net loss for the period $ (10,147,600) $ (931,159) Items not involving cash: Share-based compensation 518, ,900 Shares issued for services (Note 12) 1,049,976 38,750 Amortization (Note 8) 26,044 - Accrued interest on loans payable (Note 11) - 1,844 (8,553,409) (591,665) Net change in non-cash working capital 11,073,268 (35,740) Net cash flows provided by / (used in) operating activities 2,519,859 (627,405) FINANCING ACTIVITIES Private placement (Note 12) 12,432,527 3,085,000 Share issue costs (Note 12) (1,532,425) (228,150) Exercise of options (Note 14) 43,104 - Loan proceeds (Note 11) 820, ,848 Subscription receipts (Note 12(b)) 9,830,197 - Loan repayments (Note 11) (60,000) (91,819) Loan interest paid (Note 11) (1,236) (302) Net cash flows provided by financing activities 21,532,167 2,942,577 INVESTING ACTIVITIES (Acquisition) of property, plant, and equipment (2,584,894) - (Acquisition) of exploration and evaluation assets (5,196,323) Restricted cash (9,830,197) - Funds held in escrow to share purchase - (2,127,680) Net cash flows (used in) investing activities (17,611,414) (2,127,680) Effect of exchange rate change (54,835) (19,602) CHANGE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD 6,385, ,890 CASH AND CASH EQUIVALENTS, beginning of the period 167,890 - CASH AND CASH EQUIVALENTS, end of the period $ 6,553,667 $ 167,890 SUPPLEMENTAL INFORMATION: Shares issued to settle loans payable 847,624 - Shares issued for financing expenses 120,000 - Broker warrants issued for services 583, ,070 See accompanying notes to the consolidated financial statements Page 5

7 1. NATURE OF O PERAT IO NS The principal activity of (the Company or Desert Lion ) is the exploration and evaluation of lithium minerals Ontario Inc. was incorporated under the laws of the Province of Ontario, Canada by Articles of Incorporation dated June 17, 2016 and on February 16, 2017 the Company was renamed On November 10, 2016, the Company s subsidiaries, Canada Inc. and Canada Inc. were incorporated. On March 20, 2017, Canada Inc., a wholly-owned subsidiary of the Company, completed the acquisition of 80% of the shares of!huni-/urib Investments (Pty) Ltd., a Namibian company which holds a 100% interest in 8 mining claims comprising the Rubicon lithium property in Namibia and exclusive prospecting license 5439 ( EPL ), which comprises the surrounding 301 km 2 prospecting area. On April 18, 2017, Canada Inc. and Canada Inc. amalgamated with the surviving corporation called Canada Inc. On May 22, 2017, the Company incorporated Desert Lion Energy (Mauritius) Ltd. to serve the purpose of an intermediary holding company. On June 21, 2017, Canada Inc. continued into the Province of Ontario and was renamed Ontario Inc. On August 14, 2017, Ontario Inc. amalgamated with ( Desert Lion of the Company ). On August 2, 2017,!HUNI-/URIB Investments (Pty) Ltd. changed its name to Desert Lion Energy (Proprietary) Ltd. On December 16, 2017, the Company completed the acquisition of the Helikon mining interests. Subsequent to year-end, on February 22, 2018, completed its going public transaction with Camex Energy Corp. ( Camex ) (TSXV: CXE.V) and was renamed Desert Lion Energy Inc. Refer to Note 20 for more details on the going public transaction. The Company s head office is located at 65 Queen Street West, 8th floor, Toronto, Ontario, M5H 2M5, Canada. The consolidated financial statements include the financial statements of the Company and its subsidiaries that are listed in the following table: % Ownership Country of incorporation December 31, 2017 Desert Lion Energy (Mauritius) Ltd. Mauritius 100% Desert Lion Energy (Proprietary) Ltd. Namibia 80% Going Concern The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. 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. The business of exploration for lithium minerals involves a high degree of risk and there can be no assurance that exploration programs will result in profitable operations. The Company s continued existence is dependent upon the acquisition of mineral resource properties, preservation of its interest in the underlying properties, the discovery of economically recoverable reserves, the achievement of profitable operations, or the ability of the Company to raise alternative financing, if necessary, or alternatively upon the Company s ability to dispose of its interests on an advantageous basis. The Company does not have any operating assets that generate revenues, does not have proven reserves and for the year ended December 31, 2017 incurred a net comprehensive loss of $10,202,435. As at December 31, 2017, the Company had a working capital deficit of $1,627,192. Consequently, the Company s ability to continue as a going concern is dependent on the Company s ability to obtain additional financing if, as and when required, and, ultimately, the attainment of profitable operations or the profitable sale of exploration interests. Subsequent to December 31, 2017, the Company converted $9,830,197 subscript receipts into shares and warrants of the Company. These consolidated financial statements do not give effect to adjustments that would be necessary and could be material to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern. Page 6

8 2. BASIS O F PRESENT ATION Statement of compliance: The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). The consolidated financial statements were authorized for issue by the Board of Directors on March 27, Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis, unless otherwise disclosed. The consolidated financial statements have been prepared on an accrual basis except for cash flow information. Functional and presentation currency: The consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Canadian parent entity. The Mauritius subsidiary uses a U.S. dollar functional currency. The Namibian subsidiary uses a Namibian dollar functional currency. 3. SIGNIFICANT ACCOUNTING POL I CI ES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. Basis of consolidation These consolidated financial statements comprise the financial statements of the Company and its subsidiaries, Desert Lion Energy (Mauritius) Ltd. (100% owned) and Desert Lion Energy (Proprietary) Ltd. (80% owned) as at December 31, Subsidiaries are consolidated for the twelve months ended December 31, 2017 and for the period ended December 31, 2016, from the date of acquisition or incorporation, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. These consolidated financial statements comprise results for the twelve months ended December 31, 2017 and the period from incorporation (June 17, 2016) to December 31, All intra-company balances, income and expenses and unrealized gains and losses resulting from intra-company transactions are eliminated in full upon consolidation. Subsidiaries consist of entities over which the Company is exposed to or has rights to, variable returns as well as the ability to affect these returns through the power to direct the relevant activities of the entity. Subsidiaries are consolidated from the date control is transferred to the Company and are de-consolidated from the date control ceases. These consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Company and its subsidiaries after eliminating inter-entity balances and transactions. Profit or loss and each component of other comprehensive income ("OCI") are attributed to the equity holders of the Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to conform to the Company s accounting policies. Page 7

9 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Foreign currency transactions These consolidated financial statements are presented in Canadian dollars (the Company s presentation currency). Items included in the consolidated financial statements of the Company and each of the Company s subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the functional currency of an entity are recognized in the consolidated statement of loss. The functional currency of the Parent is the Canadian dollar and the functional currency of each of its subsidiaries is the Namibian dollar or U.S. dollar. Assets and liabilities of entities with functional currencies other than the Canadian dollar are translated into the presentation currency at the period end rates of exchange, and the results of their operations are translated at the average rates of exchange for the period. The resulting translation adjustments are recognized in other comprehensive (loss) income as cumulative translation adjustments. There is no tax impact on this translation. Exploration and evaluation assets Exploration expenditures relate to the initial search for deposits with economic potential and to detailed assessments of deposits or other projects that have been identified as having economic potential. Pre-exploration costs are expensed unless it is considered probable that they will generate future economic benefits. The cost of acquiring prospective properties and exploration rights, is capitalized to exploration and evaluation assets. Exploration costs incurred, subsequent to acquisition, in exploration and evaluation activities, are expensed as incurred and included in the consolidated statement of loss until technical feasibility and commercial viability of extraction of reserves are demonstrable. Once a mine development decision has been made by the Company, subsequent expenditures incurred to develop the mine are capitalized to mine property under development. Prior to reclassification to mine property under development, exploration and evaluation assets are first tested for impairment and any impairment loss recognized immediately in the consolidated statements of loss. Subsequent recovery of the resulting carrying value depends on successful development or sale of the undeveloped project. If a project does not prove viable, all irrecoverable costs associated with the project net of any impairment provisions are written off. Mine development assets Mine development assets are accumulated separately for each area of interest in which economically recoverable reserves have been identified. These assets are comprised of expenditures directly attributable to the construction of a mine and the related infrastructure. General and administration costs are allocated to a development asset only to the extent that those costs can be related directly to development activities in the relevant areas of interest. No amortization is recognized in respect of development properties until they are at the end of the commissioning phase, when the mine is capable of operating in the manner intended by management. Page 8

10 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Mine development assets (continued) Production Stage A mine that is under construction is determined to enter the production stage when the project is in the location and condition necessary for it to be capable of operating in the manner intended by management. When a mine development asset moves into the production stage, the capitalization of certain mine construction costs ceases and costs are either capitalized to inventory or expensed, except for capitalizable costs related to property, plant and equipment additions or improvements, open pit stripping activities that provide a future benefit or expenditures that meet the criteria for capitalization in accordance with International Accounting Standard 16 ( IAS ) 16 Property, Plant and Equipment. Pre-production stripping costs are capitalized until an other than de minimis level of mineral is extracted, after which time such costs are either expensed, capitalized to inventory or, if it qualifies as an open pit stripping activity that provides a future benefit, capitalized to property, plant and equipment. Various relevant criteria are considered to assess when an other than de minimis level of mineral is produced. Some of the criteria considered would include, but not be limited to, the following: The amount of minerals mined versus total tons in the life of mine; The amount of ore tons mined versus total life of mine expected ore tons; The current stripping ratio versus the life of mine ratio; and The ore grade versus the life of mine grade. Stripping costs incurred during the production stage of a pit are accounted for as costs of inventory produced during the period that the stripping costs are incurred, unless these costs are expected to provide future economic benefit to the identifiable component of the ore body. Components of the ore body are based on the distinct development phases identified by the mine planning engineers when determining the optimal development plan for the open pit. Production phase stripping costs generate a future economic benefit when the related stripping activity: Improves access to a component of the ore body to be mined in the future; Increases the fair value of the mine (or pit) as access to future mineral reserves becomes less costly; and Increases the production capacity or extends stripping; Costs that are expected to generate a future economic benefit are capitalized as open pit mine development costs. Mine development costs are depreciated on a unit of production basis whereby the denominator is the estimated tons of lithium in proven and probable reserves and the portion of resources considered probable of economic extraction based on the current life of mine plan in the current component of the ore body that has been made more accessible through the strip activity and all future components in the current plan that benefit from the particular stripping activity. Mine development assets are depreciated once the operation has entered production and the future economic benefit is being derived. Page 9

11 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Property, plant and equipment On initial recognition, property, plant and equipment are valued at cost, being the purchase price and directly attributable cost of acquisition or construction required to bring the asset to the location and condition necessary to be capable of operating in the manner intended by the Company, including appropriate borrowing costs and the estimated present value of any future unavoidable costs of dismantling and removing items. Property, plant and equipment is subsequently measured at cost less accumulated depreciation, less any accumulated impairment losses, with the exception of land which is not depreciated. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. 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 of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial year in which they are incurred. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount, and are recognized net within other income in profit or loss. Depreciation is based on the cost of an asset less its residual value. Amortization is recognized in profit or loss over the estimated useful lives as follows: Vehicles - 25% straight line Computers and equipment - 33% straight line Furniture and fixtures - 20% straight line Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. No depreciation has been recognized on the mine development assets. Financial instruments Non-derivative financial assets: Non-derivative financial assets comprise cash and cash equivalents, funds in escrow, restricted cash and amounts receivable. The amounts receivable are classified as loans and receivables. The Company has not designated any financial assets as fair value through profit or loss. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Page 10

12 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Financial instruments (continued) The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the consolidated statements of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Non-derivative financial liabilities: Non-derivative financial liabilities comprise trade payables and accrued liabilities, subscription receipts, offtake prepayment liability and loans payable. These financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expired. Impairment of financial assets (including receivables): A financial asset not carried at fair value through profit or loss is assessed at each reporting date for impairment if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise or indicators that a debtor or issuer will enter bankruptcy. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against the receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options and warrants are recognized as a deduction from equity, net of any tax effects. Cash and cash equivalents Cash and cash equivalents in the consolidated statement of financial position comprises cash at banks and at hand with original maturity of three months or less. Page 11

13 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Pro vi si ons Provisions are recognized when: (i) the Company has a present obligation (legal or constructive) as a result of a past event, and (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Income taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that the tax relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Share-based compensation The Company records compensation cost associated with equity-settled share-based awards based on the fair value of the equity instrument at the date of grant. The fair value of stock options and compensation options is determined using the Black-Scholes option pricing model. The compensation expense is recognized on a straight-line basis over the vesting period, if any, based on the estimate of equity instruments expected to vest. The estimate of options expected to vest is revised at the end of each reporting period. Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. When options or warrants are exercised, the proceeds received, together with any related amount in the warrant or option reserves within equity, is credited to share capital. On expiry, any amount related to the initial value of the stock option or compensation option is recorded to deficit. Page 12

14 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Inventories Lithium production inventories, concentrate inventory and ore stockpiles are measured at the lower of weighted average production cost and net realizable value. Net realizable value is calculated as the difference between the estimated selling price and estimated costs to complete processing into a saleable form and variable selling expenses. Mine supplies are measured at the lower of average purchase cost and net realizable value. Production costs include the cost of materials, labour, mine site production overheads and depreciation to the applicable stage of processing. The cost of ore stockpiles is increased based on the related current cost of production for the period, and decreases in stockpiles are charged to cost of sales using the weighted average cost per ton. Provisions are recorded to reduce the carrying amount of inventory to net realizable value to reflect changes in grades, quantity or other economic factors and to reflect current intentions for the use of redundant or slow-moving items. Provisions for redundant and slow-moving items are made by reference to specific items of inventory. The Company reverses write-downs where there is a subsequent increase in net realizable value and where the inventory is still on hand. Spare parts, stand-by and servicing equipment and consumable material held are generally classified as inventories. Major capital spare parts are classified as a component of property, plant and equipment. Revenue Recognition Revenue from the sale of materials is recognized when all the following conditions are satisfied: the Company has transferred to the buyer the significant risks and rewards of ownership; the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Offtake agreement Revenue from the off-take agreement is a payment for future product to be delivered, and has been presented as offtake prepayment liability on the consolidated statements of financial position. Advance customer payments are unearned revenues at the time of receipt. When the product is delivered to the customer the unearned revenue will be released to the statement of loss. The liability is presented as current based on its expected life. The offtake agreement provided the counterparty with the option to purchase an interest in the Company. This option represents an embedded derivative. At the date of issue, the fair value of the embedded derivative was estimated using an option valuation model. The offtake prepayment liability is subsequently measured on an amortized cost basis using the effective interest method over the expected life. The embedded derivative is initially recorded at fair value using pricing m odel techniques. The embedded derivative was determined to be a liability instrument and has been presented as option liability in the consolidated statement of financial position and is subsequently re-measured at fair value through profit and loss. This instrument is classified current based on its expected life. Page 13

15 3. SIGNIFICANT ACCOUNTING POL I CI ES (c ont inu ed) Standards issued but not yet effective Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRIC that are mandatory for accounting periods beginning after January 1, 2018 or later periods. Updates that are not applicable or are not consequential to the Company have been excluded. The following have not yet been adopted and are being evaluated to determine their impact on the Company. FRS 2 Share-based Payment ( IFRS 2 ) was amended by the IASB in June 2016 to clarify the accounting for cash-settled sharebased payment transactions that include a performance condition, the classification of share-based payment transactions with net settlement features and the accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, IFRS 9, Financial Instruments ( IFRS 9 ) was issued July 2014 and introduced new requirements for financial assets. This standard addresses; classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. A new general hedge accounting standard, which aligns hedge accounting more closely with risk management also forms part of IFRS 9. The mandatory effective date is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. IFRS 16, Leases ( IFRS 16 ) was issued in January It replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. It eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and offbalance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. IFRS 16 is effective from January 1, A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts. IFRIC 22 Foreign Currency Transactions and Advance Consideration ( IFRIC 22 ) was issued in December 2016 and addresses foreign currency transactions or parts of transactions where there is consideration that is denominated in a foreign currency; a prepaid asset or deferred income liability is recognized in respect of that consideration, in advance of the recognition of the related asset, expense or income; and the prepaid asset or deferred income liability is non-monetary. The interpretation committee concluded that the date of the transaction, for purposes of determining the exchange rate, is the date of initial recognition of the non-monetary prepaid asset or deferred income liability. IFRIC 22 is effective for annual periods beginning on or after January 1, IFRIC 23 Uncertainty Over Income Tax Treatments ( IFRIC 23 ) was issued in June 2017 and clarifies the accounting for uncertainties in income taxes. The interpretation committee concluded that an entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment. If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, then the entity shall determine taxable profit (tax loss), tax bases, unused tax losses and credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings. If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses and credits or tax rates. IFRIC 23 is effective for annual periods beginning on or after January 1, Earlier adoption is permitted. Page 14

16 3. SIGNIFI CANT ACCOUNTING POL I CI ES (c ont inu ed) New accounting standards During 2017, the Company adopted a number of new IFRS standards, interpretations, amendments and improvements of existing standards. These include IAS 7 and IAS 12. These new standards and changes did not have any material impact on the Company s consolidated financial statements. IAS 7 Statement of Cash Flows ( IAS 7 ) was amended in January 2016 to clarify that disclosures shall be provided that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments were effective for annual periods beginning on or after January 1, IAS 12 Income Taxes ( IAS 12 ) was amended in January 2016 to clarify that, among other things, unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument s holder expects to recover the carrying amount of the debt instrument by sale or by use; the carrying amount of an asset does not limit the estimation of probable future taxable profits; and estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences. The amendments were effective for annual periods beginning on or after January 1, IFRS 15 - Effective January 1, 2017, the Company elected to early adopt IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ), issued in May The standard outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. It supersedes current revenue recognition guidance including IAS 18 Revenues, IAS 11 Construction Contracts and related interpretations. IFRS 15 specifies how and when the entity should recognize revenue and additional disclosure requirements. The adoption of IFRS 15 did not have any material impact on the 2016 accounts of the Company. 4. USE OF EST IM AT ES AND J UDGEM ENT S The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from those estimates. In particular, information about significant areas of estimation uncertainty considered by management in preparing the consolidated financial statements is described below: Capitalization of exploration and evaluation assets The application of the Company s accounting policy for exploration and evaluation assets requires judgement in determining whether future economic benefits are likely, which may be based on assumptions about future events or circumstances. Estimates and assumptions made may change if new information becomes available. If, after the expenditures are capitalized, information becomes available suggesting that the recovery of assets is unlikely, the amount capitalized is written off in profit or loss in the period when the new information becomes available. Page 15

17 4. USE OF EST IM AT ES AND J UDGEM ENT S ( con tin ued) Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events. See Note 19. Fair value of share-based compensation, warrants and derivatives In determining the fair value of share-based compensation, warrants and derivatives, pricing models are used that require management to make estimates and assumptions regarding the expected life and market price of its equity instruments, volatility and risk free interest rates. Estimated useful life of property, plant and equipment Management estimates the useful lives of property, plant and equipment based on the period during which the assets are expected to be available for use. The amounts and timing of recorded expenses for amortization of property, plant and equipment for any period are affected by these estimated useful lives. The estimates are reviewed at each reporting date and are updated if expectations change as a result of physical wear and tear, technical or commercial obsolescence and legal or other limits to use. It is possible that changes in these factors may cause significant changes in the estimated useful lives of the Company s property, plant and equipment in the future. Assets carrying values and impairment charges The determination of carrying values and impairment charges and their individual assumptions require that management make an estimate based on the best available information at each reporting period. Under situations where management has determined indicators of impairment are present, an impairment assessment will be performed by management whereupon management looks at the higher of recoverable amount or fair value less costs to sell in the case of assets. Rehabilitation provisions The Company records management s best estimate of the present value of the future cash requirements of any rehabilitation obligation as a long-term liability in the period in which the related environmental disturbance occurs based on the net present value of the estimated future costs. This obligation is adjusted at each period end to reflect the passage of time and any changes in the estimated future costs underlying the obligation. In determining this obligation, management must make a number of assumptions about the amount and timing of future cash flows and discount rate to be used. The actual future expenditures may differ from the amounts currently provided if the estimates made are significantly different than actual results or if there are significant changes in environmental and/or regulatory requirements in the future. Page 16

18 4. USE OF EST IM AT ES AND J UDGEM ENT S ( con tin ued) Income, value added, withholding and other taxes The Company is subject to income, value added, withholding and other taxes. Significant judgement is required in determining the Company s provisions for taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. The determination of the Company s income, value added, withholding and other tax liabilities requires interpretation of complex laws and regulations. The Company s interpretation of taxation law as applied to transactions and activities may not coincide with the interpretation of the tax authorities. All tax related filings are subject to government audit and potential reassessment subsequent to the financial statement reporting period. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the tax related accruals and deferred income tax provisions in the period in which such determination is made. Operating levels intended by management Prior to a mine being capable of operating at levels intended by management, costs incurred are capitalized as part of the costs of the related mining properties and proceeds from mineral sales are offset against costs capitalized. Depletion of capitalized costs for mining properties begins when the mine is capable of operating at levels intended by management. Management considers several factors in determining when a mining property is capable of operating at levels intended by management. Economic recoverability and probability of future economic benefits of exploration and evaluation assets and development costs Management has determined that acquisition, development and related costs incurred which have been capitalized are economically recoverable. Management uses several criteria in its assessments of economic recoverability and probability of future economic benefit including geologic and metallurgic information, history of conversion of mineral deposits to proven and probable reserves, scoping and feasibility studies, accessible facilities, existing permits and life of mine plans. 5. I NCOM E T AXES a) Provision for income taxes Major items causing the Company's effective income tax rate to differ from the combined Canadian federal and provincial statutory rate of 26.5% ( %) were as follows: $ $ (Loss) before income taxes (10,147,600) (931,159) Expected income tax recovery based on statutory rate (2,689,000) (247,000) Adjustment to expected income tax benefit: Share-based compensation 137,000 79,000 Expenses not deductible for tax purposes 606,000 (2,000) Other 100,000 (60,000) Change in benefit of tax assets not recognized 1,846, ,000 Deferred income tax provision - - Page 17